-----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, Fql3etTo6ltT7dWJfZ25E6BDkKu4dwASdNqMjJpvk7CXq58KXAieAI/uoGpdiIPG WHiOufgTgeOQqFe0F7dccw== 0000040730-99-000021.txt : 19990311 0000040730-99-000021.hdr.sgml : 19990311 ACCESSION NUMBER: 0000040730-99-000021 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990310 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENERAL MOTORS CORP CENTRAL INDEX KEY: 0000040730 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLES & PASSENGER CAR BODIES [3711] IRS NUMBER: 380572515 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-00143 FILM NUMBER: 99562195 BUSINESS ADDRESS: STREET 1: 100 RENAISSANCE CTR CITY: DETROIT STATE: MI ZIP: 48265-1000 BUSINESS PHONE: 3135565000 MAIL ADDRESS: STREET 1: 3044 W GRAND BOULEVARD CITY: DETROIT STATE: MI ZIP: 48202-3091 10-K 1 1998 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549-1004 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Each Class Which Registered - -------------------------------------------- ----------------------------- Common, $1-2/3 par value (653,567,016 shares outstanding as of February 28, 1999) New York Stock Exchange, Inc. Class H Common, $0.10 par value (106,299,971 shares outstanding as of February 28, 1999) New York Stock Exchange, Inc. Preference, $0.10 par value, Series B 9-1/8% Depositary Shares, stated value $25 per share, dividends cumulative (20,020,586 depositary shares outstanding as of February 28, 1999) New York Stock Exchange, Inc. Preference, $0.10 par value, Series D 7.92% Depositary Shares, stated value $25 per share, dividends cumulative (3,014,654 depositary shares outstanding as of February 28, 1999) New York Stock Exchange, Inc. Preference, $0.10 par value, Series G 9.12% Depositary Shares, stated value $25 per share, dividends cumulative (5,015,410 depositary shares outstanding as of February 28, 1999) New York Stock Exchange, Inc. General Motors Capital Trust D 8.67% Trust Originated Preferred Securitiessm (TOPrSsm), Series D (3,149,748 shares outstanding as of February 28, 1999) New York Stock Exchange, Inc. General Motors Capital Trust G 9.87% Trust Originated Preferred Securitiessm (TOPrSsm), Series G (5,221,123 shares outstanding as of February 28, 1999) New York Stock Exchange, Inc. Note: The $1-2/3 par value common stock of the Registrant is also listed for trading on: Chicago Stock Exchange, Inc. Chicago, Illinois Pacific Exchange, Inc. San Francisco, California Philadelphia Stock Exchange, Inc. Philadelphia, Pennsylvania Montreal Stock Exchange Montreal, Quebec, Canada Toronto Stock Exchange Toronto, Ontario, Canada Borse Frankfurt am Main Frankfort on the Main, Germany Borse Dusseldorf Dusseldorf, Germany Bourse de Bruxelles Brussels, Belgium Courtiers en Valeurs Mobilieres Paris, France The London Stock Exchange London, England Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) The aggregate market value (based upon the average of the highest and lowest sales prices on the Composite Tape on February 26, 1999) of General Motors Corporation $1-2/3 par value and Class H common stocks held by nonaffiliates on February 26, 1999 was approximately $54.7 billion and $5.0 billion, respectively. Documents incorporated by reference are as follows: Part and Item Number of Form Document 10-K into Which Incorporated - -------- ---------------------------- General Motors Notice of Annual Meeting of Stockholders and Proxy Statement for the Annual Meeting of Stockholders to be held June 7, 1999 Part III, Items 10 through 13 - ---------------------- sm "Trust Originated Preferred Securities" and "TOPrS" are service trademarks of Merrill Lynch & Co. COVER PAGE PART I GENERAL MOTORS CORPORATION AND SUBSIDIARIES THE CORPORATION General Motors Corporation, incorporated in 1916 under the laws of the State of Delaware, is hereinafter sometimes referred to as the "Registrant" or the "Corporation" and, together with its subsidiaries, is hereinafter sometimes referred to as "General Motors" or "GM." ITEM 1. Business General The following information is incorporated herein by reference to the indicated pages in Part II: Item Page(s) Wholesale Sales II- 6 Employment and Payrolls II-21 Note 22 of Notes to Consolidated Financial Statements (Segment Reporting) II-63 through II-66 GM presents separate consolidating financial information for the following businesses: Automotive, Electronics and Other Operations and Financing and Insurance Operations. While the major portion of GM's operations is derived from the automotive and electronics industries, GM also has financing and insurance operations and produces products and provides services in other industries. GM participates in the automotive industry through the activities of its automotive business operating segments: General Motors Automotive (GMA) and Delphi Automotive Systems (Delphi). GMA is comprised of four regions: GM North America (GMNA), GM Europe (GME), GM Asia/Pacific (GMAP), and GM Latin America/Africa/Mid-East (GMLAAM). GMNA designs, manufactures, and markets vehicles primarily in North America under the following nameplates: Chevrolet, Pontiac, GMC, Oldsmobile, Buick, Cadillac, and Saturn. GME, GMAP and GMLAAM meet the demands of customers outside North America with vehicles designed, manufactured and marketed under the following nameplates: Opel, Vauxhall, Holden, Isuzu, Saab, Chevrolet, GMC, and Cadillac. Delphi is a diverse supplier of automotive systems and components. Delphi offers products and services in the areas of electronics and mobile communication; safety, thermal and electrical architecture; and dynamics and propulsion. GM's electronics operations relate to its Hughes Electronics Corporation subsidiary (Hughes) which includes activities relating to designing, manufacturing, and marketing advanced technology electronic systems, products, and services for the telecommunications and space industries. GM's other operations includes the design, manufacturing and marketing of locomotives and heavy-duty transmissions. GM's financing and insurance operations primarily relate to General Motors Acceptance Corporation (GMAC). GMAC provides a broad range of financial services, including consumer vehicle financing, full-service leasing and fleet leasing, dealer financing, car and truck extended service contracts, residential and commercial mortgage services, and vehicle and homeowners insurance. Substantially all automotive-related products are marketed through retail dealers and through distributors and jobbers in the United States, Canada, and Mexico, and through distributors and dealers overseas. At December 31, 1998, there were approximately 8,300 GM vehicle dealers in the United States, 900 in Canada and Mexico, and 5,500 outlets overseas. Raw Materials and Services GM purchases materials, parts, supplies, freight transportation, energy, and other services from numerous unaffiliated firms. Interruptions in production or delivery of these goods or services could adversely affect GM. Backlog of Orders Shipments of GM automotive products are made as promptly as possible after receipt of firm sales orders; therefore, no significant backlog of unfilled orders accumulates. Hughes had a $10.1 billion and $10.3 billion backlog of commercial contracts relating to its telecommunications and space businesses at the end of 1998 and 1997, respectively. I-1 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Competitive Position GM's principal competitors in passenger cars and trucks in the United States and Canada include Ford Motor Company, Daimler-Chrysler Corporation, Toyota Corporation, Nissan Motor Corporation, Ltd., Honda Motor Company, Ltd., Mazda Motor Corporation, Mitsubishi Motors Corporation, Fuji Heavy Industries, Ltd. (Subaru), Volkswagen A.G., Hyundai Motor Company, Ltd., Bayerische Motoren Werke AG (BMW), and Volvo AB. All but Volkswagen and Hyundai currently operate vehicle manufacturing facilities in the United States or Canada. Toyota and GM operate the New United Motor Manufacturing, Inc. facility in Fremont, California as a joint venture which currently builds passenger cars and light-duty trucks. Wholesale unit sales of GM passenger cars and trucks during the three years ended December 31, 1998 are summarized in Management's Discussion and Analysis in Part II. Total industry new motor vehicle (passenger cars, trucks, and buses) registrations of domestic and foreign makes and GM's competitive position during the years ended December 31, 1998, 1997, and 1996, respectively, were as follows: 1998(1) 1997 1996 ------- ---- ---- (Units in Thousands) Total industry registrations In the United States 15,971 15,501 15,459 In Canada and Mexico 2,091 1,919 1,535 In other countries 33,955 35,757 34,789 ------ ------ ------ Total industry registrations - all countries 52,017 53,177 51,783 ====== ====== ====== 1998(1) 1997 1996 ------- ---- ---- (Percent of Total Industry) GM's registrations In the United States 29% 31% 31% In Canada and Mexico 29 31 31 In other countries 9 9 9 Total GM's registrations - all countries 16 16 16 - ----------------- (1) Preliminary The above information on registrations of new cars, trucks, and buses was obtained from outside sources and that pertaining to GM's registrations includes units which are manufactured overseas by other companies and which are imported and sold by GM and affiliates. Research and Development In 1998, GM spent $7.9 billion for research, manufacturing engineering, product engineering, and development activities related primarily to the development of new products or services or the improvement of existing products or services, including activities related to vehicle emissions control, improved fuel economy, and the safety of persons using GM products. In addition, $719 million was spent for customer-sponsored activities, the majority of which were government related. Comparable data for 1997 were $8.2 billion for company-sponsored activities and $1.5 billion for customer-sponsored activities and for 1996 were $8.9 billion for company-sponsored activities and $1.6 billion for customer-sponsored activities, respectively. Environmental Matters Automotive Emissions Control Both the Federal and California governments currently impose stringent emission control requirements on motor vehicles sold in their respective jurisdictions. These requirements include pre-production testing of vehicles, testing of vehicles after assembly, the imposition of emission defect and performance warranties, and the obligation to recall and repair customer-owned vehicles determined to be non-compliant with emissions requirements. Both the U.S. Environmental Protection Agency (EPA) and the California Air Resources Board (CARB) continue to place great emphasis on compliance testing of customer-owned vehicles. Failure to comply with the emission standards or defective emission control hardware discovered during such testing can lead to substantial cost for General Motors related to emissions recalls. New CARB and Federal requirements will increase the time and mileage periods over which manufacturers are responsible for a vehicle's emission performance. I-2 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Automotive Emissions Control (concluded) Both the EPA and the CARB emission requirements will become even more stringent in the future. A new tier of exhaust emission standards for cars and light-duty trucks, the "LEV II" standards will begin phasing in for California vehicles in the 2004 model year. Similar Federal standards and timing are under consideration by EPA. The requirement that, for model years 2003 and later, 10% of cars and small light-duty trucks (up to 3,750 lb Loaded Vehicle Weight) sold in California must be zero emission vehicles (ZEVs), was modified by the LEV II rules to allow up to 6% of the 10% to be met using a new category of emission standards - the super low emission vehicle. Also, GM and six other major vehicle manufacturers signed Memorandum of Agreements (MOAs) with CARB to provide for a more market driven-introduction of ZEVs. The MOAs include provisions for an advanced battery ZEV demonstration program of 3,750 vehicles in the 1998-2000 time frame, a National LEV program or an alternative that provides equivalent emission benefits in California, the capability to produce specified numbers of ZEVs as warranted by demand, and continued research and development of advanced batteries. General Motors has fulfilled its MOA commitment for the 1998 model year. The Clean Air Act permits states that have areas with air quality problems to adopt the California car and truck emission standards in lieu of the Federal requirements and four states have done so. Under the voluntary National LEV (NLEV) program, the auto industry began the phase in of California vehicles in the northeast in 1999, and vehicles in all states outside California standard states meeting LEV standards on average starting in 2001. The EPA issued a final rule which would implement the NLEV program as a voluntary alternative available to automakers, and on March 2, 1998, the EPA declared that the NLEV program was "in effect" for 1999 and later model years after all manufacturers and all the Northeast states except New York, Massachusetts, Maine, and Vermont opted to participate in the program. In addition to the above-mentioned exhaust emission programs, onboard diagnostic (OBD) devices, used to diagnose problems with emission control systems, were required both federally and in California effective with the 1996 model year. This system has the potential of increasing warranty costs and the chance for recall. New evaporative emission control requirements for cars and trucks began phasing in with the 1995 model year in California and the 1996 model year federally. Systems will need to be further modified to accommodate Federal onboard refueling vapor recovery (ORVR) control standards. ORVR phases in on passenger cars in the 1998 through 2000 model years and on light-duty trucks in the 2001 through 2006 model years. Beginning with the 2004 model year, even more stringent evaporative emission standards will be required in California. Starting in the 2000 model year, today's test procedure for exhaust emissions will become more complex with vehicles required to meet two additional test requirements: 1) measuring exhaust emissions over a new test cycle with the air conditioner operating; and 2) measuring exhaust emissions over a new high speed (80 mph) and high load cycle. Both of these requirements have the potential of adding hardware (and thus costs) to many vehicles. Industrial Environmental Control GM is subject to various laws relating to the protection of the environment including laws regulating air emissions, water discharges, waste management, and environmental cleanup. GM is in various stages of investigation or remediation for sites where contamination has been alleged and has recorded a liability of $519 million at December 31, 1998 and $610 million at December 31, 1997 for worldwide environmental investigation and remediation as summarized below: . GM has been identified as a potentially responsible party at sites identified by the EPA and state regulatory agencies for investigation and remediation under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and similar state statutes. GM voluntarily and actively participates in cleanup activity where such involvement is verified. The foreseeable total liability for sites involving GM is estimated to be $147 million, which was recorded at December 31, 1998. This compares to $186 million at December 31, 1997. . For closed or closing plants owned by the Corporation, an estimated liability for environmental investigation and remediation is typically recognized at the time of the closure decision. Such liability, which is based on an environmental assessment of the plant property, is estimated at $102 million at December 31, 1998. This compares to $122 million at December 31, 1997. . GM is involved in investigations and remediation activities at additional locations worldwide with a foreseeable liability of approximately $270 million, which was recorded at December 31, 1998. This compares to $302 million at December 31, 1997. I-3 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Industrial Environmental Control (concluded) The cost impact of the Clean Air Act Amendments under Title V are the annual emission fees of approximately $9 million per year. Additional programs under the Clean Air Act, including Hazardous Air Pollutant standards, and Compliance Assurance Monitoring and periodic monitoring requirements are estimated to cost $500 million to $700 million through the year 2003. Expenditures by General Motors in the United States for industrial environmental control facilities during the years ended December 31, 1998, 1997, and 1996, respectively, were as follows (in millions): 1998-$92; 1997-$108; and 1996-$117. The Corporation currently estimates that future expenditures for industrial environmental control facilities through 2002 will be (in millions): 1999-$115; 2000-$71; 2001 and 2002-$123. Specific environmental expenses are difficult to isolate since expenditures may be made for more than one purpose, making precise classification difficult. Vehicular Noise Control Federal Truck Regulations preempt all state/local noise regulations for trucks over 10,000 lb Gross Vehicle Weight Rating (GVWR). All jurisdictions regulating noise levels of school buses which are built on medium-duty truck chassis have adopted standards compatible with Federal regulations for medium-duty trucks. Federal Truck Regulations contain label and owner's manual requirements. Passenger cars and light-duty trucks are subject to state and local motor vehicle noise regulations. The current standard for vehicles in these classes is 80 dB as measured at 50 feet. Future implementation of more stringent exhaust emission regulations and more stringent fuel economy regulations will require an assessment of increased costs of noise control. Safety Affairs and Regulations Expenditures to maintain the operational safety, occupant protection, and vehicle theft deterrence capability of new GM models continue. These expenditures include amounts for the study of alternative approaches for meeting the needs of all three areas. GM continues to meet the government requirement for passive restraints by installing driver and passenger supplemental inflatable restraints (air bags) on all passenger cars and selected light trucks and vans. GM introduced in 1998 and later models less aggressive air bags in order to address concerns about inflation injuries, particularly to children and smaller adult passengers who are not properly positioned. GM continues to make available air bag on-off switches for those customers who request them and also are eligible under the requirements of the National Highway Traffic Safety Administration (NHTSA) regulation allowing these devices. Dynamic side impact protection requirements similar to those for cars will apply to certain light trucks and vans beginning September 1, 1998. Side structure and interior trim designs of future models will continue to be affected. Additional market pressure and future model design effects are likely regarding side impact performance at higher crash speeds. This will result as the federal government continues its consumer information side impact crash test program at an elevated impact speed. A new government requirement for vehicle interior impact protection continues to significantly affect upper body structure and interior trim designs of future model passenger cars and light trucks and vans. The phase-in for this rulemaking began on September 1, 1998, and will apply to all these vehicles in the 2003 model year. The NHTSA currently is considering the effects of fuel system crash integrity requirements of the Federal Motor Vehicle Safety Standard 301. If any of the considerations ultimately are adopted as final rules, some undetermined redesign, cost, and weight increase could be expected for most of GM's vehicles. See Item 3, Legal Proceedings, Other Matters. With the passage of the Anti-Car Theft Act of 1992, implementation costs affect approximately 22 passenger car assembly plants and 4 light-duty truck plants. For the affected truck plants, the major expenditures were for new label printer installations and additional stamping equipment. Automotive Fuel Economy The Energy Policy and Conservation Act passed in 1975 provided for production-weighted average fuel economy standards for passenger cars for 1978 and thereafter. Based on EPA combined city-highway test data, the GM 1998 model year domestic passenger car fleet is projected to attain a Corporate Average Fuel Economy (CAFE) of 27.8. miles per gallon (mpg) versus the standard of 27.5 mpg. The CAFE estimate for 1999 model year passenger cars is projected at 27.6 mpg versus the standard of 27.5 mpg. Fuel economy standards for light-duty trucks became effective in 1979. General Motors' light truck CAFE fleet average for the 1998 model year is projected to be 21.1 mpg versus a standard of 20.7 mpg. GM's 1999 model year truck CAFE is projected at 20.1mpg versus a standard of 20.7 mpg. Projected shortfalls to the standard are expected to be offset by credits from future model years. I-4 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Automotive Fuel Economy (concluded) GM's ability to meet increased CAFE standards is contingent on various future economic, consumer, legislative, and regulatory factors that GM cannot control and cannot predict with certainty. If GM could not comply with any new CAFE standards, GM could be subject to sizeable civil penalties and could have to close plants or severely restrict product offerings to remain in compliance. It is expected that the Kyoto Protocol on climate change will lead to continued pressure to increase fuel economy levels. Seasonal Nature of Business In the automotive business, there are retail sales fluctuations of a seasonal nature, so that production varies from month to month. In addition, the changeover period related to the annual new model introduction has traditionally occurred in the third quarter of each year. For this reason, third quarter operating results are, in general, less favorable than those in the other three quarters of the year, depending on the magnitude of the changeover needed to commence production of new models incorporating, for example, design modifications related to more fuel-efficient vehicle packaging, stricter government standards for safety and emission controls, and consumer-oriented improvements in performance, comfort, convenience, and style. Segment Reporting Data Operating segment and principal geographic area data for 1998, 1997, and 1996 are summarized in Note 22 of Notes to Consolidated Financial Statements in Part II. * * * * * * The Registrant makes no attempt herein to predict the future trend of its business and earnings or the effect thereon of the results of changes in general economic, industrial, regulatory, and international conditions. ITEM 2. Properties The Corporation, excluding its Financing and Insurance Operations, has 291 locations operating in 33 states and 144 cities in the United States. Of these, 24 are engaged in the final assembly of GM cars and trucks; 39 are service parts operations responsible for distribution or warehousing; 9 major plants, offices, and research facilities relate to the operations of Hughes Electronics Corporation; and the remainder are offices or involved primarily in the testing of vehicles or the manufacture of automotive components and power products. In addition, the Corporation has 21 locations in Canada and assembly, manufacturing, distribution, or warehousing operations in 54 other countries, including equity interests in associated companies which conduct assembly, manufacturing, or distribution operations. The major facilities outside the United States and Canada, which are principally vehicle manufacturing and assembly operations, are located in Germany, the United Kingdom, Brazil, Mexico, Australia, Belgium, Spain, China, and Poland. Most facilities are owned by the Corporation or its subsidiaries. Leased properties consist primarily of warehouses and administration, engineering, and sales offices. The leases for warehouses generally provide for an initial period of five years and contain renewal options. Leases for sales offices are generally for shorter periods. Properties of the Registrant and its subsidiaries include facilities which, in the opinion of management, are suitable and adequate for the manufacture, assembly, and distribution of their products. Additional information regarding worldwide expenditures for plants and equipment is presented under Management's Discussion and Analysis in Part II. ITEM 3. Legal Proceedings (a) Material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Corporation became, or was, a party during the year ended December 31, 1998, or subsequent thereto, but before the filing of this report are summarized below. I-5 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Environmental Matters In August, 1996, the California Air Resources Board (CARB) ordered General Motors to recall about 11,500 1992 MY "S" Trucks. The CARB claims that the engines in these trucks, known by their emissions engine family designator as N3G4.3TBXEB2, exceeded the applicable new motor vehicle emissions standard for oxides of nitrogen (Nox). In addition to the ordered recall, the CARB threatened civil penalties of up to $57 million. General Motors believes that it has valid defenses to all CARB's claims and has requested an administrative review of the penalties and ordered recall. General Motors' defenses include the failure of CARB's outside contractor test laboratory to comply with the Federal Test Procedure used to identify non-compliant engine families. The administrative case is in the discovery stage, and a hearing is not likely until sometime in 1999. * * * On November 24, 1998, the New York Department of Environmental Conservation (NYDEC) issued a Notice of Violation to the Corporation's Delphi Automotive Systems (specifically, its Delphi Harrison Thermal Systems Division) for the unauthorized installation and operation of four thermal degreaser machines at its facility in Lockport, New York. On December 17, 1998, the matter was terminated by a settlement under a Consent Order pursuant to which Delphi agreed to pay a penalty of $110,000. The violations, which consisted of failure to have a proper permit, had been inadvertent and when discovered by Delphi were self-reported leading to the settlement. This matter will no longer be reported as part of the Corporation's Legal Proceedings. * * * In December 1998, the Louisiana Department of Environmental Quality (LDEQ) issued a Penalty Assessment in the amount of $100,000 involving the plant in Monroe, Louisiana operated by Delphi Automotive Systems. Although Delphi sold the plant to a third party in October, 1998, GM retains responsibility for certain pre-sale environmental issues, including the alleged permit violations covered by the Penalty Assessment. GM filed a request for hearing, and is pursuing settlement discussions with LDEQ. * * * Other Matters U.S. Government contracts held by the Corporation and its subsidiaries are subject to termination by the U.S. Government either for its convenience or for default by the contractor. The costs recovered for terminations for convenience do not always fully reimburse the contractor, and the profit or fee received by the contractor may be lower than that which it had expected for the portion of the contract performed. In cases of termination for default, normal contract remedies generally apply. In addition, the U.S. Government has broad discretion to suspend or debar a contractor from engaging in new government business, including discretion as to the period of suspension and activities affected. A contractor may be debarred based on a conviction or civil judgment involving certain offenses, including fraud in connection with obtaining or performing a public contract, or subcontract thereunder, and may be suspended if indicted for such an offense or if there is other adequate evidence that such an offense has been committed. Like other government contractors, GM and its subsidiaries are subject to civil audits and criminal investigations relating to their contracting activity. * * * 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 U.S. Court of Appeals for the Federal Circuit (CAFC) reaffirmed earlier decisions in the Williams case including 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, was denied the request, and thereafter applied for certiorari to the U.S. Supreme Court. On March 1, 1999, the U.S. Surpreme Court denied the U.S. Government's petition for certiorari. The case will be remanded back to the trial court (Court of Claims) for entry of the final judgement. While no amount has been recorded in the financial statements of Hughes to reflect the $114 million award or the interest accumulating thereon as of December 31, 1998, it is expected that resolution of this matter will result in the recognition of a pre-tax gain of approximately $150 million during 1999. * * * I-6 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Other Matters (Continued) In October, 1994, as previously reported, a California jury awarded a total of $89.5 million in damages against Hughes, which include $9.5 million of actual damages and punitive damages of $40 million to each of two former Hughes employees, Lane (race discrimination/retaliation) and Villalpando (retaliation), based on claims of mistreatment and denials of promotions. The trial court granted Hughes' motion to set aside the verdicts because of insufficient evidence. On January 6, 1997, the Court of Appeal reversed the trial court's decision to set aside the verdicts and reinstated the jury verdicts, but reduced the two $40 million punitive damage awards to $5 million and $2.83 million, resulting in an aggregate judgment of $17.33 million. Hughes' petition for review by the California Supreme Court was granted in November, 1997. Hughes filed its opening brief in January, 1998. This matter is now fully briefed, including amicus briefs on behalf of Hughes. The Supreme Court has not yet established a date for oral argument. * * * On or about October 25, 1996, an action was commenced by Comsat Corporation against PanAmSat, News Corporation Limited (News Corp.) and Grupo Television, S.A., in the United States District Court for the Central District of California. The Complaint alleges that News Corp. wrongfully terminated an agreement with Comsat for the lease of transponders on an Intelsat satellite over the term of a five-year lease, breached certain alleged promises related to such agreement, and breached its alleged obligations under a tariff filed by Comsat with the Federal Communications Commission (FCC). As to PanAmSat, the complaint alleges that PanAmSat, alone and in conspiracy with Televisa, intentionally interfered with the alleged agreement and with Comsat's economic relationship with News Corp. Comsat had previously filed a similar action in the United States District Court for the District of Maryland. By order dated October 10, 1996, the Maryland District Court dismissed without prejudice the complaint in that action on the ground that the court lacked personal jurisdiction over all of the defendants. The complaint in the present action seeks actual and consequential damages, and punitive or exemplary damages in an amount to be determined at trial. PanAmSat believes this action is without merit. It intends to vigorously contest this matter although there can be no assurance that PanAmSat will prevail. Following the completion of pretrial discovery, all defendants moved for summary judgment dismissing the case. These motions are awaiting action in the Court. If PanAmSat were not to prevail, the amounts involved could be material to PanAmSat. * * * 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 counterclaim have been filed by the parties in the U.S. District Court for the District of Connecticut concerning GECC's performance and DIRECTV's obligation to act as a surety. GECC claims damages from DIRECTV in excess of $140 million. DIRECTV seeks damages from GECC in excess of $70 million. Management of Hughes intends to vigorously contest GECC's allegations and pursue its own contractual rights and remedies. The management of Hughes does not believe that the litigation will have a material adverse impact on the Corporation. Discovery is not yet completed in the case no trial date has been set. * * * In connection with the 1997 spin-off of Hughes Defense and its subsequent merger with Raytheon, 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. 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 could be material to Hughes. However, the amount of any I-7 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Other Matters (Continued) 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. * * * Two suits, Stephen A. Solomon v. General Motors Corporation, et al. and TRV Holding Company v. General Motors Corporation, et al., (collectively "Solomon/TRV"), were filed in Delaware Chancery Court on May 13 and 18, 1994, respectively, challenging GM's split-off of Electronic Data Systems Corporation (EDS). Such actions have been consolidated and a consolidated amended complaint was filed on April 2, 1996. In addition, on May 10, 1996, a second amended and supplemental consolidated complaint (the "Second Amended Complaint") was filed by plaintiffs in this action. Another lawsuit, Ward et al., as Trustees for the Eisenberg Children's Irrevocable Trust II v. General Motors Corporation, et al. (Ward), was filed in Delaware Chancery Court on November 15, 1995. On May 17, 1996, Solomon/TRV and Ward (collectively, "Solomon/TRV/Ward") were consolidated and the Second Amended Complaint was adopted as the complaint for the consolidated action. Solomon/TRV/Ward purports to be a class action brought on behalf of former holders of Class E common stock, $0.10 par value per share (the "Class E Common Stock"), of General Motors against certain present and former directors of General Motors, as well as a double derivative action brought on behalf of EDS against certain present and former directors of General Motors and certain former directors of EDS (all of whom are also directors or officers of General Motors). EDS is named in the complaint only as a nominal defendant with respect to the double derivative action. The Second Amended Complaint alleges that defendants have breached and are continuing to breach their fiduciary duties in connection with their conduct with respect to EDS and the proposed split-off of EDS from General Motors (the "Split-Off"). In particular, the complaint alleges that the process of establishing terms for the Split-Off, including the consideration of alternatives to such transaction and the negotiating process in connection therewith, was unfairly dominated and controlled by General Motors and that the resulting terms unfairly benefit General Motors and its continuing shareholders, including the holders of common stock, $1-2/3 par value per share (the "$1-2/3 Common Stock"), and the Class H common stock, $0.10 par value per share (the "Class H Common Stock"), of General Motors, to the detriment of EDS and the former holders of Class E Common Stock. The complaint also alleges that the split-off would unfairly effect a disposition of EDS because it would not provide for a recapitalization of the Class E Common Stock into $1-2/3 Common Stock at a 120% exchange ratio, as had been provided in the General Motors Certificate of Incorporation upon a disposition by General Motors of substantially all of the business of EDS. Furthermore, the complaint alleges that the solicitation of consents by General Motors with respect to the proposed split-off is wrongfully coercive and the solicitation statement being used in connection therewith is materially deficient. The Second Amended Complaint seeks monetary damages from the defendants, as well as an injunction against further action in connection with the split-off. In addition, the complaint seeks an order appointing independent representatives to act on behalf of and protect the interests of EDS and the former holders of Class E Common Stock. The complaint also seeks an order requiring the defendants to disseminate completely all material information to the former holders of Class E Common Stock in connection with the split-off. On May 10, 1996, the plaintiffs in the consolidated action filed a motion for expedited proceedings, including a request for a hearing on their application for a preliminary injunction against further action in connection with the split-off. As a result of such application, a hearing on the plaintiffs' application for a preliminary injunction had been scheduled for May 30, 1996. On May 23, 1996, after limited discovery, the plaintiffs' counsel informed the court that plaintiffs had concluded that adequate relief could be afforded to the plaintiff class members after the split-off was consummated and were withdrawing their application for expedited proceedings including a preliminary injunction hearing. Thus, plaintiffs abandoned their pursuit of an injunction to prevent consummation of the split-off. On June 7, 1996, having received consent of a majority of the holders of each class of its common stock, General Motors split-off EDS to former General Motors Class E stockholders. (See Tabulation of consents at Item 4, page 36 of the Form 10-Q filed by General Motors for the Quarter Ended June 30, 1996). On December 1, 1997, plaintiffs served a Third Amended and Supplemental Consolidated Complaint which makes essentially the same allegations as the Second Amended Complaint. The complaint seeks monetary damages, including recissory damages, and an accounting for any special benefits obtained by defendants. On December 11, 1997, defendants filed a motion to dismiss the complaint. The parties continue to await a decision by the Court. * * * I-8 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Other Matters (Continued) On April 26 and 27, 1996, two purported class actions, Keith McGill v. General Motors Corporation and Richard Dolowich v. General Motors Corporation, were filed against General Motors in the Supreme Court of the State of New York, Counties of Bronx and Suffolk, alleging defective rear disc brake caliper pins in the "GM W-Body car". These actions have been consolidated in the Supreme Court of the State of New York, County of Bronx. The Dolowich suit is brought on behalf of all persons and entities in the United States who currently own or lease or previously owned or leased a 1988-1993 Buick Regal, Oldsmobile Cutlass Supreme, Pontiac Grand Prix or Chevrolet Lumina. The McGill suit includes the same model year vehicles, but is brought on behalf of persons and entities residing in the State of New York who purchased or leased such vehicles and still own them. Three additional purported nationwide class actions, brought on behalf of current and previous owners of the same vehicles, have been filed in federal courts in New Jersey, Garcia v. General Motors, and Pennsylvania, Neff v. General Motors and Marcel v. General Motors. Two additional purported class actions involving the same vehicles were filed, one in the Superior Court of New Jersey for Burlington County, Bishop v. General Motors Corporation and another in the United States District Court for the Eastern District of Pennsylvania, Cohen v. General Motors Corporation. Together, the complaints allege violation of state consumer protection laws, fraud, negligent misrepresentation, and breach of express and implied warranty, and seek unspecified amounts of economic damages, punitive damages not less than $20 million, attorneys' fees and costs, and injunctive relief. The Neff, Marcel and Cohen actions have been consolidated in Pennsylvania State Court. The Garcia and Bishop actions have been consolidated in New Jersey State Court. On November 11, 1996, the New Jersey state court rendered a decision certifying a class of all past and present owners of 1988 through 1993 model year Buick Regals, Chevrolet Luminas, Oldsmobile Cutlass Supremes and Pontiac Grand Prix. The New Jersey Appellate Division denied GM's motion for leave to appeal, but noted that the trial court is required to monitor compliance with the requirements to maintain a class. GM intends to vigorously defend this matter. * * * The following nine lawsuits were filed in the Delaware Court of Chancery during the first quarter of 1997: Jules Levine v. General Motors Corporation, et al., on February 6, 1997; Steven Verkouteren v. General Motors Corporation, et al., on February 6, 1997; Malcolm Rosenwald v. General Motors Corporation, et al., on February 7, 1997; Richard Strauss v. General Motors Corporation, et al., on February 7, 1997; Jeanette Whited, et al. v. General Motors Corporation, et al., on February 26, 1997; Andrew Carlucci, I.R.A. v. General Motors Corporation, et al., on March 3, 1997; Dr. Joseph Mantel v. General Motors Corporation, et al., on March 5, 1997; John P.McCarthy Profit Sharing Plan v. General Motors Corporation, et al., on March 6, 1997; and Patinkin v. General Motors Corporation, et al., on March 31, 1997. Each suit was denominated as a class action and was purportedly brought on behalf of specified holders of GM Class H common stock against the defendants, General Motors and its directors. The complaints made essentially the same allegations, namely, that the defendants have breached and are continuing to breach their fiduciary and alleged contractual duties to specified holders of GM Class H common stock in connection with the Hughes transactions. All of these lawsuits have been consolidated under the caption, In Re General Motors Class H Shareholders Litigation. Following a hearing on November 24, 1997, the Delaware Court of Chancery denied plaintiffs' request for expedited discovery and for the scheduling of a hearing on a motion for a preliminary injunction. On December 1, 1997, plaintiffs filed a Second Consolidated Amended Complaint which asserts three claims against General Motors and its directors. The first claim alleges that General Motors is breaching contractual obligations to GM Class H common stockholders by effecting a disposition of the defense electronics business of Hughes Electronics without providing for a recapitalization of the GM Class H common stock into $1-2/3 common stock at a 120% exchange ratio, as currently provided for under certain circumstances in the GM Certificate of Incorporation. Plaintiffs contend that any amendment of the GM Certificate of Incorporation as part of the Hughes transactions would be invalid because stockholders are being coerced into approving such a change. Plaintiffs' second claim alleges that GM's directors have breached their fiduciary duties (1) by failing to act in an informed manner and (2) by failing to act independently to protect the interests of both classes of GM common stockholders. In particular, this claim alleges that no processes were employed to ensure that the interests of GM Class H common stockholders were adequately represented in connection with the various aspects of the Hughes transactions. Plaintiffs' third claim is that GM's directors have breached their duty of candor by using false and misleading solicitation materials to obtain approval of the Hughes transactions. This claim alleges, among other things, that the Solicitation Statement fails to disclose the consideration that GM Class H common stockholders would have received in the event the Hughes transactions triggered the provision in the GM Certificate of Incorporation for nondiscretionary recapitalization of GM Class H common stock into GM $1-2/3 common stock at a 120% exchange ratio; misstates that there is substantial uncertainty I-9 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Other Matters (Continued) regarding application of this provision to the Hughes transactions; and misleadingly portrays the Hughes transactions as being fair to GM Class H common stockholders. The complaint alleges that GM Class H common stockholders would be irreparably damaged if the Hughes transactions were to be consummated as structured because they would lose their alleged right to receive a 20% premium in the event of a disposition of Hughes Aircraft. Plaintiffs sought, among other things, an injunction against the consummation of the Hughes transactions, an order requiring defendants to implement certain procedures designed to protect the interests of GM Class H common stockholders, or, in the event the transaction closes (it has now closed), rescission and/or compensatory damages against the defendants. On December 17, 1997, having received consent of a majority of the holders of each class of its common stock, the Hughes transactions were consummated. (See Tabulation of consents at Item 4, page I-13 of the Form 10-K filed by General Motors for the Year Ended December 31, 1997). Also, on December 17, 1997, defendants filed a motion to dismiss the complaint. The parties continue to await a decision by the Court. * * * Thirty-nine class actions have been filed in state, federal, and Canadian courts against the Corporation, claiming that 1973-1987 model Chevrolet and GMC full-size pickup trucks are defective because their fuel tanks are mounted below the cab and outside the frame rails. Twenty-four federal court class actions were transferred to the federal court in Philadelphia, Pennsylvania by the Judicial Panel on Multidistrict Litigation. In these actions, plaintiffs claimed that the fuel tank locations make the vehicles unreasonably susceptible to fuel-fed fires following side-impact collisions. Plaintiffs alleged breach of contract and warranty, negligence, fraud and negligent misrepresentation, as well as violation of various state consumer protection laws. The lawsuits seek compensatory and punitive damages and injunctions requiring notice to owners, repairs, retrofitting and "disgorgement" of revenues. An agreement for a nationwide settlement of the class actions pending in federal and state courts received final court approval on December 19, 1996, by a state court in Louisiana. The settlement, which is not expected to have a material effect on the consolidated financial statements of General Motors, provides for owners of 1973 to 1991 full-size pickup trucks and cab chassis with outside-the-frame fuel tanks, as of July 3, 1996, to receive certificates for $1,000 toward the purchase of any new General Motors passenger car or light truck, except Saturns. The certificates can be used for the first 15 months at $1,000 or transferred one time, whereupon the transferee would be able to use the certificate for $500 ($250 if used with a General Motors rebate) toward the purchase of an eligible vehicle until expiration of the 15-month period. After the first 15 months, original recipients of the certificates may use them for an additional 18 months at $500 or transfer them, whereupon the transferee would be able to use the certificates for $250 towards the purchase of an eligible vehicle. For fleets and governmental entities, after the first 15 months, the certificates are reduced to $250 for an additional 35 months, but are not transferable, except to other departments or agencies of the same governmental entity. The settlement also provides for $4.1 million to fund motor vehicle fire safety research. Research funds will be used to benefit motor vehicle safety generally, and research will not be done on the pickup trucks. The court ordered General Motors to pay plaintiffs' attorneys' fees and costs totaling $27.875 million. The Louisiana Court of Appeals reversed on the ground that the findings required to certify a class had not been made and remanded the case to the trial court for the required findings. The Louisiana Supreme Court denied review. On January 20, 1999, the trial court made supplemental findings, recertified the settlement class, and reaffirmed its approval of the settlement. Certificates will not be issued until any appeals are concluded and the approval of the settlement is final. There are also pending individual product liability claims and lawsuits involving allegations of defects in the design of such vehicles resulting in fuel-fed fires following side-impact collisions. GM intends to defend these cases vigorously. * * * On December 2, 1996, a purported class action, Alma Rosa Rangel, et al. v. General Motors Corporation, was filed in District Court, Webb County, Texas, claiming that the Type III door latches used in approximately 40 million 1978 to 1986 model GM passenger cars and light trucks are defective. Plaintiffs allege breaches of express and implied warranties, negligence and gross negligence, and seek compensatory and punitive damages and attorneys' fees. No determination has been made that the case can proceed as a class action. GM has removed the case to the United States District Court, Southern District of Texas, Laredo Division, and intends to oppose certification of a class. On February 27, 1998, Johnny McLain v. General Motors Corporation was filed in Circuit Court, Walker County, Alabama alleging that Type III door latches used in 1979 to 1986 model GM vehicles are defective. GM removed the case to the United States District Court, Northern District of Alabama, and moved to dismiss that case. GM intends to vigorously defend these cases. * * * I-10 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Other Matters (Concluded) Eleven purported class actions alleging that certain antilock braking systems on 1989 to 1996 light-duty GM trucks are defective were consolidated by the Judicial Panel on Multidistrict Litigation for coordinated pretrial proceedings as In Re General Motors Anti-Lock Brake Products Liability Litigation, USDC, Eastern District of Missouri, Eastern Division. On June 11, 1997, GM's motion to dismiss the consolidated complaint was granted. Plaintiffs have appealed to the federal court of appeals for the Eighth Circuit. * * * On April 25, 1997, a purported nationwide class action was filed against the Corporation and certain other vehicle manufacturers in the Circuit Court of Coosa County, Alabama, Ellen Smith, et al v. General Motors Corporation, Ford Motor Company, Chrysler Motors Corporation, Sylacauga Auto Plex, et al, claiming that the front seat air bags installed in 1993 to 1997 model vehicles are defective because, when deployed, they are likely to injure small-statured adults and children. The complaint seeks compensatory damages, the cost of repair or replacement of the allegedly defective air bags, plus attorneys' fees. No determination has been made that the matter may proceed as a class action. The defendants have filed a motion to dismiss the complaint which is under consideration by the Court. GM intends to vigorously defend this matter. Two previously reported matters which purported to be class actions asserting claims similar to those in Ellen Smith v. General Motors, et al, have been dismissed with prejudice. Those terminated cases, Eloisa Rodriguez, et al v. General Motors Corporation, Ford Motor Company, Chrysler Corporation, Volvo of North America, Inc., Armadillo Motor Company, Inc. and Wickstrom Chevrolet Co., Inc. and Frederick Lewis, et al v. Volvo of North America, Inc., General Motors Corporation, Ford Motor Corporation, Chrysler Motors Corporation and Spinato Chrysler Plymouth, Inc. d/b/a Bergeron Volvo, will no longer be reported as part of the Corporation's Legal Proceedings. * * * Seven separate putative class actions have been filed alleging defects in vehicle paint. Three of those cases have been dismissed. No determination has been made as to whether any of the four pending cases may proceed as a class action. The four pending cases, each of which GM intends to vigorously defend, are discussed below. The three cases which have been dismissed are discussed in Part (b) of these Legal Proceedings. On March 24, 1995, a purported nationwide class action (Christian Amedee and Louis Fuxan v. General Motors Corporation, et al), was filed in the Civil District Court for the Parish of New Orleans, State of Louisiana, alleging the paint or paint application process used by GM at several unspecified North American assembly plants was defective due to the omission of a surface layer primer, allegedly causing the paint to prematurely delaminate, deteriorate, and peel. Plaintiffs seek unspecified compensatory damages, equitable relief, interest, costs, and attorneys' fees. On April 8, 1998, the Corporation was served with a putative nationwide class action filed in the Circuit Court of Cook County, Illinois, Chancery Division (Craig Friedman, Robert Bengston and Debra Bengston v. General Motors Corporation). The named plaintiffs purport to represent a class of all persons who now or formerly owned or leased a 1986 through 1997 model year GM vehicle which was painted without a primer surfacer layer and which subsequently experienced paint delamination, and asserts claims for breach of contract, breach of warranty and violation of the Michigan Consumer Protection Act on behalf of that class. The Complaint also identifies a similar putative class limited to Illinois residents for the purpose of asserting a claim under the Illinois Deceptive Trade Practices Act. Plaintiffs allege that vehicles painted using a "high build electrocoat" instead of both a "bottom layer electrocoat applied directly to the sheet metal" and "a spray primer" are subject to paint delamination (peeling) and well as "softening, chipping, and other damage." Plaintiffs seek unquantified compensatory damages, punitive damages, pre-judgment interest, costs and attorneys' fees. The case has been removed to the Federal District Court for the Northern District of Illinois. On or about July 6, 1998, the Corporation was served with a putative class action complaint filed in the Superior Court for the City and County of San Francisco, California (Eddie Glorioso v. General Motors Corporation). On or about July 23, 1998, the Corporation was served with another putative class action complaint filed in the Superior Court for the County of Almeida, California (Scott Arnold v. General Motors Corporation). The two Complaints are virtually identical. In each, the named plaintiff purports to represent a class of all persons or entities resident in California which then or formerly owned or leased a 1985 through 1997 model year GM vehicle which was painted without a primer surfacer layer and which subsequently exhibited pealing or chipping of the paint. Each complaint asserts claims for breach of express warranty, violation of California's Song Beverly Consumer Warranty Act, and unfair competition and/or fraudulent business practices. Each Complaint requests 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. * * * I-11 GENERAL MOTORS CORPORATION AND SUBSIDIARIES (b) Previously reported legal proceedings which have been terminated, either during the year ended December 31, 1998, or subsequent thereto, but before the filing of this report are summarized below: Environmental Matters Which Have Been Terminated With regard to the previously reported suit filed by the Attorney General for the State of Michigan, on behalf of the Michigan Department of Natural Resources (MDNR) alleging that several of GM's plants released polychlorinated biphyls (commonly referred to as "PCB's") into the Saginaw River, a multi-party settlement has been reached. The settlement among GM, the City of Bay City, the City of Saginaw, federal and Michigan State government agencies and the Saginaw Chippewa Indian Tribe, is designed to restore, enhance and preserve the ecology of the Saginaw River and Bay area in a cost-effective manner. It will also provide substantial benefits to the community, including government ownership of ecologically significant lands, increased fishing opportunities, additional boating and recreational activities, and operation of a nature learning center. GM's payment under the settlement is approximately $27 million; a consent judgment was filed in federal court in Bay City on November 24, 1998. * * * Other Terminated Matters In connection with the previously reported matter, Jacobson, et al v. Hughes Aircraft Co., et al, in the U.S. District in Arizona, subsequently transferred to Los Angeles, which was a putative class action seeking to obtain increased retirement benefits for certain Hughes retirees, the U.S. Supreme Court, On January 25, 1999, unanimously overturned a decision by the Ninth Circuit Court of Appeals, which had reversed a decision by the U.S. District Court in Los Angeles dismissing the plaintiff's complaint without leave to amend, for failure to state a claim. Accordingly, plaintiff's claims will be dismissed with no further right of appeal. * * * On May 3, 1995, purported class action (Barney Kizzire v. General Motors Corporation and Bynum Oldsmobile-Pontiac-Cadillac-GMC, Inc.) was filed in the Circuit Court for Fayette County, Alabama, on behalf of a proposed class of Alabama residents who purchased 1989 GMC pickup trucks alleging that the paint was defective. That case was subsequently removed to federal court and the named plaintiff's claims were all dismissed with prejudice on November 27, 1996. * * * On July 12, 1996, the Corporation was served with a putative class action filed in the Circuit Court of Greene County, Alabama (Robert J. Reining, et al. v. General Motors Corporation). The complaint alleged that the paint systems used in the 1985 through 1995 model years are defective or potentially defective because GM switched to "water-based primers" which could result in various problems with vehicle finish. On September 11, 1997, the Court dismissed the case without prejudice at the request of the plaintiffs. * * * On January 29, 1997, the Corporation was served with a putative class action (Karpowicz v. General Motors Corporation), filed in the Circuit Court of the Sixteenth Judicial Circuit in Kane County, Illinois. This case, purportedly brought on behalf of Illinois purchasers of new vehicles which experienced peeling paint, alleges that GM broke a promise to repair paint conditions for six years from the date of purchase and failed to implement fair and uniform corrective measures. The case was subsequently removed to Federal Court. On March 25, 1998, the Court granted GM's motion for summary judgment dismissing all remaining claims asserted by the named plaintiffs in the Karpowicz matter. * * * On August 19, 1998, Thomas Haenish v. General Motors Corporation was filed in state court, Cook County, Illinois alleging that Type III door latches used in 1979 to 1986 model GM vehicles are defective. GM removed the case to the United States District Court, Northern District of Illinois, and moved to dismiss the complaint. GM's motion was granted. Separately, a petition to open a defect investigation of the Type III door latches was denied by the National Highway Safety Traffic Administration. * * * * * * ITEM 4. Submission of Matters to a Vote of Security Holders NONE I-12 GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 4A. Executive Officers of the Registrant The names and ages of all executive officers of the Registrant at February 28, 1999 and their positions and offices with the Registrant on that date are as follows: Name and (Age) Positions and Offices John F. Smith, Jr. (60) Chairman of the Board; Chief Executive Officer; Member, Investment Funds Committee Harry J. Pearce (56) Vice Chairman of the Board G. Richard Wagoner, Jr. (46) President and Chief Operating Officer J. Michael Losh (52) Executive Vice President; Chief Financial Officer Louis R. Hughes (50) Executive Vice President; New Business Strategies Ronald L. Zarrella (49) Executive Vice President; President, GM North America There are no family relationships, as defined, between any of the above executive officers, and there is no arrangement or understanding between any of the above executive officers and any other person pursuant to which he was selected as an officer. Each of the above executive officers was elected by the Board of Directors to hold office until the next annual election of officers and until his successor is elected and qualified or until his earlier resignation or removal. The Board of Directors elects the officers in conjunction with each annual meeting of the stockholders. I-13 GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 4A. Executive Officers of the Registrant - Concluded Mr. John F. Smith, Jr. has been associated with General Motors since 1961. He was elected Executive Vice President in charge of International Operations in 1988. Effective August 1990, he was elected Vice Chairman of the Board of Directors. On April 6, 1992, Mr. Smith was elected President and Chief Operating Officer. Effective November 1992, he was elected Chief Executive Officer and President. He served as President until October 1998. On January 1, 1996, Mr. Smith became Chairman of the Board of Directors. Mr. Pearce has been associated with General Motors since 1985. In May 1987, he was elected Vice President and General Counsel of General Motors. Effective November 1992, he was elected Executive Vice President of General Motors with responsibility for the Legal Staff, Industry-Government Relations, Environmental and Energy, Worldwide Economics, Electronic Data Systems Corporation and GM Hughes Electronics Corporation (now Hughes Electronics Corporation). In July 1994, he assumed responsibility for GM's Strategic Decision Center, Corporate Communications, Allison Transmission Division, Electro-Motive Division (now GM Locomotive Group), Corporate Relations, Worldwide Executive Compensation and Corporate Governance, and the Business Support Group. He remained General Counsel through August 1, 1994. Effective January 1996, Mr. Pearce was elected a director and became Vice Chairman of the Board of Directors and assumed responsibility for Information System Services. In 1997 he assumed responsibility for the Enterprise Activities Group and Global Human Resources and GM University. Mr. Wagoner has been associated with General Motors since 1977. He was elected Vice President in charge of finance for General Motors Europe in June 1989. In July 1991, he was elected President and Managing Director of General Motors do Brasil. Effective November 1992, he was elected Executive Vice President and Chief Financial Officer of General Motors. In July 1994, he was named President of North American Operations. In October 1998, he was elected a director, President and Chief Operating Officer of General Motors. Mr. Losh has been associated with General Motors since 1964. In July 1984, he was elected Vice President of General Motors and General Manager of Pontiac Division. He was named General Manager of Oldsmobile Division in June 1989. Effective May 1992, he was elected Group Executive in charge of North American Vehicle Sales, Service, and Marketing. In July 1994, he was elected Executive Vice President and Chief Financial Officer of General Motors. Mr. Hughes has been associated with General Motors since 1966. In April 1989, he was elected Chairman and Managing Director of Adam Opel AG. He was elected President of General Motors Europe and Vice President and Group Executive of General Motors in April 1992. Effective November 1992, he was elected Executive Vice President, in charge of International Operations of General Motors. In September 1994, he was named Executive Vice President and President of International Operations. In October, 1998 he was elected Executive Vice President, New Business Strategies. Mr. Zarrella has been associated with General Motors since 1994. In December 1994, he was elected Vice President of General Motors and Group Executive in charge of GM's North American Vehicle Sales, Service and Marketing Group. In October 1998, he was elected Executive Vice President of General Motors and President of General Motors North America. I-14 PART II GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 5. Market for the Registrant's Common Equity and Related Stockholder Matters General Motor's (GM's) common stocks are listed on the stock exchanges specified on the cover page of this Form 10-K under the trading symbols (GM) and (GMH). GM's Dividend Policy is described in Note 19 of Notes to Consolidated Financial Statements in Part II. As of December 31, 1998, there were 525,583 holders of record of $1-2/3 par value common stock and 205,904 holders of record of Class H common stock. As of December 31, 1997, there were 563,553 holders of record of $1-2/3 par value common stock and 231,627 holders of record of Class H common stock. The following table sets forth the high and low sale prices of GM's common stock as reported on the composite tape and the quarterly dividends declared for the last two years. 1998 Quarters -------------- 1st 2nd 3rd 4th --- --- --- --- Cash dividends per share of common stocks $1-2/3 par value $0.50 $0.50 $0.50 $0.50 Class H (2) $- $- $- $- Price range of common stocks $1-2/3 par value (3): High $74.25 $76.69 $74.75 $74.94 Low $55.06 $66.13 $54.44 $47.06 Class H (2)(3): High $48.00 $57.88 $50.81 $42.38 Low $31.50 $42.75 $35.00 $30.38 1997 Quarters -------------- 1st 2nd 3rd 4th --- --- --- --- Cash dividends per share of common stocks $1-2/3 par value $0.50 $0.50 $0.50 $0.50 Class H (1) $0.25 $0.25 $0.25 $0.25 Class H (2) $ - $ - $ - $ - Price range of common stocks $1-2/3 par value (3): High $63.75 $59.88 $69.75 $72.44 Low $55.00 $55.00 $53.88 $58.31 Class H (1)(3): High $64.88 $60.25 $67.88 $68.94 Low $54.25 $49.00 $55.88 $61.00 Class H (2)(3): High $ - $ - $ - $40.00 Low $ - $ - $ - $35.75 (1)Represents information through December 17, 1997, the date on which GM recapitalized the Class H common stock ("GM's Recapitalization Date"). (2)Represents information for the period subsequent to GM's Recapitalization Date. (3)The principal market is the New York Stock Exchange and prices are based on the Composite Tape. $1-2/3 par value common stock is also listed on the Chicago and Philadelphia stock exchanges and on the Pacific Exchange. II-1 GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 6. Selected Financial Data (Unaudited) Years Ended December 31 -------------------------------------------- 1998(1) 1997(2) 1996 1995 1994 ------- ------- ---- ---- ---- (Dollars in Millions Except Per Share Amounts) Total net sales and revenue $161,315 $178,252 $163,885 $160,001 $148,261 Income from continuing operations before cumulative effect of accounting changes $2,956 $6,698 $4,953 $6,033 $4,866 Income from discontinued operations - - 10 900 793 Cumulative effect of accounting changes - - - (52)(3) (758)(4) Net income $2,956 $6,698 $4,963 $6,881 $4,901 $1-2/3 par value common stock Basic earnings per share (EPS) from continuing operations $4.26 $8.70 $6.07 $7.14(3) $4.76(4) Basic earnings (loss) per share from discontinued operations $ - $ - $(0.01) $0.14 $0.46 Diluted EPS from continuing operations $4.18 $8.62 $6.03 $7.07 $4.69 Diluted earnings (loss) per share from discontinued operations $ - $ - $(0.01) $0.14 $0.46 Cash dividends declared per share $2.00 $2.00 $1.60 $1.10 $0.80 Class H common stock (prior to its recapitalization on December 17, 1997) Basic EPS from continuing operations $ - $3.17 $2.88 $2.77 $2.62(4) Diluted EPS from continuing operations $ - $3.17 $2.88 $2.77 $2.62 Cash dividends declared per share $ - $1.00 $0.96 $0.92 $0.80 Class H common stock (subsequent to its recapitalization on December 17, 1997) Basic EPS from continuing operations $0.68 $0.02 $ - $ - $ - Diluted EPS from continuing operations $0.68 $0.02 $ - $ - $ - Cash dividends declared per share $ - $ - $ - $ - $ - Class E common stock Basic EPS from discontinued operations $ - $ - $0.04 $1.96 $1.71 Diluted EPS from discontinued operations $ - $ - $0.04 $1.96 $1.71 Cash dividends declared per share $ - $ - $0.30 $0.52 $0.48 Total assets $257,389 $231,752 $224,866 $217,485 $194,791 Long-term debt (5) $7,217 $5,695 $5,397 $4,114 $5,062 GM-obligated mandatorily redeemable preferred securities of subsidiary trusts $220 $222 $ - $ - $ - (1)The 1998 results were affected by certain items which are described on pages II-68 and II-69. (2)The 1997 results were affected by certain items which are described on pages II-70 and II-71. (3)GM adopted the provisions of the EITF consensus on Issue No. 95-1, effective January 1, 1995, which resulted in an unfavorable cumulative effect of $52 million after-tax or $0.07 basic loss per share of $1-2/3 par value common stock. (4)GM adopted SFAS No. 112, Employers' Accounting for Postemployment Benefits, effective January 1, 1994. The unfavorable cumulative effect of adopting SFAS No. 112 was $751 million after-tax or $1.05 basic loss per share of $1-2/3 par value common stock and $7 million after-tax or $0.08 basic loss per share of Class H common stock. (5)Calculated from Automotive, Electronics and Other Operations only. * * * * * * II-2 GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following management's discussion and analysis of financial condition and results of operations (MD&A) should be read in conjunction with the Hughes Electronics Corporation consolidated financial statements and MD&A for the period ended December 31, 1998, included as Exhibit 99 to this Annual Report on Form 10-K, and the Delphi Automotive Systems Corporation (Delphi) and the General Motors Acceptance Corporation (GMAC) Annual Reports on Form 10-K for the period ended December 31, 1998, both to be filed separately with the Securities and Exchange Commission. Hughes Electronics Corporation, prior to the December 17, 1997 restructuring of the company, is hereinafter referred to as "former Hughes," and Hughes Electronics Corporation, subsequent to the December 17, 1997 restructuring of the company, is hereinafter referred to as "Hughes." All earnings per share amounts included in the MD&A are reported as basic. GM presents separate supplemental consolidating financial information for the following businesses: Automotive, Electronics and Other Operations and Financing and Insurance Operations. GM's reportable operating segments within its Automotive, Electronics and Other Operations business consist of: . General Motors Automotive (GMA), which is comprised of four regions: GM North America (GMNA), GM Europe (GME), GM Asia/Pacific (GMAP), and GM Latin America/Africa/Mid-East (GMLAAM), Delphi, Hughes, and Other. GMNA designs, manufactures, and markets vehicles primarily in North America under the following nameplates: Chevrolet, Pontiac, GMC, Oldsmobile, Buick, Cadillac, and Saturn. GME, GMAP and GMLAAM meet the demands of customers outside North America with vehicles designed, manufactured and marketed under the following nameplates: Opel, Vauxhall, Holden, Isuzu, Saab, Chevrolet, GMC, and Cadillac. . Delphi is a diverse supplier of automotive systems and components. Delphi offers products and services in the areas of electronics and mobile communication; safety, thermal and electrical architecture; and dynamics and propulsion. On February 5, 1999, Delphi completed an initial public offering of 100 million shares of its common stock, which represented 17.7% of its outstanding common shares. Such shares are currently traded on the New York Stock Exchange (symbol DPH). GM currently owns the remaining 82.3% of Delphi's common stock. GM has announced its intention to distribute to holders of its $1-2/3 par value common stock in 1999, all of its interest in Delphi's common stock. See Note 23 to the GM consolidated financial statements for further information. GM has received a ruling from the U.S. Internal Revenue Service confirming that GM's plan to effect a distribution of the shares it holds of Delphi would be tax-free to GM and its stockholders for U.S. federal income tax purposes. Although GM is fully committed to completing the full separation of Delphi from GM through such a distribution, any such distribution would be subject to a number of conditions and there can be no assurance as to whether or when it will occur. . Hughes includes activities relating to designing, manufacturing, and marketing advanced technology electronic systems, products, and services for the telecommunications and space industries. . The Other segment includes the design, manufacturing and marketing of locomotives and heavy-duty transmissions and the elimination of intersegment transactions. GM's reportable operating segments within its Financing and Insurance Operations business consist of GMAC and Other. GMAC provides a broad range of financial services, including consumer vehicle financing, full-service leasing and fleet leasing, dealer financing, car and truck extended service contracts, residential and commercial mortgage services, and vehicle and homeowners insurance. The Financing and Insurance Operations' Other segment includes financing entities operating in Canada, Germany and Brazil. The disaggregated financial results for GMA have been prepared using a management approach, which is consistent with the basis and manner in which GM management internally disaggregates financial information for the purposes of assisting in making internal operating decisions. In this regard, certain common expenses were allocated among regions 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 the Automotive, Electronics and Other Operations' Other segment. The financial results represent the historical information used by management for internal decision making purposes; therefore, other data prepared to represent the way in which the business will operate in the future, or data prepared on a GAAP basis, may be materially different. II-3 GENERAL MOTORS CORPORATION AND SUBSIDIARIES RESULTS OF OPERATIONS In 1998, GM's consolidated income from continuing operations totaled $3.0 billion or $4.26 per share of $1-2/3 par value common stock, compared with $6.7 billion or $8.70 per share of $1-2/3 par value common stock and $5.0 billion or $6.07 per share of $1-2/3 par value common stock in 1997 and 1996, respectively. The 1998 financial results were impacted by charges of $420 million after-tax, or $0.64 per share of $1-2/3 par value common stock, resulting from GM's 1998 competitiveness studies (see Competitiveness Studies). The 1997 financial results were impacted by two significant items: a $4.3 billion tax-free gain, or $5.91 per share of $1-2/3 par value common stock, resulting from the December 17, 1997 completion of the strategic restructuring of former Hughes (see Hughes Financial Review); and charges of $4.0 billion after-tax, or $5.59 per share of $1-2/3 par value common stock, resulting from GM's 1997 competitiveness studies (see Competitiveness Studies). Excluding the impact of these and other special items of $315 million in losses and $426 million in income for 1998 and 1997, respectively, income was $3.7 billion, or $5.38 per share of $1-2/3 par value common stock and $6.0 billion, or $7.90 per share of $1-2/3 par value common stock for 1998 and 1997, respectively. GM completed the split-off of Electronic Data Systems Corporation (EDS) on June 7, 1996 and, accordingly, the financial results related to EDS through the split-off date have been reported as discontinued operations. GM's 1996 net income, including the income from discontinued operations through the June 7, 1996 split-off, totaled $5.0 billion or $6.06 per share of $1-2/3 par value common stock. Additional information regarding the split-off of EDS is contained in Note 1 to the GM consolidated financial statements. Automotive, Electronics and Other Operations - -------------------------------------------- Highlights of financial performance by GM's Automotive, Electronics and Other Operations business were as follows for the years ended December 31,(in millions): 1998(1) 1997(1) 1996(1) ---- ------- ------- Manufactured products sales and revenues GMA $125,683 $134,121 $127,590 Delphi 28,479 31,447 31,032 Hughes 5,964 5,128 4,009 Other (19,693) (17,013) (17,290) ------- ------- ------- Manufactured products sale and revenues $140,433 $153,683 $145,341 ======== ======== ======== Net income (loss) GMA $1,634 $449 $2,337 Delphi (93) 215 853 Hughes 272 471 184 Other (279) 4,245 348 ---- ----- --- Net income $1,534 $5,380 $3,722 ====== ====== ====== - ----------------- (1)Adjustments have been made to reflect the impact of adjustments to Delphi's management basis financial statements in connection with its initial public offering. The 1997 and 1996 amounts have also been adjusted to reflect the changes to GM's organizational structure resulting from the restructuring of former Hughes which occurred in December 1997. As such, Delphi amounts include Delco, Hughes amounts exclude Delco and Hughes Defense, and Other includes Hughes Defense. The GMA, Delphi, and Hughes Financial Reviews that are presented on pages II-5 through II-11 reflect the change in GM's organizational structure resulting from the restructuring of former Hughes. II-4 GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMA Financial Highlights Year Ended December 31, -------------------------------- 1998(1) 1997 (1) 1996 (1) ---- -------- -------- (Dollars in Millions) GMNA Manufactured products sale and revenues $94,201 $100,256 $93,382 ------- -------- ------- Pre-tax income (loss) 2,409 (249) 836 Income tax expense (benefit) 787 (272) 54 Earnings of nonconsolidated associates and minority interests 13 (35) 37 -- --- -- GMNA income (loss) $1,635 $(12) $819 ====== ==== ==== GME Manufactured products sales and revenues $25,036 $24,106 $25,528 ------- ------- ------- Pre-tax income 740 256 1,053 Income tax expense 319 121 168 Earnings of nonconsolidated associates and minority interests (2) (152) (107) -- ---- ---- GME income (loss) $419 $(17) $778 ==== ==== ==== GMLAAM Manufactured products sales and revenues $7,403 $8,572 $6,723 ------ ------ ------ Pre-tax (loss) income (471) 536 667 Income tax (benefit) expense (213) 43 106 Earnings of nonconsolidated associates and minority interests 83 174 81 -- --- -- GMLAAM (loss) income $(175) $667 $642 ===== ==== ==== GMAP Manufactured products sales and revenues $2,923 $2,980 $3,001 ------ ------ ------ Pre-tax (loss) income (82) (235) 63 Income tax expense (benefit) 9 (29) 32 Earnings of nonconsolidated associates and minority interests (152) 34 79 ---- -- -- GMAP (loss) income $(243) $(172) $110 ===== ===== ==== GMA (2) Manufactured products sales and revenues $125,683 $134,121 $127,590 -------- -------- -------- Pre-tax income 2,594 279 2,600 Income tax expense (benefit) 902 (149) 353 Earnings of nonconsolidated associates and minority interests (58) 21 90 --- -- -- GMA income $1,634 $449 $2,337 ====== ==== ====== - -------------------- (1)Adjustments have been made to GMA's results to reflect the impact of adjustments to Delphi's management basis financial statements in connection with its initial public offering. (2)GMA's results include eliminations of activity between GMNA, GME, GMLAAM, GMAP. II-5 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Vehicle Unit Deliveries of Cars and Trucks - GMA
Years Ended December 31, ------------------------------------------------------------------------------- 1998 1997 1996 GM as GM as GM as a % of a % of a % of Industry GM Industry Industry GM Industry Industry GM Industry -------- -- -------- -------- -- -------- -------- -- -------- (Units in Thousands) GMNA United States Cars 8,184 2,459 30.0% 8,289 2,689 32.4% 8,528 2,786 32.7% Trucks 7,787 2,150 27.6% 7,212 2,077 28.8% 6,931 2,007 29.0% ----- ----- ----- ----- ----- ----- Total United States 15,971 4,609 28.9% 15,501 4,766 30.8% 15,459 4,793 31.0% Canada 1,427 428 30.0% 1,424 451 31.7% 1,203 381 31.7% Mexico 664 175 26.3% 496 143 28.9% 332 89 26.8% --- --- --- --- --- -- Total GMNA 18,062 5,212 28.9% 17,421 5,360 30.8% 16,994 5,263 31.0% ------ ----- ------ ----- ------ ----- GME Germany 4,036 548 13.6% 3,792 566 14.9% 3,746 581 15.5% United Kingdom 2,546 329 12.9% 2,445 338 13.8% 2,282 328 14.4% Other West Europe 9,737 851 8.7% 8,942 804 9.0% 8,444 780 9.2% ----- --- ----- --- ----- --- Total West Europe 16,319 1,728 10.6% 15,179 1,708 11.2% 14,472 1,689 11.7% Central/East Europe 2,828 129 4.6% 2,918 125 4.3% 2,405 100 4.2% ----- --- ----- --- ----- --- Total GME 19,147 1,857 9.7% 18,097 1,833 10.1% 16,877 1,789 10.6% ------ ----- ------ ----- ------ ----- GMLAAM Brazil 1,533 344 22.5% 1,943 410 21.1% 1,731 384 22.2% Venezuela 174 45 25.8% 178 48 26.7% 68 16 23.5% Other Latin America 864 129 14.9% 885 130 14.7% 784 114 14.5% --- --- --- --- --- --- Total Latin America 2,571 518 20.2% 3,006 588 19.6% 2,583 514 19.9% Africa 614 81 13.2% 673 106 15.7% 681 81 11.9% Middle East 747 54 7.2% 693 52 7.5% 664 66 10.0% --- -- --- -- --- -- Total GMLAAM 3,932 653 16.6% 4,372 746 17.1% 3,928 661 16.8% ----- --- ----- --- ----- --- GMAP Australia 808 157 19.5% 724 128 17.7% 651 131 20.1% Other Asia and Pacific 10,068 286 2.8% 12,564 447 3.6% 13,081 494 3.8% ------ --- ------ --- ------ --- Total GMAP 10,876 443 4.1% 13,288 575 4.3% 13,732 625 4.6% ------ --- ------ --- ------ --- Total Worldwide 52,017 8,165 15.7% 53,178 8,514 16.0% 51,531 8,338 16.2% ====== ===== ====== ===== ====== =====
Years Ended December 31, ---------------------------- 1998 1997 1996 ---- ---- ---- (Units in Thousands) Wholesale Sales GMNA Cars 2,731 3,095 2,913 Trucks 2,340 2,454 2,239 ----- ----- ----- Total GMNA 5,071 5,549 5,152 ----- ----- ----- GME Cars 1,882 1,708 1,673 Trucks 125 142 122 --- --- --- Total GME 2,007 1,850 1,795 ----- ----- ----- GMLAAM Cars 404 495 459 Trucks 248 290 244 --- --- --- Total GMLAAM 652 785 703 --- --- --- GMAP Cars 202 176 199 Trucks 217 416 414 --- --- --- Total GMAP 419 592 613 --- --- --- Total Worldwide 8,149 8,776 8,263 ===== ===== ===== II-6 GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMA Financial Review Including $228 million and $3.0 billion of after-tax charges for 1998 and 1997, respectively, related to the competitiveness studies (see Competitiveness Studies), GMA's income was $1.6 billion and $449 million for 1998 and 1997, respectively. Excluding the competitiveness studies charges, GMA's income was $1.9 billion or 1.5% of manufactured products sales and revenues and $3.5 billion or 2.6% of manufactured products sales and revenues for 1998 and 1997, respectively. Income was $2.3 billion or 1.8% of manufactured products sales and revenues in 1996. The decrease in 1998 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. 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 accelerate to normal production levels July 30, 1998. These work stoppages had an aggregate unfavorable after-tax impact of approximately $2.0 billion, or $2.94 per share of GM $1-2/3 par value common stock during 1998 that resulted from a loss of approximately 371,000 units of production. The above unfavorable after-tax impact represents the combined effects for GMNA ($1.5 billion) and Delphi ($450 million). The increase in 1997 income compared to 1996 (excluding the competitiveness studies charges) was primarily due to higher wholesale sales volumes, continued improvement in the profitability of new vehicles, and lower material and engineering costs. These factors were partially offset by higher retail incentives, increased commercial spending to support the numerous vehicle launches, and the unfavorable impact of approximately $240 million after-tax related to work stoppage production losses in 1997. Manufactured products sales and revenues for 1998 were $125.7 billion, which represented a decrease of $8.4 billion compared with 1997. The decrease was largely due to a lower number of wholesale units sold as a result of the previously mentioned work stoppages and the economic downturn throughout Latin America. Manufactured products sales and revenues for 1997 were $134.1 billion, which represented an increase of $6.5 billion compared with 1996. The improvement was primarily due to a 513,000 unit increase in wholesale sales volumes. GMA reported 1998 pre-tax income of $2.6 billion compared with $279 million and $2.6 billion for 1997 and 1996, respectively. Excluding the $224 million and $4.7 billion pre-tax impact of the competitiveness studies charges, GMA's pre-tax income was $2.8 billion and $5.0 billion for 1998 and 1997, respectively. The decrease in 1998 pre-tax income (excluding the competitiveness studies charges) was primarily due to the impact of lower wholesale sales resulting from the previously mentioned work stoppages and higher retail incentives, partially offset by material, engineering and manufacturing cost improvements. The increase in 1997 pre-tax income was primarily due to higher wholesale sales volumes, continued improvement in the profitability of new vehicles, and lower material and engineering costs. GMA's 1998 worldwide market share decreased to 15.7%, compared with 16.0% and 16.2% in 1997 and 1996, respectively. The decrease in market share was primarily due to dealer inventory shortages due to the above mentioned work stoppages at GMNA. GMNA's 1998 market share was 28.9% compared with 30.8% and 31.0% for 1997 and 1996, respectively. GMNA reported income of $1.6 billion for 1998 compared with a loss of $12 million and income of $819 million for 1997 and 1996, respectively. Excluding the competitiveness studies charges, GMNA's income was $1.7 billion and $2.4 billion for 1998 and 1997, respectively. The decrease in income for 1998 compared to 1997(excluding the competitiveness studies charges) was primarily due to the previously discussed work stoppages, minimized by strong cost performance which more than offset price reductions driven by competitive market pressures. The 1998 cost performance resulted from quality initiatives, material performance and reduced structural cost. The increase in income for 1997 compared to 1996 (excluding the competitiveness studies charges) was primarily due to a 397,000 unit increase in wholesale sales volumes, continued improvement in the profitability of new vehicles, and lower material and engineering costs. These factors were partially offset by higher retail incentives, increased commercial spending to support the numerous vehicle launches in progress, and the unfavorable impact of the work stoppages. GME reported income of $419 million for 1998 compared with a loss of $17 million and income of $778 million for 1997 and 1996, respectively. Excluding the competitiveness studies charge, GME's income was $471 million for 1997. GME's results also included an after-tax charge in 1998 of $44 million related to work schedule modifications at Opel Belgium and after-tax gains in 1997 of $103 million related to the sale of GME's interest in Avis Europe and $55 million related to a settlement agreement with Volkswagen A.G. Excluding these items, GME's income was $463 million and $313 million for 1998 and 1997, respectively. The increase in 1998 adjusted earnings compared to 1997 was primarily due to savings on material costs and policy & warranty spending, as well as lower equity losses from Saab Automobile A.B. (Saab). The decrease in 1997 adjusted earnings compared to 1996 was primarily due to higher sales and marketing costs under intensely competitive market conditions, and lower equity earnings from Saab related to the launch of the new 9-5 model. The 1996 Restructuring Agreement between GM and Saab's other owners (Investor A.B.) includes certain provisions and options which may II-7 GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMA Financial Review (concluded) impact the relative ownership interests of the parties involved. The agreement gives GM and Adam Opel the right to purchase up to 100% of Investor A.B.'s interest in Saab during 1999 and 2000. Investor A.B. has the right to sell up to 50% of its present holdings in Saab to GM and Adam Opel in 2000. GM currently maintains a 50% ownership interest in Saab. GMLAAM reported a loss of $175 million for 1998 compared with income of $667 million and $642 million for 1997 and 1996, respectively. The decrease in 1998 earnings compared to 1997 was primarily due to the economic downturn throughout Latin America, $51 million of after-tax charges in 1998 related to the competitiveness studies, and higher incentive costs. The increase in 1997 earnings compared to 1996 was primarily due to an increase in wholesale sales. The financial outlook for GMLAAM is uncertain for 1999 due to the ongoing economic crisis in Latin America. In 1998, GMLAAM reduced employment levels by approximately 21%, in an effort to resize the operations to the current conditions. An additional reduction should be accomplished in 1999 by further significant schedule adjustments. Capital spending has also been greatly reduced to conserve cash in the region. GMAP reported a loss of $243 million in 1998 compared with a loss of $172 million and income of $110 million for 1997 and 1996, respectively. Excluding the competitiveness studies charges, GMAP's losses were $146 million and $2 million for 1998 and 1997, respectively. Higher losses for 1998 compared to 1997 were primarily attributable to decreased equity earnings at Isuzu resulting from a write down of investments due to the economic downturn in Asia and continued spending associated with GMAP's growth strategy. The decrease in 1997 earnings compared to 1996 was due to increased spending associated with GMAP's growth strategy and the beginning of the economic downturn in Asia. GMA's effective income tax (credit) rate for 1998 was 34.8% compared with (53.0)% and 13.6% for 1997 and 1996, respectively. Excluding the previously mentioned competitiveness studies charges, the effective income tax rates for 1998 and 1997 were 34.5% and 32.3%, respectively. These adjusted rates indicated a return to a more normalized level. The lower 1996 tax rate resulted from research and experimentation credits in the United States, a favorable resolution of items related to GM's 1995 tax return, and a favorable tax position in Mexico. Delphi Financial Highlights Years Ended December 31, ---------------------------- 1998(1) 1997(1) 1996(1) ---- ------- ------- (Dollars in Millions) Manufactured products sales and revenues $28,479 $31,447 $31,032 ------- ------- ------- Pre-tax (loss) income (332) 223 1,052 Income tax (benefit) expense (173) 44 259 Minority interests 11 9 3 Earnings of nonconsolidated associates 55 27 57 -- -- -- (Loss) income $(93) $215 $853 ==== ==== ==== - ----------------------- (1)The 1997 and 1997 amounts have been adjusted to reflect the changes to GM's organizational structure resulting from the restructuring of former Hughes which occurred in December 1997. As such, Delphi adjusted amounts include Delco. Adjustments have also been made for all periods to reflect the impact of adjustments to Delphi's management basis financial statements in connection with its initial public offering. Delphi Financial Review Delphi reported a loss of $93 million for 1998 compared to income of $215 million and $853 million for 1997 and 1996, respectively. Delphi's results in each of those years included the impact of several special items, all of which are described below. During the fourth quarter of 1998, Delphi recorded a $310 million charge ($192 million after-tax) related to its evaluation of the competitiveness of its business (see Competitiveness Studies). During the third quarter of 1998, Delphi recorded a loss of $430 million ($271 million after-tax) related to the divestitures of its seating, lighting and coil spring businesses. During the fourth quarter of 1997, Delphi recorded a $1.4 billion charge ($870 million after-tax) relating to an evaluation of the competitiveness of its business (see Competitiveness Studies). During the first quarter of 1997, Delphi recorded an $80 million plant closing charge ($50 million after-tax) relating to a facility in Trenton, New Jersey. During the fourth quarter of 1996, Delphi sold four facilities located in Flint and Livonia, Michigan and Oshawa and Windsor, Ontario, which resulted in a loss of $247 million ($153 million after-tax). Also, retiree lump sum benefit payments resulting from U.S. labor negotiations during 1996 resulted in a fourth quarter charge of $86 million ($53 million after-tax). II-8 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Delphi Financial Review (concluded) Income, excluding the impact of special items discussed above, was $370 million for 1998 compared to income of $1.1 billion for both 1997 and 1996. The decrease in 1998 income, excluding the impact of special items, primarily reflects unfavorable volumes due to the impact of work stoppages during 1998 at certain GM and Delphi locations as well as the economic downturn throughout Asia and Latin America during 1998. For the 1998 year, material and manufacturing cost savings exceeded the impact of price reductions and unrecovered design costs and partially offset the unfavorable impact of lower volume. Income in 1997, excluding the impact of special items, increased $76 million due to lower material and manufacturing costs and the net impact of work stoppages that occurred in 1997 compared to the three work stoppages during 1996 at certain GM and Delphi locations. Manufactured products sales and revenues for 1998 totaled $28.5 billion compared with $31.4 billion in 1997, a decrease of $3.0 billion. The decrease reflects unfavorable volumes associated with work stoppages; lost fourth quarter revenues associated with divested businesses with historical annual net sales of approximately $2.0 billion; and economic conditions in Asia and Latin America, as well as the impact of price reductions during 1998. Manufactured products sales and revenues for 1997 increased over $400 million compared to 1996. The increase reflects improved sales volumes to non-GM customers as well as higher production by GMNA during 1997. These improved volumes during 1997 were partially offset by the impact of the 1996 sale of four plants with annual revenues of approximately $1.0 billion as well as continued pricing pressures. The effective income tax rate for 1998 was a 52.1% credit compared to an effective income tax rate of 19.7% for 1997. During 1998, certain deductions and tax credits remained constant while taxable income decreased substantially, resulting in a greater effective tax benefit as a percentage of pretax loss. The effective income tax rate for 1996 was 24.6%. The lower effective rates for 1997 and 1996 reflect the favorable impact of state, local and foreign tax rates which were generally lower than the U.S. federal statutory rate and the impact of research and experimentation credits. Earnings of nonconsolidated associates increased $28 million during 1998 compared to 1997. The increase primarily reflects improved profitability for certain new and established ventures. Earnings of nonconsolidated associates decreased to $27 million in 1997 compared with $57 million in 1996. The decrease reflects the sale of certain minority owned investments and the unfavorable impact of economic volatility on overseas joint ventures. II-9 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Hughes Financial Highlights Years Ended December 31, ----------------------------------- 1998 1997(1) 1996(1) ---- ------- ------- (Dollars in Millions Except Per Share Amounts) Revenues $5,964 $5,128 $4,009 ------ ------ ------ Pre-tax income 310 734 257 Income tax (benefit) expense (45) 237 105 Minority interests 24 25 53 Losses in nonconsolidated associates (128) (72) (42) ---- --- --- Net income $251 $450 $163 ==== ==== ==== Earnings used for computation of Available Separate Consolidated Net Income (2) $272 $471 $184 Earnings per share attributable to Class H common stock (3) $0.68 $1.18 $0.46 - ------------ (1)The 1997 and 1996 amounts relate only to the telecommunications and space business of former Hughes to reflect the changes to GM's organizational structure resulting from the Hughes Transactions which occurred in December 1997. See further discussion of Hughes Transactions below. (2)Excludes amortization of GM purchase accounting adjustments of $21 million in each of the years related to GM's acquisition of Hughes Aircraft Company (HAC) in 1985. (3)For 1997 and 1996, earnings per share attributable to Class H common stock are presented on a pro forma basis. Prior to the Hughes Transactions, such amounts were calculated based on the financial performance of former Hughes. Since the financial highlights for 1997 and 1996 relate only to the telecommunications and space business of former Hughes, they do not reflect the earnings per share 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 and 1996 relative to the Class H common stock based solely on the performance of the telecommunications and space business of former Hughes. See Hughes Financial Review for further discussion. Hughes Financial Review On December 17, 1997, GM and former Hughes completed a series of transactions (Hughes Transactions) that were designed to address strategic challenges facing the three principal businesses of former Hughes (consisting of the defense electronics, automotive electronics and telecommunications and space businesses). The Hughes Transactions included the tax-free spin-off of the defense electronics business of former Hughes (Hughes Defense) to holders of GM's $1-2/3 par value and Class H common stocks, the transfer of Delco from former Hughes to Delphi, and the recapitalization of Class H common stock into a new GM tracking stock, Class H common stock, that is linked to the remaining telecommunications and space business of Hughes. The Hughes Transactions were followed immediately by the merger of Hughes Defense with Raytheon Company. The 1997 and 1996 amounts presented for Hughes relate only to the telecommunications and space businesses of former Hughes. Revenues increased to $6.0 billion in 1998, compared with $5.1 billion in 1997 and $4.0 billion in 1996. The 1998 revenue growth was propelled by an increase in the DIRECTV(R) businesses due to strong subscriber growth and average monthly revenues per subscriber, as well as low subscriber churn rates; an increase at PanAmSat primarily from the May 1997 PanAmSat merger and increased operating lease revenues for video, data and Internet-related services; higher commercial satellite sales; and higher sales of DIRECTV(TM) receiver equipment. The 1997 increase was due primarily to strong DIRECTV subscriber growth, higher sales of commercial satellites and completion of the PanAmSat merger. Operating profit, excluding amortization of purchase accounting adjustments related to GM's acquisition of HAC, was $270 million in 1998 compared with $306 million and $210 million in 1997 and 1996, respectively. Full-year 1998 operating profit margin on the same basis was 4.5% compared with 6.0% in 1997 and 5.2% in 1996. The lower 1998 operating profit and operating profit margin were principally a result of lower sales of wireless telephone systems and private business networks in the Asia Pacific region, as well as provisions for estimated losses associated with uncollectible amounts due from certain wireless customers at Hughes Network Systems. These were offset in part by the lower operating losses at domestic DIRECTV and higher operating profit at PanAmSat. The increase in 1997 operating profit and operating profit margin resulted primarily from the completion of the PanAmSat merger, reduced losses in the DIRECTV business and higher commercial satellite sales. II-10 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Hughes Financial Review (concluded) Pre-tax income was $310 million in 1998, compared with $734 million and $257 million in 1997 and 1996, respectively. The decrease in 1998 primarily resulted from the 1997 $490 million pre-tax gain recognized in connection with the PanmSat merger in 1997, goodwill amortization associated with the PanAmSat merger and a provision for uncollectible amounts due from certain wireless customers, offset by a decrease in interest expense and an increase in interest income. The increase in 1997 of $477 million from 1996 reflects the $490 million pre-tax gain discussed above, the completion of the PanAmSat merger, reduced losses in the DIRECTV business and higher commercial satellite sales. Nineteen ninety-six included the $120 million pre-tax gain recognized from the sale of 2.5% of DIRECTV to AT&T. The effective income tax rate for 1998 was (14.5)%, compared with 32.3% and 40.9% in 1997 and 1996, respectively. The effective income tax rate in 1998 benefited from the favorable adjustment relating to an agreement with the Internal Revenue Service regarding the treatment of research and experimentation costs for the years 1983 through 1995. The 1997 decrease in the effective income tax rate was due primarily to an increase in research and experimentation credits and the favorable resolution of certain tax contingencies. Excluding amortization of purchase accounting adjustments related to GM's acquisition of HAC, Hughes' earnings used for computation of available separate consolidated net income for 1998 was $272 million compared with $471 million and $184 million in 1997 and 1996, respectively. In May 1998, Hughes purchased an additional 9.5% interest in PanAmSat, increasing Hughes' ownership interest in PanAmSat to 81.0%. In October 1998, Hughes agreed to acquire, pending regulatory approval in Mexico, an additional ownership interest in Grupo Galaxy Mexicana, S.A. de C.V. (GGM), a Galaxy Latin America, LCC (GLA) local operating company located in Mexico, from Grupo MVS, S.A. de C.V. (MVS). Hughes' equity ownership will represent 49.0% of the voting equity and all of the non-voting equity of GGM. As part of the transaction, Hughes acquired from MVS an additional 10.0% interest in GLA, increasing its ownership interest to 70.0% as well as an additional 19.8% interest in SurFin Ltd., increasing its ownership percentage to 59.1%. In December 1998, Hughes agreed to acquire all of the outstanding capital stock of United States Satellite Broadcasting Company, Inc. (USSB). USSB provides direct-to-home premium satellite programming in conjunction with DIRECTV's basic programming service. USSB launched its service in June 1994 and, as of December 31, 1998, had more than two million subscribers nationwide. The acquisition will be accounted for using the purchase method of accounting. The purchase price, consisting of cash and GM Class H common stock, will be determined at closing based upon an agreed-upon formula and will not exceed $1.6 billion in the aggregate. Subject to certain limitations in the merger agreement, USSB shareholders will be entitled to elect to receive cash or shares of GM Class H common stock. The amount of cash to be paid in the merger cannot be less than 30% or greater than 50% of the aggregate purchase price with the remaining consideration consisting of GM Class H common stock. The merger, which is subject to USSB shareholder approval and the receipt of appropriate regulatory approvals, is expected to close in early to mid-1999. In January 1999, Hughes agreed to acquire Primestar, Inc.'s (Primestar) 2.3 million-subscriber medium-power direct-to-home business. In a related transaction, Hughes also agreed to acquire the high-power satellite assets and direct broadcast satellite (DBS) orbital frequencies of Tempo, a wholly-owned subsidiary of TCI Satellite Entertainment, Inc. The Primestar transaction, pending regulatory and Primestar lender approval, is expected to close in early to mid-1999. The Tempo transaction, pending regulatory approval, is expected to close in mid to late-1999. II-11 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Financing and Insurance Operations - ---------------------------------- Highlights of financial performance by GM's Financing and Insurance Operations business were as follows for the years ended December 31, (in millions): 1998 1997 1996 ---- ---- ---- Financing revenues GMAC $12,731 $12,577 $12,644 Other 854 185 30 --- --- -- Total $13,585 $12,762 $12,674 ======= ======= ======= Net income GMAC $1,325 $1,301 $1,240 Other 97 17 1 -- -- - Total $1,422 $1,318 $1,241 ====== ====== ====== GMAC Financial Highlights Years Ended December 31, ----------------------------- 1998 1997 1996 ---- ---- ---- (Dollars in Millions) Financing revenues Retail and lease financing $3,869 $3,571 $3,822 Operating leases 7,233 7,260 7,215 Wholesale and term loans 1,629 1,746 1,607 ----- ----- ----- Total financing revenues 12,731 12,577 12,644 Interest and discount 5,787 5,256 4,938 Depreciation on operating leases 4,693 4,677 4,627 ----- ----- ----- Net financing revenue 2,251 2,644 3,079 Mortgage revenue 2,030 1,499 944 Insurance premiums earned 1,859 1,360 1,158 Other income 1,295 1,159 1,228 ----- ----- ----- Net financing revenue and other 7,435 6,662 6,409 Expenses 5,498 4,448 4,332 ----- ----- ----- Pre-tax income 1,937 2,214 2,077 Income tax expense 612 913 837 --- --- --- Net income $1,325 $1,301 $1,240 ====== ====== ====== Net income from automotive financing operations $984 $910 $946 Net income from mortgage operations 115 167 102 Net income from insurance operations 226 224 192 --- --- --- Net income $1,325 $1,301 $1,240 ====== ====== ====== GMAC Financial Review GMAC's 1998 consolidated net income increased 2% over 1997 to $1.3 billion. Net income from automotive financing operations totaled $984 million, up 8% from 1997. Earnings were higher due to retail asset growth, reduced credit losses and a lower effective income tax rate, partially offset by lower net interest margins and lower wholesale volume. Net income from insurance operations totaled $226 million, up from the $224 million earned in 1997. Net income from mortgage operations totaled $115 million, down from $167 million earned in 1997. Earnings were lower primarily as a result of reduced mortgage asset values due to higher prepayment levels. During 1998, GMAC financed 41.8% of new GM vehicle retail deliveries in the United States, up from 33.1% and 28.4% in 1997 and 1996, respectively. The improvements since 1996 primarily reflect higher volumes generated through special rate financing and lease incentive programs sponsored by GM. This improvement was achieved amid continued competitive pressures in the automotive financing marketplace. II-12 GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMAC Financial Review (concluded) GMAC's automotive financing revenue totaled $12.7 billion in 1998, compared with $12.6 billion for both 1997 and 1996. Higher retail financing revenues in 1998 were partially offset by a decline in wholesale revenues, principally from the reduction in average wholesale receivable balances related to the GM work stoppages. GMAC's worldwide cost of borrowing decreased to 5.99%, compared with 6.30% and 6.57% in 1997 and 1996, respectively. The cost of borrowings in the United States was 5.89% in 1998, down from 6.39% and 6.51% in 1997 and 1996, respectively. The lower average borrowing costs since 1996 are largely a result of a decrease in U.S. interest rates and a greater proportion of floating rate debt compared to fixed rate debt. Net automotive financing revenue combined with mortgage revenue, insurance premiums, and other income increased to $7.4 billion, compared with $6.7 billion and $6.4 billion in 1997 and 1996, respectively. The increases in 1998 and 1997 are primarily due to results from mortgage and insurance operations, partially offset by reduced net automotive financing margins. Expenses increased by $1.1 billion and $116 million in 1998 and 1997, respectively. The increases during 1998 and 1997 were primarily due to higher costs for salaries and benefits, increased insurance losses, and other operating charges incidental to expanding mortgage and insurance business activities. GMAC's effective income tax rate for 1998 was 31.6%, compared with 41.2% in 1997 and 40.3% in 1996. The favorable change in 1998 was primarily attributable 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. The unfavorable change in 1997 was primarily attributable to increases in accruals from prior years based on periodic assessment of the adequacy of such accruals and higher state and local income taxes. Competitiveness Studies The global automotive industry, including the automotive components and systems market, continues to be increasingly competitive and is presently undergoing significant restructuring and consolidation activities. All of the major industry participants are continuing to increase their focus on efficiency and cost improvements, while excess capacity led to continuing price pressures. As a result, GMNA, Delphi, GME, GMLAAM, and GMAP initiated studies in 1997 concerning the long-term competitiveness of all facets of their businesses. As market conditions continued to warrant such review, the competitiveness studies were again completed in 1998 in conjunction with the annual business planning cycle. Additional information regarding the competitiveness studies is contained in Note 2 to the GM consolidated financial statements. Based on the results of these competitiveness studies, GM recorded pre-tax charges against income totaling $534 million ($420 million after tax, or $0.64 per share of $1-2/3 par value common stock) in 1998 and $6.4 billion ($4.0 billion after-tax, or $5.59 per share of $1-2/3 par value common stock) in 1997. In 1998, the pre-tax charges were comprised of $105 million ($80 million after-tax) for GMNA, $310 million ($192 million after-tax) for Delphi, $82 million ($51 million after-tax) for GMLAAM, and $37 million ($97 million after-tax) for GMAP. Overall, these charges had the effect of increasing 1998 cost of sales, depreciation and amortization and other expenses by $246 million, $223 million and $65 million, respectively. In 1997, the pre-tax charges were comprised of $3.8 billion ($2.4 billion after tax) for GMNA, $1.4 billion ($870 million after-tax) for Delphi, $848 million ($488 million after-tax) for GME, $174 million ($170 million after-tax) for GMAP and $205 million ($128 million after-tax) for GM Automotive, Electronics and Other Operations' Other segment. These charges reduced 1997 net sales and revenues by $548 million and increased cost of sales, depreciation and amortization, and other expenses by $1.7 billion, $4.1 billion and $72 million, respectively. Accruals related to capacity reductions and expenses that were part of the 1997 charges that still remain as of December 31, 1998 total $1.1 billion. Going forward, GM's future cash requirements relating to the 1998 and 1997 charges are expected to total approximately $1.4 billion over the next five years, with over 70% evenly expended over the first three years. The competitiveness studies charges included amounts for underperforming assets, including both vehicle and component manufacturing assets, pursuant to GM's policy for the valuation of long-lived assets. Future investments relating to underperforming product lines will be expensed. Charges also include amounts for voluntary employee separation programs, recorded when the employee accepts the offer in accordance with GM's policy for such programs. GM will continue to monitor the competitiveness of all aspects of its businesses and further competitiveness studies will be undertaken when and as market conditions warrant. II-13 GENERAL MOTORS CORPORATION AND SUBSIDIARIES 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. Additionally, 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 cars and trucks produced during the period of approximately the last 15 years. GM began installing microchips capable of processing date information approximately 15 years ago. 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 have any Year 2000 issues. 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 developing 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 was substantially completed by the end of 1998. Remediation -- design and execution of a remediation plan, followed by testing for adherence to the design. GM has substantially completed the remediation of its critical and non-critical systems. A small number of systems will be remediated or replaced in 1999. Unimportant systems have been and will continue to be removed from GM's Year 2000 inventory and will not be remediated. GM believes that it will meet its targets for Year 2000 readiness. 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. 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. This phase commenced during the fourth quarter of 1998 and is expected to be the major focus of the Year 2000 program throughout 1999. II-14 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Year 2000 (continued) 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 GM's business or that of its suppliers that it believes would be most likely to experience Year 2000 problems. GM contingency planning will also address 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, 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. Additionally, GM has initiated its own review of suppliers considered to be critical to GM's operations, including more than 2,400 on-site assessments to date. These assessment efforts have been substantially completed with respect to the critical supplier sites. 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 is not relying entirely on the receipt of written assurances from suppliers with respect to their Year 2000 compliance. GM is also evaluating certain suppliers on a first-hand basis and seeking to enhance their likelihood of full Year 2000 readiness by actively assisting them with training and consultation regarding Year 2000 remediation projects. GM expects that information from our suppliers, written responses and interactions with them, will provide GM with a basis for further contingency planning and risk management. 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. GM's direct Year 2000 program cost is being expensed as incurred with the exception of capitalizable replacement hardware and, beginning in 1999, internal-use software. Total incremental spending by GM is not expected to be material to the Corporation's operations, liquidity or capital resources. In addition to the work for which GM has direct financial responsibility, EDS is providing Year 2000-related services to GM, as required under the Master Service Agreement. These services are being provided by EDS as part of normal fixed price services and other on-going payments to EDS. GM's current forecast is that its total direct expenditures, and the value of services performed by EDS attributable to GM's Year 2000 program, will be between approximately $710 million and $780 million for its entire Year 2000 program. Of this amount, GM currently expects its total Year 2000 direct spending to be between approximately $450 million and $520 million, with peak spending occurring in the last quarter of 1998, and early in 1999. This total direct spending estimate 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 do not cause a significant business disruption that results in a material financial loss to GM due to the millennium change. The estimated value of the services that EDS is required to provide to GM under the Master Service Agreement, attributable to work being performed in connection with GM's Year 2000 program, is approximately $335 million. II-15 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Year 2000 (concluded) GM incurred approximately $40 million of Year 2000 expense during 1997 and approximately $145 million in 1998. Also, the estimated value of services provided to GM by EDS during 1997 and 1998 under the Master Service Agreement that were attributable to work performed in connection with GM's Year 2000 program, was approximately $260 million. Thus, the total direct expenditures by GM, and value of Year 2000-related services performed by EDS in 1997 and 1998, attributable to GM's Year 2000 program, amounted to approximately $445 million. Despite the incremental Year 2000 spending expected to be incurred throughout the Corporation, GM's current business plan projects continued 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-looking 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 issue 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. LIQUIDITY AND CAPITAL RESOURCES Automotive, Electronics and Other Operations - -------------------------------------------- Cash, marketable securities, and $3.0 billion of assets of the Voluntary Employees' Beneficiary Association (VEBA) trust invested in fixed-income securities, at December 31, 1998 totaled $14.1 billion compared with $17.5 billion at December 31, 1997. During 1997, GM elected to pre-fund part of its other postretirement benefits liability, which is primarily related to postretirement health care expenses, by creating a VEBA trust. The total VEBA assets, which approximated $4.6 billion and $3.0 billion at December 31, 1998 and 1997, respectively, had the effect of reducing GM's postretirement benefits liability on the consolidated balance sheet. Net liquidity, calculated as cash and marketable securities less the total of loans payable and long-term debt, was $2.4 billion at December 31, 1998, a decrease of $5.8 billion from the prior year. GM previously indicated that it had a goal of maintaining $13.0 billion of cash and marketable securities in order to continue funding product development programs throughout the next downturn in the business cycle. This $13.0 billion target includes cash to pay certain costs that were pre-funded in part by VEBA contributions. Long-term debt was $7.2 billion at December 31, 1998, an increase of approximately $1.5 billion from the prior year. The ratio of long-term debt to long-term debt and GM investment in Automotive, Electronics and Other Operations was 58.8% and 38.9% at December 31, 1998 and 1997, respectively. The ratio of long-term debt and short-term loans payable to the total of this debt and GM investment was 63.3% and 41.5% at December 31, 1998 and 1997, respectively. GM believes it has sufficient resources to meet anticipated future cash flow requirements. In addition to cash flows from operations, GM and its subsidiaries maintain substantial lines of credit with various financial institutions. Additional information on GM's available credit facilities is contained in Note 10 to the GM consolidated financial statements. II-16 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Financing and Insurance Operations - ---------------------------------- GM's Financing and Insurance Operations primarily consist of GMAC. At December 31, 1998, GMAC owned assets and serviced automotive receivables for others totaling $138.7 billion compared with $121.2 billion at year end 1997. Earning assets totaled $125.1 billion and $104.0 billion at December 31, 1998 and 1997, respectively. The increase in earning assets was primarily attributable to increases in automotive finance receivables outstanding, operating lease assets, the investments in securities portfolio, real estate mortgages outstanding and receivables due from GM. Cash and cash equivalents totaled $618 million and $759 million at December 31, 1998 and 1997, respectively. GMAC's consolidated finance receivables, net of unearned income, totaled $72.1 billion and $60.0 billion at December 31, 1998 and 1997, respectively. The higher outstanding balance was primarily attributable to a $7.5 billion worldwide increase in retail receivables, a $3.1 billion increase in U.S. and European wholesale receivables and a $1.8 billion increase in term loans. GMAC's liquidity, as well as its ability to profit from ongoing acquisition activity, is in large part dependent on its access to capital and the costs associated with raising funds in different segments of the capital markets. In this regard, GMAC regularly accesses the short-, medium-, and long-term debt markets, principally through commercial paper, term notes, and underwritten issuances. GMAC's borrowings outstanding at December 31, 1998 totaled $103.8 billion compared with $86.7 billion at December 31, 1997. GMAC's ratio of debt to stockholder's equity at December 31, 1998 was 10.6:1, up from 9.9:1 at December 31, 1997. The higher year-to-year debt levels were principally used to fund increased asset levels. GMAC has continued to use an asset securitization program as an alternative funding source and has sold finance receivables that it continues to service for a fee. The servicing portfolio of sold finance receivables totaled $7.3 billion and $12.4 billion at December 31, 1998 and 1997, respectively. GMAC and its subsidiaries maintain substantial bank lines of credit, which totaled $42.9 billion and $39.8 billion at December 31, 1998 and 1997, respectively. The unused portion of these credit lines totaled $33.2 billion at December 31, 1998, which was $2.8 billion higher than at December 31, 1997. Book Value Per Share Book value per share of $1-2/3 par value common stock decreased to $19.90 from $22.26 at December 31, 1998 and 1997, respectively. Book value per share of Class H common stock decreased to $11.94 at December 31, 1998 from $13.36 at December 31, 1997. Book value per share was determined based on the liquidation rights of the various classes of common stock. Stock Repurchases In February 1998, the GM Board of Directors (GM Board) approved a $4.0 billion stock repurchase program. Due to the previously mentioned work stoppages during the second and third quarters of 1998, stock repurchases were temporarily suspended as part of GM's cash conservation initiatives. The stock repurchases were reinstated during the first quarter of 1999 and are expected to be completed by the end of 1999. Upon completion of the $4.0 billion stock repurchase program, GM's stock repurchases since January 1997 will total $9.0 billion. In January 1999, GM announced its intention to redeem the Series B Preference Stock pursuant to its option to do so which commenced on January 1, 1999. CASH FLOWS Automotive, Electronics and Other Operations - -------------------------------------------- Net cash provided by operating activities was $9.3 billion, $12.8 billion, and $14.5 billion in 1998, 1997, and 1996, respectively. The decrease in net cash provided by operating activities in 1998 primarily resulted from a decrease in cash generated from lower net income primarily due to the work stoppages previously discussed, partially offset by lower VEBA contributions in 1998. The decrease in net cash provided by operating activities in 1997 primarily resulted from a $3.0 billion VEBA contribution, and a $3.5 billion increase in deferred tax assets, partially offset by a $500 million year-over-year increase in other operating assets and liabilities and a $1.7 billion year-over-year increase in income from continuing operations. Depreciation and amortization expenses increased by $4.7 billion in 1997 primarily due to the competitiveness studies charges. II-17 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Automotive, Electronics and Other Operations (concluded) - -------------------------------------------------------- Net cash used in investing activities was relatively unchanged at $8.6 billion for 1998 and 1997. The increase in cash due to the net change in investments in other marketable securities and operating leases in 1998 was offset by the proceeds from borrowings of Hughes Defense prior to the spin-off of Hughes Defense in 1997. Net cash used in investing activities decreased $1.3 billion in 1997 from $9.9 billion in 1996. This decrease was primarily due to GM's receipt of $4.0 billion in proceeds from borrowings of Hughes Defense, partially offset by a $1.7 billion increase in investments in companies, net of cash acquired, which primarily related to the completion of the merger of the satellite service operations of former Hughes and PanAmSat. These amounts were also offset by an intercompany payment from EDS prior to its separation in 1996 and lower dividends received from GMAC in 1997. Net cash used in financing activities was $2.1 billion, $6.7 billion, and $1.2 billion in 1998, 1997 and 1996, respectively. The decrease in cash used for financing activities in 1998 was primarily due to a $3.3 billion net increase in loans payable and long-term debt and a decrease in cash used for stock repurchases. Net cash used in financing activities increased $5.5 billion in 1997 compared to 1996. During 1997, GM used $3.8 billion to acquire 63.5 million shares of $1-2/3 par value common stock. GM also used approximately $600 million to repurchase shares of $1-2/3 par value common stock for certain employee benefit plans during 1997. Also in 1997, net cash flows used in association with changes in long-term debt increased by approximately $1.8 billion compared with 1996 and reflected a combination of refinancing and retirement using GM's new commercial paper program and cash received in connection with the Hughes Transactions. Financing and Insurance Operations - ---------------------------------- Cash provided by operating activities during 1998 totaled $7.7 billion, an increase from the $4.1 billion and $4.3 billion provided during the comparable 1997 and 1996 periods, respectively. The additional operating cash flow was primarily the result of increased mortgage activity. Cash used for investing activities during 1998 totaled $22.6 billion, compared with $12.1 billion and $6.5 billion during the same periods in 1997 and 1996, respectively. Cash usage increased primarily as a result of lower net finance receivable activity and a decrease in sales of retail receivables proceeds. Cash provided by financing activities during 1998 totaled $15.5 billion, compared with $8.2 billion and $2.5 billion of cash provided by financing activities during the comparable 1997 and 1996 periods, respectively. The change is primarily the result of increases in short- and long-term debt and lower dividends paid to GM. Dividends Dividends may be paid on common stocks only when, as and if declared by the GM Board in its sole discretion. GM's policy is to distribute dividends on its $1-2/3 par value common stock based on the outlook and indicated capital needs of the business. In January 1999, the GM Board declared a quarterly cash dividend of $0.50 per share on $1-2/3 par value common stock, payable March 10, 1999. 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 May 1, 1999. With respect to Class H common stock, which was recapitalized on December 17, 1997, the GM Board determined that it will not pay any cash dividends at this time in order to allow the earnings of Hughes to be retained for investment in its telecommunications and space businesses. Health Care Expense and Other Postretirement Benefits The cost of postretirement medical, dental, vision, and life insurance benefits provided to retirees and eligible dependents are recognized in the consolidated financial statements during the period in which employees provide services to GM. Costs for medical, dental, vision, and life insurance benefits provided to employees during active service are expensed as incurred (pay-as-you-go). The components of postretirement benefits expense, the U.S. health care cost, and cash expenditures for GM's U.S. operations are set forth below (excluding cash expenditures for Hughes' and former Hughes' non-automotive employees, but including GMAC). GM is committed to reducing the burden of continuing health care cost increases. During 1997, GM elected to pre-fund part of its other postretirement benefits liability by creating a VEBA trust to which it contributed $3 billion of its cash reserves. In 1998, GM contributed an additional $1.7 billion to and paid $375 million in benefits from the VEBA trust. The VEBA assets had the effect of reducing GM's postretirement benefits liability on the consolidated balance sheet. II-18 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Health Care Expense and Other Postretirement Benefits (concluded) Year Ended December 31, 1998 ------------------------------------- Postretirement Health Pay-As-You-Go Benefit Care Cost Cost* -------------- --------- ------------- (Dollars in Millions) GM U.S. operations health care Postretirement medical, dental, and vision $2,829 $2,829 $ - Retired employees pay-as-you-go - - 2,012 Active employees pay-as-you-go - 1,717 1,717 ----- ----- ----- Total health care 2,829 $4,546 $3,729 ----- ===== ===== Life insurance 449 Other subsidiaries - health care and life insurance 193 ---- Total postretirement benefits expense $3,471 ====== - ------------------ * Pay-as-you-go amounts for 1997 were $1.9 billion for retirees, $1.7 billion for active employees, and $3.6 billion in total. GM has disclosed in its consolidated financial statements certain amounts associated with estimated future postretirement benefits other than pensions and classified such amounts as "accumulated postretirement benefit obligations," "liabilities," or "obligations." Notwithstanding the recording of such amounts and the use of these terms, GM does not admit or otherwise acknowledge that such amounts or existing postretirement benefit plans of GM (other than pensions) represent legally enforceable liabilities of GM. GM Card GM sponsors a credit card program, entitled the GM Card program, which was introduced in the U.S. in September 1992 and subsequently in Canada, Australia, Brazil, Mexico, Chile and the United Kingdom. A cardholder's use of the card generates entitlements to rebates that can be used in connection with the cardholder's purchase or lease of a new GM vehicle. As the sponsor of the GM Card program, GM does not provide consumer credit. The program is used as a marketing tool to increase product sales. Independent banks issue the GM Card and are responsible for evaluating, extending, and funding credit to the cardholders, and are fully responsible for any credit card losses with no recourse against GM. In the U.S., GM Card rebates accumulate at a rate equal to 5% of all spending for goods or services charged on the GM Card up to a maximum rebate amount of $500 per year. The rebates, which expire in 7 years, may be applied over and above all sales allowances in the market at the time of vehicle purchase or lease. GM is solely responsible to cardholders for rebates. Provisions for GM Card rebates are recorded as reductions in revenue at the time of vehicle sale. GM has the right to prospectively modify the plan. Rebates redeemed worldwide during 1998, 1997, and 1996 were $705 million, $656 million, and $443 million, respectively. Cardholder rebates available worldwide for future redemption when the cardholder purchases or leases a new GM vehicle amounted to $3.7 billion and $3.5 billion (net of deferred program income) at December 31, 1998 and 1997, respectively. GM anticipates that profits from incremental sales resulting from the GM Card program, along with deferred program income, will more than offset future rebate costs associated with the GM Card. II-19 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Deferred Income Taxes At December 31, 1998, GM's consolidated balance sheet included a net deferred tax asset of approximately $20.8 billion related to net future deductible temporary differences (see Note 6 to the GM consolidated financial statements) in the United States of which approximately $15.4 billion related to the obligation for postretirement benefits other than pensions. Realization of the net deferred tax asset is dependent upon profitable operations in the United States and future reversals of existing taxable temporary differences. Although realization is not assured, GM believes that it is more likely than not that such benefits will be realized through the reduction of future taxable income. Management has carefully considered various factors in assessing the probability of realizing this deferred tax asset including: . The operating results of GMNA over the most recent three year period and overall financial forecasts of book and taxable income for the 1999-2003 period. Further improvements are expected by continuing efforts to maintain GM's competitiveness, including actions relating to reducing material costs through global sourcing and increasing efficiency through lean manufacturing. . Operating results of GMAC and Hughes which generated U.S. pre-tax income of approximately $1.8 billion, $3.3 billion, and $3.1 billion in 1998, 1997, and 1996, respectively. . The ability to utilize tax planning, such as capitalization of research and experimentation costs for tax purposes, so that GM does not have, and does not expect to generate in the near future, any significant U.S. federal tax net operating loss carryforwards. . The extended period of time over which the tax assets can be utilized. Postretirement benefits become tax deductions over periods up to 50 years. . The fact that GM has never lost deferred federal tax assets due to the expiration of a U.S. net operating loss carryforward. Dividends received from foreign operations for U.S. federal income tax purposes totaled approximately $3.1 billion, $3.0 billion, and $1.2 billion in 1998, 1997, and 1996, respectively. Pensions At December 31, 1998, GM's total worldwide net unfunded pension position increased to $6.3 billion ($1.2 billion for the U.S. automotive qualified hourly/salary plans and $5.1 billion for all other plans worldwide) from $5.0 billion a year ago ($0.5 billion for the U.S. automotive qualified hourly/salary plans and $4.5 billion for all other plans worldwide). The predominant factor contributing to the increase in the unfunded position of the U.S. automotive qualified hourly/salary plans was a 25 basis point decline in the discount rate used to measure the pension obligation at the end of 1998 compared to 1997 (6.75% and 7.00%, respectively). During 1998 and 1997, GM contributed $1.1 billion and $1.5 billion in cash, respectively, to its U.S. hourly pension plans. On an economic basis, GM continues to maintain a fully-funded status for its U.S. hourly and salaried pension plans as of December 31, 1998. The economic basis of measuring the U.S. hourly and salaried pension liability differs from the Statement of Financial Accounting Standards (SFAS) No. 87 basis, Employers' Accounting for Pensions, required by GAAP, but GM believes it to be a better measure of GM's ongoing economic exposure for pension obligations and as such uses this as a measure to determine its funded status. The economic basis discounts pension liabilities at the long-term asset earnings rate assumption (currently 10.0%) rather than at a variable, year-end market rate as required by SFAS No. 87 (currently 6.75%). In periods of low interest rates, as in the current market environment, the SFAS No. 87 liability will generally exceed the liability calculated on an economic basis, whereas in periods of high interest rates the economic basis liability will generally exceed the SFAS No. 87 liability. Environmental Matters GM is subject to various laws relating to the protection of the environment including laws regulating air emissions, water discharges, waste management, and environmental cleanup. GM is also in various stages of investigation and remediation for sites where contamination has been alleged. The liability for worldwide environmental cleanup was $519 million and $610 million at December 31, 1998 and 1997, respectively. In future periods, new laws or regulations, advances in technologies, additional information about the ultimate remedy selected at new and existing sites, and GM's share of the cost of such remedies could significantly change GM's estimates. The process of estimating such liabilities is complex and dependent primarily on the nature and extent of historical information and physical data relating to a contaminated site, the complexity of the site, the uncertainty as to what remedy and technology will be required, the outcome of discussions with regulatory agencies and other potentially responsible parties (PRPs) at multi-party sites, and the number and financial viability of other PRPs. In 1998, 1997, and 1996, GM expensed $91 million, $88 million, and $94 million, respectively, for environmental investigation, remediation, and waste management. In addition, worldwide capital expenditures, as discussed previously, included $98 million, $115 million, and $122 million in 1998, 1997, and 1996, respectively, for various environmental matters. II-20 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Euro Conversion On January 1, 1999, eleven of fifteen member countries of the European Union established fixed conversion rates between their existing currencies and adopted the euro as their new common currency. The euro trades on currency exchanges and the legacy currencies remain legal tender in the participating countries for a transition period until January 1, 2002. Beginning on January 1, 2002, euro denominated bills and coins will be issued and legacy currencies will be withdrawn from circulation. GM has established plans to assess and address the impact to GM as a result of the euro conversion. The introduction of the euro on January 1, 1999 has increased the pace of price harmonization throughout Europe. GM has developed a comprehensive program to identify, analyze and determine the best strategy to address this price harmonization. GM is analyzing all aspects of its pricing strategy to minimize any potential risk of this pricing harmonization. In addition, the Corporation has reviewed and has made required modifications to applicable information technology systems and contracts based on the new currency. GM believes the introduction of the euro does not have any material tax consequences, and also believes it reduces its overall foreign exchange risk as the number of currencies in which it transacts is now reduced. GM believes that the euro conversion will not have a material adverse impact on its financial position or results of operations. Employment and Payrolls Worldwide employment at December 31, (in thousands) 1998 1997 1996(1) ---- ---- ------ GMNA 226 237 245 GME 84 79 79 GMLAAM 24 27 23 GMAP 10 10 9 Delphi 198 210 211 GMAC 24 21 18 Hughes 15 14 12 Other 13 10 8 -- -- - Total employees 594 608 605 === === === Worldwide payrolls - continuing operations (in billions) $26.5 $28.3 (1) $27.8 U.S. hourly payrolls (in billions) (2)(3) $12.5 $13.9 $13.8 Average labor cost per active hour worked - U.S. hourly (2) $45.42 $44.86 $44.08 - ----------------------- (1) Amounts have been adjusted to reflect the changes to GM's organizational structure resulting from the restructuring of former Hughes which occurred in December 1997. As such, Delphi adjusted amounts include Delco and Hughes adjusted amounts exclude Delco and Hughes Defense. (2) Excludes EDS, Hughes' and former Hughes' non-automotive employees. (3) Includes employees "at work" (excludes laid-off employees receiving benefits). New Accounting Standards 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. In the second quarter of 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilitiies in the statement of financial position and measure those instruments at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. GM plans to adopt SFAS No. 133 by January 1, 2000, as required. GM is currently assessing the impact of this Statement on GM's consolidated financial statements. II-21 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Forward-Looking Statements Following are the principal important factors which may cause actual results to differ materially from those expressed in forward-looking statements made by the managements of GM, Hughes and Delphi: . Changes in economic conditions, currency exchange rates, or political stability in the major markets where the corporation procures material, components, and supplies for the production of its principal products or where its products are produced, distributed, or sold (i.e., North America, Europe, Latin America and Asia-Pacific), including the effects of current economic problems in Asia and political problems in the Far East. . Shortages of fuel or interruptions in transportation systems, labor strikes, work stoppages, or other interruptions to or difficulties in the employment of labor in the major markets where the corporation purchases material, components, and supplies for the production of its products or where its products are produced, distributed or sold. . Significant changes in the competitive environment in the major markets where the corporation purchases material, components and supplies for the production of its products or where its products are produced, distributed, or sold. . Changes in the laws, regulations, policies or other activities of governments, agencies and similar organizations where such actions may affect the production, licensing, distribution or sale of the corporation's products, the cost thereof or applicable tax rates. . The ability of the corporation to achieve reductions in cost and employment levels, to realize production efficiencies, and to implement capital expenditures, all at the levels and times planned by management. . With respect to Hughes, additional risk factors include: the ability to achieve subscriber growth in its Direct-To-Home businesses, the ability to sustain technological competitiveness, the possible failure or delay of planned satellite launches, access to capital and financial flexibility in order to take advantage of new market opportunities, the ability to complete strategic acquisition of businesses and assets, and the ability to respond to competitive pressures and react quickly to other major changes in the marketplace. * * * * * * II-22 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Item 7A. Quantitative and Qualitative Disclosures About Market Risk GM is exposed to market risk from changes in foreign currency exchange rates, interest rates and certain commodity and equity security prices. In order to manage the risk arising from these exposures, GM enters into a variety of foreign exchange, interest rate, and commodity forward contracts and options. A discussion of GM's accounting policies for derivative instruments is included in Note 1 to the GM consolidated financial statements and further disclosure is provided in Notes 10, 11, and 12 to the GM consolidated financial statements. GM maintains risk management control systems to monitor foreign exchange, interest rate, commodity and equity price risks, and related hedge positions. Positions are monitored using a variety of analytical techniques including market value, sensitivity analysis, and value-at-risk models. The following analyses are based on sensitivity analysis tests which assume instantaneous, parallel shifts in exchange rates, interest rate yield curves, and commodity and equity prices. For options and instruments with non-linear returns, models appropriate to the instrument are utilized to determine the impact of sensitivity shifts. Foreign Currency Exchange Rate Risk GM has foreign currency exposures related to buying, selling, and financing in currencies other than the local currencies in which it operates. More specifically, GM is exposed to foreign currency risk related to uncertainty to which future earnings or assets and liability values are exposed due to operating cash flows and various financial instruments that are denominated in foreign currencies. GM's most significant foreign currency exposures relate to Canada, Mexico, Western European countries (primarily Germany, United Kingdom, Spain, Italy, Belgium and France), Australia, Japan and Brazil. As of December 31, 1998 and 1997, the net fair value liability of financial instruments with exposure to foreign currency risk was approximately $3.5 billion and $1.9 billion, respectively. The potential loss in fair value for such financial instruments from a hypothetical 10% adverse change in quoted foreign currency exchange rates would be approximately $161 million and $190 million for 1998 and 1997, respectively. The model assumes a parallel shift in the foreign currency exchange rates. Exchange rates rarely move in the same direction. The assumption that exchange rates change in a parallel fashion may overstate the impact of changing exchange rates on assets and liabilities denominated in a foreign currency. Interest Rate Risk GM is subject to market risk from exposure to changes in interest rates based on its financing, investing, and cash management activities. GM enters into various financial instrument transactions to maintain the desired level of exposure to the risk of interest rate fluctuations and to minimize interest expense. More specifically, General Motors Acceptance Corporation (GMAC) and its affiliates have also entered into contracts to provide commercial and retail financing, retain mortgage servicing rights, and to retain various assets related to mortgage securitization. Certain exchange traded future and option contracts, interest rate caps and floors, along with various investments, have been entered into to reduce the interest rate risk related to these activities and manage potential prepayment activity associated with mortgage servicing rights. The GMAC Mortgage Group (GMACMG) manages prepayment risk associated with its capitalized mortgage servicing rights with U.S. Treasury options and futures. Since the derivative instruments do not have identical characteristics to the underlying mortgage servicing rights, GM is exposed to basis risk. GMACMG mitigates this risk through a historical review of value change in various interest rate scenarios when establishing and maintaining its hedge program. As of December 31, 1998 and 1997, the net fair value liability of all financial instruments held for purposes other than trading with exposure to interest rate risk was approximately $15.9 billion and $3.7 billion, respectively. The potential decrease in fair value resulting from a hypothetical 10% shift in interest rates would be approximately $90 million and $214 million for 1998 and 1997, respectively. The net fair value asset of all financial instruments held for trading purposes with exposure to interest rate risk was approximately $3.2 billion and $2.1 billion for 1998 and 1997, respectively. The potential loss in fair value resulting from a hypothetical 10% shift in interest rates would be approximately $84 million and $43 million for 1998 and 1997, respectively. The SEC disclosures on market risk require that all financial instruments, as defined by Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures about Fair Value of Financial Instruments, should be included in the quantitative disclosure calculation. Operating leases are not required to be disclosed by SFAS No. 107, and have not been presented as part of the sensitivity analysis. This is a significant limitation to the analysis presented. While the sensitivity analysis will show a fair market value change for the debt which funds GM's operating lease portfolio, a corresponding change for GM's operating lease portfolio, which had a book value of $37.1 billion and $33.7 billion as of December 31, 1998 and 1997, respectively, was not considered by the model. As a result, the overall impact to the fair market value of financial instruments from a hypothetical change in interest rates may be overstated. II-23 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Interest Rate Risk (concluded) There are certain shortcomings inherent to the sensitivity analyses presented. The model assumes interest rate changes are instantaneous parallel shifts in the yield curve. In reality, changes are rarely instantaneous. Although certain assets and liabilities may have similar maturities or periods to repricing, they may not react correspondingly to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate with changes in market interest rates, while interest rates on other types of assets may lag behind changes in market rates. Finance receivables are less susceptible to prepayments when interest rates change, while prepayments on many mortgage related instruments are directly affected by a change in interest rates. As such, GM's model does not address prepayment risk for automotive related finance receivables, but does consider prepayment risk for mortgage related instruments that are highly sensitive to prepayment risk. However, in the event of a change in interest rates, actual loan prepayments may deviate significantly from assumptions used in the model. Further, certain assets, such as adjustable rate loans, have features, such as annual and lifetime caps, that restrict changing the interest rates both on a short-term basis and over the life of the asset. Finally, the ability of certain borrowers to make scheduled payments on their adjustable rate loans may decrease in the event of an interest rate increase. Commodity Price Risk GM enters into commodity forward and option contracts. Such contracts are executed to offset GM's exposure to the potential change in prices mainly for various non-ferrous metals used in the manufacturing of automotive components. The net fair value liability of such contracts, excluding the underlying exposures, as of December 31, 1998 and 1997 was approximately $200 million and $42 million, respectively. The potential change in the fair value of commodity forward and option contracts, assuming a 10% change in the underlying commodity price, would be approximately $203 million and $111 million at December 31, 1998 and 1997, respectively. This amount excludes the offsetting impact of the price risk inherent in the physical purchase of the underlying commodities. Equity Price Risk GM holds investments in various available-for-sale equity securities which are subject to price risk. The fair value of such investments, as of December 31, 1998 and 1997 was approximately $1.2 billion and $899 million, respectively. The potential change in the fair value of these investments, assuming a 10% change in prices would be approximately $121 million and $90 million for 1998 and 1997, respectively. Forward-Looking Statements The above discussion and the estimated amounts generated from the sensitivity analyses referred to above include forward-looking statements of market risk which assume for analytical purposes that certain adverse market conditions may occur. Actual future market conditions may differ materially from such assumptions because the amounts noted previously are the result of analyses used for the purpose of assessing possible risks and the mitigation thereof. Accordingly, the forward-looking statements should not be considered projections by GM of future events or losses. * * * * * * II-24 RESPONSIBILITIES FOR CONSOLIDATED FINANCIAL STATEMENTS The following consolidated financial statements of General Motors Corporation and subsidiaries were prepared by management, which is responsible for their integrity and objectivity. The statements have been prepared in conformity with generally accepted accounting principles and, as such, include amounts based on judgments of management. Management is further responsible for maintaining internal control designed to provide reasonable assurance that the books and records reflect the transactions of the companies and that established policies and procedures are carefully followed. From a stockholder's point of view, perhaps the most important feature in internal control is that it is continually reviewed for effectiveness and is augmented by written policies and guidelines, the careful selection and training of qualified personnel, and a strong program of internal audit. Deloitte & Touche LLP, an independent auditing firm, is engaged to audit the consolidated financial statements of General Motors Corporation and subsidiaries and issue reports thereon. The audit is conducted in accordance with generally accepted auditing standards that comprehend the consideration of internal control and tests of transactions to the extent necessary to form an independent opinion on the financial statements prepared by management. The Independent Auditors' Report appears on the next page. The Board of Directors, through the Audit Committee (composed entirely of non-employee Directors), is responsible for assuring that management fulfills its responsibilities in the preparation of the consolidated financial statements. The Audit Committee selects the independent auditors annually in advance of the Annual Meeting of Stockholders and submits the selection for ratification at the Meeting. In addition, the Audit Committee reviews the scope of the audits and the accounting principles being applied in financial reporting. The independent auditors, representatives of management, and the internal auditors meet regularly (separately and jointly) with the Audit Committee to review the activities of each, to ensure that each is properly discharging its responsibilities, and to assess the effectiveness of internal control. It is management's conclusion that internal control at December 31, 1998 provides reasonable assurance that the books and records reflect the transactions of the companies and that established policies and procedures are complied with. To ensure complete independence, Deloitte & Touche LLP has full and free access to meet with the Audit Committee, without management representatives present, to discuss the results of the audit, the adequacy of internal control, and the quality of financial reporting. /s/John F. Smith, Jr. /s/J. Michael Losh - --------------------- ------------------ John F. Smith, Jr. J. Michael Losh Chairman and Chief Executive Officer Executive Vice President and Chief Financial Officer II-25 Independent Auditors' Report General Motors Corporation, its Directors, and Stockholders: We have audited the Consolidated Balance Sheets of General Motors Corporation and subsidiaries as of December 31, 1998 and 1997, and the related Consolidated Statements of Income, Cash Flows, and Stockholders' Equity for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedule listed at Item 14. These financial statements and the financial statement schedule are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of General Motors Corporation and subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/DELOITTE & TOUCHE LLP - ------------------------ DELOITTE & TOUCHE LLP Detroit, Michigan January 20, 1999 (March 2, 1999 as to Note 23) II-26 ITEM 8 CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, ------------------------------- 1998 1997 1996 ---- ---- ---- (Dollars in Millions) AUTOMOTIVE, ELECTRONICS AND OTHER OPERATIONS Manufactured products sales and revenues (Note 1) $140,433 $153,683 $145,341 Other income (Note 21) 2,598 8,084 2,849 ----- ----- ----- Total net sales and revenues 143,031 161,767 148,190 ------- ------- ------- Cost of sales and other operating charges, exclusive of items listed below (Note 2 117,973 130,028 123,195 Selling, general and administrative expenses 13,311 13,386 11,999 Depreciation and amortization expense (Notes 1 and 2) 7,281 11,803 7,145 ----- ------ ----- Total operating costs and expenses 138,565 155,217 142,339 ------- ------- ------- Other expenses (Notes 2 and 21) 782 241 792 Interest expense (Note 10) 1,050 863 771 Net expense (income) from transactions with Financing and Insurance Operations (Note 1) 82 (101) (125) -- ---- ---- Income from continuing operations before income taxes and minority interests 2,552 5,547 4,413 Income tax expense (Note 6) 845 155 885 Minority interests 11 66 56 (Losses) earnings of nonconsolidated associates (184) (78) 128 ---- --- --- Income from continuing operations 1,534 5,380 3,712 Income from discontinued operations (Note 1) - - 10 ----- ----- ----- Net income - Automotive, Electronics and Other Operations $1,534 $5,380 $3,722 ====== ====== ====== Years Ended December 31, ------------------------------- 1998 1997 1996 ---- ---- ---- (Dollars in Millions) FINANCING AND INSURANCE OPERATIONS Financing revenues (Note 1) $13,585 $12,762 $12,674 Insurance, mortgage and other income (Note 21) 4,699 3,723 3,021 ----- ----- ----- Total revenues and other income 18,284 16,485 15,695 ------ ------ ------ Interest expense (Note 10) 5,843 5,250 4,924 Depreciation and amortization expense (Note 1) 4,920 4,813 4,695 Operating and other expenses 4,019 2,806 2,581 Provisions for financing losses (Notes 1 and 21) 463 523 669 Insurance losses and loss adjustment expenses (Note 21) 1,061 747 622 ----- --- --- Total costs and expenses 16,306 14,139 13,491 ------ ------ ------ Net (income) expense from transaction with Automotive, Electronics and Other Operations (Note 1) (82) 101 125 --- --- --- Income before income taxes 2,060 2,245 2,079 Income tax expense (Note 6) 618 914 838 Minority interests (20) (13) - --- --- ----- Net income - Financing and Insurance Operations $1,422 $1,318 $1,241 ====== ====== ======
The above supplemental consolidating information is explained in Note 1, "Nature of Operations". Reference should be made to the notes to consolidated financial statements. II-27 CONSOLIDATED STATEMENTS OF INCOME - Concluded
Years Ended December 31, ------------------------------- 1998 1997 1996 ---- ---- ---- (Dollars in Millions Except Per Share Amounts) GENERAL MOTORS CORPORATION AND SUBSIDIARIES Manufactured products sales and revenues (Note 1) $140,433 $153,683 $145,341 Financing revenues (Note 1) 13,585 12,762 12,674 Other income (Note 21) 7,297 11,807 5,870 ----- ------ ----- Total net sales and revenues 161,315 178,252 163,885 ------- ------- ------- Cost of sales and other operating charges, exclusive of items listed below (Note 2) 117,973 130,028 123,195 Selling, general and administrative expenses 17,330 16,192 14,580 Depreciation and amortization expense (Notes 1 and 2) 12,201 16,616 11,840 Interest expense (Note 10) 6,893 6,113 5,695 Other expenses (Notes 2 and 21) 2,306 1,511 2,083 ----- ----- ----- Total costs and expenses 156,703 170,460 157,393 ------- ------- ------- Income from continuing operations before income taxes and minority interests 4,612 7,792 6,492 Income tax expense (Note 6) 1,463 1,069 1,723 Minority interests (9) 53 56 (Losses) earnings of nonconsolidated associates (184) (78) 128 ---- --- --- Income from continuing operations $2,956 $6,698 $4,953 Income from discontinued operations (Note 1) - - 10 ----- ----- ----- Net income $2,956 $6,698 $4,963 ------ ------ ------ Premium on exchange of preference stocks (Note 16) - 26 - Dividends on preference stocks (Note 17) 63 72 81 -- -- -- Earnings on common stocks $2,893 $6,600 $4,882 ====== ====== ====== Basic earnings per share attributable to common stocks (Note 18) $1-2/3 par value common stock Continuing operations $4.26 $8.70 $6.07 Discontinued operations - - (0.01) ---- ---- ---- Earnings per share attributable to $1-2/3 par value $4.26 $8.70 $6.06 ===== ===== ===== Income from discontinued operations attributable to Class E $ - $ - $0.04 ===== ===== ===== Earnings per share attributable to Class H (prior to its recapitalization on December 17, 1997) (Note 1) $ - $3.17 $2.88 ===== ===== ===== Earnings per share attributable to Class H (subsequent to its recapitalization on December 17, 1997) (Note 1) $0.68 $0.02 $ - ===== ===== ===== Diluted earnings per share attributable to common stocks (Note 18) $1-2/3 par value common stock Continuing operations $4.18 $8.62 $6.03 ===== ===== ===== Discontinued operations - - (0.01) ----- ----- ----- Earnings per share attributable to $1-2/3 par value $4.18 $8.62 $6.02 ===== ===== ===== Income from discontinued operations attributable to Class E $ - $ - $0.04 ===== ===== ===== Earnings per share attributable to Class H (prior to its recapitalization on December 17, 1997) (Note 1) $ - $3.17 $2.88 ===== ===== ===== Earnings per share attributable to Class H (subsequent to its recapitalization on December 17, 1997) (Note 1) $0.68 $0.02 $ - ===== ===== ===== Reference should be made to the notes to consolidated financial statements.
II-28 CONSOLIDATED BALANCE SHEETS
December 31, ----------------- AUTOMOTIVE, ELECTRONICS AND OTHER OPERATIONS 1998 1997 - -------------------------------------------- ---- ---- (Dollars in Millions) ASSETS Cash and cash equivalents $10,723 $10,685 Marketable securities 407 3,826 --- ----- Total cash and marketable securities (Notes 1 and 3) 11,130 14,511 Accounts and notes receivable (less allowances) 5,599 5,440 Inventories (less allowances) (Note 5) 12,207 12,102 Equipment on operating leases (less accumulated depreciation) (Note 7) 4,954 4,677 Deferred income taxes and other current assets (Note 6) 10,473 6,278 Net receivable from Financing and Insurance Operations (Note 1) - 319 ------ ------ Total current assets 44,363 43,327 Equity in net assets of nonconsolidated associates 1,317 1,407 Property - net (Note 8) 37,187 33,914 Intangible assets - net (Notes 1 and 9) 10,222 10,752 Deferred income taxes (Note 6) 17,780 20,721 Other assets 14,769 13,547 ------ ------ Total Automotive, Electronics and Other Operations assets $125,638 $123,668 ======== ======== LIABILITIES AND GM INVESTMENT Accounts payable (principally trade) $13,479 $12,461 Loans payable (Note 10) 1,526 656 Accrued expenses (Note 14) 31,985 33,254 Net payable to Financing and Insurance Operations (Note 1) 816 - ------ ------ Total current liabilities 47,806 46,371 Long-term debt (Note 10) 7,217 5,695 Postretirement benefits other than pensions (Note 13) 38,076 38,388 Pensions (Note 13) 6,590 4,271 Other liabilities and deferred income taxes (Note 14) 20,267 19,294 ------ ------ Total Automotive, Electronics and Other Operations liabilities 119,956 114,019 Minority interests 615 695 GM investment in Automotive, Electronics and Other Operations 5,067 8,954 ----- ----- Total Automotive, Electronics and Other Operations liabilities and GM investment $125,638 $123,668 ======== ======== December 31, ------------------- FINANCING AND INSURANCE OPERATIONS 1998 1997 - ---------------------------------- ---- ---- (Dollars in Millions) ASSETS Cash and cash equivalents (Note 1) $146 $577 Investments in securities (Note 3) 8,748 7,896 Finance receivables - net (Note 4) 70,436 58,289 Investment in leases and other receivables (Note 7) 32,798 28,523 Other assets 18,807 12,799 Net receivable from Automotive, Electronics and Other Operations (Note 1) 816 - ------- ------- Total Financing and Insurance Operations assets $131,751 $108,084 ======== ======== LIABILITIES AND GM INVESTMENT Accounts payable $6,492 $3,321 Debt (Note 10) 105,409 86,676 Deferred income taxes and other liabilities (Note 14) 9,661 8,962 Net payable to Automotive, Electronics and Other Operations (Note 1) - 319 ------- ------ Total Financing and Insurance Operations liabilities 121,562 99,278 Minority interests 52 32 GM investment in Financing and Insurance Operations 10,137 8,774 ------ ----- Total Financing and Insurance Operations liabilities and GM investment $131,751 $108,084 ======== ========
The above supplemental consolidating information is explained in Note 1, "Nature of Operations". Reference should be made to the notes to consolidated financial statements. II-29 CONSOLIDATED BALANCE SHEETS - Concluded
December 31, ----------------- GENERAL MOTORS CORPORATION AND SUBSIDIARIES 1998 1997 - ------------------------------------------- ---- ---- (Dollars in Millions) ASSETS Automotive, Electronics and Other Operations Cash and cash equivalents $10,723 $10,685 Marketable securities 407 3,826 --- ----- Total cash and marketable securities (Notes 1 and 3) 11,130 14,511 Accounts and notes receivable (less allowances) 5,599 5,440 Inventories (less allowances) (Note 5) 12,207 12,102 Equipment on operating leases (less accumulated depreciation) (Note 7) 4,954 4,677 Deferred income taxes and other current assets (Note 6) 10,473 6,278 Net receivable from Financing and Insurance Operations (Note 1) - 319 ------ ------ Total current assets 44,363 43,327 Equity in net assets of nonconsolidated associates 1,317 1,407 Property - net (Note 8) 37,187 33,914 Intangible assets - net (Notes 1 and 9) 10,222 10,752 Deferred income taxes (Note 6) 17,780 20,721 Other assets 14,769 13,547 ------ ------ Total Automotive, Electronics and Other Operations assets 125,638 123,668 Financing and Insurance Operations Cash and cash equivalents (Note 1) 146 577 Investments in securities (Note 3) 8,748 7,896 Finance receivables - net (Note 4) 70,436 58,289 Investment in leases and other receivables (Note 7) 32,798 28,523 Other assets 18,807 12,799 Net receivable from Automotive, Electronics and Other Operations (Note 1) 816 - ------- ------- Total Financing and Insurance Operations assets 131,751 108,084 ------- ------- Total assets $257,389 $231,752 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Automotive, Electronics and Other Operations Accounts payable (principally trade) $13,479 $12,461 Loans payable (Note 10) 1,526 656 Accrued expenses (Note 14) 31,985 33,254 Net payable to Financing and Insurance Operations (Note 1) 816 - ------ ------ Total current liabilities 47,806 46,371 Long-term debt (Note 10) 7,217 5,695 Postretirement benefits other than pensions (Note 13) 38,076 38,388 Pensions (Note 13) 6,590 4,271 Other liabilities and deferred income taxes (Note 14) 20,267 19,294 ------ ------ Total Automotive, Electronics and Other Operations liabilities 119,956 114,019 Financing and Insurance Operations Accounts payable 6,492 3,321 Debt (Note 10) 105,409 86,676 Deferred income taxes and other liabilities (Note 14) 9,661 8,962 Net payable to Automotive, Electronics and Other Operations (Note 1) - 319 ------- ------ Total Financing and Insurance Operations liabilities 121,562 99,278 Minority interests 667 727 General Motors - obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures of General Motors (Note 16) Series D 79 79 Series G 141 143 Stockholders' equity (Notes 17 and 19) Preference stocks 1 1 $1-2/3 par value common stock (issued, 655,008,344 and 693,456,394 shares) 1,092 1,156 Class H common stock (issued, 106,159,776 and 103,885,803 shares) 11 10 Capital surplus (principally additional paid-in capital) 12,661 15,369 Retained earnings 6,984 5,416 ------ ------ Subtotal 20,749 21,952 Accumulated foreign currency translation adjustments (1,157) (888) Net unrealized gains on securities 481 504 Minimum pension liability adjustment (5,089) (4,062) ------ ------ Accumulated other comprehensive loss (5,765) (4,446) ------ ------ Total stockholders' equity 14,984 17,506 ------- ------- Total liabilities and stockholders' equity $257,389 $231,752 ======== ========
Reference should be made to the notes to consolidated financial statements. II-30 CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31, ------------------------------------------------------------------------ 1998 1997 1996 ---------------------- ---------------------- ------------ --------- Automotive, Financing Automotive, Financing Automotive, Financing Electronics and Electronics and Electronics and and Other Insurance and Other Insurance and Other Insurance --------- --------- ---------- --------- ---------- --------- (Dollars in Millions) Cash flows from operating activities Income from continuing operations $1,534 $1,422 $5,381 $1,317 $3,712 $1,241 Adjustments to reconcile income from continuing operations to net cash provided by operating activities Depreciation and amortization expenses 7,281 4,920 11,803 4,813 7,145 4,695 Gain on Hughes Defense spin-off (Note 1) - - (4,269) - - - Postretirement benefits other than pensions, net of payments and VEBA contributions (182) 31 (1,451) 26 1,549 26 Pension expense, net of contributions 284 - 240 - 801 - Originations and purchases of mortgage loans - (54,433) - (30,878) - (19,455) Proceeds on sales of mortgage loans - 51,582 - 28,543 - 18,157 Originations and purchases of mortgage securities - (2,237) - (2,516) - (970) Proceeds on sales of mortgages securities - 849 - 1,449 - 758 Change in other investments and miscellaneous assets 392 908 (1,413) 600 374 (777) Change in other operating assets and liabilities (Note 1) 304 3,610 1,850 467 (306) (237) Other (264) 1,066 684 264 1,256 850 ----- ----- ------ ----- ------ ----- Net cash provided by operating activities 9,349 7,718 12,825 4,085 14,531 4,288 ----- ----- ------ ----- ------ ----- Cash flows from investing activities Expenditures for property (9,339) (279) (9,801) (238) (9,606) (121) Investments in other marketable securities - acquisitions (13,705) (21,152) (13,167) (17,730) (14,340) (13,091) Investments in other marketable securities - liquidations 16,973 21,688 12,984 16,295 11,891 13,075 Mortgage servicing rights - acquisitions - (1,862) - (479) - (409) Mortgage servicing rights - liquidations - 80 - 23 - 99 Finance receivables - acquisitions - (155,613) - (163,614) - (155,477) Finance receivables - liquidations - 114,662 - 129,615 - 120,323 Proceeds from sales of finance receivables - 27,681 - 31,191 - 36,657 Operating leases - acquisitions (6,397 (17,128) (5,680 (15,393) (4,089) (14,405) Operating leases - liquidations 5,609 9,777 3,711 8,476 3,819 6,405 Proceeds from borrowings of Hughes Defense prior to the Hughes Defense spin-off (Note 1) - - 4,006 - - - Investments in companies, net of cash acquired (1,172 (173) (1,874) (422) (167) - Special inter-company payment from EDS (Note 1) - - - - 500 - Net investing activity with Financing and Insurance Operations 338 - 750 - 1,200 - Other (951) (242) 473 211 850 433 ----- ----- ------ ----- ------ ----- Net cash used in investing activities (8,644) (22,561) (8,598) (12,065) (9,942) (6,511) ------ ------- ------ ------- ------ ------ Cash flows from financing activities Net increase (decrease) in loans payable 521 6,162 (557) 5,626 (974) 1,636 Increase in long-term debt 2,993 21,098 384 14,587 1,924 14,009 Decrease in long-term debt (1,486) (11,377) (1,143) (11,311) (871) (11,939) Net financing activity with Automotive, Electronics and Other Operations - (338) - (750) - (1,200) Repurchases of common and preference stocks (3,089) - (4,365) - (251) - Proceeds from issuing common stocks 343 - 614 - 480 - Cash dividends paid to stockholders (1,388) - (1,620) - (1,530) - ----- ------ ----- ----- ----- ----- Net cash (used in) provided by financing activities (2,106) 15,545 (6,687) 8,152 (1,222) 2,506 ------ ------ ------ ----- ------ ----- Effect of exchange rate changes on cash and cash equivalents 304 2 (513) - (185) - Net transactions with Automotive/ Financing Operations 1,135 (1,135) 338 (338) 989 (989) ----- ------ --- ---- --- ---- Net cash provided by (used in) continuing operations 38 (431) (2,635) (166) 4,171 (706) Net cash provided by discontinued operations - - - - 103 - ----- ---- ------ ---- ----- ---- Net increase (decrease) in cash and cash equivalents 38 (431) (2,635) (166) 4,274 (706) Cash and cash equivalents at beginning of the year 10,685 577 13,320 743 9,046 1,449 ------ --- ------ --- ----- ----- Cash and cash equivalents at end of the year $10,723 $146 $10,685 $577 $13,320 $743 ======= ==== ======= ==== ======= ====
The above supplemental consolidating information is explained in Note 1, "Nature of Operations". Reference should be made to the notes to consolidated financial statements. II-31 CONSOLIDATED STATEMENTS OF CASH FLOWS - Concluded
For The Years Ended December 31, ------------------------------------- 1998 1997 1996 ---- ---- ---- (Dollars in Millions) GENERAL MOTORS CORPORATION AND SUBSIDIARIES Cash flows from operating activities Income from continuing operations $2,956 $6,698 $4,953 Adjustments to reconcile income from continuing operations to net cash provided by operating activities Depreciation and amortization expenses 12,201 16,616 11,840 Gain on Hughes Defense spin-off (Note 1) - (4,269) - Postretirement benefits other than pensions, net of payments and VEBA contributions (151) (1,425) 1,575 Pension expense, net of contributions 284 240 801 Originations and purchases of mortgage loans (54,433) (30,878) (19,455) Proceeds on sales of mortgage loans 51,582 28,543 18,157 Originations and purchases of mortgage securities (2,237) (2,516) (970) Proceeds on sales of mortgage securities 849 1,449 758 Change in other investments and miscellaneous assets 1,300 (813) (403) Change in other operating assets and liabilities (Note 1) 3,914 2,317 (543) Other 802 948 2,106 ------ ------ ------ Net cash provided by operating activities 17,067 16,910 18,819 ------ ------ ------ Cash flows from investing activities Expenditures for property (9,618) (10,039) (9,727) Investments in other marketable securities - acquisitions (34,857) (30,897) (27,431) Investments in other marketable securities - liquidations 38,661 29,279 24,966 Mortgage servicing rights - acquisitions (1,862) (479) (409) Mortgage servicing rights - liquidations 80 23 99 Finance receivables - acquisitions (155,613) (163,614) (155,477) Finance receivables - liquidations 114,662 129,615 120,323 Proceeds from sales of finance receivables 27,681 31,191 36,657 Operating leases - acquisitions (23,525) (21,073) (18,494) Operating leases - liquidations 15,386 12,187 10,224 Proceeds from borrowings of Hughes Defense prior to the Hughes Defense spin-off (Note 1) - 4,006 - Investments in companies, net of cash acquired (1,345) (2,296) (167) Special inter-company payment from EDS (Note 1) - - 500 Other (1,193) 684 1,283 ------ --- ----- Net cash used in investing activities (31,543) (21,413) (17,653) ------- ------- ------- Cash flows from financing activities Net increase in loans payable 6,683 5,069 662 Increase in long-term debt 24,091 14,971 15,933 Decrease in long-term debt (12,863) (12,454) (12,810) Repurchases of common and preference stocks (3,089) (4,365) (251) Proceeds from issuing common stocks 343 614 480 Cash dividends paid to stockholders (1,388) (1,620) (1,530) ------ ------ ------ Net cash provided by financing activities 13,777 2,215 2,484 ------ ----- ----- Effect of exchange rate changes on cash and cash equivalents 306 (513) (185) ------ ------ ------ Net cash (used in) provided by continuing operations (393) (2,801) 3,465 Net cash provided by discontinued operations - - 103 ------ ------ ------ Net (decrease) increase in cash and cash equivalents (393) (2,801) 3,568 Cash and cash equivalents at beginning of the year 11,262 14,063 10,495 ------ ------ ------ Cash and cash equivalents at end of the year $10,869 $11,262 $14,063 ======= ======= =======
Reference should be made to the notes to consolidated financial statements. II-32 GENERAL MOTORS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
Accumulated Total Compre- Other Total Capital Capital hensive Retained Comprehensive Stockholders' Stock Surplus Income Earnings Income (Loss) Equity ----- ------- ------ -------- ------------ ------ Balance at January 1, 1996 $1,310 $18,871 $7,185 $(4,020) $23,346 Shares reacquired (8) (243) - - (251) Shares issued 14 519 - - 533 Series C conversion 5 (7) - - (2) EDS split-off (49) 49 (4,481) - (4,481) Comprehensive income: Net income - - $4,963 4,963 - 4,963 ----- Other comprehensive income (loss): Foreign currency translation adjustments - - (336) - - - Unrealized losses on securities - - (70) - - - Minimum pension liability adjustment - - 1,246 - - - ----- Other comprehensive income - - 840 - 840 840 ----- Comprehensive income - - $5,803 - - - ===== Cash dividends - - (1,530) - (1,530) ----- ------ ----- ----- ----- Balance at December 31, 1996 1,272 19,189 6,137 (3,180) 23,418 Shares reacquired (122) (4,243) - - (4,365) Shares issued 17 619 - - 636 Preference stock exchange - (196) (26) - (222) Hughes Defense spin-off - - (5,773) - (5,773) Comprehensive income: Net income - - $6,698 6,698 - 6,698 ----- Other comprehensive income (loss): Foreign currency translation adjustments - - (775) - - - Unrealized gains on securities - - 81 - - - Minimum pension liability adjustment - - (572) - - - ----- Other comprehensive loss - - (1,266) - (1,266) (1,266) ----- Comprehensive income - - $5,432 - - - ===== Cash dividends - - (1,620) - (1,620) ----- ------ ----- ----- ------ Balance at December 31, 1997 1,167 15,369 5,416 (4,446) 17,506 Shares reacquired (75) (3,105) - - (3,180) Shares issued 12 397 - - 409 Comprehensive income: Net income - - $2,956 2,956 2,956 ----- Other comprehensive income (loss): Foreign currency translation adjustments - - (269) - - - Unrealized losses on securities - - (23) - - - Minimum pension liability adjustment - - (1,027) - - - ----- Other comprehensive loss - - (1,319) - (1,319) (1,319) ----- Comprehensive income - - $1,637 - - - ===== Cash dividends - - (1,388) - (1,388) ----- ------ ----- ----- ------ Balance at December 31, 1998 $1,104 $12,661 $6,984 $(5,765) $14,984 ====== ======= ====== ======= =======
Reference should be made to the notes to consolidated financial statements. II-33 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of General Motors Corporation (hereinafter referred to as the Corporation) and domestic and foreign subsidiaries that are more than 50% owned, principally General Motors Acceptance Corporation and Subsidiaries (GMAC) and Hughes Electronics Corporation and Subsidiaries, prior to the December 17, 1997 restructuring of the company (hereinafter referred to as "former Hughes") and subsequent to the December 17, 1997 restructuring of the company (hereinafter referred to as "Hughes") (see "Hughes Transactions" below) (collectively referred to as "General Motors or GM"). General Motors' share of earnings or losses of associates, in which at least 20% of the voting securities is owned, is included in the consolidated operating results using the equity method of accounting. GM encourages reference to the Delphi Automotive Systems Corporation (Delphi) and the GMAC Annual Reports on Form 10-K for the period ended December 31, 1998, both to be filed with the Securities and Exchange Commission, and the Hughes consolidated financial statements included as Exhibit 99 to the GM Annual Report on Form 10-K for the period ended December 31, 1998. Certain amounts for 1997 and 1996 have been reclassified to conform with the 1998 classifications. Nature of Operations GM presents separate supplemental consolidating financial information for the following businesses: (1) Automotive, Electronics and Other Operations which consists of the design, manufacturing and marketing of cars, trucks, locomotives and heavy duty transmissions and related parts and accessories, as well as the operations of Hughes; and (2) Financing and Insurance Operations which consists primarily of GMAC, which provides a broad range of financial services, including consumer vehicle financing, full-service leasing and fleet leasing, dealer financing, car and truck extended service contracts, residential and commercial mortgage services, and vehicle and homeowners insurance. Transactions between businesses have been eliminated in the Corporation's consolidated statements of income. Automotive, Electronics and Other Operations' net expense (income) from transactions with Financing and Insurance Operations was as follows (in millions): Years Ended December 31, ------------------------ 1998 1997 1996 ---- ---- ---- Interest $140 $89 $71 Service fees 58 34 27 Insurance - net (24) (127) (138) Other (92) (97) (85) --- --- --- Net expense (income) $82 $(101) $(125) === ===== ===== Use of Estimates in the Preparation of the Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that differ from those estimates. Revenue Recognition Sales are generally recorded when products are shipped or when services are rendered to independent dealers or other third parties. Provisions for normal dealer sales incentives, returns and allowances, and GM Card rebates are made at the time of vehicle sales. Costs related to special sales incentive programs are recognized as reductions to sales when determinable. Financing revenue is recorded over the terms of the receivables using the interest method. Certain loan origination costs are deferred and amortized to financing revenue over the lives of the related loans using the interest method. Income from operating lease assets is recognized on a straight-line basis over the scheduled lease term. Certain operating lease origination costs are deferred and amortized to financing revenue over the lives of the related operating leases using the straight-line method. Insurance premiums are earned on a basis related to coverage provided over the terms of the policies. Commission, premium taxes, and other costs incurred in acquiring new business are deferred and amortized over the terms of the related policies on the same basis as premiums are earned. The liability for losses and loss expenses includes a provision for unreported losses, based on past experience, net of the estimated salvage and subrogation recoverable. II-34 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 1. Significant Accounting Policies (continued) Product-Related Expenses Advertising and sales promotion, research and development, and other product-related costs are charged to expense as incurred. Provisions for estimated expenses related to product warranty are made at the time the products are sold. Advertising expense was $3.7 billion in 1998, $4.1 billion in 1997, and $3.4 billion in 1996. Research and development expense was $7.9 billion in 1998, $8.2 billion in 1997, and $8.9 billion in 1996. Depreciation and Amortization Depreciation is provided based on the estimated useful lives of property groups generally using accelerated methods, which accumulate depreciation of approximately two-thirds of the depreciable cost during the first half of the estimated useful lives. Leasehold improvements are amortized over the period of the lease or the life of the property, whichever is shorter, with the amortization applied directly to the asset account. Depreciation on capitalized leases with terms of five years or less is provided using the straight-line method; leases with terms in excess of five years are depreciated using the foregoing accelerated methods. Depreciation of vehicles and other equipment on operating leases or in GM's use is provided generally on a straight-line basis. The difference between the net book value and the proceeds of sale or salvage on items disposed of is accounted for as a charge against or credit to the provision for depreciation. Expenditures for special tools are amortized over their estimated useful lives, primarily using the units of production method. Amortization is applied directly to the asset account. Replacement of special tools for reasons other than changes in products is charged directly to cost of sales. Depreciation and amortization expense was as follows (in millions): Years Ended December 31, ------------------------ Automotive,Electronics and Other Operations 1998 1997 1996 - ------------------------------------------- ---- ---- ---- Depreciation (Note 2) $4,501 $5,901 $4,139 Amortization of special tools (Note 2) 2,661 5,674 2,856 Amortization of intangible assets (Note 9) 119 228 150 --- --- --- Total $7,281 $11,803 $7,145 ====== ======= ====== Financing and Insurance Operations - ---------------------------------- Depreciation and amortization expense $4,920 $4,813 $4,695 ====== ====== ====== Foreign Currency Translation Foreign currency exchange transaction and translation losses on an after-tax basis included in consolidated net income in 1998, 1997, and 1996, pursuant to Statement of Financial Accounting Standards (SFAS) No. 52, Foreign Currency Translation, amounted to $323 million, $429 million, and $380 million, respectively. Discontinued Operations On June 7, 1996, GM split-off Electronic Data Systems Corporation (EDS) to GM Class E stockholders on a tax-free basis for U.S. federal income tax purposes. Under the terms of the split-off, each share of GM former Class E common stock was exchanged for one share of EDS common stock. In addition, GM and EDS entered into a new 10-year agreement, under which EDS will continue to be GM's principal provider of information technology services and EDS made a special inter-company payment of $500 million to GM. The financial data related to EDS prior to the June 7, 1996 split-off from GM are classified as discontinued operations. The financial results of EDS, including assets and liabilities, subsequent to the split-off are not included in GM's consolidated financial statements. EDS systems and other contracts revenues from outside customers included in income from discontinued operations totaled $4.3 billion for the year ended December 31, 1996. Income from discontinued operations of $10 million for the year ended December 31, 1996, is reported net of income tax expense of $14 million. Income from discontinued operations for 1996 also includes split-off expenses attributable to $1-2/3 par value common stock of $15 million after-tax or $0.02 per share of $1-2/3 par value common stock. Cash and Cash Equivalents Cash equivalents are defined as short-term, highly liquid investments with original maturities of 90 days or less. II-35 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 1. Significant Accounting Policies (continued) Statement of Cash Flows Supplementary Information Years Ended December 31, ------------------------ Automotive, Electronics and Other Operations 1998 1997 1996 - -------------------------------------------- ---- ---- ---- (Dollars in Millions) Changes in other operating assets and liabilities were as follows: Accounts receivable $166 $(1,160) $206 Prepaid expenses and other deferred charges 158 1,101 (178) Inventories (276) (716) (757) Accounts payable 982 1,153 830 Deferred taxes and income taxes payable (1,555) (2,651) (354) Accrued expenses and other liabilities 829 4,123 (53) --- ----- --- Total $304 $1,850 $(306) ==== ====== ===== Cash paid for interest and income taxes was as follows: Interest $721 $748 $899 Income taxes $1,873 $1,085 $1,334 Years Ended December 31, ------------------------ Financing and Insurance Operations 1998 1997 1996 - ---------------------------------- ---- ---- ---- (Dollars in Millions) Changes in other operating assets and liabilities were as follows: Other receivables $206 $(714) $(384) Other assets (36) (55) 44 Accounts payable 2,976 624 700 Deferred taxes and other liabilities 464 612 (597) --- --- ---- Total $3,610 $467 $(237) ====== ==== ===== Cash paid for interest and income taxes was as follows: Interest $5,695 $5,202 $4,893 Income taxes $138 $338 $1,004 Allowance for Credit Losses An allowance for credit losses is generally established during the period in which receivables are acquired and is maintained at a level deemed appropriate by management based on historical and other factors that affect collectibility. Losses arising from the sale of repossessed collateral are charged to the allowance for credit losses. Where repossession has not taken place, receivables are charged off as soon as it is determined that the collateral cannot be repossessed, generally not more than 150 days after default. Repossessed Property and Impaired Loans Losses arising from the repossession of collateral supporting doubtful accounts and property supporting defaulted operating leases are recognized upon repossession. Repossessed assets are recorded at the lower of historical cost or estimated realizable value and are reclassified from finance receivables or operating leases to nonearning assets with the related adjustments to the valuation allowance included in other operating expenses. Non-retail finance receivables are reduced to the lower of book value or the estimated fair value of collateral when determined to be impaired or uncollectible. Valuation of Long-Lived Assets GM periodically evaluates the carrying value of long-lived assets to be held and used, including goodwill and other intangible assets, when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost to dispose. II-36 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 1. Significant Accounting Policies (continued) Derivative Instruments GM is party to a variety of foreign exchange, interest rate, and commodity forward contracts and options entered into in connection with the management of its exposure to fluctuations in foreign exchange rates, interest rates, and certain commodity prices. These financial exposures are managed in accordance with corporate policies and procedures. GM established the Risk Management Committee to develop and monitor the Corporation's financial risk strategies, policies, and procedures. The Committee reviews and approves all new risk management strategies, establishes approval authority guidelines for approved programs, monitors compliance and performance of existing risk management programs. GM does not enter into derivative transactions for trading purposes. As part of the hedging program approval process, GM's management is required to identify the specific financial risk which the derivative transaction will minimize, the appropriate hedging instrument to be used to reduce the risk, and the correlation between the financial risk and the hedging instrument. Purchase orders, letters of intent, vehicle production forecasts, capital planning forecasts, and historical data are used as the basis for determining the anticipated values of the transactions to be hedged. Generally, GM does not enter into derivative transactions that do not have a high correlation with the underlying financial risk. In the infrequent instances in which a derivative transaction is entered into that does not have a high correlation with the underlying exposure, the derivative is marked to market and included in net income on a current basis. The hedge positions, as well as the correlation between the transaction risks and the hedging instruments, are reviewed by management on an ongoing basis. Foreign exchange forward and option contracts are accounted for as hedges to the extent they are designated, and are effective, as hedges of firm foreign currency commitments. Additionally, certain foreign exchange option contracts receive hedge accounting treatment to the extent such contracts hedge certain anticipated foreign currency transactions. Other such foreign exchange contracts and options are marked to market and included in net income on a current basis. Interest rate swaps and options that are designated, and are effective, as hedges of underlying debt obligations are not marked to market and included in net income, but are used to adjust interest expense recognized over the lives of the underlying debt agreements. Gains and losses from terminated hedge contracts are deferred and amortized over the remaining period of the original swap or the remaining term of the underlying exposure, whichever is shorter. Open interest rate contracts are reviewed regularly to ensure that they remain effective as hedges of interest rate exposure. Written options (including swaptions, interest rate caps and collars, and swaps with embedded swaptions) and other swaps that do not qualify for hedge accounting are marked to market and included in net income on a current basis. GM also enters into commodity forward and option contracts. Since GM has the discretion to settle these transactions either in cash or by taking physical delivery, these contracts are not considered financial instruments for accounting purposes. Commodity forward contracts and options are accounted for as hedges to the extent they are designated, and are effective, as hedges of firm or anticipated commodity purchase contracts. Other commodity forward contracts and options are marked to market and included in net income on a current basis. Postemployment Benefits and Employee Termination Benefits GM's postemployment benefits primarily relate to GM's extended disability benefit program in the United States and employee job security and supplemental unemployment compensation benefits (mainly pursuant to union or other contractual agreements). Extended disability benefits are accrued on a service-driven basis and employee job security and supplemental unemployment compensation benefits are accrued on an event-driven basis. Accruals for postemployment benefits represent the discounted future cash expenditures expected during the period between the idling of affected employees and the time when such employees are redeployed, retire or otherwise terminate their employment. Voluntary termination benefits are accrued when the employees accept the offer. Involuntary termination benefits are accrued when management has committed to a termination plan and the benefit arrangement is communicated to affected employees. Environmental Liabilities GM recognizes environmental liabilities when a loss is probable and can be reasonably estimated. Such liabilities are generally not subject to insurance coverage. The cost of each environmental liability is estimated by engineering, financial, and legal specialists within GM based on current law. Such estimates are based primarily upon the estimated cost of investigation and remediation required and the likelihood that other potentially responsible parties (PRPs) will be able to fulfill their commitments at the sites where GM may be jointly and severally liable. At sites being addressed under the U.S. Comprehensive Environmental Response, Compensation and Liability Act or similar state laws (the Superfund Sites), GM typically recognizes a loss once it has been named as a PRP and has determined that some loss is probable and estimable. The Superfund Sites are primarily multi-PRP sites not owned or operated by GM. II-37 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 1. Significant Accounting Policies (concluded) For GM's operating plants, an estimated liability is typically recognized either upon completion of an environmental assessment or when GM proposes an agreement with the appropriate regulatory agency to take action at a site. For closed or closing plants owned by GM and properties being sold, an estimated liability is typically recognized at the time the closure decision is made or sale is recorded and is based on an environmental assessment of the plant property. GM's estimates for environmental obligations are dependent primarily on the nature and extent of historical information and physical data relating to a contaminated site, the complexity of the site, uncertainty as to what remedy and technology will be required, the outcome of discussions with regulatory agencies and other PRPs at multi-party sites, the number and financial viability of other PRPs, and the timing of expenditures; accordingly, such estimates could change materially as GM periodically evaluates and revises such estimates based on expenditures against established reserves and the availability of additional information. New Accounting Standards In 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. In the second quarter of 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. GM plans to adopt SFAS No. 133 by January 1, 2000, as required. GM is currently assessing the impact of this Statement on GM's consolidated financial statements. Labor Force GM, on a worldwide basis, has a concentration of its labor supply in employees working under union collective bargaining agreements, a significant number of which will expire in 1999. Hughes Transactions On December 17, 1997, GM and former Hughes completed a series of related transactions (Hughes Transactions) that were designed to address strategic challenges facing the three principal businesses of former Hughes and unlock stockholder value in GM. The Hughes Transactions included the tax-free spin-off of the defense electronics business of former Hughes (Hughes Defense) to holders of $1-2/3 par value and Class H common stocks, which was then followed immediately by the merger of Hughes Defense with Raytheon Company (Raytheon). Concurrently, Delco Electronics Corporation (Delco), the automotive electronics subsidiary of former Hughes, was transferred from former Hughes to GM's Delphi Automotive Systems unit. Finally, Class H common stock was recapitalized into a GM tracking stock, Class H common stock, that is linked to the telecommunications and space businesses of Hughes. The spin-off of Hughes Defense and merger with Raytheon had a total value to GM and its stockholders of approximately $9.8 billion that consisted of approximately $4.0 billion cash retained by Hughes from debt proceeds incurred by Hughes Defense prior to its spin-off and $5.8 billion of Hughes Defense Class A common stock distributed to holders of $1-2/3 par value and Class H common stock. Substantially all of the proceeds from the debt obligation of Hughes Defense were made available to Hughes. The distribution of Hughes Defense to the $1-2/3 par value and Class H common stockholders was recorded by GM at fair value and resulted in the recognition of a $4.3 billion gain that was included in other income. In addition, GM's total stockholders' equity was reduced by approximately $1.5 billion as a result of the Hughes Transactions. GM distributed a total of 102,630,503 shares of Class A common stock of Hughes Defense, 44,308,316 shares or 43.2% to $1-2/3 par value stockholders and 58,322,187 shares or 56.8% to Class H stockholders, which represented approximately 30% of the total equity of the newly combined Hughes Defense/Raytheon Company. The distribution to Class H common stockholders, which had a total value of approximately $3.3 billion, accounted for their tracking stock interest in Hughes Defense valued at approximately $1.5 billion, plus an additional amount to compensate them for the elimination of their tracking stock interest in Delco and other factors valued at approximately $1.8 billion. II-38 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 2. Competitiveness Studies GM periodically evaluates the carrying value of long-lived assets to be held and used, when events and circumstances warrant such review. These evaluations and reviews are generally done in conjunction with the annual business planning cycle. Based on the results of these reviews, GM recorded pre-tax charges against income totaling $534 million ($420 million after-tax, or $0.64 per share of $1-2/3 par value common stock) in 1998 and $6.4 billion ($4.0 billion after-tax, or $5.59 per share of $1-2/3 par value common stock) in 1997. Following are the pre-tax components of the charges: 1998 1997 ---- ---- Underperforming assets, including both vehicle and component-manufacturing assets $298 million $3.7 billion Capacity reductions and employee separation programs $236 million $1.4 billion Assets held for disposal - $0.5 billion Other - $0.8 billion In 1998, the pre-tax charges were comprised of $105 million ($80 million after-tax) for GMNA, $310 million ($192 million after-tax) for Delphi, $82 million ($51 million after-tax) for GMLAAM, and $37 million ($97 million after-tax) for GMAP. Overall, these charges had the effect of increasing 1998 cost of sales, depreciation and amortization and other expenses by $246 million, $223 million and $65 million, respectively. In 1997, the pre-tax charges were comprised of $3.8 billion ($2.4 billion after-tax) for GMNA, $1.4 billion ($870 million after-tax) for Delphi, $848 million ($488 million after-tax) for GME, $174 million ($170 million after-tax) for GMAP and $205 million ($128 million after-tax) for GM Automotive, Electronics and Other Operations' Other segment. These charges reduced 1997 net sales and revenues by $548 million and increased cost of sales, depreciation and amortization and other expenses by $1.7 billion, $4.1 billion and $72 million, respectively. Amounts related to capacity reduction and other expenses that were recorded in 1997 that still remain as of December 31, 1998 total $1.1 billion. Going forward, GM's future cash requirements relating to the 1998 and 1997 charges are expected to total approximately $1.4 billion over the next five years, with over 70% evenly expended over the first three years. In 1998, the amount included for underperforming assets represents charges recorded pursuant to GM's policy for the valuation of long-lived assets. GM re-evaluated the carrying values of its long-lived assets during its annual business planning cycle. This re-evaluation was performed using product specific cash flow information. As a result, the carrying values of certain tooling and other property, plant and equipment was determined to be impaired as the separately identifiable, anticipated, undiscounted future cash flows from such assets were less than their respective carrying values. The resulting pre-tax impairment charges represented the amount by which the carrying values of such assets exceeded their respective fair market values. The amount included for employee separation programs represents voluntary early retirement and other separation programs affecting approximately 5,700, 3,300 and 1,150, for Delphi, GMLAAM and employees involved in the restructuring of the U.S. sales and service field organizations, respectively. In 1997, the amount included for underperforming assets, principally tooling, property, plant and equipment and investments in joint ventures, represents charges recorded pursuant to GM's policy for the valuation of long-lived assets. The amount included for capacity reductions represents post-employment benefits payable to employees, pursuant to contractual agreements and costs associated with the disposal of assets at facilities subject to capacity reductions. This affects approximately 10,000 employees at GMNA's Buick City Assembly and V-6 Powertrain plants in Flint, Michigan; Detroit Truck Assembly in Detroit, Michigan; Delphi's leaf-spring plant in Livonia, Michigan; and certain GME facilities. Pursuant to some of these actions, additional charges of $74 million ($44 million after-tax) related to work schedule modifications at Opel Belgium were recorded during the second quarter of 1998. Assets held for disposal primarily related to Delphi's seating, lighting, and coil spring operations, which were announced for sale during 1997 and subsequently sold in 1998. Additional charges recorded in 1998 in other income related to these sales amounted to $430 million ($271 million after-tax). Delphi's results of operations included total operating losses related to these businesses of $107 million, $488 million and $224 million for the years ended December 31, 1998, 1997 and 1996, respectively. The amount included as other primarily represents losses on contracts associated with pricing pressures on used vehicles and the related effect on GM's retail-lease commitments. These pricing pressures are primarily a result of increased industry sales incentives on new vehicles. In connection with the 1997 evaluation of long-lived assets, GM reviewed its remaining previously recorded reserve for plant closings and reclassified the reserve to the consolidated balance sheet accounts that reflected the nature of the specific reserve components. At December 31, 1998 and 1997, the remaining balance of this previously recorded reserve represents primarily accrued expenses for post-employment benefits affecting approximately 3,100 employees (mainly pursuant to union or other contractual arrangements) of approximately $900 million and $1.0 billion, respectively. In 1996, favorable II-39 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 2. Competitiveness Studies (concluded) adjustments to the previously recorded plant closings reserve totaled $789 million. Of this amount, $409 million reflected GM's ability to utilize its Wilmington, Delaware facility for the assembly of a new generation Saturn vehicle, and $380 million was primarily due to revised estimates of postemployment benefit costs to be incurred in connection with plant closings. Separately, GM recorded pre-tax plant closings charges of $80 million in 1997 and $62 million in 1996. NOTE 3. Marketable and Other Securities Marketable securities held by GM are classified as available-for-sale, except for certain mortgage-related securities of GMAC, which are classified as trading securities. The aggregate excess of fair value over cost, net of related income taxes, for available-for-sale securities is included as a separate component of stockholders' equity. The excess of fair value over cost for trading securities is included in income on a current basis. GM determines cost on the specific identification basis. Automotive, Electronics and Other Operations - -------------------------------------------- Investments in marketable securities were as follows (in millions): December 31, 1998 ----------------- Fair Unrealized Unrealized Cost Value Gains Losses ---- ----- ----- ------ Type of Security Bonds, notes, and other securities United States government and governmental agencies and authorities $291 $291 $ - $ - States, municipalities, and political subdivisions 11 11 - - Corporate debt securities and other 98 105 7 - -- --- - -- Total marketable securities $400 $407 $7 $ - ==== ==== == == December 31, 1997 ----------------- Fair Unrealized Unrealized Cost Value Gains Losses ---- ----- ----- ------ Type of Security Bonds, notes, and other securities United States government and governmental agencies and authorities $621 $623 $2 $ - Corporate debt securities and other 3,188 3,203 15 - ----- ----- -- -- Total marketable securities $3,809 $3,826 $17 $ - ====== ====== === == Debt securities totaling $136 million mature within one year and $271 million mature after one through five years. Proceeds from sales of marketable securities totaled $4.4 billion in 1998, $10.9 billion in 1997 and $3.4 billion in 1996. The gross gains related to sales of marketable securities were $17 million, $121 million and $106 million in 1998, 1997 and 1996, respectively. The gross losses related to sales of marketable securities were $11 million, $51 million and $4 million in 1998, 1997 and 1996, respectively. Other securities classified as cash equivalents, which consisted primarily of commercial paper, repurchase agreements and certificates of deposit, were $9.2 billion and $10.0 billion at December 31, 1998 and 1997, respectively. Financing and Insurance Operations - ---------------------------------- Investments in securities were as follows (in millions): December 31, 1998 ----------------- Fair Unrealized Unrealized Cost Value Gains Losses ---- ----- ----- ------ Type of Security Bonds, notes, and other securities United States government and governmental agencies and authorities $445 $456 $12 $1 States, municipalities, and political subdivisions 1,495 1,600 117 12 Mortgage-backed securities 415 383 6 38 Corporate debt securities and other 1,895 1,926 66 35 ----- ----- -- -- Total debt securities available-for-sale 4,250 4,365 201 86 Mortgage-backed securities held for trading purposes 3,173 3,173 - - ----- ----- --- --- Total debt securities 7,423 7,538 201 86 Equity securities 779 1,210 534 103 --- ----- --- --- Total investment in securities $8,202 $8,748 $735 $189 ====== ====== ==== ==== II-40 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 3. Marketable and Other Securities (concluded) December 31, 1997 ----------------- Fair Unrealized Unrealized Cost Value Gains Losses ---- ----- ----- ------ Type of Security Bonds, notes, and other securities United States government and governmental agencies and authorities $687 $694 $7 $- States, municipalities, and political subdivisions 1,576 1,686 121 11 Mortgage-backed securities 110 113 3 - Corporate debt securities and other 2,401 2,441 50 10 ----- ----- -- -- Total debt securities available-for-sale 4,774 4,934 181 21 Mortgage-backed securities held for trading purposes 2,063 2,063 - - ----- ----- --- -- Total debt securities 6,837 6,997 181 21 Equity securities 523 899 416 40 --- --- --- -- Total investment in securities $7,360 $7,896 $597 $61 ====== ====== ==== === Debt securities totaling $317 million mature within one year, $1.3 billion mature after one through five years, $1.5 billion mature after five years through 10 years and $4.5 billion mature after 10 years. Proceeds from sales of marketable securities totaled $3.6 billion in 1998, $2.7 billion in 1997 and $2.3 billion in 1996. The gross gains related to sales of marketable securities were $218 million, $176 million and $130 million in 1998, 1997 and 1996, respectively. The gross losses related to sales of marketable securities were $49 million, $45 million and $29 million in 1998, 1997 and 1996, respectively. Other securities classified as cash equivalents, which consisted primarily of commercial paper, repurchase agreements and certificates of deposit, were $155 million and $293 million at December 31, 1998 and 1997, respectively. NOTE 4. Finance Receivables - Net Finance receivables - net included the following (in millions): December 31, ------------ 1998 1997 ---- ---- U.S. Retail $33,321 $26,570 Wholesale 17,722 15,213 Leasing and lease financing 632 716 Term loans to dealers and others 4,924 3,118 ----- ----- Total U.S. 56,599 45,617 ------ ------ Canada, Mexico and International Retail 9,337 8,059 Wholesale 6,668 6,475 Leasing and lease financing 2,023 2,069 Term loans to dealers and others 857 488 --- --- Total Canada, Mexico and International 18,885 17,091 ------ ------ Total finance receivables 75,484 62,708 Less- Unearned income (4,027) (3,516) Allowance for financing losses (1,021) (903) ------ ---- Total finance receivables - net $70,436 $58,289 ======= ======= The aggregate amount of total finance receivables maturing in each of the five years following December 31, 1998 is as follows: 1999-$42.1 billion; 2000-$13.7 billion; 2001-$10.7 billion; 2002-$5.6 billion; 2003-$2.5 billion; and 2004 and thereafter-$900 million. GMAC participates in various sales of receivables programs and sold retail finance receivables through special purpose subsidiaries with principal aggregating $1.6 billion in 1998 and $5.4 billion in 1997. These subsidiaries generally retain a subordinated investment of no greater than 7.0% of the total receivables pool and market the remaining portion. These subordinated investments absorb losses related to sold receivables to the extent that such losses are greater than the excess cash flows from those receivables and cash reserves related to the sale transaction. Subordinated interests in trusts are recorded in investments in securities. Pre-tax gains relating to such sales (excluding limited recourse loss provisions which generally have been provided at the time the contracts were originally acquired) amounted to $31.0 II-41 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 4. Finance Receivables - Net (concluded) million in 1998 and $84.8 million in 1997. GMAC continues to service these receivables for a fee that is considered to be adequate compensation and earns other related ongoing income. GMAC's sold retail finance receivables servicing portfolio amounted to $4.0 billion and $6.0 billion at December 31, 1998 and 1997, respectively. GMAC also sold wholesale receivables that it continues to service for a fee that is considered to be adequate compensation. The sold wholesale receivables servicing portfolio totaled $3.3 billion and $6.3 billion at December 31, 1998 and 1997, respectively. Additionally, GMAC is committed to sell eligible wholesale receivables, on a revolving basis, arising in certain dealer accounts. NOTE 5. Inventories Automotive, Electronics and Other Operations' inventories included the following (in millions): December 31, ------------ 1998 1997 ---- ---- Productive material, work in process, and supplies $7,287 $7,023 Finished product, service parts, etc. 7,215 7,347 ----- ----- Total inventories at FIFO 14,502 14,370 Less LIFO allowance 2,295 2,268 ----- ----- Total inventories (less allowances) $12,207 $12,102 ======= ======= Inventories are stated generally at cost, which is not in excess of market. The cost of substantially all U.S. inventories other than the inventories of Saturn Corporation (Saturn), Delco and Hughes is determined by the last-in, first-out (LIFO) method. The cost of non-U.S., Saturn, Delco and Hughes inventories is determined generally by either the first-in, first-out (FIFO) or average cost methods. NOTE 6. Income Taxes Income from continuing operations before income taxes and minority interests included the following (in millions): Years Ended December 31, ------------------------ 1998 1997 1996 ---- ---- ---- U.S. income $1,228 $3,413 $1,703 Foreign income 3,384 4,379 4,789 ----- ----- ----- Total $4,612 $7,792 $6,492 ====== ====== ====== The provision for income taxes was estimated as follows (in millions): Income taxes estimated to be payable (refundable) currently U.S. federal $36 $1,307 $(357) Foreign 2,086 1,793 1,607 U.S. state and local 276 198 197 --- --- --- Total payable currently 2,398 3,298 1,447 ----- ----- ----- Deferred income tax (credit) expense - net U.S. federal 145 (1,467) 477 Foreign (844) (396) (147) U.S. state and local (207) (332) (15) ---- ---- --- Total deferred (906) (2,195) 315 ---- ------ --- Investment tax credits (29) (34) (39) --- --- --- Total income taxes $1,463 $1,069 $1,723 ====== ====== ====== Annual tax provisions include amounts considered sufficient to pay assessments that may result from examination of prior year tax returns; however, the amount ultimately paid upon resolution of issues raised may differ materially from the amount accrued. Provisions are made for estimated U.S. and foreign income taxes, less available tax credits and deductions, which may be incurred on the remittance of the Corporation's share of subsidiaries' undistributed earnings not deemed to be permanently invested. Taxes have not been provided on foreign subsidiaries' earnings, which are deemed essentially permanently reinvested, of approximately $9.7 billion at December 31, 1998 and $8.7 billion at December 31, 1997. Quantification of the deferred tax liability, if any, associated with permanently reinvested earnings is not practicable. II-42 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 6. Income Taxes (concluded) A reconciliation of the provision for income taxes compared with the amounts at the U.S. federal statutory rate was as follows (in millions): Years Ended December 31, ------------------------ 1998 1997 1996 ---- ---- ---- Tax at U.S. federal statutory income tax rate $1,614 $2,727 $2,272 Hughes Defense spin-off - (1,494) - Foreign rates other than 35% 60 (123) (285) Taxes on unremitted earnings of subsidiaries 98 44 49 Tax effect of the 1995 contribution of Class E common stock to the U.S. hourly pension plan - - (245) Research and experimentation credits (237) (311) (165) Subsidiary settlement of affirmative claim with IRS (92) - - Other adjustments 20 226 97 -- --- -- Total income tax $1,463 $1,069 $1,723 ====== ====== ====== Deferred income tax assets and liabilities for 1998 and 1997 reflect the impact of temporary differences between amounts of assets and liabilities for financial reporting purposes and the bases of such assets and liabilities as measured by tax laws. The net deferred tax asset in the U.S. was $20.8 billion and $20.3 billion at December 31, 1998 and 1997, respectively. Temporary differences and carryforwards that gave rise to deferred tax assets and liabilities included the following (in millions): December 31, ------------ 1998 1997 ---- ---- Deferred Tax Deferred Tax ------------ ------------ Assets Liabilities Assets Liabilities ------ ----------- ------ ----------- Postretirement benefits other than pensions $16,135 $ - $15,683 $ - Minimum pension liability adjustment 3,054 - 2,423 - Employee benefit plans 2,171 5,816 2,226 6,047 Policy and warranty reserves 2,534 - 2,445 - Sales and product reserves 2,176 - 1,977 8 Profits on long-term contracts 146 156 156 143 Alternative minimum tax credit carryforwards 690 - 673 - Depreciation and amortization expense 602 3,263 900 3,130 Capitalized research and experimentation 82 - 285 - U.S. state net operating loss carryforwards 559 - 559 - Financing losses 407 - 361 - Tax credit carryforwards 879 - 467 - Lease transactions - 3,624 - 3,075 Tax on unremitted profits - 372 - 339 Other U.S. 5,835 2,918 6,700 3,016 Miscellaneous foreign 2,861 978 1,850 692 ----- --- ----- --- Subtotal 38,131 17,127 36,705 16,450 Valuation allowances (672) - (700) - ------ ------ ------ ------ Total deferred taxes $37,459 $17,127 $36,005 $16,450 ======= ======= ======= ======= Realization of the net deferred tax assets is dependent on future reversals of existing taxable temporary differences and adequate future taxable income, exclusive of reversing temporary differences and carryforwards. Although realization is not assured, management believes that it is more likely than not that the net deferred tax assets will be realized. The amount of the net deferred tax assets considered realizable, however, could be reduced in the near term if actual future taxable income is lower than estimated, or if there are differences in the timing or amount of future reversals of existing taxable temporary differences. The alternative minimum tax credit can be carried forward indefinitely. The U.S. state net operating loss carryforwards will expire in the years 1999 - 2013 and 2018 if not utilized; however, a substantial portion will not expire until after the year 2004. The tax credit carryforwards will expire in the years 2000 - - 2013 and 2018 if not utilized. II-43 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 7. Equipment on Operating Leases The Corporation has significant investments in the residual values of its leasing portfolios. The residual values represent the estimate of the values of the assets at the end of the lease contracts and are initially recorded based on appraisals and estimates. Realization of the residual values is dependent on the Corporation's future ability to market the vehicles under then prevailing market conditions. Management reviews residual values periodically to determine that recorded amounts are appropriate. Included in equipment on operating leases and other assets for Automotive, Electronics and Other Operations was the following (in millions): December 31, ------------ 1998 1997 ---- ---- Equipment on operating leases $9,064 $8,312 Less accumulated depreciation (935) (992) ---- ---- Net book value $8,129 $7,320 ====== ====== Equipment on operating leases included in investment in leases and other receivables for Financing and Insurance Operations was as follows (in millions): December 31, ------------ 1998 1997 ---- ---- Equipment on operating leases $35,804 $33,364 Less accumulated depreciation (6,817) (6,994) ------ ------ Net book value $28,987 $26,370 ======= ======= The lease payments to be received related to equipment on operating leases maturing in each of the five years following December 31, 1998 are as follows: Automotive, Electronics and Other Operations -1999-$5.5 billion; 2000-$490 million; 2001-$478 million; 2002-$463 million; and 2003-$441 million; Financing and Insurance Operations - 1999-$6.1 billion; 2000-$4.1 billion; 2001-$1.6 billion; 2002-$161 million; and 2003-$8 million. NOTE 8. Property - Net Property - net included the following for Automotive, Electronics and Other Operations (in millions): Estimated December 31, Useful ------------ Lives (Years) 1998 1997 ------------- ---- ---- Land - $774 $703 Land improvements 10-30 1,906 1,805 Leasehold improvements - less amortization 3-10 222 209 Buildings 29-45 13,400 12,733 Machinery and equipment 3-30 49,284 46,602 Furniture and office equipment 3-20 1,089 972 Capitalized leases 5-40 1,120 1,137 Construction in progress - 4,397 4,673 ----- ----- Real estate, plants, and equipment 72,192 68,834 Less accumulated depreciation (42,829) (41,722) ------- ------- Real estate, plants, and equipment - net 29,363 27,112 Special tools - net 7,824 6,802 ----- ----- Total property - net $37,187 $33,914 ======= ======= Financing and Insurance Operations had net property of $386 million and $265 million recorded in other assets at December 31, 1998 and 1997, respectively. II-44 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 9. Intangible Assets - Net Intangible assets - net included the following for Automotive, Electronics and Other Operations (in millions): December 31, ------------ 1998 1997 ---- ---- Pensions $6,434 $7,683 Intangible assets relating to acquisition of HAC 427 448 Goodwill relating to all other acquisitions 3,361 2,621 ----- ----- Total intangible assets - net $10,222 $10,752 ======= ======= Intangible assets relating to the acquisition of Hughes Aircraft Company (HAC) as of December 31, 1998 are applicable to Hughes. Such intangible assets relate to patents and related technology and other intangible assets that were originally recorded in 1985 and are being amortized over 40 years. Goodwill resulting from other acquisitions is amortized over periods not exceeding 40 years. Such goodwill includes $3.1 billion associated with Hughes' 1997 merger with, and additional 1998 investment in, PanAmSat Corporation (PAS). Financing and Insurance Operations had net intangible assets of $855 million and $717 million recorded in other assets at December 31, 1998 and 1997, respectively. NOTE 10. Long-Term Debt and Loans Payable Automotive, Electronics and Other Operations Long-term debt and loans payable were as follows (in millions): December 31, Weighted-Average ------------ Interest Rate(1) 1998 1997 ---------------- ---- ---- Long-term debt and loans payable Payable within one year Current portion of long-term debt 7.4% $273 $627 Commercial paper (2) 5.7% 381 29 All other 8.2% 872 - Payable beyond one year 1999 - - 796 2000 9.5% 799 738 2001 9.8% 432 457 2002 13.1% 47 21 2003 7.5% 611 425 2004 and after 7.5% 5,345 3,278 Unamortized discount (17) (20) --- --- Total long-term debt and loans payable $8,743 $6,351 ====== ====== - --------------- (1) The 1998 weighted-average interest rate for commercial paper includes the impact of interest rate swap agreements. (2) The 1997 weighted-average interest rate for commercial paper was 5.7%. Amounts payable beyond one year after consideration of foreign currency swaps at December 31, 1998 included $401 million in currencies other than the U.S. Dollar, primarily the Brazilian Real ($231 million), the Canadian Dollar ($52 million), the French Franc ($44 million) and the German Mark ($24 million). At December 31, 1998 and 1997, long-term debt and loans payable for automotive, electronics and other operations included $7.5 billion and $4.5 billion, respectively, of obligations with fixed interest rates and $1.2 billion and $1.9 billion, respectively, of obligations with variable interest rates (predominantly based on the London Interbank Offering Rate - i.e., LIBOR), after considering the impact of interest rate swap agreements. To achieve its desired balance, between fixed and variable rate debt, within prescribed limits, GM has entered into interest rate swap, cap and floor agreements. The notional amounts of such agreements as of December 31, 1998 for automotive, electronics and other operations were approximately $1.8 billion ($600 million pay variable and $1.2 billion pay fixed), $100 million and $nil, respectively. The notional amounts of such agreements as of December 31, 1997 were approximately $2.4 billion ($1.2 billion pay variable and $1.2 billion pay fixed), $200 million and $50 million, respectively. II-45 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 10. Long-Term Debt and Loans Payable (concluded) GM and its subsidiaries maintain substantial bank lines of credit with various banks that totaled $14.5 billion at December 31, 1998, of which $6.7 billion represented short-term credit facilities and $7.8 billion represented long-term credit facilities. At December 31, 1997, bank lines of credit totaled $9.3 billion, of which $3.9 billion represented short-term credit facilities and $5.4 billion represented long-term credit facilities. The unused short-term and long-term portions of the credit lines totaled $6.2 billion and $7.2 billion at December 31, 1998, compared with $2.5 billion and $4.8 billion at December 31, 1997. Certain bank lines of credit contain covenants with which the Corporation and applicable subsidiaries were in compliance during the year ended December 31, 1998. Financing and Insurance Operations - ---------------------------------- Debt was as follows (in millions): December 31, Weighted-Average ------------ Interest Rate(1) 1998 1997 ---------------- ---- ---- Debt Payable within one year Current portion of debt 6.2% $12,701 $10,851 Commercial paper (2) 5.3% 32,143 27,461 All other (2) 7.5% 15,208 12,087 Payable beyond one year 1999 - - 11,347 2000 6.2% 13,154 6,165 2001 6.0% 10,322 5,932 2002 5.9% 8,561 7,017 2003 5.8% 7,919 2,603 2004 and after 6.8% 6,072 3,907 Unamortized discount (671) (694) -------- ------- Total debt $105,409 $86,676 ======== ======= - ------------------ (1) The 1998 weighted-average interest rate for commercial paper includes the impact of interest rate swap agreements. (2) The 1997 weighted-average interest rate for commercial paper and other short-term borrowings was 5.6% and 5.2%, respectively. Amounts payable beyond one year after consideration of foreign currency swaps at December 31, 1998 included $8.3 billion in currencies other than the U.S. Dollar, primarily the Canadian Dollar ($4.3 billion), the German Mark ($1.6 billion), the U.K. Pound Sterling ($898 million) and the Australian Dollar ($783 million). At December 31, 1998 and 1997, debt for financing and insurance operations included $72.8 billion and $67.9 billion, respectively, of obligations with fixed interest rates and $32.6 billion and $18.8 billion, respectively, of obligations with variable interest rates (predominantly based on the London Interbank Offering Rate - i.e., LIBOR), after considering the impact of interest rate swap agreements. To achieve its desired balance, between fixed and variable rate debt, within prescribed limits, GM has entered into interest rate swap, cap, floor and option agreements. The notional amounts of such agreements as of December 31, 1998 for financing and insurance operations were approximately $13.2 billion ($9.5 billion pay variable and $3.7 billion pay fixed), $400 million, $1.0 billion and $1.0 billion, respectively. The notional amounts for interest rate swap, cap and option agreements as of December 31, 1997 were approximately $9.7 billion ($5.9 billion pay variable and $3.8 billion pay fixed), $1.1 billion and $6.5 billion, respectively. GM's financing and insurance subsidiaries maintain substantial bank lines of credit with various banks that totaled $44.3 billion at December 31, 1998, of which $17.3 billion represented short-term credit facilities and $27.0 billion represented long-term credit facilities. At December 31, 1997, bank lines of credit totaled $41.0 billion, of which $25.8 billion represented short-term credit facilities and $15.2 billion represented long-term credit facilities. The unused short-term and long-term portions of the credit lines totaled $7.5 billion and $25.7 billion at December 31, 1998, compared with $17.7 billion and $13.9 billion at December 31, 1997. Certain bank lines of credit contain covenants with which the Corporation and applicable subsidiaries were in compliance during the year ended December 31, 1998. II-46 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 11. Derivative Financial Instruments and Risk Management GM is a party to financial instruments with off-balance-sheet risk. These financial instruments are used in the normal course of business to manage exposure to fluctuations in interest rates and foreign exchange rates, and to meet the financing needs of its customers. The primary classes of derivatives used by GM are foreign exchange forward contracts and options, interest rate swaps and options and forward contracts to purchase or sell mortgages or mortgage-backed securities. Those instruments involve, to varying degrees, market risk, as the instruments are subject to rate and price fluctuations, and elements of credit risk in the event a counterparty should default. Credit risk is managed through the approval and periodic monitoring of financially sound counterparties. Derivative transactions are used to hedge underlying business exposures. Market risk in these instruments is offset by opposite movements in the underlying exposure. Cash receipts or payments on these contracts normally occur at maturity, or for interest rate swap agreements, at periodic contractually defined intervals. Foreign Exchange Forward Contracts and Options GM is an international corporation with operations in over 50 countries and has foreign currency exposures at these operations related to buying, selling and financing in currencies other than the local currency. GM's most significant foreign currency exposures relate to Canada, Mexico, Western European countries (primarily Germany, United Kingdom, Spain, Italy, Belgium and France), Australia, Japan and Brazil. The magnitude of these exposures significantly varies over time depending upon the strength of local automotive markets and sourcing decisions. GM enters into agreements by which it seeks to manage certain of its foreign exchange exposures in accordance with established policy guidelines, primarily through foreign exchange forward contracts and purchased and written foreign exchange options. These agreements primarily hedge cash flows such as debt, firm commitments and anticipated transactions involving vehicles, components, fixed assets, and subsidiary dividends. As a general practice, GM has not hedged the foreign exchange exposure related to either the translation of overseas earnings into U.S. dollars, or the translation of overseas equity positions back to U.S. dollars. At December 31, 1998 and 1997, the Automotive, Electronics and Other Operations held foreign exchange forward contracts of $6.3 billion and $3.9 billion (including cross-currency swaps of $70 million), respectively. At December 31, 1998 and 1997, the Automotive, Electronics and Other Operations had entered into foreign exchange options of $2.8 billion and $2.9 billion, respectively. At December 31, 1998 and 1997, the Financing and Insurance Operations held foreign exchange forward contracts of $8.0 billion and $6.2 billion (including cross-currency swaps of $3.4 billion and $2.0 billion), respectively. The Automotive, Electronics and Other Operations had deferred hedging losses on outstanding foreign exchange forward contracts hedging firm commitments to purchase inventory or fixed assets totaling $3 million and $17 million at December 31, 1998 and 1997, respectively. Deferred hedging losses on outstanding purchased foreign exchange option contracts hedging firm and anticipated transactions to purchase inventory or fixed assets totaled $2 million and $20 million at December 31, 1998 and 1997, respectively. The Financing and Insurance Operations had deferred hedging gains on outstanding foreign exchange forward contracts hedging firm commitments to purchase assets totaling $13 million and $9 million at December 31, 1998 and 1997, respectively. Such deferred amounts on outstanding foreign exchange forward and option contracts will be included in the cost of such assets when purchased, and subsequently recognized in operations as part of the basis of these assets. In the event the contract is terminated early or the anticipated transaction is no longer likely to occur, the derivative is then marked to market. Foreign exchange forward contracts, which hedge foreign exchange exposures of anticipated inventory, fixed assets and sales transactions, are marked to market and recognized with other gains or losses on foreign exchange transactions in the consolidated statement of income. GM's firm commitments are typically up to one year and may extend for periods of up to three years. Interest Rate Swaps and Options GM's financing and cash management activities subject it to market risk from exposure to changes in interest rates. GM has entered into various financial instrument transactions to maintain the desired level of exposure to the risk of interest rate fluctuations and to minimize interest expense. To achieve this objective, GM will at times use written options in the management of these exposures. In a limited number of cases, interest rate swaps are matched to the anticipated roll-over of investments, wholesale assets or debt, and are executed over terms of up to five years on a portfolio basis to achieve specific interest rate management objectives. Swaps are also matched to operating lease payments where interest rate exposure exists. The differential paid or received on such swaps is recorded as an adjustment to expense or income over the term of the underlying agreement or matched portfolio. II-47 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 11. Derivative Financial Instruments and Risk Management (concluded) Interest rate swaps are contractual agreements between GM and another party to exchange fixed and floating interest rate payments periodically over the life of the agreements without the exchange of underlying principal amounts. Interest rate options, including swaptions and interest rate caps and floors, may result in the future exchange of interest payments if market interest rates reach certain levels. At December 31, 1998 and 1997, the total notional amount of such agreements with off-balance-sheet risk was $2.1 billion and $3.1 billion, respectively, for the Automotive, Electronics and Other Operations. At December 31, 1998 and 1997, the Financing and Insurance Operations held such agreements with off-balance-sheet risk with notional amount totaling $20.0 billion and $26.4 billion, respectively. Interest rate swaps used to hedge an underlying debt obligation are not marked to market, but are used to adjust interest expense recognized over the life of the underlying debt agreement. Gains and losses on terminated interest rate swaps are deferred and recognized as yield adjustments on the underlying debt. The Automotive, Electronics and Other Operations' unamortized net gains on interest rate swaps totaled approximately $6 million and $7 million at December 31, 1998 and 1997, respectively. Unamortized net gains on interest rate swaps for the Financing and Insurance Operations totaled approximately $37 million and $33 million at December 31, 1998 and 1997, respectively. Written options, including those embedded in interest rate swaps, written interest rate caps, interest rate collars, written swaptions and interest rate swaps that do not meet settlement accounting criteria are marked to market with related gains and losses recognized in income on a current basis. Mortgage Contracts GMAC has also entered into contracts to purchase and sell mortgages at specific future dates and has entered into certain exchange traded futures and option contracts to reduce exposure to interest rate risk. At December 31, 1998 and 1997, commitments to sell mortgage loans and securities totaled $6.2 billion and $3.9 billion, respectively, and commitments to purchase or originate mortgage loans totaled $5.2 billion and $4.1 billion, respectively. GMAC's exchange traded futures and option contracts, which are used to hedge mortgage loans held for sale, had notional values of $5.0 billion and $2.2 billion at December 31, 1998 and 1997, respectively. Gains and losses on derivatives, including exchange traded futures and option contracts, used to hedge interest rate risk associated with rate locked funding commitments and mortgage loans held for sale, are deferred and considered in the reporting of the underlying mortgages on a lower of cost or market basis. The notional values of derivatives used to hedge price and interest rate risk associated with mortgage related securities totaled $9.7 billion and $1.4 billion at December 31, 1998 and 1997, respectively. Gains and losses associated with these instruments are recognized in the current period on a marked to market basis. Derivatives used to hedge mortgage servicing rights had notional values of $65.1 billion and $8 billion at December 31, 1998 and 1997, respectively. Gains and losses on such contracts are recorded as an adjustment to amortization expense. GMAC has also entered into interest rate swaps in an effort to stabilize short-term borrowing costs and to maintain a minimum return on certain mortgage loans held for investment. Amounts received or paid under such interest rate swaps are recorded as an adjustment to interest expense. At December 31, 1998 and 1997, the notional values of such instruments totaled $100 million and $264 million, respectively. Credit Risk The forward contracts, swaps, options and lines of credit previously discussed contain an element of risk that the counterparties may be unable to meet the terms of the agreements. However, GM minimizes such risk exposure for forward contracts, swaps and options by limiting the counterparties to major international banks and financial institutions that meet established credit guidelines and by limiting the amount of its risk exposure with any one bank or financial institution. Management also reduces its credit risk for unused lines of credit by applying the same credit policies in making commitments as it does for extending loans. Management does not expect to incur any losses as a result of counterparty default. GM generally does not require or place collateral for these financial instruments, except for the lines of credit it extends. GM has business activities with customers, dealers and associates around the world. The Corporation's receivables from, and guarantees to, such parties are well diversified, and when warranted, are secured by collateral. Consequently, in management's opinion, no significant concentration of credit risk exists for GM. II-48 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 12. Fair Value of Financial Instruments The estimated fair value of financial instruments has been determined using available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value; therefore, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange. The effect of using different market assumptions and/or estimation methodologies may be material to the estimated fair value amounts. Fair value information presented herein is based on information available at December 31, 1998 and 1997. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been updated since those dates and, therefore, the current estimates of fair value at dates subsequent to December 31, 1998 and 1997 may differ significantly from these amounts. Book and estimated fair values of financial instruments, for which it is practicable to estimate fair value, were as follows (in millions): December 31, ------------ 1998 1997 ---- ---- Book Fair Book Fair Value Value Value Value ----- ----- ----- ----- Automotive, Electronics and Other Operations Assets Cash and marketable securities $11,130 $11,130 $14,511 $14,511 Accounts and notes receivable (less allowances) $5,478 $5,478 $5,352 $5,352 Other assets $2,710 $2,729 $2,287 $2,279 Liabilities Accounts payable $13,479 $13,479 $12,461 $12,461 Long-term debt and loans payable Payable within one year $1,526 $1,526 $656 $656 Payable beyond one year $7,217 $7,621 $5,695 $6,147 Other liabilities $590 $651 $593 $626 Preferred securities of subsidiary trusts (Note 16) $220 $226 $222 $233 Financing and Insurance Operations Assets Cash and investments in securities $8,894 $8,894 $8,473 $8,473 Finance receivables - net $70,258 $70,457 $58,219 $58,667 Accounts and notes receivable (less allowances) $3,797 $3,797 $2,042 $2,042 Other assets $11,441 $11,465 $8,746 $8,762 Liabilities Accounts payable $6,492 $6,492 $3,321 $3,321 Debt Payable within one year $60,052 $60,098 $50,399 $50,440 Payable beyond one year $45,357 $46,600 $36,277 $37,049 The prior tables exclude the book values and estimated fair values of financial instrument derivatives which were as follows (in millions): Fair Value of Open Contracts at December 31, ------------ 1998 1997 ---- ---- Asset Liability Asset Liability Position Position Position Position -------- -------- -------- -------- Automotive, Electronics and Other Operations (1) - ------------------------------------------------ Foreign exchange forward contracts (2) $126 $107 $78 $83 Foreign exchange options $71 $10 $46 $7 Interest rate swaps $34 $38 $27 $50 Interest rate options $- $1 $- $2 II-49 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 12. Fair Value of Financial Instruments (continued) Financing and Insurance Operations (3) - -------------------------------------- Foreign exchange forward contracts (4) $499 $161 $149 $326 Interest rate swaps $180 $93 $93 $49 Interest rate options $- $- $2 $- Mortgage contracts $344 $55 $53 $30 - --------------------- (1)The related asset (liability) recorded on the balance sheet for foreign exchange forward contracts, foreign exchange options, interest rate swaps and interest rate options totaled $22 million, $62 million, $(7) million and $(1) million, respectively, at December 31, 1998 and $33 million, $43 million, $(17) million and $(2) million, respectively, at December 31, 1997. (2)Foreign exchange forward contracts included certain derivatives with both foreign exchange and interest rate exposures which had a fair value of $54 million and $17 million at December 31, 1998 and 1997, respectively. (3)The related asset recorded on the balance sheet for foreign exchange forward contracts and interest rate swaps totaled $233 million and $14 million, respectively, at December 31, 1998. The related asset (liability) recorded on the balance sheet for foreign exchange forward contracts, interest rate swaps and interest rate options totaled $(111) million, $3 million and $1 million, respectively, at December 31, 1997. The related asset recorded on the balance sheet for mortgage contracts was $284 million and $20 million at December 31, 1998 and 1997, respectively. (4)Foreign exchange forward contracts included certain derivatives with both foreign exchange and interest rate exposures which had a fair value of $154 million and $(194) million at December 31, 1998 and 1997, respectively. The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Cash and Marketable Securities The fair value of cash equivalents and marketable securities was determined principally based on quoted market prices. Finance Receivables The fair value was estimated by discounting the future cash flows using applicable spreads to approximate current rates applicable to each category of finance receivables. The carrying value of wholesale receivables and other receivables whose interest rates adjust on a short-term basis with applicable market indices (generally the prime rate) were assumed to approximate fair value either due to their short maturities or due to the interest rate adjustment feature. Accounts and Notes Receivable and Accounts Payable For receivables and payables with short maturities the book values approximate fair values. Other Assets and Accrued Expenses and Other Liabilities Other assets reported at December 31, 1998 and 1997 include various financial instruments (e.g., long-term receivables and certain investments) that have fair values based on discounted cash flows, market quotations, and other appropriate valuation techniques. The fair values of retained subordinated interests in trusts and excess servicing assets (net of deferred costs) were derived by discounting expected cash flows using current market rates. Estimated values of Industrial Development Bonds, included in accrued expenses and other liabilities, were based on quoted market prices for the same or similar issues. Debt and Loans Payable The fair value of the debt payable within one year was determined by using quoted market prices, if available, or by calculating the estimated value of each bank loan, note, or debenture in the portfolio at the applicable rate in effect. Commercial paper, master notes and demand notes have an original term of less than 90 days and; therefore, the carrying amounts of these liabilities were considered their fair values. Debt payable beyond one year has an estimated fair value based on quoted market prices for the same or similar issues or based on the current rates offered to GM for debt of similar remaining maturities. Foreign Exchange Forward Contracts and Options The fair value of foreign exchange forward contracts was determined by using current exchange rates. The fair value of foreign exchange options was estimated using pricing models with indicative quotes obtained for the market variables. II-50 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 12. Fair Value of Financial Instruments (concluded) Preferred Securities of Subsidiary Trusts The fair value of the GM-obligated mandatorily redeemable preferred securities of subsidiary trusts (Note 16) was determined based on quoted market prices. Interest Rate Swaps and Options The fair value of interest rate swaps, including contracts with optionality, was estimated using pricing models based upon current market interest rates. Exchange traded options are valued at quoted market prices. Mortgage Contracts The fair value of mortgage contracts was estimated based upon the amount that would be received or paid to terminate the contracts based on market prices of similar financial instruments and current rates for mortgage loans. Unused Lines of Credit Because loans extended under these commitments are at market interest rates, there is no significant fair value position related to the outstanding commitments. NOTE 13. Pensions and Other Postretirement Benefits GM has a number of defined benefit pension plans covering substantially all employees. Plans covering U.S. and Canadian represented employees generally provide benefits of negotiated, stated amounts for each year of service as well as significant supplemental benefits for employees who retire with 30 years of service before normal retirement age. The benefits provided by the plans covering U.S. and Canadian salaried employees and employees in certain foreign locations are generally based on years of service and salary history. GM also has certain nonqualified pension plans covering executives that are based on targeted wage replacement percentages and are unfunded. The measurement dates used for the principal U.S. pension plans of the Corporation and Hughes were December 31 and December 1, respectively. For non-U.S. pension plans, the measurement dates were December 1 for Canadian plans and October 1 for other foreign plans. Pension plan assets are primarily invested in U.S. Government obligations, equity and fixed income securities, commingled pension trust funds, insurance contracts, the Corporation's $1-2/3 par value common stock (valued as of the 1998 measurement date at $56 million) and EDS common stock (valued as of the 1998 measurement date at $5.3 billion). In March 1995, under the terms of an agreement between the Corporation and the Pension Benefit Guarantee Corporation (PBGC), the Corporation contributed to the GM Hourly-Rate Employees Pension Plan (Hourly Plan) 173.2 million shares of Class E common stock valued at $6.3 billion on such date. Subsequent to the split-off of EDS, the Class E stock held by the Hourly Plan was exchanged for EDS common stock. The trustees for the Hourly Plan have, from time-to-time, sold shares of former Class E common stock and EDS common stock, with the effect of reducing the number of shares of EDS common stock held by the Hourly Plan. GM's funding policy with respect to its qualified pension plans is to contribute annually not less than the minimum required by applicable law and regulations. GM made pension contributions to the U.S. plans of $1.2 billion in 1998, $1.5 billion in 1997 and $800 million in 1996. Additionally, GM maintains hourly and salaried benefit plans that provide postretirement medical, dental, vision and life insurance to most U.S. retirees and eligible dependents. The cost of such benefits is recognized in the consolidated financial statements during the period employees provide service to GM. Postretirement plan assets in GM's VEBA trust are invested primarily in fixed income securities. Certain of the Corporation's non-U.S. subsidiaries have postretirement plans, although most participants are covered by government-sponsored or administered programs. The cost of such programs generally is not significant to GM. II-51 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 13. Pensions and Other Postretirement Benefits (continued) U.S. Plans Non-U. S. Plans Pension Benefits Pension Benefits Other Benefits ---------------- ---------------- -------------- 1998 1997 1998 1997 1998 1997 ---- ---- ---- ---- ---- ---- (in millions) Change in benefit obligations Benefit obligation at beginning of year $73,570 $72,501 $9,824 $9,526 $44,294 $41,387 Service cost 1,270 1,332 214 191 663 639 Interest cost 4,974 5,261 643 633 3,113 3,128 Plan participants' contributions 43 69 28 25 31 31 Amendments 208 25 81 - - - Actuarial losses 1,973 4,443 92 710 1,622 1,819 Benefits paid (5,196) (5,408) (349) (331) (2,287) (2,174) Curtailment charges and other 121 (4,653) (250) (930) (90) (536) ------ ------ ------ ----- ------ ------ Benefit obligation at end of year 76,963 73,570 10,283 9,824 47,346 44,294 ------ ------ ------ ----- ------ ------ Change in plan assets Fair value of plan assets at beginning of year 72,280 71,295 6,075 5,915 3,000 - Actual return on plan assets 6,438 10,882 328 756 249 - Employer contributions 1,151 1,535 206 71 1,700 3,000 Plan participants' contributions 43 69 28 25 - - Benefits paid (5,196) (5,408) (349) (331 (375) - Settlement charges and other 291 (6,093) (312) (361) - - ------ ------ ------ ----- ------ ------ Fair value of plan assets at end of year 75,007 72,280 5,976 6,075 4,574 3,000 ------ ------ ----- ----- ----- ----- Funded status (1,956) (1,290) (4,307) (3,749 (42,772) (41,294) Unrecognized actuarial loss 10,368 8,632 1,880 1,773 2,209 689 Unrecognized prior service cost 7,064 8,103 764 824 (448) (563) Unrecognized transition (asset) obligation (64) (105) 48 10 - - ------ ------ ------ ----- ------ ------ Net amount recognized $15,412 $15,340 $(1,615) $(1,142)$(41,011)$(41,168) ======= ======= ======= ======= ======== ======== Amounts recognized in the consolidated balance sheets consist of: Prepaid benefit cost $6,448 $6,202 $898 $868 $ - $ - Accrued benefit liability (4,361) (3,595) (3,814) (3,463) (41,011) (41,168) Intangible asset 5,961 7,071 504 602 - - Accumulated other comprehensive income 7,364 5,662 797 851 - - ------ ------ ------ ----- ------ ------ Net amount recognized $15,412 $15,340 $(1,615) $(1,142)$(41,011)$(41,168) ======= ======= ======= ======= ======== ======== The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $56.7 billion, $56.0 billion and $47.8 billion, respectively, as of December 31, 1998 and $54.4 billion, $53.7 billion and $46.7 billion, respectively, as of December 31, 1997.
U.S. Plans Non-U. S. Plans Pension Benefits Pension Benefits Other Benefits ---------------- ---------------- -------------- 1998 1997 1996 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- ---- ---- ---- (in millions) Components of expense Service cost $1,270 $1,332 $1,208 $214 $191 $185 $663 $639 $668 Interest cost 4,974 5,261 4,777 643 633 653 3,113 3,128 2,980 Expected return on plan assets (6,815) (6,630) (6,283 (516) (524 (487 (286) - - Amortization of prio service cost 1,173 1,170 824 99 99 100 (116) (116) (116) Amortization of transition asset (44) (85) (63) (17) (20) (18) - - - Recognized net actuarial loss 331 308 675 75 60 57 97 72 43 Curtailments, settlements and other 207 53 69 48 2 158 - (2) (3) ----- ----- ----- --- --- --- ----- ----- ----- Net expense $1,096 $1,409 $1,207 $546 $441 $648 $3,471 $3,721 $3,572 ====== ====== ====== ==== ==== ==== ====== ====== ====== Weighted-average assumptions Discount rate 6.8% 7.0% 7.5% 6.4% 6.8% 7.3% 6.7% 7.2% 7.8% Expected return on plan assets 10.0% 10.0% 10.0% 9.2% 9.2% 9.8% 10.0% - - Rate of compensation increase 5.0% 5.0% 5.0% 3.5% 4.1% 4.2% 4.4% 4.4% 4.4%
II-52 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 13. Pensions and Other Postretirement Benefits (concluded) For measurement purposes, a 6 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 1999. The rate was assumed to decrease on a linear basis to 5 percent through 2004 and remain at that level thereafter. A one percentage point increase in the assumed health care trend rate would have increased the Accumulated Projected Benefit Obligation (APBO) by $5.5 billion at December 31, 1998 and increased the aggregate service and interest cost components of non-pension postretirement benefit expense for 1998 by $484 million. A one percentage point decrease would have decreased the APBO by $4.6 billion and decreased the aggregate service and interest cost components of non-pension postretirement benefit expense for 1998 by $377 million. A one percentage point increase in the weighted-average discount rate would have resulted in a $4.8 billion decrease in the APBO at December 31, 1998. GM has disclosed in the consolidated financial statements certain amounts associated with estimated future postretirement benefits other than pensions and characterized such amounts as "accumulated postretirement benefit obligations," "liabilities," or "obligations." Notwithstanding the recording of such amounts and the use of these terms, GM does not admit or otherwise acknowledge that such amounts or existing postretirement benefit plans of GM (other than pensions) represent legally enforceable liabilities of GM. NOTE 14. Accrued Expenses, Other Liabilities and Deferred Income Taxes Automotive, Electronics and Other Operations Accrued expenses, other liabilities and deferred income taxes included the following (in millions): December 31, ------------ 1998 1997 ---- ---- Warranties, dealer and customer allowances, claims, and discounts $14,603 $13,992 Deferred revenue 8,548 7,799 Payrolls and employee benefits (excludes postemployment) 6,884 7,794 Unpaid losses under self-insurance programs 1,774 1,631 Taxes, other than income taxes 1,067 981 Interest 1,545 1,235 Income taxes 449 1,023 Deferred income taxes 2,973 2,923 Postemployment benefits 3,820 4,038 Other 10,589 11,132 ------ ------ Total accrued expenses, other liabilities and deferred income taxes $52,252 $52,548 ======= ======= Financing and Insurance Operations Deferred income taxes and other liabilities included the following (in millions): December 31, ------------ 1998 1997 ---- ---- Unpaid insurance losses, loss adjustment expenses and unearned insurance premiums $3,918 $3,929 Postemployment benefits 704 672 Income taxes 552 321 Deferred income taxes 2,910 2,578 Interest 1,276 1,118 Other 301 344 ------ ------ Total deferred income taxes and other liabilities $9,661 $8,962 ====== ====== NOTE 15. Commitments and Contingent Matters Commitments GM had the following minimum commitments under noncancelable operating leases having terms in excess of one year primarily for real property: 1999-$688 million; 2000-$668 million; 2001-$640 million; 2002-$620 million; 2003-$473 million; and $758 million in 2004 and thereafter. Certain of the leases contain escalation clauses and renewal or purchase options. Rental expenses under operating leases were $930 million in 1998, $925 million in 1997 and $853 million in 1996. GM sponsors a credit card program, entitled the GM Card program, that offers rebates that can be applied against the purchase or lease of GM vehicles. The amount of rebates available to qualified cardholders at December 31, 1998 and 1997 was $3.7 billion and $3.5 billion, respectively. Provisions for GM Card rebates are recorded as reductions in revenues at the time of vehicle sale. II-53 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 15. Commitments and Contingent Matters (concluded) The 1996 Restructuring Agreement between GM and Saab's other owners (Investor A.B.) includes certain provisions and options which may impact the relative ownership interests of the parties involved. The agreement gives GM and Adam Opel the right to purchase up to 100% of Investor A.B.'s interest in Saab during 1999 and 2000. Investor A.B. has the right to sell up to 50% of its present holding in Saab to GM and Adam Opel in 2000. GM currently maintains a 50% ownership in Saab. In December 1998, Hughes agreed to acquire all of the outstanding capital stock of United States Satellite Broadcasting Company, Inc. (USSB). USSB provides direct-to-home premium satellite programming in conjunction with DIRECTV's basic programming service. USSB launched its service in June 1994 and, as of December 31, 1998, had more than two million subscribers nationwide. The purchase price, consisting of cash and GM Class H common stock, will be determined at closing based upon an agreed-upon formula and will not exceed $1.6 billion in the aggregate. Subject to certain limitations in the merger agreement, USSB shareholders will be entitled to elect to receive cash or shares of GM Class H common stock. The amount of cash to be paid in the merger cannot be less than 30% of the aggregate purchase price or greater than 50% of the aggregate purchase price with the remaining consideration consisting of GM Class H common stock. The merger, which is subject to USSB shareholder approval and the receipt of appropriate regulatory approvals, is expected to close in early to mid-1999. Contingent Matters In connection with the 1997 spin-off of Hughes Defense and its subsequent merger with Raytheon, 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. 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 could 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. GM is subject to potential liability under government regulations and various claims and legal actions which are pending or may be asserted against them. Some of the pending actions purport to be class actions. The aggregate ultimate liability of GM under these government regulations and under these claims and actions, was not determinable at December 31, 1998. After discussion with counsel, it is the opinion of management that such liability is not expected to have a material adverse effect on the Corporation's consolidated financial statements. Note 16. 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). II-54 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued Note 16. Preferred Securities of Subsidiary Trusts (concluded) 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. II-55 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 17. Stockholders' Equity The following table presents changes in capital stock for the period from January 1, 1996 to December 31, 1998 (in millions):
Common Stocks ---------------------------------------- Total Preference $1-2/3 Capital Stocks(a) par value Class H(b) Class E Class H(c) Stock --------- --------- ---------- -------- ---------- ----- Balance at January 1, 1996 $ 1 $1,255 $ - $44 $10 $1,310 Shares reacquired - (8) - - - (8) Shares issued - 14 - - - 14 Series C conversion - - - 5 - 5 EDS split-off - - - (49) - (49) --- ----- --- --- --- ----- Balance at December 31, 1996 1 1,261 - - 10 1,272 Shares reacquired - (122) - - - (122) Shares issued - 17 - - - 17 Recapitalization of Class H Common Stock - - 10 - (10) - --- ----- --- --- --- ----- Balance at December 31, 1997 1 1,156 10 - - 1,167 Shares reacquired - (75) - - - (75) Shares issued - 11 1 - - 12 --- ----- --- --- --- ----- Balance at December 31, 1998 $ 1 $1,092 $11 $ - $ - $1,104 === ===== === === === =====
- ------------------------ (a)The following describes the Corporation's preference stocks (in millions except par value, stated value, and per share amounts): Preference Stock, $0.10 par value (authorized 100 shares): - Series B 9-1/8% Depositary Shares, stated value $25 per share, redeemable at Corporation option on or after January 1, 1999; issued at December 31, 1998, 20 shares equivalent to 5 shares of nonconvertible Series B 9-1/8% Preference Stock, stated value $100 per share. - Series C Depositary Shares, liquidation preference $50 per share. - Series D 7.92% Depositary Shares, stated value $25 per share, redeemable at Corporation option on or after August 1, 1999; outstanding at December 31, 1998, 3 shares equivalent to .75 shares of Series D 7.92% Preference Stock (see Note 16). - Series G 9.12% Depositary Shares, stated value $25 per share, redeemable at Corporation option on or after January 1, 2001; outstanding at December 31, 1998, 5 shares, equivalent to 1.25 shares of Series G 9.12% Preference Stock (see Note 16). (b)Subsequent to its recapitalization on December 17, 1997. (c)Prior to its recapitalization on December 17, 1997. II-56 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 17. Stockholders' Equity (concluded) Common Stocks The voting and liquidation rights of $1-2/3 par value common stock are one vote per share and one liquidation unit per share. The voting and liquidation rights of the recapitalized Class H common stock are 0.6 votes per share and 0.6 liquidation units per share. The liquidation rights of the $1-2/3 par value and Class H common stocks are subject to certain adjustments if outstanding common stock is subdivided, by stock split or otherwise, or if shares of one class of common stock are issued as a dividend to holders of another class of common stock. Holders of Class H common stock have no direct rights in the equity or assets of Hughes, but rather have rights in the equity and assets of GM (which includes 100% of the stock of Hughes). The outstanding shares of Class H common stock may be recapitalized as shares of $1-2/3 par value common stock at any time after December 31, 2002, at the sole discretion of the GM Board of Directors (GM Board), or automatically, if at any time the Corporation should sell, liquidate, or otherwise dispose of 80% or more of the business of Hughes, based on fair market value of the assets, both tangible and intangible, of Hughes as of the date that such proposed transaction is approved by the GM Board. In the event of any recapitalization, all outstanding shares of Class H common stock will automatically be converted into the Corporation's $1-2/3 par value common stock at an exchange rate that would provide Class H common stockholders with that number of shares of $1-2/3 par value common stock that would have a value equal to 120% of the value of their Class H common stock, on such date. A recapitalization of the type described in the prior sentence would occur if any of the triggering events took place unless the holders of GM common stock (including the holders of $1-2/3 par value common stock and holders of the Class H common stock voting separately as individual classes) vote to approve an alternative proposal from the GM Board. Common Stock Repurchases During 1998, GM used $2.6 billion to acquire 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 33 percent of the $4.0 billion stock repurchase program announced in February 1998. Due to work stoppages at various GM components plants, stock repurchases were suspended as part of GM's cash conservation initiatives. GM also used approximately $427 million to repurchase shares of $1-2/3 par value common stock for certain employee benefit plans. Preference Stocks During 1996, approximately 45 million shares of Class E common stock were issued upon conversion of approximately 3 million shares of Series C Preference Stock (represented by depositary shares). The remaining 6,784 shares of Series C Preference Stock were redeemed on February 22, 1996. Other Comprehensive Income The changes in the components of other comprehensive income (loss) are reported net of income taxes, as follows (in millions):
Years Ended December 31, -------------------------------------------------------------------------------------- 1998 1997 1996 ------------------------- --------------------------- -------------------------- Pre-tax Tax Exp. Net Pre-tax Tax Exp. Net Pre-tax Tax Exp. Net Amount (Credit) Amount Amount (Credit) Amount Amount (Credit) Amount ------ -------- ------ ------ -------- ------ ------ -------- ------ Foreign currency translation adjustments $(262) $7 $(269) $(1,274) $(499) $(775) $(614) $(278) $(336) Unrealized gain (loss) on securities: Unrealized holding gain (loss) 38 (14) 52 272 114 158 (15) (8) (7) Reclassification adjustment (115) (40) (75) (118) (41) (77) (96) (33) (63) ---- --- --- ---- --- --- --- --- --- Net unrealized (loss) gain (77) (54) (23) 154 73 81 (111) (41) (70) --- --- --- --- -- -- ---- --- --- Minimum pension liability adjustment (1,657) (630) (1,027) (906) (334) (572) 2,013 767 1,246 ------ ---- ------ ---- ---- ---- ----- --- ----- Other comprehensive (loss) income $(1,996) $(677) $(1,319) $(2,026) $(760)$(1,266) $1,288 $448 $840 ====== ==== ====== ====== ==== ====== ===== === ===
II-57 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 18. Earnings Per Share Attributable to Common Stocks Earnings per share attributable to each class of GM common stock was determined based on the attribution of earnings to each such class of common stock for the period divided by the weighted-average number of common shares for each such class outstanding during the period. Diluted earnings per share attributable to each class of GM common stock considers the impact of potential common shares, unless the inclusion of the potential common shares would have an antidilutive effect. The 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): Years Ended December 31, ------------------------ 1998 1997 1996 ---- ---- ---- Earnings attributable to common stocks $1-2/3 par value Continuing operations $2,821 $6,276 $4,589 Discontinued operations - - (5) ----- ----- ----- Earnings attributable to $1-2/3 par value $2,821 $6,276 $4,584 == = = ====== ====== ====== Income from discontinued operation attributable to Class E $ - $ - $15 --- --- --- Earnings attributable to Class H (prior to its recapitalization on December 17, 1997) $ - $322 $283 --- ---- ---- Earnings attributable to Class H (subsequent to its recapitalization on December 17, 1997) $72 $2 $ - --- -- --- 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 EDS (Note 1), former Hughes, and Hughes for the period. During the period that EDS was an indirect wholly-owned subsidiary of the Corporation, the earnings attributable to Class E common stock for the period represented the ASCNI of EDS for the period. The ASCNI of EDS was determined quarterly in amounts equal to the separate consolidated net income of EDS for each respective quarter, excluding the effects of purchase accounting adjustments relating to the Corporation's acquisition of EDS for each such period, multiplied by a fraction, the numerator of which represented the weighted-average number of shares of Class E common stock outstanding during the period. The weighted-average number of shares of Class E common stock outstanding for 1996 reflects shares outstanding through June 30, 1996. Earnings attributable to Class H common stock represented the ASCNI of Hughes and former Hughes. The ASCNI of Hughes and former Hughes was determined quarterly in amounts equal to the separate consolidated net income of Hughes and former Hughes for each respective quarter, excluding the effects of purchase accounting adjustments arising at the time of the Corporation's acquisition of Hughes Aircraft Company (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 during the quarter (106 million, 103 million and 99 million in the fourth quarters of 1998, 1997 and 1996, respectively) and the denominator of which was 400 million during the fourth quarters of 1998, 1997, and 1996. Earnings attributable to Class H common stock for the period subsequent to the recapitalization of Class H common stock for 1997 represent the ASCNI of Hughes for the period December 18, 1997 through December 31, 1997, excluding the effects of purchase accounting adjustments arising 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 during the period (104 million) and the denominator of which was 400 million. The denominators used in determining the ASCNI of EDS and former Hughes were adjusted from time-to-time as deemed appropriate by the GM Board to reflect subdivisions or combinations of the Class E common stock and Class H common stock, respectively, and to reflect certain transfers of capital to or from EDS and former Hughes, respectively. 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. II-58 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 18. Earnings Per Share Attributable to Common Stocks (concluded) The reconciliation of the amounts used in the basic and diluted earnings per share computations for income from continuing operations was as follows (in millions except per share amounts):
Class H Common Stock - Class H Common Stock - Prior to its recapitalization Subsequent to its recapitalization $1-2/3 Par Value Common Stock on December 17,1997 on December 17, 1997 ----------------------------- ------------------- -------------------- Per Share Per Share Per Share Income Shares Amount ASCNI Shares Amount ASCNI Shares Amount ------ ------ ------ ----- ------ ------ ----- ------ ------ Year ended December 31, 1998 Income from continuing operations $2,884 $72 Less:Dividends on preference stocks 63 - ----- -- Basic EPS Income from continuing operations available to common stockholders 2,821 663 $4.26 72 105 $0.68 ==== ==== Effect of Dilutive Securities Assumed exercise of dilutive stock options (3) 11 3 4 ----- --- -- --- Diluted EPS Adjusted income from continuing operations available to common stockholders $2,818 674 $4.18 $75 109 $0.68 ===== === ==== == === ==== Year ended December 31, 1997 Income from continuing operations $6,374 $322 $2 Less:Premium on exchange of preference stocks 26 - - Dividends on preference stocks 72 - - ----- --- -- Basic EPS Income from continuing operations vailable to common stockholders 6,276 721 $8.70 322 101 $3.17 2 104 $0.02 ==== ==== ==== Effect of Dilutive Securities Assumed exercise of dilutive stock options (11) 6 11 4 - 3 -- --- --- --- -- --- Diluted EPS Adjusted income from continuing operations available to common stockholders $6,265 727 $8.62 $333 105 $3.17 $2 107 $0.02 ===== === ==== === === ==== == === ==== Year ended December 31, 1996 Income from continuing operations $4,670 $283 Less: Dividends on preference stocks 81 - ----- --- Basic EPS Income from continuing operations available to common stockholders 4,589 756 $6.07 283 98 $2.88 Effect of Dilutive Securities Assumed exercise of dilutive stock options (9) 4 9 3 ----- --- --- --- Diluted EPS Adjusted income from continuing operations available to common stockholders $4,580 760 $6.03 $292 101 $2.88 ===== === ==== === === ====
II-59 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 19. Dividends on Common Stock In connection with the consummation of the Hughes Transactions, the GM Board determined that the amount available for the payment of dividends on outstanding shares of $1-2/3 par value common stock would be the cumulative amount available for the payment of dividends on $1-2/3 par value common stock immediately prior to the closing of the Hughes Transactions, reduced by a pro rata portion of the net reduction in GM's total stockholders' equity resulting from the Hughes Transactions. In addition, the GM Board determined that the amount initially available for the payment of dividends on shares of Class H common stock would be the cumulative amount available for the payment of dividends on Class H common stock immediately prior to the closing of the Hughes Transactions, reduced by a pro rata portion of the net reduction in GM's total stockholders' equity resulting from the Hughes Transactions. The pro rata allocation of the net reduction in GM's total stockholders' equity resulting from the Hughes Transactions was based on the fraction used in determining the ASCNI of former Hughes immediately prior to the consummation of the Hughes Transactions. Dividends may be paid on $1-2/3 par value common stock to the extent of the amount determined to be available for the payment of dividends on $1-2/3 par value common stock in connection with the consummation of the Hughes Transactions, plus all of the earnings of GM after the consummation of the Hughes Transactions, other than the earnings attributed to the Class H common stock. Dividends may be paid on Class H common stock to the extent of the amount initially determined to be available for the payment of dividends on Class H common stock, plus the portion of earnings of GM after the closing of the Hughes Transactions attributed to Class H common stock. The amount available for the payment of dividends on each class of common stock will be reduced from time-to-time by dividends paid on that class and will be adjusted from time-to-time for changes to the amount of surplus attributed to the class resulting from the repurchase or issuance of shares of that class. As of December 31, 1998, the amount available for the payment of dividends on $1-2/3 par value and Class H common stock was $15.9 billion and $3.8 billion, respectively. Dividends may be paid on common stocks only when, and if declared by the GM Board in its sole discretion. The GM Board's policy with respect to $1-2/3 par value common stock is to distribute dividends based on the outlook and the indicated capital needs of the business. The GM Board does not currently intend to pay cash dividends on the Class H common stock, which was recapitalized on December 17, 1997 as part of the Hughes Transactions. Cash dividends per share of $1-2/3 par value common stock were $2.00, $2.00 and $1.60 for 1998, 1997, and 1996, respectively. Cash dividends per share for Class H common stock, prior to its recapitalization on December 17, 1997, were $1.00 and $0.96 in 1997 and 1996, respectively. Cash dividends per share of Class E common stock were $0.30 in 1996. NOTE 20. Stock Incentive Plans Stock-Based Compensation GM previously adopted SFAS No. 123, Accounting for Stock-Based Compensation, and as permitted by this standard, will continue to apply the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25 to its stock options and other stock-based employee compensation awards. If compensation cost for stock options and other stock-based employee compensation awards had been determined based on the fair value at the grant date, consistent with the method prescribed by SFAS No. 123, GM's pro forma net income, earnings attributable to common stocks, and basic and diluted earnings per share attributable to common stocks would have been as follows (in millions except per share amounts): 1998 1997 1996 ---- ---- ---- Net income - as reported $2,956 $6,698 $4,963 - Pro forma $2,797 $6,558 $4,904 Earnings attributable to common stocks $1-2/3 - as reported $2,821 $6,276 $4,584 - Pro forma $2,673 $6,147 $4,528 Class H (prior to recapitalization) - as reported $ - $322 $283 - Pro forma $ - $315 $280 Class H (subsequent to recapitalization) - as reported $72 $2 $ - - Pro forma $61 $(2) $ - II-60 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 20. Stock Incentive Plans (continued) 1998 1997 1996 ---- ---- ---- Basic earnings per share attributable to common stocks $1-2/3 - as reported $4.26 $8.70 $6.06 - Pro forma $4.04 $8.52 $5.98 Class H (prior to recapitalization) - as reported $ - $3.17 $2.88 - Pro forma $ - $3.10 $2.85 Class H (subsequent to recapitalization) - as reported $0.68 $0.02 $ - - Pro forma $0.57 $(0.02) $ - Diluted earnings per share attributable to common stocks $1-2/3 - as reported $4.18 $8.62 $6.02 - Pro forma $3.96 $8.44 $5.94 Class H (prior to recapitalization) - as reported $ - $3.17 $2.88 - Pro forma $ - $3.10 $2.85 Class H (subsequent to recapitalization) - as reported $0.68 $0.02 $ - - Pro forma $0.57 $(0.02) $ - The fair value of each option grant is estimated on the date of grant using the Black-Scholes option- pricing model with the following weighted-average assumptions: 1998 1997 1996 --------------------- -------------- -------------- Hughes Hughes Hughes GMSIP Plan GMSSOP GMSIP Plan GMSIP Plan ----- ---- ------ ----- ---- ----- ---- Interest rate 5.2% 5.6% 5.2% 6.2% 6.8% 5.3% 6.6% Expected life (years) 5.0 6.2 5.0 5.0 7.0 5.8 7.0 Expected volatility 26.2% 32.8% 26.2% 26.3% 20.7% 27.3% 20.6% Dividend yield 3.6% - 3.6% 3.4% 2.1% 3.1% 1.6% The effect of the Hughes Transactions adjustment on the number of options and related exercise prices, as described below, is considered, under SFAS No. 123, a modification of the terms of the outstanding options. Accordingly, the 1997 pro forma disclosure includes compensation cost for the incremental fair value, under SFAS No. 123, resulting from such modification. The pro forma amounts for compensation cost are not indicative of the effects on operating results for future periods. GM's stock incentive plans consist of the General Motors 1997 Stock Incentive Plan, formerly the General Motors Amended Stock Incentive Plan, (the "GMSIP"), the Hughes Electronics Corporation Incentive Plan (the "Hughes Plan") and the General Motors 1998 Salaried Stock Option Plan (the "GMSSOP"). The GMSIP and GMSSOP are administered by the Executive Compensation Committee of the GM Board. The Hughes Plan is administered by the Executive Compensation Committee of the Board of Directors of Hughes. Under the GMSIP, 60 million shares of $1-2/3 par value and 2.5 million shares of Class H common stocks may be granted from June 1, 1997 through May 31, 2002, of which 50 million and 2.4 million were available for grants at December 31, 1998. Options granted prior to 1998 under the GMSIP generally are exercisable one-half after one year and one-half after two years from the dates of grant. Stock option grants awarded during 1998 vest ratably over three years following the grant date. Option prices are 100% of fair market value on the dates of grant and the options generally expire 10 years from the dates of grant, subject to earlier termination under certain conditions. Under the Hughes Plan, Hughes may grant shares, rights, or options to acquire up to 35.6 million shares of Class H common stock through December 31, 1998, of which 5.4 million were available for grants at December 31, 1998. Option prices are 100% of fair market value on the dates of grant and the options generally vest over two to four years and expire 10 years from the dates of grant, subject to earlier termination under certain conditions. Under the GMSSOP, 50 million shares of $1-2/3 par value may be granted from January 1, 1998 through December 31, 2007, of which 45.7 million were available for grants at December 31, 1998. Stock options are exercisable two years from the date of grant and vest one year following the date of grant, subject to earlier termination under certain conditions. Option prices are 100% of fair market value on the dates of grant and the options generally expire 10 years and two days from the dates of grant. II-61 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 20. Stock Incentive Plans (concluded) In connection with the Hughes Transactions, the number of options and related exercise prices for outstanding options under the GMSIP and the Hughes Plan were adjusted to reflect the change in the fair market value of $1-2/3 par value and Class H common stocks that resulted from the Hughes Defense Class A common stock distribution. The number of shares under option and the exercise price were adjusted such that the aggregate intrinsic value of the options immediately before and immediately after the transaction remained unchanged. Changes in the status of outstanding options were as follows:
GMSIP and GMSIP Hughes Plan GMSSOP $1-2/3 Par Value Common Class H Common $1-2/3 Par Value Common --------------------------------------------------------------------- Weighted- Weighted- Weighted Shares Average Shares Average Share Average under Exercise under Exercise under Exercise Option Price Option Price Option Price - ---------------------------------------------------------------------------------------- Options outstanding at January 1, 1996 29,280,126 $44.03 8,190,867 $30.16 - $ - Granted 7,087,590 $52.27 1,501,900 $61.31 - $ - Exercised 6,207,072 $39.16 864,889 $28.58 - $ - Terminated 202,697 $51.75 128,075 $42.94 - $ - - ---------------------------------------------------------------------------------------- Options outstanding at December 31, 1996 29,957,947 $46.94 8,699,803 $35.51 - $ - - ---------------------------------------------------------------------------------------- Granted 8,989,460 $58.81 5,750,600 $54.90 - $ - Exercised 9,273,674 $42.95 2,158,728 $30.21 - $ - Terminated 330,727 $57.05 2,694,982 $42.56 - $ - Hughes Transactions adjustment 3,023,651 $ - 5,897,936 $ - - $ - - ---------------------------------------------------------------------------------------- Options outstanding at December 31, 1997 32,366,657 $51.40 15,494,629 $28.70 - $ - - ---------------------------------------------------------------------------------------- Granted 9,854,805 $56.14 4,234,620 $50.78 4,332,305 $56.00 Exercised 8,242,624 $44.08 2,055,168 $22.71 - $ - Terminated 454,558 $54.45 980,464 $31.95 328,630 $56.00 - ---------------------------------------------------------------------------------------- Options outstanding at December 31, 1998 33,524,280 $50.72 16,693,617 $34.85 4,003,675 $56.00 - ---------------------------------------------------------------------------------------- Options exercisable at December 31, 1998 17,475,607 $46.71 6,089,532 $27.48 - $ - - ----------------------------------------------------------------------------------------
The following table summarizes information about GM's stock option plans at December 31, 1998:
------------------------------------------------------------------------------------------------ Weighted-Average Range of Options Remaining Weighted-Avg. Options Weighted-Average Exercise Outstanding Contractual Exercise Exercisable Exercise Prices Life (yrs.) Price Price ------------------------------------------------------------------------------------------------ GMSIP $1-2/3 Par Value Common $15.00 to $39.99 5,739,004 4.8 $36.81 5,737,377 $36.81 40.00 to 49.99 5,200,940 6.7 $47.86 4,921,723 $47.85 50.00 to 70.00 22,584,336 7.9 $54.91 6,816,507 $54.21 ------------------------------------------------------------------------------------------------ $15.00 to $70.00 33,524,280 7.2 $50.72 17,475,607 $46.71 ------------------------------------------------------------------------------------------------ GMSIP and Hughes Plan Class H Common $9.86 to $20.00 940,516 3.7 $14.80 940,516 $14.80 20.01 to 30.00 1,489,096 5.9 $22.25 1,489,096 $22.25 30.01 to 40.00 10,255,230 8.2 $32.20 3,659,920 $32.86 40.01 to 50.00 1,372,700 9.6 $43.71 - $ - 50.01 to 54.79 2,636,075 9.3 $54.79 - $ - ----------------------------------------------------------------------------------------------- $9.86 to $54.79 16,693,617 8.1 $34.85 6,089,532 $27.48 ----------------------------------------------------------------------------------------------- GMSSOP $1-2/3 Par Value Common ----------------------------------------------------------------------------------------------- $56.00 4,003,675 9.0 $56.00 - $ - -----------------------------------------------------------------------------------------------
II-62 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 21. Other Income and Other Expenses Other income and other expenses included the following (in millions): Years Ended December 31, ------------------------ 1998 1997 1996 ---- ---- ---- Other income Interest income $2,149 $2,127 $1,679 Insurance premiums 1,426 1,161 947 Mortgage operations investment income and servicing fees 1,836 1,525 921 Rental car lease revenue 1,234 1,143 966 Gain on Hughes Defense spin-off - 4,269 - Other 652 1,582 1,357 --- ----- ----- Total other income $7,297 $11,807 $5,870 ====== ======= ====== Other expenses Insurance losses and loss adjustment expenses $1,061 747 622 Provision for financing losses 463 523 669 Other 782 241 792 --- --- --- Total other expenses $2,306 $1,511 $2,083 ====== ====== ====== NOTE 22: Segment Reporting SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, established standards for reporting information about operating segments in financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. GM's chief operating decision maker is the Chairman and Chief Executive Officer. The operating segments are managed separately because each operating segment represents a strategic business unit that offers different products and serves different markets. GM's reportable operating segments within its Automotive, Electronics and Other Operations business consist of General Motors Automotive (GMA), which is comprised of four regions: GM North America (GMNA), GM Europe (GME), GM Asia/Pacific (GMAP), and GM Latin America/Africa/Mid-East (GMLAAM), Delphi, Hughes, and Other. GMNA designs, manufactures, and markets vehicles primarily in North America under the following nameplates: Chevrolet, Pontiac, GMC, Oldsmobile, Buick, Cadillac, and Saturn. GME, GMAP and GMLAAM meet the demands of customers outside North America with vehicles designed, manufactured and marketed under the following nameplates: Opel, Vauxhall, Holden, Isuzu, Saab, Chevrolet, GMC, and Cadillac. Delphi is a diverse supplier of automotive systems and components. Delphi offers products and services in the areas of electronics and mobile communication; safety, thermal and electrical architecture; and dynamics and propulsion. Hughes includes activities relating to designing, manufacturing, and marketing advanced technology electronic systems, products, and services for the telecommunications and space industries . The Other segment includes the design, manufacturing and marketing of locomotives and heavy-duty transmissions and the elimination of intersegment transactions, as well as former Hughes' defense business prior to the Hughes Transactions. GM's reportable operating segments within its Financing and Insurance Operations business consist of GMAC and Other. GMAC provides a broad range of financial services, including consumer vehicle financing, full-service leasing and fleet leasing, dealer financing, car and truck extended service contracts, residential and commercial mortgage services, and vehicle and homeowners insurance. The Financing and Insurance Operations' Other segment includes financing entities operating in Canada, Germany and Brazil, as well as eliminations of intersegment transactions. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies except that the disaggregated financial results have been prepared using a management approach, which is consistent with the basis and manner in which GM management internally disaggregates financial information for the purposes of assisting in making internal operating decisions. GM evaluates performance based on stand alone operating segment net income and generally accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices. Revenues are attributed to geographic areas based on the location of the assets producing the revenues. II-63 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Note 22. Segment Reporting (continued)
Elimin- Total Other Total GMNA GME GMLAAM GMAP ations GMA Delphi Hughes Other(b) Automotive GMAC Financing Financing ---- --- ------ ---- ------ --- ------ ------ -------- ---------- ----- --------- --------- (in millions) 1998(a) Manufactured products sales & revenues: External customers $91,771 $23,948 $7,150 $2,814 $ - $125,683 $6,157 $5,924 $2,669 $140,433 $ - $ - $ - Intersegment 2,430 1,088 253 109 (3,880) - 22,322 40 (22,362) - - - - ------ ------ ----- ----- ----- ------- ------ ----- ------ ------- --- --- --- Total manufactured products 94,201 25,036 7,403 2,923 (3,880) 125,683 28,479 5,964 (19,693) 140,433 - - - Financing revenue - - - - - - - - - - 12,731 854 13,585 Other income 2,296 804 150 121 - 3,371 179 131 (1,083) 2,598 5,183 (484) 4,699 ------ ------ ----- ----- ---- ------- ----- ---- ----- ------- ------ --- ------ Total net sales and revenues $96,497 $25,840 $7,553 $3,044 $(3,880) $129,054$28,658 $6,095 $(20,776) $143,031 $17,914 $370 $18,284 ======= ======= ====== ====== ======= ======== ====== ====== ======== ======== ======= ==== ======= Depreciation and amortization (c) $4,138 $1,102 $366 $95 $ - $5,701 $1,102 $434 $44 $7,281 $4,812 $108 $4,920 Interest income $537 $544 $116 $9 $ - $1,206 $57 $112 $(605) $770 $1,524 $(145) $1,379 Interest expense $939 $433 $92 $7 $ - $1,471 $277 $18 $(716) $1,050 $5,787 $56 $5,843 Income tax expense (benefit $787 $319 $(213) $9 $ - $902 $(173) $(45) $161 $845 $612 $6 $618 Earnings (losses) of nonconsolidated associates $14 $(14) $102 $(152) $ - $(50) $55 $(128) $(61) $(184) $ - $ - $ - Net income (loss)(c) $1,635 $419 $(175) $(243) $(2) $1,634 $(93) $272 $(279) $1,534 $1,325 $97 $1,422 Investments in nonconsolidated associates $675 $262 $445 $395 $(261) $1,516 $366 $41 $(606) $1,317 $557 $(557) $ - Segment assets $69,043 $18,440 $5,548 $1,557 $(2,261) $92,327$15,506 $13,008 $4,797 $125,638$131,417 $334 $131,751 Expenditures for property (d) $5,464 $1,205 $534 $197 $ - $7,400 $1,381 $344 $214 $9,339 $278 $ - $278 1997(a) Manufactured products sales & revenues: External customers $99,435 $23,269 $8,437 $2,980 $ - $134,121 $5,540 $5,083 $8,939 $153,683 $ - $ - $ - Intersegment 821 837 135 - (1,793) - 25,907 45 (25,952) - - - - ------ ------ ----- ----- ----- ------- ------ ----- ------ ------- --- --- --- Total manufactured products 100,256 24,106 8,572 2,980 (1,793) 134,121 31,447 5,128 (17,013) 153,683 - - - Financing revenue - - - - - - - - - - 12,577 185 12,762 Other income 2,372 812 212 158 - 3,554 189 496 3,845 8,084 4,018 (295) 3,723 ------ ------ ------ ----- ----- ------- ----- ----- ------ ------- ------ ---- ------ Total net sales and revenues $102,628 $24,918 $8,784 $3,138 $(1,793) $137,675$31,636 $5,624 $(13,168) $161,767 $16,595 $(110) $16,485 ======== ======= ====== ====== ======= ======= ====== ====== ======== ======== ======= ===== ======= Depreciation and amortization (c) $7,116 $1,563 $248 $294 $ - $9,221 $1,970 $296 $316 $11,803 $4,746 $67 $4,813 Interest income $839 $549 $167 $10 $ - $1,565 $57 $33 $(546) $1,109 $1,127 $(109) $1,018 Interest expense $643 $395 $118 $23 $(1) $1,178 $287 $91 $(693) $863 $5,256 $(6) $5,250 Income tax (benefit) expense $(272) $121 $43 $(29) $(12 $(149) $44 $237 $23 $155 $913 $1 $914 (Losses) earnings of nonconsolidated associates $(35) $(171) $173 $11 $ - $(22) $27 $(72) $(11) $(78) $ - $ - $ - Net (loss) income (c) $(12) $(17) $667 $(172) $(17) $449 $215 $471 $4,245 $5,380 $1,301 $17 $1,318 Investments in nonconsolidated associates $552 $229 $414 $427 $1 $1,623 $346 $75 $(637) $1,407 $213 $(213) $ - Segment assets $69,378 $17,582 $5,651 $1,567 $(874) $93,304$15,026 $12,283 $3,055 $123,668$109,319 $(1,235) $108,084 Expenditures for property (d) $5,387 $1,687 $435 $327 $ - $7,836 $1,383 $251 $331 $9,801 $238 $ - $238 See notes on next page
II-64 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Note 22. Segment Reporting (continued)
Elimin- Total Other Total GMNA GME GMLAAM GMAP ations GMA Delphi Hughes Other(b) Automotive GMAC Financing Financing ---- --- ------ ---- ------ --- ------ ------ -------- ---------- ----- --------- --------- (in millions) 1996(a) Manufactured products sales & revenues: External customer $92,659 $25,239 $6,691 $3,001 $ - $127,590 $5,284 $3,958 $8,509 $145,341 $ - $ - $ - Intersegment 723 289 32 - (1,044) - 25,748 51 (25,799 - - - - ------ ------ ----- ----- ----- ------- ----- ----- ------ ------- --- --- --- Total manufactured products 93,382 25,528 6,723 3,001 (1,044) 127,590 31,032 4,009 (17,290) 145,341 - - - Financing revenue - - - - - - - - - - 12,644 30 12,674 Other income 1,960 775 173 133 - 3,041 125 118 (435) 2,849 3,330 (309) 3,021 ----- --- --- --- --- ----- --- --- ---- ----- ----- ---- ----- Total net sales and revenues $95,342 $26,303 $6,896 $3,134 $(1,044) $130,631$31,157 $4,127 $(17,725 $148,190 $15,974 $(279) $15,695 ======= ======= ====== ====== ======= ======== ====== ====== ======== ======== ======= ===== ======= Depreciation and amortization (c) $4,348 $1,213 $202 $71 $ - $5,834 $843 $195 $273 $7,145 $4,676 $19 $4,695 Interest income $569 $581 $169 $26 $ - $1,345 $49 $7 $(377) $1,024 $743 $(88) $655 Interest expense $500 $430 $107 $29 $ - $1,066 $276 $43 $(614) $771 $4,938 $(14) $4,924 Income tax (benefit) expense $54 $168 $106 $32 $(7) $353 $259 $105 $168 $885 $837 $1 $838 Earnings (losses) of nonconsolidated associates $37 $(97) $79 $70 $ - $89 $57 $(42) $24 $128 $ - $ - $ - Net income (loss) (c) $819 $778 $642 $110 $(12) $2,337 $853 $184 $348 $3,722 $1,240 $1 $1,241 Investments in nonconsolidated associates $472 $597 $242 $379 $ - $1,690 $292 $95 $(523) $1,554 $158 $(158) $ - Segment assets $67,528 $18,575 $4,941 $2,087 $(616) $92,515$15,390 $3,904 $15,182 $126,991 $98,578 $(703) $97,875 Expenditures for property (d) $5,177 $1,652 $628 $389 $ - $7,846 $1,177 $262 $321 $9,606 $121 $ - $121
- ---------------------- (a)The operating results for 1997 and 1996 and assets as of December 31, 1996 are presented to reflect the changes to GM's organizational structure resulting from the Hughes Transactions which occurred in December 1997. As such, Delphi includes Delco, Hughes excludes Delco and Hughes Defense and Other includes Hughes Defense. Adjustments have also been made to reflect the impact of adjustments to Delphi's management basis financial statements in connection with its initial public offering. (b)Other includes the $4.3 billion gain resulting from the Hughes Transactions for the year ended December 31, 1997, and income from discontinued operations of $10 million for the year ended December 31, 1996. (c)The amount reported for Hughes excludes amortization of GM purchase accounting adjustments of approximately $21 million for 1998, 1997 and 1996 related to GM's acquisition of Hughes Aircraft Company. Such amortization was allocated to GM's Other segment which is consistent with the basis upon which the segments are evaluated. (d)Excludes expenditures related to telecommunications and other equipment amounting to $726 million, $606 million and $259 million in 1998, 1997 and 1996, respectively. II-65 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued Note 22. Segment Reporting (concluded) Information concerning principal geographic areas was as follows (in millions): 1998 1997 1996 ----------------- ----------------- ---------------- Net Sales Net Sales Net Sales & Net & Net & Net Revenues Property Revenues Property Revenues Property -------- -------- -------- -------- -------- -------- North America United States $111,375 $22,814 $127,226 $20,778 $112,961 $22,821 Canada and Mexico 10,960 2,641 12,207 2,783 9,661 3,386 ------- ------ ------- ------ ------- ------ Total North America 122,335 25,455 139,433 23,561 122,622 26,207 Europe France 2,107 448 1,972 424 2,680 390 Germany 10,711 3,508 10,723 3,083 12,363 3,821 Spain 1,966 555 1,760 611 1,730 805 United Kingdom 5,379 1,205 5,409 1,183 5,063 1,103 Other 9,679 2,095 9,165 1,800 8,717 1,797 ------- ------ ------- ------ ------- ------ Total Europe 29,842 7,811 29,029 7,101 30,553 7,916 Latin America Brazil 4,775 1,991 5,317 1,964 5,063 1,910 Other Latin America 2,909 425 2,978 466 2,237 328 ------- ------ ------- ------ ------- ------ Total Latin America 7,684 2,416 8,295 2,430 7,300 2,238 All Other 1,454 1,891 1,495 1,087 3,410 947 ------- ------ ------- ------ ------- ------ Total $161,315 $37,573 $178,252 $34,179 $163,885 $37,308 ======== ======= ======== ======= ======== ======= Note 23. Subsequent Events On January 22, 1999, Hughes agreed to acquire Primestar, Inc.'s (Primestar) 2.3 million-subscriber medium power direct-to-home business. In a related transaction, Hughes also agreed to acquire the high-power satellite assets and direct broadcast satellite (DBS) orbital frequencies of Tempo, a wholly-owned subsidiary of TCI Satellite Entertainment, Inc. The acquisitions will be accounted for using the purchase method of accounting. The purchase price for the direct-to-home business will be comprised of $1.1 billion in cash and 4,871,448 shares of GM Class H common stock, for a total purchase price of $1.3 billion. The direct-to-home transaction, pending regulatory and Primestar lender approval is expected to close in early to mid-1999. The purchase price for the Tempo assets consists of $500 million in cash, $150 million of which is expected to be paid in early to mid-1999 and $350 million which is payable upon Federal Communications Commission approval of the transfer of the DBS orbital frequencies, which is expected in mid to late-1999. On February 5, 1999, Delphi completed an initial public offering of 100 million shares of its common stock, which represented 17.7% of its outstanding common shares. GM currently owns the remaining 82.3% of Delphi's common stock. GM intends to fully separate Delphi from GM later in 1999 by distributing all of its shares of Delphi common stock to holders of GM $1-2/3 par value common stock. GM expects to accomplish this distribution through the following: . Split-Off - such as an exchange offer by GM in which holders of GM's $1-2/3 common stock would be invited to tender their shares in exchange for shares of Delphi common stock; or . Spin-Off - a pro rata distribution by GM of its shares of Delphi common stock to holders of GM's $1-2/3 common stock; or . Combined Split-Off/Spin-Off - some combination of the above transactions. Although GM is fully committed to completing the full separation of Delphi from GM through such a distribution, any such distribution would be subject to a number of conditions and there can be no assurance as to whether or when it will occur. Hughes entered into a contract with Asia-Pacific Mobile Telecommunications Satellite Pte. Ltd. (APMT) effective May 15, 1998, whereby Hughes was to provide to APMT a satellite-based mobile telecommunications system consisting of two satellites, a ground segment, user terminals and associated equipment and software. As part of the contract, Hughes was required to obtain all necessary U.S. Government export licenses for the APMT system by February 15, 1999. On February 24, 1999, the Department of Commerce notified Hughes that it intends to deny the export licenses required by Hughes to fulfill its contractual obligation to APMT. Hughes has until March 16, 1999 to request reconsideration of the decision. As a result of Hughes failing to obtain the export licenses, APMT has the right to terminate the contract. At this time, there are ongoing discussions between Hughes and APMT regarding the contract, and between Hughes and the U.S. Government regarding the export licenses. If the U.S. Government ultimately denies the required export licenses or APMT terminates the II-66 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - concluded Note 23. Subsequent Events (concluded) contract, Hughes could be required to refund $45 million to APMT and record a pre-tax charge to earnings of approximately $100 million in 1999. 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 U.S. Court of Appeals for the Federal Circuit (CAFC) reaffirmed earlier decisions in the Williams case including 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, was denied the request, and thereafter applied for a certiorari to the U.S. Supreme Court. On March 1, 1999, the U.S. Surpreme Court denied the U.S. Government's petition for certiorari. The case will be remanded back to the trial court (Court of Claims) for entry of the final judgement. While no amount had been recorded in the financial statements of Hughes to reflect the $114 million award or the interest accumulating thereon as of December 31, 1998, it is expected that resolution of this matter will result in the recognition of a pre-tax gain of approximately $150 million during 1999. On March 2, 1999, GM purchased an additional equity interest in Isuzu Motors, Ltd. (Isuzu) that increased GM's equity interest from 37.5% to 49%. The additional equity interest was purchased for approximately 52.5 billion yen or approximately $440 million. * * * * * * II-67 GENERAL MOTORS CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INFORMATION Selected Quarterly Data (Unaudited) 1998 Quarters --------------------------------------------- 1st 2nd(1)(2) 3rd(2)(3) 4th(4) --- --------- --------- ------ (Dollars in Millions Except Per Share Amounts) Total net sales and revenues $41,576 $38,929 $34,444 $46,366 ------- ------- ------- ------- Income (loss) before income taxes and minority interests 2,427 589 (1,243) 2,839 Income tax expense (credit) 808 175 (451) 931 Minority interests (10) 3 4 (6) Losses of nonconsolidated associates (5) (28) (21) (130) ------ ---- ----- ------ Net income 1,604 389 (809) 1,772 Dividends on preference stocks 16 16 16 15 ------ ---- ----- ------ Earnings on common stocks $1,588 $373 $(825) $1,757 ====== ==== ===== ====== Earnings (loss) attributable to common stocks Earnings attributable to $1-2/3 par value $1,574 $358 $(836) $1,725 -- - - ------ ---- ----- ------ Earnings attributable to Class H $14 $15 $11 $32 --- --- --- --- Basic earnings (loss) per share attributable to common stocks Earnings attributable to $1-2/3 par value $2.31 $0.54 $(1.28) $2.64 -- - - ----- ----- ------ ----- Earnings attributable to Class H $0.13 $0.14 $0.11 $0.30 ----- ----- ----- ----- Average number of shares of common stocks outstanding - basic (in millions) $1-2/3 par value 682 661 654 654 Class H 104 105 106 106 Diluted earnings (loss) per share attributable to common stocks Earnings attributable to $1-2/3 par value $2.27 $0.52 $(1.28) $2.61 -- - - ----- ----- ------ ----- Earnings attributable to Class H $0.13 $0.14 $0.11 $0.30 ----- ----- ----- ----- Average number of shares of common stocks outstanding - diluted (in millions) $1-2/3 par value 693 672 654 665 Class H 109 111 110 109 II-68 GENERAL MOTORS CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INFORMATION - Continued Selected Quarterly Data (Unaudited) - Continued (1)Second-quarter 1998 results included a pre-tax charge of $74 million ($44 million after-tax, or $0.07 basic loss per share of $1-2/3 par value common stock), related to work schedule modifications at Opel Belgium. (2)Work stoppages in the United States during the second and third quarter of 1998 reduced calendar year pre-tax income by approximately $3.1 billion ($2.0 billion after-tax or $2.94 basic loss per share of $1-2/3 par value common stock), after considering partial recovery of production losses from the work stoppages. (3)Third quarter 1998 results included a pre-tax loss of $430 million ($271 million after-tax, or $0.41 basic loss per share of $1-2/3 par value common stock) related to the sale of the Delphi seating, coil spring and lighting businesses. (4)Fourth quarter 1998 results included pre-tax charges against income totaling $534 million ($420 million after-tax or $0.64 basic loss per share of $1-2/3 par value common stock) resulting from GM's competitiveness studies. II-69 GENERAL MOTORS CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INFORMATION - Continued Selected Quarterly Data (Unaudited) - Continued 1997 Quarters --------------------------------------------- 1st(1)(2) 2nd 3rd 4th(6)(7) --------- --- --- --------- (Dollars in Millions Except Per Share Amounts) Total net sales and revenues $42,217 $45,141 $41,903 $48,991 ------- ------- ------- ------- Income before income taxes and minority interests 2,742 3,228 1,609 213 Income tax expense (credit) 989 1,153 533 (1,606)(6) Minority interests 19 18 4 12 Earnings (losses) of nonconsolidated associates 24 5 (13) (94) ----- ----- ----- ----- Net income 1,796 2,098 1,067 1,737 Premium on exchange of preference stocks - - 26 - Dividends on preference stocks 20 20 16 16 ----- ----- ----- ----- Earnings on common stocks $1,776 $2,078 $1,025 $1,721 ====== ====== ====== ====== Earnings attributable to common stocks Earnings attributable to $1-2/3 par value $1,717 $1,941 $964 $1,654 ----- ----- ----- ----- Earnings attributable to Class H (8) $59 $137 $61 $65 ----- ----- ----- ----- Earnings attributable to Class H (9) $ - $ - $ - $2 ----- ----- ----- ----- Basic earnings per share attributable to common stocks Earnings attributable to $1-2/3 par value $2.30 $2.68 $1.35 $2.36 ----- ----- ----- ----- Earnings attributable to Class H (8) $0.59 $1.35 $0.60 $0.63 ----- ----- ----- ----- Earnings attributable to Class H (9) $ - $ - $ - $0.02 ---- ---- ---- ---- Average number of shares of common stocks outstanding - basic (in millions) $1-2/3 par value 747 724 713 702 Class H (8) 100 101 102 103 Class H (9) - - - 104 Diluted earnings per share attributable to common stocks Earnings attributable to $1-2/3 par value $2.28 $2.67 $1.34 $2.33 -- - - ----- ----- ----- ----- Earnings attributable to Class H (8) $0.59 $1.35 $0.60 $0.63 -- ----- ----- ----- ----- Earnings attributable to Class H (9) $ - $ - $ - $0.02 ----- ----- ----- ----- Average number of shares of common stocks outstanding - diluted (in millions) $1-2/3 par value 752 729 720 709 Class H (8) 103 104 105 106 Class H (9) - - - 107 II-70 GENERAL MOTORS CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INFORMATION - Concluded Selected Quarterly Data (Unaudited) - Concluded - ---------------------- (1)First quarter 1997 results included a pre-tax gain of $88 million, after deducting certain legal expenses ($55 million after-tax or $0.07 basic earnings per share of $1-2/3 par value common stock) that resulted from an agreement with Volkswagen A.G. (VW) settling a civil lawsuit which GM brought against VW. (2)First quarter 1997 results included the unfavorable impact of a pre-tax plant closing charge of $80 milion ($50 million after-tax or $0.07 basic loss per share of $1-2/3 par value common stock) related to the announcement that Delphi Interior and Lighting Systems will cease production at its Trenton, New Jersey plant during the 1998 calendar year. (3)Work stoppages in the United States during the second quarter of 1997 reduced calendar year pre-tax income by approximately $530 million ($330 million after-tax or $0.45 basic loss per share of $1-2/3 par value common stock), after considering partial recovery of production losses from the work stoppages. (4)Second quarter 1997 results included a pre-tax gain of $490 million ($318 million after-tax or $0.33 basic earnings per share of $1-2/3 par value common stock and $0.80 basic earnings per share of Class H common stock) related to the merger of the satellite service operations of Hughes and PanAmSat Corporation. (5)Second quarter 1997 results included a pre-tax gain of $128 million ($103 million after-tax or $0.14 basic earnings per share of $1-2/3 par value common stock) related to the sale of GM Europe's equity interest in Avis Europe. (6)Fourth quarter 1997 results included a tax-free gain of $4.3 billion ($6.08 basic earnings per share of $1-2/3 par value common stock) related to the December 17, 1997 completion of the strategic restructuring of GM's Hughes Electronics subsidiary (Hughes Transactions). The 1997 tax credit primarily resulted from the effect of the tax-free status of the gain. (7)Fourth quarter 1997 results included pre-tax charges against income totaling $6.4 billion ($4.0 billion after-tax or $5.75 basic loss per share of $1-2/3 par value common stock) resulting from GM's competitiveness studies. (8)Represents information through December 17, 1997, the date on which GM recapitalized the Class H common stock (GM's Recapitalization Date). (9)Represents information for the period from December 18, 1997, through December 31, 1997, which is subsequent to GM's Recapitalization Date. II-71 GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 9. Changes in and disagreements with accountants on accounting and financial disclosure None II-72 PART III GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEMS 10, 11, 12, AND 13 Information required by Part III (Items 10, 11, 12, and 13) of this Form 10-K is incorporated by reference from General Motors Corporation's definitive Proxy Statement for its 1999 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission, pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year, all of which information is hereby incorporated by reference in, and made part of, this Form 10-K, except that the information required by Item 10 with respect to executive officers of the Registrant is included in Item 4A of Part I of this report. III-1 PART IV ITEM 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K Page Number ------ (a) 1. All Financial Statements See Part II 2. Financial Statement Schedule II - Allowances for the Years Ended December 31, 1998, 1997, and 1996 IV-3 3. Exhibits (Including Those Incorporated by Reference) Exhibit Number - ------ (3)(a) Restated Certificate of Incorporation, as amended, filed as Exhibit 3(i) to the Current Report on Form 8-K of General Motors Corporation dated June 8, 1998, and Amendment to Article Fourth of the Certificate of Incorporation - Division III - Preference Stock, by reason of the Certificates of Designations filed with the Secretary of State of the State of Delaware on September 14, 1987 and the Certificate of Decrease filed with the Secretary of State of the State of Delaware on September 29, 1987 (pertaining to the six series of Preference Stock contributed to the General Motors pension trusts), incorporated by reference to Exhibit 19 to the Quarterly Report on Form 10-Q of General Motors Corporation for the quarter ended June 30, 1990 in the Form SE of General Motors Corporation dated August 6, 1990; as further amended by the Certificate of Designations filed with the Secretary of State of the State of Delaware on June 28, 1991 (pertaining to Series A Conversion Preference Stock), incorporated by reference to Exhibit 4(a) to Form S-8 Registration Statement No. 33-43744 in the Form SE of General Motors Corporation dated November 1, 1991; as further amended by the Certificate of Designations filed with the Secretary of State of the State of Delaware on December 9, 1991 (pertaining to Series B 9-1/8% Preference Stock), incorporated by reference to Exhibit 4(a) to Form S-3 Registration Statement No. 33-45216 in the Form SE of General Motors Corporation dated January 27, 1992; as further amended by the Certificate of Designations filed with the Secretary of State of the State of Delaware on February 14, 1992 (pertaining to Series C Convertible Preference Stock), incorporated by reference to Exhibit (3)(a) to the Annual Report on Form 10-K of General Motors Corporation for the year ended December 31, 1991 in the Form SE of General Motors Corporation dated March 20, 1992; as further amended by the Certificate of Designations filed with the Secretary of State of the State of Delaware on July 15, 1992 (pertaining to Series D 7.92% Preference Stock), incorporated by reference to Exhibit 3(a)(2) to the Quarterly Report on Form 10-Q of General Motors Corporation for the quarter ended June 30, 1992 in the Form SE of General Motors Corporation dated August 10, 1992; and as further amended by the Certificate of Designations filed with the Secretary of State of the State of Delaware on December 15, 1992 (pertaining to Series G 9.12% Preference Stock), incorporated by reference to Exhibit 4(a) to Form S-3 Registration Statement No. 33-49309 in the Form SE of General Motors Corporation dated January 25, 1993. N/A (3)(b) By-Laws, as amended, filed as Exhibit 3(ii) to the Current Report on Form 8-K of General Motors Corporation dated March 2, 1998. N/A (4)(a) Form of Indenture relating to the $500,000,000 8-1/8% Debentures Due April 15, 2016 dated as of April 1, 1986 between General Motors Corporation and Citibank, N.A., Trustee, incorporated by reference to Exhibit 4 to Amendment No. 1 to Form S-3 Registration Statement No. 33-4452 and resolutions adopted by the Special Committee on April 15, 1986, incorporated by reference to Exhibit 4(a) to the Current Report on Form 8-K of General Motors Corporation dated April 24, 1986. N/A (4)(b) Form of Indenture relating to the $700,000,000 9-5/8% Notes Due December 1, 2000 and the $1,400,000,000 Medium-Term Note Program dated as of November 15, 1990 between General Motors Corporation and Citibank, N.A., Trustee, incorporated by reference to Exhibit 4(a) to Form S-3 Registration Statement No. 33-37737. N/A (4)(c) Form of Indenture relating to the $377,377,000 7.75% Debentures Due March 15, 2036 dated as of December 7, 1995 between General Motors Corporation and Citibank, N.A., Trustee, filed as Exhibit 4(a) to Amendment No. 1 to Form S-3 Registration Statement No. 33-64229. N/A IV-1 GENERAL MOTORS CORPORATION AND SUBSIDIARIES PART IV - Continued ITEM 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K (continued) Exhibit Page Number Number - ------ ------ (4)(d) Instruments defining the rights of holders of nonregistered debt of the Registrant have been omitted from this exhibit index because the amount of debt authorized under any such instrument does not exceed 10% of the total assets of the Registrant and its subsidiaries. The Registrant agrees to furnish a copy of any such instrument to the Commission upon request. N/A (4)(e)(i) Amended and Restated Declaration of Trust of General Motors Capital Trust D, incorporated by reference to Exhibit 4(c)(i) to the Current Report on Form 8-K of General Motors Corporation dated July 1, 1997. N/A (4)(e)(ii) Amended and Restated Declaration of Trust of General Motors Capital Trust G, incorporated by reference to Exhibit 4(c)(ii) to the Current Report on Form 8-K of General Motors Corporation dated July 1, 1997. N/A (4)(f)(i) Indenture between General Motors Corporation and Wilmington Trust Company, incorporated by reference to Exhibit 4(d)(i) to the Current Report on Form 8-K of General Motors Corporation dated July 1, 1997. N/A (4)(f)(ii) First Supplemental Indenture between General Motors Corporation and Wilmington Trust Company With Respect To The Series D Junior Subordinated Debentures, incorporated by reference to Exhibit 4(d)(ii) to the Current Report on Form 8-K of General Motors Corporation dated July 1, 1997. N/A (4)(f)(iii)Second Supplemental Indenture between General Motors Corporation and Wilmington Trust Company With Respect To The Series G Junior Subordinated Debentures, incorporated by reference to Exhibit 4(d)(iii) to the Current Report on Form 8-K of General Motors Corporation dated July 1, 1997. N/A (4)(g)(i) Series D Preferred Securities Guarantee Agreement, General Motors Capital Trust D, incorporated by reference to Exhibit 4(g)(i) to the Current Report on Form 8-K of General Motors Corporation dated July 1, 1997. N/A (4)(g)(ii) Series G Preferred Securities Guarantee Agreement, General Motors Capital Trust G, incorporated by reference to Exhibit 4(g)(ii) to the Current Report on Form 8-K of General Motors Corporation dated July 1, 1997. N/A (10)(a)** General Motors Amended 1987 Stock Incentive Plan, incorporated by reference to Exhibit A to the Proxy Statement of General Motors Corporation dated April 13,1992 N/A (10)(b)** General Motors Performance Achievement Plan, incorporated by reference to Exhibit A to the Proxy Statement of General Motors Corporation dated April 16, 1982. N/A (10)(c)** General Motors 1987 Performance Achievement Plan, incorporated by reference to Exhibit A to the Proxy Statement of General Motors Corporation dated April 17,1987 N/A (10)(d)** General Motors 1992 Performance Achievement Plan, incorporated by reference to Exhibit A to the Proxy Statement of General Motors Corporation dated April 13,1992 N/A (12) Computation of Ratios of Earnings to Fixed Charges for the Years Ended December 31, 1998, 1997, and 1996. IV-6 (21) Subsidiaries of the Registrant as of December 31, 1998 IV-7 (23) Consent of Independent Auditors IV-14 (99) Hughes Electronics Corporation and Subsidiaries Consolidated Financial Statements and Management's Discussion and Analysis IV-15 (27) Financial Data Schedule (for SEC information only) N/A * The registrant hereby undertakes to furnish supplementally a copy of any omitted schedule or other attachment to the Securities and Exchange Commission upon request. ** Required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. (b) Reports on Form 8-K Five reports on Form 8-K, dated October 5, 1998, October 6, 1998, October 13, 1998, November 16, 1998 and December 11, 1998 were filed during the quarter ended December 31, 1998 reporting matters under Item 5, Other Events. IV-2 GENERAL MOTORS CORPORATION AND SUBSIDIARIES SCHEDULE II - ALLOWANCES
Additions Additions Balance at charged to charged to beginning costs and other Balance at Description of year expenses accounts Deductions end of year - ----------- ------- -------- -------- ---------- ----------- (Dollars in Millions) For the Year Ended December 31, 1998 Allowances Deducted from Assets Finance receivables (unearned income) $3,516 $ - $3,288 $2,777 $4,027 Allowance for credit losses 903 463 96(a) 441(b) 1,021 Accounts and notes receivable (for doubtful receivables) 181 210 19(a) 79(b) 331 Inventories (principally for obsolescence of service parts) 259 9(c) - - 268 Other investments and miscellaneous assets (receivables and other) 13 - 1 - 14 Miscellaneous allowances (mortgage and other) 202 52 113 115 252 ----- ---- ----- ----- ------ Total Allowances Deducted from Assets $5,074 $734 $3,517 $3,412 $5,913 ====== ==== ====== ====== ====== For the Year Ended December 31, 1997 Allowances Deducted from Assets Finance receivables (unearned income) $3,642 $ - $3,161 $3,287 $3,516 Allowance for credit losses 922 523 62(a) 604(b) 903 Accounts and notes receivable (for doubtful receivables) 151 41 41(a) 52(b) 181 Inventories (principally for obsolescence of service parts) 303 - - 44(c) 259 Other investments and miscellaneous assets (receivables and other) 12 - 1 - 13 Miscellaneous allowances (mortgage) 138 106 6 48 202 ----- ---- ----- ----- ------ Total Allowances Deducted from Assets $5,168 $670 $3,271 $4,035 $5,074 ====== ==== ====== ====== ====== For the Year Ended December 31, 1996 Allowances Deducted from Assets Finance receivables (unearned income) $3,922 $ - $3,044 $3,324 $3,642 Allowance for credit losses 808 669 116(a) 671(b) 922 Accounts and notes receivable (for doubtful receivables) 138 49 9(a) 45(b) 151 Inventories (principally for obsolescence of service parts) 229 74(c) - - 303 Other investments and miscellaneous assets (receivables and other) 33 1 - 22 12 Miscellaneous allowances (mortgage) 59 99 31 51 138 ----- ---- ----- ----- ------ Total Allowances Deducted from Assets $5,189 $892 $3,200 $4,113 $5,168 ====== ==== ====== ====== ======
Notes:(a) Primarily reflects the recovery of accounts previously written-off. (b) Accounts written off. (c) Represents net change of inventory allowances. Reference should be made to the notes to consolidated financial statements. IV-3 GENERAL MOTORS CORPORATION AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. GENERAL MOTORS CORPORATION -------------------------- (Registrant) Date: March 1, 1999 By /s/JOHN F. SMITH, JR. --------------------- (John F. Smith, Jr. Chairman of the Board of Directors and Chief Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on this 1st day of March 1999 by the following persons on behalf of the Registrant and in the capacities indicated. Signature Title --------- ----- /s/JOHN F. SMITH, JR. Chairman of the Board of Directors - --------------------- and Chief Executive Officer (John F. Smith, Jr.) /s/HARRY J. PEARCE Vice Chairman of the Board of - ------------------ Directors (Harry J. Pearce) /s/G. RICHARD WAGONER, JR. President, Chief Operating Officer and - -------------------------- Director (G. Richard Wagoner, Jr.) /s/J. MICHAEL LOSH Executive Vice President ) - ------------------ and Chief Financial Officer ) (J. Michael Losh) )Principal )Financial /s/ERIC A. FELDSTEIN Vice President and Treasurer)Officers - -------------------- ) (Eric A. Feldstein) ) /s/WALLACE W. CREEK Comptroller ) - ------------------- ) (Wallace W. Creek) )Principal )Accounting /s/PETER R. BIBLE Chief Accounting Officer )Officers - ----------------- ) (Peter R. Bible) ) IV-4 GENERAL MOTORS CORPORATION AND SUBSIDIARIES SIGNATURES - Concluded Signature Title /s/PERCY BARNEVIK Director - ----------------- (Percy Barnevik) /s/JOHN H. BRYAN Director - ---------------- (John H. Bryan) /s/THOMAS E. EVERHART Director - --------------------- (Thomas E. Everhart) /s/CHARLES T. FISHER, III Director - ------------------------- (Charles T. Fisher, III) /s/GEORGE M. C. FISHER Director - ---------------------- (George M. C. Fisher) /s/KAREN KATEN Director - -------------- (Karen Katen) /s/J. WILLARD MARRIOTT, JR. Director - -------------------------- (J. Willard Marriott, Jr.) /s/ANN D. MCLAUGHLIN Director - -------------------- (Ann D. McLaughlin) /s/ECKHARD PFIEFFER Director - ------------------- (Eckhard Pfeiffer) /s/JOHN G. SMALE Director - ---------------- (John G. Smale) /s/LOUIS W. SULLIVAN Director - -------------------- (Louis W. Sullivan) /s/DENNIS WEATHERSTONE Director - ---------------------- (Dennis Weatherstone) IV-5 EX-12 2 FIXED CHARGES EXHIBIT 12 GENERAL MOTORS CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES Years Ended December 31, ------------------------ 1998 1997 1996 ---- ---- ---- (Dollars in Millions) Income from continuing operations $2,956 $6,698 $4,953 Income taxes 1,463 1,069 1,723 Losses (earnings) of nonconsolidated associates 184 78 (128) Cash dividends received from associates 78 41 48 Amortization of capitalized interest 68 56 54 ----- ----- ----- Income from continuing operations before income taxes, undistributed income of associates, and capitalized interest 4,749 7,942 6,650 ----- ----- ----- Fixed charges included in income from continuing operations Interest and related charges on debt 6,644 5,946 5,673 Portion of rentals deemed to be interest 285 305 287 ----- ----- ----- Total fixed charges included in income from continuing operations 6,929 6,251 5,960 ----- ----- ----- Earnings available for fixed charges $11,678 $14,193 $12,610 ======= ======= ======= Fixed charges Fixed charges included in income from continuing operations $6,929 $6,251 $5,960 Interest capitalized in the period 112 126 49 ----- ----- ----- Total fixed charges $7,041 $6,377 $6,009 ====== ====== ====== Ratios of earnings to fixed charges 1.66 2.23 2.10 ==== ==== ==== IV-6 EX-21 3 GM'S SUBSIDIARY LISTING EXHIBIT 21 GENERAL MOTORS CORPORATION AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT AS OF DECEMBER 31, 1998 Subsidiary companies of the Registrant are listed below. State or Sovereign Power Name of Subsidiary of Incorporation ------------------ ---------------- Subsidiaries included in the Registrant's consolidated financial statements Adam Opel Aktiengesellschaft................................Germany Adam Opel Unterstuetzungskasse GmbH.......................Germany Alpha Trans Grundbesitz - und Vermogensverwaltungs GmbH...Germany Autohaus am Nordring GmbH, Berlin.........................Germany Carus Grundstucks-Vermietungsgesellschaft mbH & Co. Object Kuno 65 KG.......................................Germany Carus Grundstucks-Vermietungsgesellschaft mbH & Co. Object Leo 40 KG........................................Germany Edmund Becker und Co. AG..................................Germany GM Europe GmbH............................................Germany General Motors GmbH & Co. OHG.............................Germany General Motors Poland Spolka, zo.o........................Poland Opel-Automobilwerk Eisenach-PKW GmbH......................Germany Opel China GmbH...........................................France OPEL Guangzhou Precision Machining Co. Ltd................China Opel Hungary Automobile Production Ltd....................Hungary Opel Hungary Automotive Manufacturing Ltd. ...............Hungary Opel Performance Center GmbH..............................Germany Opel Polen GmbH...........................................Germany Opel Polska Sp. z oo......................................Poland Opel Restrukturierungsgesellschaft mbH....................Germany Opel Turkiye Limited Sirketi..............................Turkey Saginaw Deutschland GmbH..................................Germany Aisin GM Allison Co., Ltd...................................Japan Arabian Battery Holding Company.............................Delaware Arabian Financing Company ..................................Delaware Argonaut Holdings, Inc......................................Delaware Auto Lease Payment Corporation..............................Cayman Islands North American New Cars, Inc..............................Delaware Battery Technology Services, Inc. ..........................Delaware Brazauto Industria e Comercio Ltda..........................Cayman Islands Chevrolet Sociedad Anonima de Ahorro para Fines Determinados..............................................Argentina Convesco Vehicle Sales GmbH.................................Germany Controladora General Motors, S.A. de C.V. ..................Mexico Centro Tecnico Herramental, S.A. de C.V...................Mexico Componentes Para Automotores, S. de R.L. de C.V. .........Mexico Delphi Alambrados Automotrices, S.A. de C.V. ...........Mexico Delphi Cableados, S.A. de C.V. .........................Mexico Delphi Componentes Mecanicos de Matamoros, S.A. de C.V..Mexico Delphi Ensamble de Cables y Componentes, S. de R.L. de C.V. ...................................Mexico Productos Delco de Chihuahua, S.A. de C.V. .............Mexico Sistemas Electricos y Conmutadores, S.A. de C.V. .......Mexico Electro-Motive de Mexico, S.A. de C. V. ..................Mexico General Motors de Mexico, S. de R.L. de C.V. .............Mexico Sistemas Para Automotores de Mexico, S.A. de C.V. ........Mexico Delphi Automotive Systems, S.A. de C.V. ................Mexico Dealership Liquidations, Inc................................Delaware Delco Electronics Corporation...............................Delaware Delco Electronics Asia/Pacific Pte Ltd. ..................Singapore Delco Electronics International, Inc. ....................Delaware Delco Electronics Holding GmbH..........................Germany Delco Electronics Overseas Corporation....................Delaware Delco Electronics Singapore Pte. Ltd. ....................Singapore Delco Electronics (Suzhou) Co., Ltd. .....................China Delnosa, S.A. de C.V. ....................................Mexico IV-7 GENERAL MOTORS CORPORATION AND SUBSIDIARIES State or Sovereign Power Name of Subsidiary of Incorporation ------------------ ---------------- Deltronicos de Matamoros, S.A. de C.V. ...................Mexico f & g Megamos Sicherheitselektronik GmbH...................Germany Famar do Brasil Comercio e Representacao Ltda.............Brazil Holdcar S.A...............................................Argentina Famar Fueguina, S. A. ..................................Argentina Mecel AB..................................................Sweden Texton S.A. ..............................................France Texton P.L.C............................................United Kingdom Delphi Automotive Systems Corporation.......................Delaware Delphi Automotive Systems do Brasil Ltda. ..................Brazil Delphi Automotive Systems International, Inc. ..............Delaware Delphi Automotive Systems China, Inc. .......................Delaware Beijing Delphi Automotive Systems China Co., Ltd..........China Delphi Packard Electric (Guangzhou) Company, Ltd..........China Hubei Delphi Automotive Generator Co., Ltd. ..............China Packard Electric Baicheng Co., Limited....................China Packard Electric Hebi Co., Limited........................China Shanghai Delco International Storage Battery Company, Ltd............................................China Tianjin Delphi Suspension Systems Co., Ltd................China Delphi Automotive Systems Deutschland GmbH..................Germany Reinshagen GmbH...........................................Germany Unterstuetzungsgesellschaft der Kabelwerke Reinshagen GmbH.........................................Germany Delphi Automotive Systems (Holding), Inc....................Delaware Delphi Automotive Systems Indonesia.........................Indonesia Delphi Automotive Systems Korea, Inc. ......................Delaware Delphi Automotive Systems L.L.C.............................Delaware Delphi Automotive Systems (M) SND BHD.......................Malaysia Delphi Automotive Systems Poland Sp. zo.o. .................Poland Delphi Automotive Systems Singapore PTE LTD.................Singapore Delphi Automotive Systems Sweden AB.........................Sweden Delphi Calsonic Compressors, S.A.S. ........................France Delphi Chassis Systems Krosno S.A...........................Poland Delphi Controladora, S. A. de C. V..........................Mexico Delphi Energy and Engine Management System SDN BHD..........Malaysia Delphi France Automotive Systems............................France Delphi Automotive Systems Luxembourg S.A. ................Luxembourg Delphi Automotive Systems UK Limited......................England/Wales Delphi Italia Automotive Systems S.r.l....................Italy Delphi Italia Service Center S.r.l........................Italy Delphi Saginaw Steering Systems U.K. Limited..............England DRB s.a./n.v..............................................France Diavia S.r.l..............................................Italy Opel France S.A...........................................France Societe Francaise des Amortisseurs De Carbon S.A..........France Delphi Harrison - Calsonic..................................France Delphi International Services, Inc..........................Delaware Delphi L'EM Argentina S.A...................................Argentina Delphi Packard Austria Ges. m.b.H. .........................Austria Delphi Packard Electric Ceska republika s.r.o.............Czech Republic Packard Electric Vas kft..................................Hungary Reinshagen Tournai S.A....................................Belgium Delphi Packard Electric Sielin Argentina S.A................Argentina Delphi Packard Electric Systems (M) Sdn Bhd.................Malaysia Delphi Packard Romania S.r.l................................Romania Delphi Polska Automotive Systems Sp. z.o.o..................Poland Delphi Rimir, S.A. de C.V. .................................Mexico Delphi Steering (Malaysia) Sdn Bhd..........................Malaysia Delphi Technologies, Inc....................................Delaware IV-8 GENERAL MOTORS CORPORATION AND SUBSIDIARIES State or Sovereign Power Name of Subsidiary of Incorporation ------------------ ---------------- Delphi Unicables, S.A. .....................................Spain Delphi Cisa S.A. .........................................Spain Delphi Colvegasa, S.A.....................................Spain DEOC Pension Trustees Limited...............................England Electro-Motive Maintenance Operations Pty Ltd. .............Australia Exhaust Systems Corporation.................................Delaware AlliedSignal Catalyseurs pour L environment S.A. de C. V..France AS Catalizadores Ambientales, S.A. do C.V...............Mexico ASEC Manufacaturing.......................................Michigan ASEC Sales................................................New Jersey Environmental Catalysts, LLC..............................Delaware GM Automotive Services Belgium..............................Belgium GM Auto Receivables Co. ....................................Delaware GMC Truck Motors Development Corporation....................Delaware GM-DI Leasing Corporation...................................Delaware GM Ovonic L.L.C.............................................Michigan Ovonic Energy Products, Inc...............................Michigan General Motors Acceptance Corporation.......................Delaware Autofinanciamiento GMAC, S.A. de C.V......................Mexico Banque Opel...............................................France Basic Credit Holding Company, L.L.C.......................Delaware Nuvell Credit Corporation...............................Delaware Nuvell Financial Services Corp..........................Delaware Capital Auto Receivables, Inc. ...........................Delaware General Acceptance (Thailand) Ltd.*.......................Thailand GMAC - 20th Century Finance Corporation Ltd.*.............India GMAC, a.s. ...............................................Czech Republic GMAC Arrendamiento S.A. de C.V............................Mexico GMAC, Australia (Finance) Limited.........................Australia GMAC Business Credit, L.L.C...............................Delaware GMAC Comercial Automotriz Chile S.A. .....................Chile GMAC Automotriz Limitada................................Chile GMAC Commercial Corporation...............................Delaware G.M.A.C. Comercio e Aluguer de Veiculos, Lta..............Portugal GMAC de Argentina S.A.....................................Argentina GMAC del Ecuador S.A......................................Ecuador G.M.A.C. Financiera de Colombia S.A. Compania de Financiamiento Comercial................................Colombia GMAC Holding S.A. de C. V.................................Mexico GMAC Insurance Holdings, Inc..............................Delaware Cadmic Agency Corporation...............................Delaware CoverageOne, Inc........................................Delaware GMAC Securities Corporation, Inc........................Delaware GMAC Service Agreement Corporation......................Michigan GM Motor Club, Inc......................................North Carolina Integon Corporation.....................................Delaware MIC RE Corp.............................................Delaware Motors Insurance Corporation............................New York Motors Insurance Corporation of Michigan ...............Michigan MRP Service Agreement Corporation.......................Michigan Trinity General Agency, Inc.............................Texas GMAC International Finance, B.V...........................Netherlands GMAC International Corporation............................Delaware GMAC Italia Leasing S.p.A. ...............................Italy GMAC Lease B.V............................................Netherlands GMAC Leasing Corporation .................................Delaware Patlan Corporation .....................................Delaware GMAC Mortgage Group, Inc..................................Michigan GMAC Commercial Holding Corp............................Nevada GMAC Mortgage Holdings, Inc. ...........................Delaware GMAC Residential Holding Corp...........................Nevada * Joint Venture Partnership IV-9 GENERAL MOTORS CORPORATION AND SUBSIDIARIES State or Sovereign Power Name of Subsidiary of Incorporation ------------------ ---------------- GMAC RF, INC. ..........................................Michigan Residential Money Centers, Inc..........................Delaware GMAC Sverige AB...........................................Sweden General Motors Acceptance Corporation, Australia..........Delaware Holden National Leasing Limited.........................Australia General Motors Acceptance Corporation of Canada, Limited..Canada Canadian Securitized Auto Receivables Corporation.......Canada GMAC Leaseco Limited....................................Canada General Motors Acceptance Corporation, Colombia S.A. .....Delaware General Motors Acceptance Corporation, Continental........Delaware GMAC Finansiering A/S...................................Denmark GM Finance HB...........................................Sweden General Motors Acceptance Corporation Hungary Commercial Limited Liability Company...............................Hungary General Motors Acceptance Corporation Italia S.p.A. ......Italy General Motors Acceptance Corporation Nederland N.V. .....Netherlands GMAC Espana, Sociedad Anonima de Financiacion, E.F.C....Spain General Motors Acceptance Corporation, North America......Delaware General Motors Acceptance Corporation (N.Z.) Limited......New Zealand General Motors Acceptance Corporation de Portugal - Servicos Financeiros, S.A...............................Portugal General Motors Acceptance Corporation, South America......Delaware General Motors Acceptance Corporation del Ecuador S.A. GMAC-Management (Holding).............................Ecuador General Motors Acceptance Corporation de Venezuela, C.A.Venezuela General Motors Acceptance Corporation Suisse S.A. ........Switzerland General Motors Austria Beteiligungsgesellschaft m.b.H. ...Austria OPEL Bankgesellschaft m.b.H.............................Austria OPEL Leasinggesellschaft, m.b.H.........................Austria Lease Auto Receivables, Inc...............................Delaware Opel Bank GmbH............................................Germany Opel Leasing GmbH & Co. OHG*............................Germany Opel Leasing Verwaltungs GmbH...........................Germany Opel Bank Hungary Reszrenytarsasag........................Hungary Opel Bank, S.A.*..........................................Poland P.T. GMAC Lippo Finance*..................................Indonesia Wholesale Auto Receivables Corporation....................Delaware General Motors de Argentina S.A.............................Argentina General Motors Asia, Inc. ..................................Delaware General Motors (Thailand) Ltd. ...........................Thailand General Motors Asia Pacific (Pte) Ltd.......................Singapore General Motors Automobiles Philippines, Inc.................Philippines General Motors do Brasil Ltda. .............................Brazil Brazauto Trading (Cayman) Limited.........................Cayman Islands Compass Investimentos e Participacoes Ltda................Brazil GM Factoring Sociedade de Fomento Comercial Ltda. ........Brazil General Motors of Canada Limited............................Canada General Motors Chile S.A., Industria Automotriz.............Chile General Motors China, Inc. .................................Delaware General Motors Colmotores, S.A..............................Colombia General Motors Commercial Corporation.......................Delaware General Motors del Ecuador S.A..............................Ecuador General Motors (Europe) AG..................................Switzerland General Motors Export Corporation...........................Delaware General Motors Foreign Sales Corporation....................Virgin Islands General Motors Holding Espana, S.A..........................Spain Delphi Automotive Systems Espana, S.A. .................Spain Delphi Componentes, S.A. ...............................Spain Opel Espana de Automoviles, S.A.........................Spain * Joint Venture Partnership IV-10 GENERAL MOTORS CORPORATION AND SUBSIDIARIES State or Sovereign Power Name of Subsidiary of Incorporation ------------------ ---------------- General Motors Holdings (U.K.)..............................England General International (UK) Limited........................England General Motors Acceptance Corporation (U.K.) Public Limited Company..................................England General Motors Acceptance Corporation (U.K.) Finance plc.........................................England GMAC Leasing (U.K.) Limited...........................England GMAC Leasing (U.K.) (No. 1) Limited...................England GMAC Leasing (U.K.) (No. 2) Limited...................England GMAC Leasing (U.K.) (No. 3) Limited...................England IBC Vehicles Limited......................................United Kingdom Millbrook Land and Co. Ltd. ..............................England Millbrook Pension Management Ltd..........................England Millbrook Proving Ground Ltd. ............................England VHC Sub-Holdings (UK).....................................England Vauxhall Motors (Finance) Plc...........................England Vauxhall Motors Limited.................................England General Motors Indonesia, Inc. .............................Delaware General Motors Interamerica Corporation.....................Delaware General Motors International Operations, Inc. ..............Delaware General Motors Investment Management Corporation............Delaware General Motors Japan Ltd. ..................................Japan General Motors Kenya Limited................................Kenya General Motors Korea, Inc...................................Delaware General Motors Locomotive Group India Private Limited.......India General Motors Nederland B.V. ..............................Netherlands Allison Transmission Europe B.V. .........................Netherlands General Motors Yugoslavia, d.o.o. ........................Yugoslavia Opel C&S spol. s.r.o. ....................................Czech Republic Opel Nederland B.V. ......................................Netherlands General Motors Nordiska AB..................................Sweden General Motors Overseas Corporation.........................Delaware Delphi Automotive Systems Australia Ltd. .................Australia Delphi Energy and Engine Management Systems UK Overseas Corporation....................................Delaware G.M. Holding (Portugal) SGPS, Lda. .......................Portugal DELPHI INLAN - Industria de Componentes Mecanicos, S.A. Portugal Delphi Packard Sistemas Electricos, S.A. ...............Portugal Opel Portugal, Lda. ....................................Portugal GMOC Administrative Services Corporation..................Delaware GM (UK) Pension Trustees Limited........................United Kingdom GMOC Australia Pty. Ltd. .................................Australia General Motors Overseas Commercial Vehicle Corporation....Delaware General Motors Venezolana, C.A. ..........................Venezuela Holden Ltd................................................Australia Lidlington Engineering Company, Ltd. .....................Delaware Truck and Bus Engineering U.K., Limited...................Delaware General Motors Overseas Distribution Corporation............Delaware Delphi Packard Elektrik Sistemleri Ltd. Sti...............Turkey GMODC Finance N.V. .......................................Netherlands Antilles General Motors Investment Services Company N.V. ..........Belgium General Motors Peru S.A. ...................................Peru General Motors Receivables Corporation......................Delaware General Motors Uruguay, S.A. ...............................Uruguay General Motors U.S. Trading Corp. ..........................Nevada Hughes Electronics Corporation..............................Delaware DIRECTV Enterprises, Inc..................................Delaware DIRECTV, Inc............................................California DIRECTV Merchandising, Inc..............................Delaware DIRECTV Operations, Inc.................................California First HNS Mauritius , Ltd.................................Mauritius Kellerton Corporation...................................Virgin Islands HNS-Clairtel CP, Inc......................................Delaware IV-11 GENERAL MOTORS CORPORATION AND SUBSIDIARIES State or Sovereign Power Name of Subsidiary of Incorporation ------------------ ---------------- HNS-India, Inc............................................Delaware HNS India Private Limited (India).......................India Hughes Software Systems Private Limited.................India HNS-India VSAT, Inc.......................................Delaware Hughes Escorts Communications Limited...................India HNS-Italia S.r.L..........................................Italy HNS-Shanghai, Inc.........................................Delaware Hughes do Brasil - Electronica e Comunicacoes Ltda.........Brazil Hughes Electronics Foreign Sales Corporation..............Barbados Hughes Electronics International Corporation..............Delaware Hughes Electronics Realty, Inc............................Delaware Hughes Electronics Systems International..................California Hughes Foreign Sales Corporation..........................Virgin Islands Hughes International Sales Corporation....................California Hughes International Sales Corporation No. 2..............California Hughes Investment Management Company......................California Hughes Network Systems France.............................France Hughes Network Systems International Service Company......Delaware Hughes Network Systems Limited............................United Kingdom Hughes Telecommunications & Space Company.................Delaware Hughes Communications, Inc..............................California Hughes Space and Communications Company.................Delaware Spectrolab, Inc.........................................California Hughes International de Mexico, S.A. de C.V. .............Mexico HNS de Mexico, S.A. de C.V..............................Mexico Hughes-Avicom International, Inc..........................California MDP, Ltd. ................................................California Interactive Distance Learning, Inc........................Delaware One Touch Systems, Inc..................................California P.T. Hughes Network Systems Co., Ltd......................Indonesia Shanghai Hughes Network Systems...........................China XMC Holdings, Ltd.........................................California Holden New Zealand Limited..................................New Zealand General Motors New Zealand Pensions Limited...............New Zealand IBC Pension Trustees Limited................................England IBC Vehicles (Distribution) Limited ........................United Kingdom Jennings Motors, Inc........................................Delaware Luton Design Centre Limited.................................United Kingdom MB Cable Confection Sdn Bhd.................................Malaysia Motors Holding San Fernando Valley, Inc.....................Delaware Omnibus BB Transportes, S. A................................Ecuador Opel Austria GmbH...........................................Austria Delphi Automotive Systems Vienna GmbH.....................Austria Opel Southeast Europe Ltd. ...............................Hungary Opel Belgium N.V. ..........................................Belgium Opel Ireland Limited........................................Ireland Opel Italia S.p.A...........................................Italy Opel Norge AS...............................................Norway Opel Oy.....................................................Finland Opel Suisse S.A. ...........................................Switzerland GM-Saab Communication GmbH................................Switzerland Packard CTA Pty. Ltd........................................Australia Packard Electric Ireland Limited............................Ireland Packard Hughes Interconnect Company.........................Delaware Packard Hughes Interconnect Connection Systems............California Packard Hughes Interconnect Engineering Services..........Delaware Packard Hughes Interconnect Wiring Systems................California Packard Electric Systems Samara Cable Company...............Russia Premier Investment Group, Inc...............................Delaware PT General Motors Indonesia.................................Indonesia Radiadores Richard, S.A.....................................Argentina Renaissance Center Management Company.......................Michigan IV-12 GENERAL MOTORS CORPORATION AND SUBSIDIARIES State or Sovereign Power Name of Subsidiary of Incorporation ------------------ ---------------- Riverfront Holdings, Inc....................................Delaware Saab Opel Sverige AB........................................Sweden Saturn Corporation...........................................Delaware Saturn County Bond Corporation..............................Delaware Societe pour le Developpment et l'..........................Morocco WRE, Inc....................................................Michigan Grand Pointe Holdings, Inc. ..............................Michigan Zhejiang Delphi Asia Pacific Brake Co. Ltd..................China 357 directly or indirectly owned subsidiaries Companies not included in the Registrant's consolidated financial statements, for which no financial statements are submitted: 28other directly or indirectly owned domestic and foreign subsidiaries 11 active subsidiaries 17 inactive subsidiaries 31 fifty-percent owned companies and 57 less than fifty-percent owned companies the investments in which are accounted for by the equity method. In addition, the Registrant owns 100% of the voting control of the following companies: 331 dealerships, including certain dealerships operating under dealership assistance plans, engaged in retail distribution of General Motors products 234 dealerships operating in the United States 97 dealerships operating in foreign countries The number of dealerships operating under dealership assistance plans decreased by a net of 16 during 1998. Companies not shown by name, if considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. During 1998, there were changes in the number of subsidiaries and companies of the Registrant, as follows: 7 directly and 48 indirectly owned domestic subsidiaries, and 3 directly and 32 indirectly owned foreign subsidiaries were organized or acquired. 1 directly and 14 indirectly owned domestic subsidiaries, and 4 direct and 10 indirectly owned foreign subsidiaries were dissolved, sold, or spun-off. A fifty-percent interest and less than fifty-percent interests were acquired in 8 companies and 4 companies, while interests in 1 fifty-percent owned 7 less than fifty-percent owned companies were terminated. 2 indirectly owned domestic and 3 indirectly owned foreign subsidiaries went from fifty percent owned to greater than fifty percent owned. 1 indirectly owned domestic and 1 indirectly owned foreign subsidiaries moved from inactive to active subsidiaries and 6 indirectly owned foreign subsidiaries moved from active to inactive subsidiaries. * * * * * * * IV-13 EX-23 4 AUDITORS CONSENT EXHIBIT 23 GENERAL MOTORS CORPORATION AND SUBSIDIARIES CONSENT OF INDEPENDENT AUDITORS The Board of Directors General Motors Corporation: We consent to the incorporation by reference of our report on page II-26 dated January 20, 1999 (March 2 as to Note 23) and of our report on page IV-16 dated January 20, 1999 (March 1 as to Note 19) appearing in this Annual Report on Form 10-K of General Motors Corporation for the year ended December 31, 1998, in the following Registration Statements: Registration Form Statement No. Description - ---- ------------- ----------- S-3 333-13797 General Motors Corporation Debt Securities S-3 333-61613 General Motors Corporaiton Debt Securities S-3 33-47343 General Motors Corporation $1-2/3 Par Value Common (Post-Effective Stock Amendment No. 1) S-3 33-49035 General Motors Corporation $1-2/3 Par Value Common (Amendment No. 1) Stock S-3 33-56671 General Motors Corporation $1-2/3 Par Value Common (Amendment No. 1) Stock S-3 33-49309 General Motors Corporation Dividend Reinvestment Plan S-8 333-17975 The General Motors Personal Savings Plan for Hourly-Rate Employees in the United States S-8 33-54841 General Motors Amended 1987 Stock Incentive Plan S-8 333-73141 General Motors Savings-Stock Purchase Program for Salaried Employees in the United States S-8 33-32322 Hughes Aircraft Company Salaried Employees' Thrift and Savings Plan Hughes Aircraft Company Tucson Bargaining Employees' Thrift and Savings Plan Hughes Aircraft Company California Hourly Employees' Thrift and Savings Plan Hughes Thrift and Savings Plan S-8 33-54835 The GMAC Mortgage Corporation Savings Incentive Plan S-8 333-49571 Hughes Electronics Corporation Incentive Plan S-8 333-21029 Saturn Individual Savings Plan for Represented Members S-8 333-17937 Saturn Personal Choices Savings Plan for Non-Represented Members S-8 333-44957 General Motors 1998 Stock Option Plan S-8 333-66653 ASEC Manufacturing Savings Plan S-8 333-66655 General Motors Deferred Compensation Savings Plan for Executive Employees /s/DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Detroit, Michigan March 9, 1999 IV-14 EX-99 5 HUGHES INFORMATION EXHIBIT 99 HUGHES ELECTRONICS CORPORATION RESPONSIBILITIES FOR FINANCIAL STATEMENTS The following financial statements of Hughes Electronics Corporation (as more fully described in Note 1 to the financial statements) were prepared by management, which is responsible for their integrity and objectivity. The statements have been prepared in conformity with generally accepted accounting principles and, as such, include amounts based on judgments of management. Management is further responsible for maintaining internal control designed to provide reasonable assurance that the books and records reflect the transactions of the companies and that established policies and procedures are carefully followed. Perhaps the most important feature in internal control is that it is continually reviewed for effectiveness and is augmented by written policies and guidelines, the careful selection and training of qualified personnel and a strong program of internal audit. Deloitte & Touche LLP, an independent auditing firm, is engaged to audit the financial statements of Hughes Electronics Corporation and issue reports thereon. The audit is conducted in accordance with generally accepted auditing standards that comprehend the consideration of internal control and tests of transactions to the extent necessary to form an independent opinion on the financial statements prepared by management. The Independent Auditors' Report appears on the next page. The Board of Directors, through its Audit Committee, is responsible for assuring that management fulfills its responsibilities in the preparation of the financial statements and engaging the independent auditors. The Audit Committee reviews the scope of the audits and the accounting principles being applied in financial reporting. The independent auditors, representatives of management, and the internal auditors meet regularly (separately and jointly) with the Audit Committee to review the activities of each, to ensure that each is properly discharging its responsibilities and to assess the effectiveness of internal control. It is management's conclusion that internal control at December 31, 1998 provides reasonable assurance that the books and records reflect the transactions of the company and that established policies and procedures are complied with. To ensure complete independence, Deloitte & Touche LLP has full and free access to meet with the Audit Committee, without management representatives present, to discuss the results of the audit, the adequacy of internal control, and the quality of financial reporting. /s/MICHAEL T. SMITH /s/CHARLES H. NOSKI /s/ROXANNE S. AUSTIN - ------------------- ------------------- -------------------- Michael T. Smith Charles H. Noski Roxanne S. Austin Chairman of the Board and President and Chief Senior Vice President and Chief Executive Officer Operating Officer Chief Financial Officer IV-15 HUGHES ELECTRONICS CORPORATION INDEPENDENT AUDITORS' REPORT To the Board of Directors of Hughes Electronics Corporation: We have audited the accompanying Balance Sheet of Hughes Electronics Corporation (as more fully described in Note 1 to the financial statements) as of December 31, 1998 and 1997 and the related Statement of Income and Available Separate Consolidated Net Income, Statement of Changes in Owner's Equity and Statement of Cash Flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of Hughes Electronics Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Hughes Electronics Corporation at December 31, 1998 and 1997 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. As discussed in Note 2 to the accompanying financial statements, effective January 1, 1998, Hughes Electronics Corporation changed its method of accounting for costs of start-up activities by adopting American Institute of Certified Public Accountants Statement of Position 98-5, Reporting on the Costs of Start-Up Activities. /s/DELOITTE & TOUCHE LLP - ------------------------ DELOITTE & TOUCHE LLP Los Angeles, California January 20, 1999 (March 1, 1999 as to Note 19) IV-16 HUGHES ELECTRONICS CORPORATION STATEMENT OF INCOME AND AVAILABLE SEPARATE CONSOLIDATED NET INCOME Years Ended December 31, ------------------------ 1998 1997 1996 -------- ------- ------- (Dollars in Millions Except Per Share Amounts) Revenues Product sales $3,360.3 $3,143.6 $3,009.0 Direct broadcast, leasing and other services 2,603.6 1,984.7 999.7 ------- ------- -------- Total Revenues 5,963.9 5,128.3 4,008.7 ------- ------- ------- Operating Costs and Expenses Cost of products sold 2,627.3 2,493.3 2,183.7 Broadcast programming and other costs 1,175.7 912.3 631.8 Selling, general and administrative expenses 1,457.0 1,119.9 788.5 Depreciation and amortization 433.8 296.4 194.6 Amortization of GM purchase accounting adjustments 21.0 21.0 21.0 ---- ---- ---- Total Operating Costs and Expenses 5,714.8 4,842.9 3,819.6 ------- ------- ------- Operating Profit 249.1 285.4 189.1 Interest income 112.3 33.1 6.8 Interest expense (17.5) (91.0) (42.9) Other, net (153.1) 390.7 69.1 ----- ----- ----- Income From Continuing Operations Before Income Taxes, Minority Interests, Extraordinary Item and Cumulative Effect of Accounting Change 190.8 618.2 222.1 Income taxes (44.7) 236.7 104.8 Minority interests in net losses of subsidiaries 24.4 24.8 52.6 ------ ------ ------ Income from continuing operations before extraordinary item and cumulative effect of accounting change 259.9 406.3 169.9 Income (Loss) from discontinued operations, net of taxes - 1.2 (7.4) Gain on sale of discontinued operations, net of taxes - 62.8 - ------ ------ ------ Income before extraordinary item and cumulative effect of accounting change 259.9 470.3 162.5 Extraordinary item, net of taxes - (20.6) - Cumulative effect of accounting change, net of taxes (9.2) - - ------ ------ ------ Net Income 250.7 449.7 162.5 Adjustments to exclude the effect of GM purchase accounting adjustments 21.0 21.0 21.0 ------ ------ ------ Earnings Used for Computation of Available Separate Consolidated Net Income $271.7 $470.7 $183.5 ===== ===== ===== Available Separate Consolidated Net Income Average number of shares of General Motors Class H Common Stock outstanding (in millions) (Numerator) 105.3 101.5 98.4 Class H dividend base (in millions) (Denominator) 399.9 399.9 399.9 Available Separate Consolidated Net Income $71.5 $119.4 $ 45.2 ==== ===== ===== Earnings Attributable to General Motors Class H Common Stock on a Per Share Basis Income from continuing operations before extraordinary item and cumulative effec of accounting change $0.70 $1.07 $0.48 Discontinued operations - 0.16 (0.02) Extraordinary item - (0.05) - Cumulative effect of accounting change (0.02) - - ---- ------ ------ Earnings Attributable to General Motors Class H Common Stock $0.68 $1.18 $0.46 ==== ==== ==== - --------------------- Reference should be made to the Notes to Financial Statements. IV-17 HUGHES ELECTRONICS CORPORATION BALANCE SHEET December 31, ------------ ASSETS 1998 1997 ---- ---- (Dollars in Millions) Current Assets Cash and cash equivalents $1,342.1 $2,783.8 Accounts and notes receivable, net of allowances of $23.9 and $15.2 922.4 630.0 Contracts in process, less advances and progress payments of $27.0 and $50.2 783.5 575.6 Inventories 471.5 486.4 Prepaid expenses and other, including deferred income taxes of $33.6 and $93.2 326.9 297.3 -------- -------- Total Current Assets 3,846.4 4,773.1 Satellites, net 3,197.5 2,643.4 Property, net 1,059.2 889.7 Net Investment in Sales-type Leases 173.4 337.6 Intangible Assets, net of accumulated amortization of $413.2 and $318.3 3,552.2 2,954.8 Investments and Other Assets 1,606.3 1,132.4 --------- --------- Total Assets $13,435.0 $12,731.0 ======== ======== LIABILITIES AND OWNER'S EQUITY Current Liabilities Accounts payable $764.1 $472.8 Advances on contracts 291.8 209.8 Deferred revenues 43.8 77.8 Current portion of long-term debt 156.1 - Accrued liabilities 753.7 689.4 ------- ------- Total Current Liabilities 2,009.5 1,449.8 ------- ------- Long-Term Debt 778.7 637.6 Deferred Gains on Sales and Leasebacks 121.5 191.9 Accrued Operating Leaseback Expense 56.0 100.2 Postretirement Benefits Other Than Pensions 150.7 154.8 Other Liabilities and Deferred Credits 811.1 706.4 Deferred Income Taxes 643.9 570.8 Commitments and Contingencies Minority Interests 481.7 607.8 Owner's Equity Capital stock and additional paid-in capital 8,146.1 8,322.8 Net income retained for use in the business 257.8 7.1 ------- ------- Subtotal Owner's Equity 8,403.9 8,329.9 ------- ------- Accumulated Other Comprehensive Income (Loss) Minimum pension liability adjustment (37.1) (34.8) Accumulated unrealized gains on securities 16.1 21.4 Accumulated foreign currency translatio adjustments (1.0) (4.8) ---- ---- Accumulated other comprehensive loss (22.0) (18.2) --------- --------- Total Owner's Equity 8,381.9 8,311.7 --------- --------- Total Liabilities and Owner's Equity $13,435.0 $12,731.0 ======== ======== - ------------------------ Certain 1997 amounts have been reclassified to conform with the 1998 presentation. Reference should be made to the Notes to Financial Statements. IV-18 HUGHES ELECTRONICS CORPORATION STATEMENT OF CHANGES IN OWNER'S EQUITY (Dollars in Millions)
Capital Stock Net Income Accumulated Parent and Retained Other Company's Additional for Use in Compre- Total Compre- Net Paid-In the hensive Owner's hensive Investment Capital Business Income (Loss) Equity Income ---------- ------- -------- ------------- ------ ------ Balance at January 1, 1996 $2,615.1 $(6.2) $2,608.9 Net distribution to Parent Company (280.6) (280.6) Net income 162.5 162.5 $162.5 Foreign currency translation adjustments 0.8 0.8 0.8 ----- Comprehensive income $163.3 ------- ---- ------ ===== Balance at December 31, 1996 2,497.0 (5.4) 2,491.6 Net contribution from Parent Company 1,124.2 1,124.2 Transfer of capital from Parent Company's net investment (4,063.8) $4,063.8 - Capital contribution resulting from the Hughes Transactions 4,259.0 4,259.0 Minimum pension liability adjustment resulting from the Hughes Transactions (34.8) (34.8) Unrealized gains on securities resulting from the Hughes Transactions 21.4 21.4 Net income 442.6 $7.1 449.7 $449.7 Foreign currency translation adjustments 0.6 0.6 0.6 ----- Comprehensive income $450.3 ------ ------- ---- ---- ------ ===== Balance at December 31, 1997 - 8,322.8 7.1 (18.2) 8,311.7 Net Income 250.7 250.7 $250.7 Delco post-closing price adjustment (199.7) (199.7) Tax benefit from exercise of GM Class H common stock options 23.0 23.0 Minimum pension liability adjustment (2.3) (2.3) (2.3) Foreign currency translation adjustments 3.8 3.8 3.8 Unrealized gains on securities: Unrealized holding gains 1.8 1.8 1.8 Less: reclassification adjustment for gains included in net income (7.1) (7.1) (7.1) ----- Comprehensive income $246.9 ------ ------- ---- ---- ---- ===== Balance at December 31, 1998 $ - $8,146.1 $257.8 $(22.0) $8,381.9 ====== ======= ===== ==== ======= - -------------------------------- Reference should be made to the Notes to Financial Statements.
* * * * * * * * * * * IV-19 HUGHES ELECTRONICS CORPORATION STATEMENT OF CASH FLOWS Years Ended December 31, ------------------------ 1998 1997 1996 ---- ---- ---- (Dollars in Millions) Cash Flows from Operating Activities Net Income $250.7 $449.7 $162.5 Adjustments to reconcile net income to net cash provided by continuing operations (Income) Loss from discontinued operations, net of taxes - (1.2) 7.4 Gain on sale of discontinued operations, net of taxes - (62.8) - Extraordinary item, net of taxes - 20.6 - Cumulative effect of accounting change, net of taxes 9.2 - - Depreciation and amortization 433.8 296.4 194.6 Amortization of GM purchase accounting adjustments 21.0 21.0 21.0 Net gain on sale of investments and businesses sold (13.7) (489.7) (120.3) Gross profit on sales-type leases - (33.6) (51.8) Deferred income taxes and other 153.2 285.5 91.9 Change in other operating assets and liabilities Accounts and notes receivable (97.5) (239.0) (87.0) Contracts in process (230.9) (174.2) 54.1 Inventories 20.2 (60.7) (121.5) Collections of principal on net investment in sales-type leases 40.6 22.0 31.2 Accounts payable 277.3 (184.1) 116.8 Advances on contracts 82.0 (95.6) 97.6 Deferred revenues (34.0) (21.2) 80.6 Accrued liabilities 66.8 217.8 22.4 Deferred gains on sales and leasebacks (36.2) (42.9) (41.6) Other (67.3) 102.5 (90.5) ------ ----- ------ Net Cash Provided by Continuing Operations 875.2 10.5 367.4 Net cash used by discontinued operations - (15.9) (8.0) ------ ------ ------ Net Cash Provided by (Used in) Operating Activities 875.2 (5.4) 359.4 ------ ------ ------ Cash Flows from Investing Activities Investment in companies, net of cash acquired (1,240.3) (1,798.8) (32.2) Expenditures for property (343.6) (251.3) (261.5) Increase in satellites (945.2) (633.5) (191.6) Proceeds from sale of investments 12.4 242.0 - Proceeds from the sale and leaseback of satellite transponders with General Motors Acceptance Corporation - - 252.0 Proceeds from the sale of minority interest in subsidiary - - 137.5 Early buy-out of satellite under sale and leaseback (155.5) - - Proceeds from sale of discontinued operations - 155.0 - Proceeds from disposal of property 20.0 55.1 15.3 Proceeds from insurance claims 398.9 - - ------- ------- ----- Net Cash Used in Investing Activities (2,253.3) (2,231.5) (80.5) ------- ------- ----- Cash Flows from Financing Activities Long-term debt borrowings 1,165.2 2,383.3 - Repayment of long-term debt (1,024.1) (2,851.9) - Premium paid to retire debt - (34.4) - Contributions from (distributions to) Parent Company - 1,124.2 (279.8) Payment to General Motors for Delco post-closing price adjustment (204.7) - - Capital infusion resulting from Hughes Transactions - 4,392.8 - ------- ------- ------- Net Cash (Used in) Provided by Financing Activities (63.6) 5,014.0 (279.8) ------ ------- ------- Net (decrease) increase in cash and cash equivalents (1,441.7) 2,777.1 (0.9) Cash and cash equivalents at beginning of the year 2,783.8 6.7 7.6 ------- ------- ---- Cash and cash equivalents at end of the year $1,342.1 $2,783.8 $6.7 ======= ======= ==== - -------------------- Certain 1997 and 1996 amounts have been reclassified to conform with the 1998 presentation. Reference should be made to the Notes to Financial Statements. IV-20 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS Note 1: Basis of Presentation and Description of Business On December 17, 1997, Hughes Electronics Corporation ("Hughes Electronics") and General Motors Corporation ("GM"), the parent of Hughes Electronics, completed a series of transactions (the "Hughes Transactions") designed to address strategic challenges facing the three principal businesses of Hughes Electronics and unlock stockholder value in GM. The Hughes Transactions included the tax-free spin-off of the defense electronics business ("Hughes Defense") to holders of GM $1-2/3 par value and Class H common stocks, the transfer of Delco Electronics Corporation ("Delco"), the automotive electronics business, to GM's Delphi Automotive Systems unit and the recapitalization of GM Class H common stock into a new tracking stock, GM Class H common stock, that is linked to the remaining telecommunications and space business. The Hughes Transactions were followed immediately by the merger of Hughes Defense with Raytheon Company ("Raytheon"). For the periods prior to the consummation of the Hughes Transactions on December 17, 1997, Hughes Electronics, consisting of its defense electronics, automotive electronics and telecommunications and space businesses, is hereinafter referred to as former Hughes or Parent Company. In connection with the recapitalization of Hughes Electronics on December 17, 1997, the telecommunications and space business of former Hughes, consisting principally of its direct-to-home broadcast, satellite services, satellite systems and network systems businesses, was contributed to the recapitalized Hughes Electronics. Such telecommunications and space business, both before and after the recapitalization, is hereinafter referred to as Hughes. The accompanying financial statements and footnotes pertain only to Hughes and do not include balances of former Hughes related to Hughes Defense or Delco. Prior to the Hughes Transactions, the Hughes businesses were effectively operated as divisions of former Hughes. For the period prior to December 18, 1997, these financial statements include allocations of corporate expenses from former Hughes, including research and development, general management, human resources, financial, legal, tax, quality, communications, marketing, international, employee benefits and other miscellaneous services. These costs and expenses have been charged to Hughes based either on usage or using allocation methodologies primarily based upon total revenues, certain tangible assets and payroll expenses. Management believes the allocations were made on a reasonable basis; however, they may not necessarily reflect the financial position, results of operations or cash flows of Hughes on a stand-alone basis in the future. Also, prior to December 18, 1997, interest expense in the Statement of Income and Available Separate Consolidated Net Income included an allocated share of total former Hughes' interest expense. The Hughes Transactions had a significant impact on the Hughes balance sheet. Prior to the consummation of the Hughes Transactions, Hughes participated in the centralized cash management system of former Hughes, wherein cash receipts were transferred to and cash disbursements were funded by former Hughes on a daily basis. Accordingly, Hughes' balance sheet included only cash and cash equivalents held directly by the telecommunications and space business. In conjunction with the completion of the Hughes Transactions, certain assets and liabilities were contributed by former Hughes to Hughes. The contributed assets and liabilities consisted principally of cash, pension assets and liabilities, liabilities for other postretirement benefits, deferred taxes, property and equipment, and other miscellaneous items. In addition, Hughes received $4.0 billion of cash proceeds from the borrowings incurred by Hughes Defense prior to its spin-off to GM. The accompanying financial statements include the applicable portion of intangible assets, including goodwill, and related amortization resulting from purchase accounting adjustments associated with GM's purchase of Hughes in 1985. Hughes is a leading manufacturer of communications satellites and provider of satellite-based services. It owns and operates one of the world's largest private fleets of geostationary communications satellites and is the world's leading supplier of satellite-based private business networks. Hughes is also a leader in the direct broadcast satellite market with its programming distribution service known as DIRECTV(R), which was introduced in the U.S. in 1994 and was the first high-powered, all digital, Direct-To-Home ("DTH") television distribution service in North America. DIRECTV began service in Latin America in 1996 and Japan in 1997. Hughes also provides communications equipment and services in the mobile communications and packet switching markets. Its equipment and services are applied in, among other things, data, video and audio transmission, cable and network television distribution, private business networks, digital cellular communications and DTH satellite broadcast distribution of television programming. IV-21 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 2: Summary of Significant Accounting Policies Principles of Combination and Consolidation Prior to December 18, 1997, the financial statements present the financial position, results of operations and cash flows of the telecommunications and space business owned and operated by former Hughes on a combined basis. Subsequent to the Hughes Transactions, the accompanying financial statements are presented on a consolidated basis. The financial statements include the accounts of Hughes and its domestic and foreign subsidiaries that are more than 50% owned or controlled by Hughes, with investments in associated companies in which Hughes owns at least 20% of the voting securities or has significant influence accounted for under the equity method of accounting. Use of Estimates in the Preparation of the Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates. Revenue Recognition Revenues are generated from sales of satellites and telecommunications equipment, DTH broadcast subscriptions, and the sale of transponder capacity and related services through outright sales, sales-type leases and operating lease contracts. Sales under long-term contracts are recognized primarily using the percentage-of-completion (cost-to-cost) method of accounting. Under this method, sales are recorded equivalent to costs incurred plus a portion of the profit expected to be realized, determined based on the ratio of costs incurred to estimated total costs at completion. Profits expected to be realized on long-term contracts are based on estimates of total sales value and costs at completion. These estimates are reviewed and revised periodically throughout the lives of the contracts, and adjustments to profits resulting from such revisions are recorded in the accounting period in which the revisions are made. Estimated losses on contracts are recorded in the period in which they are identified. Certain contracts contain cost or performance incentives which provide for increases in profits for surpassing stated objectives and decreases in profits for failure to achieve such objectives. Amounts associated with incentives are included in estimates of total sales values when there is sufficient information to relate actual performance to the objectives. Sales which are not pursuant to long-term contracts are generally recognized as products are shipped or services are rendered. DTH subscription revenues are recognized when programming is viewed by subscribers. Programming payments received from subscribers in advance of viewing are recorded as deferred revenue until earned. Satellite transponder lease contracts qualifying for capital lease treatment (typically based on the term of the lease) are accounted for as sales-type leases, with revenues recognized equal to the net present value of the future minimum lease payments. Upon entering into a sales-type lease, the cost basis of the transponder is removed and charged to cost of products sold. The portion of each periodic lease payment deemed to be attributable to interest income is recognized in each respective period. Contracts for sales of transponders typically include telemetry, tracking and control ("TT&C") service agreements. Revenues related to TT&C service agreements are recognized as the services are performed. Transponder and other lease contracts that do not qualify as sales-type leases are accounted for as operating leases. Operating lease revenues are recognized on a straight-line basis over the respective lease term. Differences between operating lease payments received and revenues recognized are deferred and included in accounts and notes receivable or investments and other assets. Hughes has entered into agreements for the sale and leaseback of certain of its satellite transponders. The leaseback transactions have been classified as operating leases and, therefore, the capitalized cost and associated depreciation related to satellite transponders sold are not included in the accompanying financial statements. Gains resulting from such transactions are deferred and amortized over the leaseback period. Leaseback expense is recorded using the straight-line method over the term of the lease, net of amortization of the deferred gains. Differences between operating leaseback payments made and expense recognized are deferred and included in accrued operating leaseback expense. IV-22 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 2: Summary of Significant Accounting Policies - Continued Cash Flows Cash equivalents consist of highly liquid investments purchased with original maturities of 90 days or less. Net cash from operating activities includes cash payments made for interest of $53.2 million, $156.8 million and $55.8 million in 1998, 1997 and 1996, respectively. Net cash refunds received by Hughes for prior year income taxes amounted to $59.9 million in 1998. Cash payments for income taxes amounted to $24.0 million and $36.5 million in 1997 and 1996, respectively. Certain non-cash transactions occurred in connection with the consummation of the Hughes Transactions on December 17, 1997, resulting in a contribution of a net liability of $133.8 million. In 1997, in a separate non-cash transaction, Hughes' subsidiary, PanAmSat Corporation ("PanAmSat"), converted its outstanding preferred stock into debt amounting to $438.5 million. Contracts in Process Contracts in process are stated at costs incurred plus estimated profit, less amounts billed to customers and advances and progress payments applied. Engineering, tooling, manufacturing, and applicable overhead costs, including administrative, research and development and selling expenses, are charged to costs and expenses when incurred. Contracts in process include amounts relating to contracts with long production cycles, with $151.0 million of the 1998 amount expected to be billed after one year. Amounts billed under retainage provisions of contracts are not significant, and substantially all amounts are collectible within one year. Under certain contracts with the U.S. Government, progress payments are received based on costs incurred on the respective contracts. Title to the inventories related to such contracts (included in contracts in process) vests with the U.S. Government. Inventories Inventories are stated at the lower of cost or market principally using the average cost method. Major Classes of Inventories (Dollars in Millions) 1998 1997 ------ ----- Productive material and supplies $73.4 $57.5 Work in process 285.1 328.5 Finished goods 113.0 100.4 ----- ----- Total $471.5 $486.4 ===== ===== Property, Satellites and Depreciation Property and satellites are carried at cost. Satellite costs include construction costs, launch costs, launch insurance and capitalized interest. Capitalized satellite costs represent the costs of successful satellite launches. Satellite costs related to unsuccessful launches, net of insurance proceeds, are recognized in the period of failure. Depreciation is computed generally using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the life of the asset or term of the lease. Intangible Assets Intangible assets, a majority of which is goodwill, are amortized using the straight-line method over periods not exceeding 40 years. Software Development Costs Other assets include certain software development costs capitalized in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. Capitalized software development costs at December 31, 1998 and 1997, net of accumulated amortization of $70.6 million and $107.7 million, respectively, totaled $104.1 million and $99.0 million. The software is amortized using the greater of the units of revenue method or the straight-line method over its useful life, not in excess of five years. Software program reviews are conducted to ensure that capitalized software development costs are properly treated and costs associated with programs that are not generating revenues are appropriately written-off. IV-23 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 2: Summary of Significant Accounting Policies - Continued Valuation of Long-Lived Assets Hughes periodically evaluates the carrying value of long-lived assets to be held and used, including goodwill and other intangible assets, when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost of disposal. Research and Development Expenditures for research and development are charged to costs and expenses as incurred and amounted to $121.4 million in 1998, $120.4 million in 1997 and $94.6 million in 1996. Foreign Currency Substantially all of Hughes' foreign operations have determined the local currency to be their functional currency. Accordingly, these foreign entities translate assets and liabilities from their local currencies to U.S. dollars using year-end exchange rates while income and expense accounts are translated at the average rates in effect during the year. The resulting translation adjustment is recorded as part of accumulated other comprehensive income (loss), a separate component of owner's equity. Gains and losses resulting from remeasurement into the functional currency of transactions denominated in non-functional currencies are recognized in earnings. Net foreign currency transaction gains and losses included in the operating results were not material for all years presented. Financial Instruments and Investments Hughes maintains investments in equity securities of unaffiliated companies. These investments are considered available-for-sale and carried at current fair value with unrealized gains or losses, net of tax, reported as part of accumulated other comprehensive income (loss), a separate component of owner's equity. Fair value is determined by market quotes, when available, or by management estimate. Market values of financial instruments, other than debt and derivative instruments, are based upon management estimates. Market values of debt and derivative instruments are determined by quotes from financial institutions. The carrying value of cash and cash equivalents, accounts and notes receivable, investments and other assets, accounts payable, amounts included in accrued liabilities meeting the definition of a financial instrument and debt approximated fair value at December 31, 1998. Hughes' derivative contracts primarily consist of foreign exchange-forward contracts. Hughes enters into these contracts to reduce its exposure to fluctuations in foreign exchange rates. Foreign exchange-forward contracts are accounted for as hedges to the extent they are designated as, and are effective as, hedges of firm foreign currency commitments. Gains and losses on foreign exchange-forward contracts designated as hedges of firm foreign currency commitments are recognized in income in the same period as gains and losses on the underlying transactions are recognized. IV-24 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 2: Summary of Significant Accounting Policies - Concluded Stock Compensation Hughes issues stock options to employees with grant prices equal to the fair value of the underlying security at the date of grant. No compensation cost has been recognized for options in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees. See Note 10 for information regarding the pro forma effect on earnings of recognizing compensation cost based on the estimated fair value of the stock options granted, as required by SFAS No. 123, Accounting for Stock-Based Compensation. Compensation related to stock awards is recognized ratably over the vesting period and, where required, periodically adjusted to reflect changes in the stock price of the underlying security. Market Concentrations and Credit Risk Sales under U.S. Government contracts were 12.4%, 15.3% and 22.5% of total revenues in 1998, 1997 and 1996, respectively. Hughes provides services and extends credit to a large number of customers in the commercial satellite communications market and to a large number of residential consumers. Management monitors its exposure to credit losses and maintains allowances for anticipated losses. Accounting Change In 1998, Hughes adopted American Institute of Certified Pubic Accountants Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-Up Activities. SOP 98-5 requires that all start-up costs previously capitalized be written off and recognized as a cumulative effect of accounting change, net of taxes, as of the beginning of the year of adoption. On a prospective basis, these types of costs are required to be expensed as incurred. The unfavorable cumulative effect of this accounting change at January 1, 1998 was $9.2 million after-tax, or $0.02 per share of GM Class H common stock. New Accounting Standard In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires all derivatives to be recorded as either assets or liabilities and the instruments to be measured at fair value. Gains or losses resulting from changes in the values of those derivatives are to be recognized immediately or deferred depending on the use of the derivative and whether or not it qualifies as a hedge. Hughes plans to adopt SFAS No. 133 by January 1, 2000, as required. Management is currently assessing the impact of this statement on Hughes' results of operations and financial position. Note 3: Property and Satellites, Net Estimated Useful Lives (Dollars in Millions) (years) 1998 1997 ---------------- ----- ----- Land and improvements 5 - 25 $51.7 $51.2 Buildings and unamortized leasehold improvements 2 - 45 321.8 305.8 Machinery and equipment 3 - 12 1,163.1 1,015.4 Furniture, fixtures and office machines 3 - 10 80.2 83.2 Construction in progress - 285.3 169.9 -------- ------- Total 1,902.1 1,625.5 Less accumulated depreciation 842.9 735.8 -------- ------- Property, net $1,059.2 $889.7 ======= ===== Satellites 9 - 16 $3,783.2 $3,051.9 Less accumulated depreciation 585.7 408.5 -------- -------- Satellites, net $3,197.5 $2,643.4 ======= ======= Hughes capitalized interest of $55.3 million, $64.5 million and $12.9 million for 1998, 1997 and 1996, respectively, as part of the cost of its satellites under construction. IV-25 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 4: Leasing Activities Future minimum lease payments due from customers under noncancelable satellite transponder operating leases, exclusive of amounts due from subleases reported below, are $550.5 million in 1999, $498.9 million in 2000, $477.6 million in 2001, $462.5 million in 2002, $440.7 million in 2003 and $2,031.7 million thereafter. The components of the net investment in sales-type leases are as follows: (Dollars in Millions) 1998 1997 --------------------- ---- ---- Total minimum lease payments $301.9 $662.5 Less unearned interest income and allowance for doubtful accounts 106.0 297.1 ----- ----- Total net investment in sales-type leases 195.9 365.4 Less current portion 22.5 27.8 ---- ---- Total $173.4 $337.6 ====== ====== Future minimum payments due from customers under sales-type leases and related service agreements as of December 31, 1998 are as follows: Minimum Service Lease Agreement (Dollars in Millions) Payments Payments - --------------------- -------- -------- 1999 $46.1 $4.5 2000 44.7 5.7 2001 45.8 5.7 2002 44.9 5.7 2003 43.4 5.7 Thereafter 77.0 10.4 ---- ---- Total $301.9 $37.7 ===== ==== In February 1996, Hughes entered into a sale-leaseback agreement for certain satellite transponders on Galaxy III-R with General Motors Acceptance Corporation ("GMAC"), a subsidiary of GM. Proceeds from the sale were $252.0 million, and the sale resulted in a deferred gain of $108.8 million. In 1992 and 1991, Hughes entered into sale-leaseback agreements for certain transponders on Galaxy VII and SBS-6, respectively, resulting in deferred gains of $180.0 million in 1992 and $96.1 million in 1991. Deferred gains from sale-leaseback agreements are amortized over the expected term of leaseback period. In 1998, PanAmSat exercised certain early buy-out options on the SBS-6 transaction and repurchased the transponders for a total payment of $155.5 million. In January 1999, PanAmSat exercised early buy-out options for $141.3 million related to certain transponders on Galaxy VII, and has remaining early buy-out options of approximately $227.0 million on Galaxy III-R and Galaxy VII that can be exercised later in 1999. As of December 31, 1998, the future minimum leaseback amounts payable to lessors under the operating leasebacks and the future minimum sublease amounts due from subleases under noncancelable subleases are as follows: Minimum Leaseback Sublease (Dollars in Millions) Payments Amounts - --------------------- -------- ------- 1999 $90.9 $57.5 2000 120.3 58.2 2001 71.9 53.2 2002 110.9 49.5 2003 26.6 34.2 ------ ------ Total $420.6 $252.6 ===== ===== IV-26 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 5: Accrued Liabilities (Dollars in Millions) 1998 1997 ---- ---- Payroll and other compensation $196.5 $200.2 Contract-related provisions 138.0 76.0 Reserve for consumer finance and rebate programs 93.0 86.9 Other 326.2 326.3 ----- ----- Total $753.7 $689.4 ====== ====== Note 6: Long-Term Debt (Dollars in Millions) 1998 1997 ------ ----- Notes payable $750.0 $ - Revolving credit facilities 155.9 500.0 Bridge loan - 100.0 Other 28.9 37.6 ------ ------ Total debt 934.8 637.6 Less current portion 156.1 - ----- ------ Total long-term debt $778.7 $637.6 ===== ===== Notes payable consisted of five, seven, ten and thirty-year notes totaling $750.0 million issued by PanAmSat in January 1998. The proceeds received were used by PanAmSat to repay the revolving credit facility of $500.0 million and bridge loan of $100.0 million outstanding at December 31, 1997. The outstanding principal balances and interest rates for the five, seven, ten and thirty-year notes as of December 31, 1998 were $200.0 million at 6.00%, $275.0 million at 6.13%, $150.0 million at 6.38% and $125.0 million at 6.88%, respectively. Principal on the notes is payable at maturity, while interest is payable semi-annually. At December 31, 1998, Hughes' 59.1% owned subsidiary, SurFin Ltd. ("SurFin"), had a total of $155.9 million outstanding under two separate $150.0 million unsecured revolving credit facilities. The first matures on April 30, 1999 and the second matures on July 31, 1999. Both credit facilities, which are expected to be renewed, are subject to a facility fee of 0.10% per annum. Borrowings under these credit facilities bear interest at the Eurodollar Rate plus 0.15% and were included in current portion of long-term debt. Other long-term debt at December 31, 1998 and 1997 consisted primarily of notes bearing fixed rates of interest of 9.61% to 11.11%. Principal is payable at maturity in April 2007 while interest is payable semi-annually. Also included in other long-term debt at December 31, 1997 was $9.1 million of PanAmSat Senior Notes which were repaid in 1998. As part of a debt refinancing program undertaken by PanAmSat in 1997, an extraordinary charge of $20.6 million ($34.4 million before taxes) was recorded, related to the excess of the price paid for the debt over its carrying value, net of deferred financing costs. The aggregate maturities of long-term debt for the five years subsequent to December 31, 1998 are $156.1 million in 1999, $200.0 million in 2003 and $578.7 million thereafter. Hughes has $1.0 billion of unused credit available under two unsecured revolving credit facilities, consisting of a $750.0 million multi-year facility and a $250.0 million 364-day facility. The multi-year credit facility provides for a commitment of $750.0 million through December 5, 2002, subject to a facility fee of 0.07% per annum. Borrowings bear interest at a rate which approximates the London Interbank Offered Rate ("LIBOR") plus 0.155%. The 364-day credit facility provides for a commitment of $250.0 million through December 1, 1999, subject to a facility fee of 0.05% per annum. Borrowings bear interest at a rate which approximates LIBOR plus 0.25%, with an additional 0.125% utilization fee when borrowings exceed 50% of the commitment. No amounts were outstanding under either facility at December 31, 1998. These facilities provide backup capacity for Hughes' $1.0 billion commercial paper program. No amounts were outstanding under the commercial paper program at December 31, 1998. PanAmSat maintains a $500.0 million multi-year revolving credit facility that provides for short-term and long-term borrowings and a $500.0 million commercial paper program that provides for short-term borrowings. The multi-year revolving credit facility provides for a commitment through December 24, 2002, subject to a facility fee of 0.10% per annum. Borrowings bear interest at a rate which approximates LIBOR plus 0.30%. Borrowings under the credit facility and commercial paper program are limited to $500.0 million in the aggregate. No amounts were outstanding under either agreement at December 31, 1998. IV-27 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 7: Income Taxes The provision for income taxes is based on reported income from continuing operations before income taxes, minority interests, extraordinary item and cumulative effect of accounting change. Deferred income tax assets and liabilities reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes, as measured by applying currently enacted tax laws. Hughes and former Hughes (prior to December 18, 1997), and their domestic subsidiaries join with General Motors in filing a consolidated U.S. Federal income tax return. The portion of the consolidated income tax liability recorded by Hughes is generally equivalent to the liability it would have incurred on a separate return basis. Prior to December 18, 1997, certain income tax assets and liabilities were maintained by former Hughes. Income tax expense was allocated to Hughes as if Hughes filed a separate income tax return. In connection with the Hughes Transactions, certain income tax assets and liabilities were contributed to and assumed by Hughes on December 17, 1997 and are included in the accompanying balance sheet. The income tax provision consisted of the following: (Dollars in Millions) 1998 1997 1996 ------ ------ ----- U.S. Federal, state and foreign taxes currently (refundable) payable $(177.3) $24.0 $36.5 U.S. Federal, state and foreign deferred tax liabilities, net 132.6 212.7 68.3 ----- ----- ----- Total income tax (benefit) provision $(44.7) $236.7 $104.8 ==== ===== ===== Income from continuing operations before income taxes, minority interests, extraordinary item and cumulative effect of accounting change included the following components: (Dollars in Millions) 1998 1997 1996 ------ ------ ----- U.S. income $283.8 $659.4 $218.4 Foreign (loss) income (93.0) (41.2) 3.7 ------ ------ ------- Total $190.8 $618.2 $222.1 ===== ===== ===== The combined income tax provision was different than the amount computed using the U.S. Federal statutory income tax rate for the reasons set forth in the following table: (Dollars in Millions) 1998 1997 1996 ------ ------ ----- Expected tax at U.S. Federal statutory income tax rate $66.8 $216.4 $77.7 Research and experimentation tax benefits (183.6) (39.3) - Foreign sales corporation tax benefit (30.1) (25.5) (24.0) U.S. state and local income taxes 13.7 24.8 9.4 Purchase accounting adjustments 7.3 7.3 7.3 Losses of equity method investees 36.7 18.7 14.8 Minority interests in losses of partnership 19.3 17.5 17.7 Non-deductible goodwill amortization 20.1 9.7 - Other 5.1 7.1 1.9 ----- ------ ------ Total income tax (benefit) provision $(44.7) $236.7 $104.8 ==== ===== ===== IV-28 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 7: Income Taxes - Concluded Temporary differences and carryforwards which gave rise to deferred tax assets and liabilities at December 31 were as follows: 1998 1997 ---- ---- Deferred Deferred Deferred Deferred Tax Tax Tax Tax (Dollars in Millions) Assets Liabilities Assets Liabilities - --------------------- ------ ----------- ------ ----------- Profits on long-term contracts $145.5 $155.5 $156.0 $142.8 Sales and leasebacks 65.4 - 85.8 - Employee benefit programs 68.3 101.3 64.3 114.0 Postretirement benefits other than pensions 72.3 - 72.9 - Customer deposits and rebates 52.9 - 61.9 - State taxes 38.8 - 50.0 - Gain on PanAmSat merger - 191.1 - 195.0 Satellite launch insurance costs - 103.1 - 43.7 Depreciation - 470.9 - 438.6 Net operating loss and tax credit carryforwards 77.8 - - - Sale of equity interest in DIRECTV - 47.5 - 48.7 Other 32.8 30.5 63.9 35.4 ------ ------- ------- ------- Subtotal 553.8 1,099.9 554.8 1,018.2 Valuation allowance (64.2) - (14.2) - ------ ------- ------- ------- Total deferred taxes $489.6 $1,099.9 $540.6 $1,018.2 ===== ======= ===== ======= No income tax provision has been made for the portion of undistributed earnings of foreign subsidiaries deemed permanently reinvested that amounted to approximately $18.5 million and $18.2 million at December 31, 1998 and 1997, respectively. Repatriation of all accumulated earnings would have resulted in tax liabilities of $6.4 million in 1998 and $5.4 million in 1997. At December 31, 1998, Hughes has $63.9 million of foreign operating loss carryforwards expiring in varying amounts between 1999 and 2003. A valuation allowance was provided for all of the foreign operating loss carryforwards. Hughes has an agreement with Raytheon which governs Hughes' rights and obligations with respect to U.S. Federal and state income taxes for all periods prior to the merger of Hughes Defense with Raytheon. Hughes is responsible for any income taxes pertaining to those periods prior to the merger, including any additional income taxes resulting from U.S. Federal and state tax audits. Hughes is also entitled to any U.S. Federal and state income tax refunds relating to those years. The U.S. Federal income tax returns of former Hughes have been examined through 1990. All years prior to 1983 are closed. Issues relating to the years 1983 through 1990 are being contested through various stages of administrative appeal. The Internal Revenue Service ("IRS") is currently examining former Hughes' U.S. Federal tax returns for years 1991 through 1994. Management believes that adequate provision has been made for any adjustment which might be assessed for open years. Hughes reached an agreement with the IRS regarding a claim for refund of U.S. Federal income taxes related to the treatment of research and experimentation costs for the years 1983 through 1995. Hughes recorded a total of $183.6 million of research and experimentation tax benefits during 1998, a substantial portion of which related to the above noted agreement with the IRS and covered prior years. Note 8: Retirement Programs and Other Postretirement Benefits Hughes adopted SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits. SFAS No. 132 required changes in disclosure of certain information about pensions and other postretirement benefits. Substantially all of Hughes' employees participate in Hughes' contributory and non-contributory defined benefit retirement plans. Benefits are based on years of service and compensation earned during a specified period of time before retirement. Additionally, an unfunded, nonqualified pension plan covers certain employees. Hughes also maintains a program for eligible retirees to participate in health care and life insurance benefits generally until they reach age 65. Qualified employees who elected to participate in the Hughes contributory defined benefit pension plans may become eligible for these health care and life insurance benefits if they retire from Hughes between the ages of 55 and 65. IV-29 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 8: Retirement Programs and Other Postretirement Benefits - Continued Prior to December 18, 1997, the pension-related assets and liabilities and the postretirement benefit plans were maintained by former Hughes for its non-automotive businesses and were not included in the Hughes balance sheet. A portion of former Hughes' net pension expense or income and postretirement benefit cost was allocated to Hughes and is included in the Statement of Income and Available Separate Consolidated Net Income. The net pension expense allocation was $12.3 million and $12.2 million for 1997 and 1996, respectively. For 1997 and 1996, the pension expense components including benefits earned during the year, interest accrued on benefits earned in prior years, actual return on assets and net amortization and deferral, were not determined separately for the Hughes participants. The postretirement benefit cost allocated to Hughes was $11.2 million and $10.4 million for 1997 and 1996, respectively. For 1997 and 1996, the postretirement benefit cost components, including benefits earned during the year, interest accrued on benefits earned in prior years and net amortization, were not determined separately for the Hughes employees. The 1997 information presented below is based on pro rata allocations from former Hughes for each pension and postretirement benefit component. The components of the pension benefit obligation and the other postretirement benefit obligation, as well as the net benefit obligation recognized in the balance sheet, are shown below: Other Postretirement Pension Benefits Benefits ---------------- -------- (Dollars in Millions) 1998 1997 1998 1997 ---- ---- ---- ---- Change in Benefit Obligation Net benefit obligation at beginning of year $1,556.4 $1,490.5 $135.6 $132.3 Service cost 57.5 47.9 3.6 3.6 Interest cost 110.8 110.3 9.3 9.1 Plan participants' contributions 14.1 13.7 - - Actuarial loss 66.6 32.4 35.1 4.1 Acquisitions/divestitures - (17.6) - - Benefits paid (151.3) (120.8) (12.0) (13.5) ------- ------- ----- ----- Net benefit obligation at end of year 1,654.1 1,556.4 171.6 135.6 ------- ------- ----- ----- Change in Plan Assets Fair value of plan assets at beginning of year 1,906.1 1,716.4 - - Actual return on plan assets 165.0 302.4 - - Employer contributions 20.3 12.0 12.0 13.5 Plan participants' contributions 14.1 13.7 - - Acquisitions/divestitures - (17.6) - - Benefits paid (151.3) (120.8) (12.0) (13.5) Transfers 4.7 - - - ------- ------- ---- ----- Fair value of plan assets at end of year 1,958.9 1,906.1 - - ------- ------- ---- ----- Funded status at end of year 304.8 349.7 (171.6) (135.6) Unamortized asset at date of adoption - (12.8) - - Unamortized amount resulting from changes in plan provision 4.4 5.1 - - Unamortized net amount resulting from changes in plan experience and actuarial assumptions (80.8) (122.3) 4.9 (31.0) ----- ------ --- ----- Net amount recognized at end of year $228.4 $219.7 $(166.7) $(166.6) ===== ===== ===== ===== Amounts recognized in the balance sheet consist of: Prepaid benefit cost $248.1 $227.0 - - Accrued benefit cost (89.3) (83.8) $(166.7) $(166.6) Intangible asset 7.4 18.0 N/A N/A Deferred tax assets 25.1 23.7 N/A N/A Accumulated other comprehensive loss 37.1 34.8 N/A N/A ----- ----- ----- ------ Net amount recognized at end of year $228.4 $219.7 $(166.7) $(166.6) ===== ===== ===== ===== IV-30 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 8: Retirement Programs and Other Postretirement Benefits - Concluded Included in the pension plan assets at December 31, 1998 are GM Class H common stock of $2.3 million, GM $1-2/3 common stock of $7.1 million and GMAC bonds of $3.3 million. Other Postretirement Weighted-average assumptions as of Pension Benefit Benefits --------------- -------- December 31 1998 1997 1998 1997 ---- ---- ---- ---- Discount rate 6.75% 7.25% 6.50% 6.75% Expected return on plan assets 9.50% 9.50% N/A N/A Rate of compensation increase 5.00% 5.00% N/A N/A For measurement purposes, a 9.5% annual rate of increase per capita cost of covered health care benefits was assumed for 1999. The rate was assumed to decrease gradually 0.5% per year to 6.0% in 2006. Other Postretirement Pension Benefits Benefit ---------------- ------- (Dollars in Millions) 1998 1997 1998 1997 ---- ---- ---- ---- Components of net periodic benefit cost Benefits earned during the year $57.5 $47.9 $3.6 $3.6 Interest accrued on benefits earned in prior years 110.8 110.3 9.3 9.1 Expected return on assets (144.5) (135.7) - - Amortization components Unamortized asset at date of adoption (12.8) (14.2) - - Unamortized amount resulting from changes in plan provisions 0.7 0.7 - - Unamortized net amount resulting from changes in plan experience and actuarial assumptions 4.6 3.3 (0.8) (1.5) --- --- ---- ---- Net periodic benefit cost $16.3 $12.3 $12.1 $11.2 ==== ==== ==== ==== The projected benefit obligation and accumulated benefit obligation for the pension plans with accumulated benefit obligations in excess of plan assets were $114.3 and $89.3, respectively, as of December 31, 1998, and $93.5 and $83.8, respectively, as of December 31, 1997. The pension plans with accumulated benefit obligations in excess of plan assets do not have any underlying assets. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage point change in assumed health care cost trend rates would have the following effects: 1-Percentage 1-Percentage (Dollars in Millions) Point Increase Point Decrease -------------- -------------- Effect on total of service and interest cost components $1.5 $(1.2) Effect on postretirement benefit obligation 14.0 (12.2) Hughes maintains 401(k) plans for qualified employees. A portion of employee contributions are matched by Hughes and amounted to $30.6 million, $26.3 million and $16.7 million in 1998, 1997 and 1996, respectively. Hughes has disclosed in the financial statements certain amounts associated with estimated future postretirement benefits other than pensions and characterized such amounts as "other postretirement benefit obligation." Notwithstanding the recording of such amounts and the use of these terms, Hughes does not admit or otherwise acknowledge that such amounts or existing postretirement benefit plans of Hughes (other than pensions) represent legally enforceable liabilities of Hughes. IV-31 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 9: Owner's Equity In connection with the Hughes Transactions, Hughes was recapitalized on December 17, 1997 at which time 1,000 shares of $1.00 par value common stock, representing all of the authorized and outstanding common stock of Hughes, were issued to GM. Prior to December 17, 1997, the equity of Hughes was comprised of Parent Company's net investment in its telecommunications and space business. The following represents changes in the components of accumulated other comprehensive income (loss), net of income taxes, as of December 31:
1998 1997 1996 ------------------------ ---------------------- ------------------------- Tax Pre-tax (Credit) Net Pre-tax Tax Net Pre-tax Tax Net (Dollars in Millions) Amount Expense Amount Amount Expense Amount Amount Credit Amount ------ ------- ------ ------ ------- ------ ------ ------ ------ Minimum pension liability adjustments $(3.9) $(1.6) $(2.3) - - - - - - Foreign currency translation adjustments $6.4 $2.6 $3.8 $1.0 $0.4 $0.6 $1.3 $0.5 $0.8 Unrealized holding losses $3.0 $1.2 $1.8 - - - - - - Reclassification adjustment for gains included in net income $(11.8) $(4.7) $(7.1) - - - - - -
Note 10: Incentive Plans Under the Hughes Electronics Corporation Incentive Plan ("the Plan"), as approved by the GM Board of Directors in 1998, shares, rights or options to acquire up to 35.6 million shares of GM Class H common stock on a cumulative basis were available for grant through December 31, 1998. The GM Executive Compensation Committee may grant options and other rights to acquire shares of GM Class H common stock under the provisions of the Plan. The option price is equal to 100% of the fair market value of GM Class H common stock on the date the options are granted. These nonqualified options generally vest over two to four years, expire ten years from date of grant and are subject to earlier termination under certain conditions. As part of the Hughes Transactions, the outstanding options of former Hughes employees who continued as Hughes employees were converted on December 18, 1997 into options to purchase recapitalized GM Class H common stock. Recognition of compensation expense was not required in connection with the conversion. Changes in the status of outstanding options were as follows: Shares Under Weighted-Average GM Class H Common Stock Option Exercise Price -------------- -------------- Outstanding at December 31, 1997 13,961,615 $29.08 Granted 4,180,525 51.02 Exercised (1,506,241) 23.22 Terminated (937,179) 31.79 ---------- ----- Outstanding at December 31, 1998 15,698,720 $35.32 ========== ===== IV-32 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 10: Incentive Plans - Concluded The following table summarizes information about the Plan stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable ------------------------------------------ -------------------------- Weighted- Average Remaining Weighted- Weighted- Range of Number Contractual Average Number Average Exercise Prices Outstanding Life (years) Exercise Price Exercisable Exercise Price ------------------ ----------- ----------- -------------- ----------- -------------- $9.86 to $20.00 833,203 3.7 $14.70 833,203 $14.70 20.01 to 30.00 1,056,354 5.9 22.18 1,056,354 22.18 30.01 to 40.00 9,800,388 8.2 32.08 3,344,007 32.64 40.01 to 50.00 1,372,700 9.6 43.71 - - 50.01 to 54.79 2,636,075 9.3 54.79 - - --------------- ---------- --- ----- --------- ------ $9.86 to $54.79 15,698,720 8.1 $35.32 5,233,564 $27.67 ============== ========== === ===== ========= =====
At December 31, 1998, 5,373,522 shares were available for grant under the Plan subject to GM Executive Compensation Committee approval. On May 5, 1997, PanAmSat adopted a stock option incentive plan with terms similar to the Plan. As of December 31, 1998, PanAmSat had issued 1,493,319 options to purchase its common stock with exercise prices ranging from $29.00 per share to $59.75 per share. The options vest ratably over three years and have a remaining life of approximately nine years on the 1998 options and eight and one-half years on the 1997 options. At December 31, 1998, 113,590 options were exercisable. The PanAmSat options have been considered in the following pro forma analysis. The following table presents pro forma information as if Hughes recorded compensation cost using the fair value of issued options on their grant date: (Dollars in Millions Except Per Share Amounts) 1998 1997 1996 ----- ----- ----- Reported earnings used for computation of available separate consolidated net income $271.7 $470.7 $183.5 Assumed stock compensation cost, net of tax 85.0 43.5 8.8 ------ ------ ------ Adjusted earnings used for computation of available separate consolidated net income $186.7 $427.2 $174.7 ===== ===== ===== Reported earnings per share attributable to GM Class H common stock $0.68 $1.18 $0.46 Adjusted earnings per share attributable to GM Class H common stock $0.47 $1.07 $0.44 ==== ==== ==== For stock options granted prior to the Hughes Transactions, the estimated compensation cost was based upon an allocation from former Hughes which was calculated using the Black-Scholes valuation model for estimation of the fair value of its options. The following table presents the estimated weighted-average fair value of options granted and the assumptions used for the 1998 and 1997 calculations (stock volatility has been estimated based upon a three-year average derived from a study of a Hughes determined peer group and may not be indicative of actual volatility for future periods): 1998 1997 Estimated fair value per option granted $22.78 $26.90 Average exercise price per option granted 51.02 31.71 Stock volatility 32.8% 32.5% Average risk-free interest rate 5.63% 5.87% Average option life in years 6.2 7.0 Note 11: Other Income and Expenses (Dollars in Millions) 1998 1997 1996 ----- ----- ----- Gain on PanAmSat merger $489.7 Gain on sale of DIRECTV interest to AT&T - $120.3 Equity losses from unconsolidated affiliates $(128.3) (72.2) (42.2) Other (24.8) (26.8) (9.0) ----- ---- ----- Total Other, net $(153.1) $390.7 $69.1 ===== ===== ==== IV-33 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 11: Other Income and Expenses - Concluded Equity losses from unconsolidated affiliates at December 31, 1998, are primarily comprised of losses at DIRECTV Japan, of which Hughes owns 31.6%, and American Mobile Satellite Corporation, of which Hughes owns 20.7%. Note 12: Related-Party Transactions In the ordinary course of its operations, Hughes provides telecommunications services and sells electronic components to, and purchases sub-components from, related parties. In addition, prior to December 18, 1997, Hughes received allocations of corporate expenses and interest costs from former Hughes and GM. The following table summarizes significant related party transactions: (Dollars in Millions) 1998 1997 1996 ------ ------ ----- Revenues $40.5 $45.2 $50.8 Costs and expenses Purchases 29.0 275.4 241.5 Allocation of corporate expenses - 77.5 75.6 Allocated interest - 55.6 53.2 Note 13: 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 ("ASCNI") of Hughes. The ASCNI 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 ASCNI), 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 and the denominator of which was 399.9 million during 1998, 1997 and 1996. The denominator used in determining the ASCNI of Hughes may be adjusted from time-to-time as deemed appropriate by the GM Board of Directors to reflect subdivisions or combinations of the GM 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 GM's Restated Certificate of Incorporation. For 1997 and 1996, ASCNI and earnings attributable to GM Class H common stock are presented on a pro forma basis. Prior to the Hughes Transactions, such amounts were calculated based on the financial performance of former Hughes. Since the 1997 and 1996 financial statements relate only to the telecommunications and space business of former Hughes prior to the consummation of the Hughes Transactions, they do not reflect the earnings attributable to the GM Class H common stock on a historical basis. The pro forma presentation is used, therefore, to present the financial results which would have been achieved for 1997 and 1996 relative to the GM Class H common stock had they been calculated based on the performance of the telecommunication and space business of former Hughes. Earnings per share represent basic earnings per share. The assumed exercise of stock options does not have a dilutive effect since such exercises do not currently result in a change to 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 are not presented. IV-34 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 13: Earnings Per Share Attributable to GM Class H Common Stock and Available Separate Consolidated Net Income - Concluded Dividends may be paid on the GM Class H common stock only when, as, and if declared by GM's Board of Directors in its sole discretion. Dividends may be paid on GM Class H common stock to the extent of the amount initially determined to be available for the payment of dividends on Class H common stock, plus the portion of earnings of GM after the closing of the Hughes Transactions attributed to GM Class H common stock. The GM Board determined that the amount initially available for payment of dividends on shares of the recapitalized GM Class H common stock was the cumulative amount available for the payment of dividends on GM Class H common stock immediately prior to the closing of the Hughes Transactions, reduced by a pro rata portion of the net reduction in GM's total stockholders' equity resulting from the Hughes Transactions. As of December 31, 1998, the amount available for the payment of dividends on GM Class H common stock was $3.8 billion. The GM Board does not currently intend to pay cash dividends on the recapitalized GM Class H common stock. Note 14: Acquisitions In December 1998, Hughes agreed to acquire all of the outstanding capital stock of United States Satellite Broadcasting Company, Inc. ("USSB"). USSB provides DTH premium satellite programming in conjunction with DIRECTV's basic programming service. USSB launched its service in June 1994 and, as of December 31, 1998, had more than two million subscribers nationwide. The acquisition will be accounted for using the purchase method of accounting. The purchase price, consisting of cash and GM Class H common stock, will be determined at closing based upon an agreed-upon formula and will not exceed $1.6 billion in the aggregate. Subject to certain limitations in the merger agreement, USSB shareholders will be entitled to elect to receive cash or shares of GM Class H common stock. The amount of cash to be paid in the merger cannot be less than 30% or greater than 50% of the aggregate purchase price with the remaining consideration consisting of GM Class H common stock. The merger, which is subject to USSB shareholder approval and the receipt of appropriate regulatory approval, is expected to close in early to mid-1999. In October 1998, Hughes agreed to acquire, pending regulatory approval in Mexico, an additional ownership interest in Grupo Galaxy Mexicana, S.A. de C.V. ("GGM"), a Galaxy Latin America, LLC ("GLA") local operating company located in Mexico, from Grupo MVS, S.A. de C.V. ("MVS"). Hughes' equity ownership will represent 49.0% of the voting equity and all of the non-voting equity of GGM. The GGM transaction will be accounted for using the purchase method of accounting. As part of the GGM transaction, in October 1998 Hughes acquired from MVS an additional 10.0% interest in GLA, increasing its ownership interest to 70.0%, as well as an additional 19.8% interest in SurFin, a company providing financing of subscriber receiver equipment for certain GLA local operating companies located in Latin America and Mexico, increasing its ownership percentage from 39.3% to 59.1%. The GLA and SurFin transactions were accounted for using the purchase method of accounting. The increased ownership in SurFin resulted in its consolidation since the date of acquisition. The aggregate purchase price for the transactions was $197.0 million in cash. In May 1998, Hughes purchased an additional 9.5% interest in PanAmSat for $851.4 million in cash, increasing Hughes' ownership interest in PanAmSat from 71.5% to 81.0%. IV-35 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 14: Acquisitions - Concluded In December 1997, Hughes repurchased from AT&T, a 2.5% equity interest in DIRECTV, ending AT&T's marketing agreement to distribute the DIRECTV direct broadcast satellite television service and DIRECTV(TM) receiver equipment. The $161.8 million repurchase resulted in goodwill of approximately $156.1 million. 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 Corporation. 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. Such cash consideration and other funds required to consummate the merger were funded by new debt financing totaling $1,725.0 million provided by Hughes, which borrowed such funds from GM. 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). As the Hughes 1997 financial statements include only PanAmSat's results of operations since the date of acquisition, the following selected unaudited pro forma information is being provided to present a summary of the combined results of Hughes and PanAmSat as if the acquisition had occurred as of the beginning of the respective periods, giving effect to purchase accounting adjustments. The pro forma data is presented for informational purposes only and may not necessarily reflect the results of operations of Hughes had PanAmSat operated as part of Hughes for the years ended December 31, 1997 and 1996, nor are they necessarily indicative of the results of future operations. The pro forma information excludes the effect of non-recurring charges. (Dollars in Millions Except Per Share Amounts) 1997 1996 ------ ------- Total Revenues $5,247.9 $4,189.8 Income before extraordinary item 164.1 42.1 Net income 143.5 42.1 Pro forma available separate consolidated net income 41.8 15.5 Pro forma earnings per share attributable to GM Class H common stock $0.41 $0.16 Note 15: Derivative Financial Instruments and Risk Management In the normal course of business, Hughes enters into transactions that expose it to risks associated with foreign exchange rates. Hughes utilizes derivative instruments in an effort to mitigate these risks. Hughes' policy does not allow speculation in derivative instruments for profit or execution of derivative instrument contracts for which there are no underlying exposures. Instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged and designated as a hedge at the inception of the contract. Accordingly, changes in market values of hedge instruments are highly correlated with changes in market values of the underlying transactions, both at the inception of the hedge and over the life of the hedge contract. Hughes primarily uses foreign exchange-forward contracts to hedge firm commitments denominated in foreign currencies. Foreign exchange-forward contracts are legal agreements between two parties to purchase and sell a foreign currency, for a price specified at the contract date, with delivery and settlement in the future. The total notional amounts of contracts afforded hedge accounting treatment at December 31, 1998 and 1997 were not significant. Hughes is exposed to credit risk in the event of non-performance by the counterparties to its foreign exchange-forward contracts. While Hughes believes this risk is remote, credit risk is managed through the periodic monitoring and approval of financially sound counterparties. In connection with debt refinancing activities by PanAmSat in 1997, PanAmSat entered into certain U.S. Treasury rate lock contracts to reduce its exposure to fluctuations in interest rates. The aggregate notional value of these contracts was $375.0 million and these contracts were accounted for as hedges. The cost to settle these instruments in 1998 was $9.1 million and is being amortized to interest expense over the term of the related debt securities. IV-36 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 16: Discontinued Operations On December 15, 1997, Hughes sold substantially all of the assets and liabilities of Hughes Avicom International, Inc. ("Hughes Avicom") to Rockwell Collins, Inc. for cash. Hughes Avicom is a supplier of products and services to the commercial airline market. Hughes recorded an after-tax gain of $62.8 million on the sale. The net operating results of Hughes Avicom have been reported, net of applicable income taxes, as "Income (Loss) from discontinued operations, net of taxes" and the net cash flows as "Net cash used by discontinued operations." Summarized financial information for Hughes Avicom follows: (Dollars in Millions) 1997* 1996 ------ ----- Revenues $102.5 $89.9 Net income (loss) 1.2 (7.4) *Includes the results of Hughes Avicom through December 15, 1997. Note 17: Segment Reporting Hughes' segments, which are differentiated by their products and services, include Direct-To-Home Broadcast, Satellite Services, Satellite Systems and Network Systems. Direct-To-Home Broadcast is engaged in acquiring, promoting, selling and/or distributing digital programming via satellite to residential and commercial customers. Satellite Services is engaged in the selling, leasing and operating of satellite transponders and providing services for cable television systems, news companies, Internet service providers and private business networks. Satellite Systems designs, manufactures and markets satellites and satellite components. Network Systems products include satellite-based business networks and Internet access service, cellular-based fixed wireless telephone systems and mobile cellular digital packet data systems. Other includes the corporate office and other entities.
Direct-To- Home Satellite Satellite Network (Dollars in Millions) Broadcast Services Systems Systems Other Eliminations Total --------- -------- ------- ------- ----- ------------ ----- 1998 External Revenues $1,813.7 $643.8 $2,493.4 $1,000.6 $12.4 $5,963.9 Intersegment Revenues 2.4 123.5 337.7 76.1 0.8 $(540.5) - ------- ----- ------- ------- ---- ----- ------- Total Revenues $1,816.1 $767.3 $2,831.1 $1,076.7 $13.2 $(540.5) $5,963.9 ------- ----- ------- ------- ---- ----- ------- Operating Profit (1) $(228.1) $318.3 $246.3 $10.9 $(68.2) $(30.1) $249.1 Depreciation and Amortization (1) 102.3 235.0 49.2 41.7 31.6 (5.0) 454.8 Intangibles, net - 2,433.5 - 53.6 1,065.1 - 3,552.2 Segment Assets (2) 2,190.4 5,890.5 1,491.2 1,299.0 2,856.8 (292.9 13,435.0 Capital Expenditures (3) 230.8 921.7 99.7 40.0 3.3 133.0 1,428.5 ------- ------- ------- ------- ------- ----- ------- 1997 External Revenues $1,276.9 $537.3 $2,290.0 $998.3 $25.8 $5,128.3 Intersegment Revenues - 92.6 201.9 13.0 2.7 $(310.2) - ------- ------- ------- ------- ------- ----- ------- Total Revenues $1,276.9 $629.9 $2,491.9 $1,011.3 $28.5 $(310.2) $5,128.3 ------- ------- ------- ------- ------- ----- ------- Operating Profit (1 $(254.6) $292.9 $226.3 $74.1 $(47.9) $(5.4) $285.4 Depreciation and Amortization (1) 86.1 145.2 39.4 32.0 14.7 - 317.4 Intangibles, net - 2,498.5 - - 456.3 - 2,954.8 Segment Assets (2) 1,408.7 5,682.4 1,312.6 1,215.6 3,298.1 (186.4) 12,731.0 Capital Expenditures (3) 105.6 625.7 113.9 43.1 0.4 (62.1) 826.6 ------- ------- ------- ------- ------- ----- ------- 1996 External Revenues $621.0 $381.7 $1,950.4 $1,049.6 $6.0 $4,008.7 Intersegment Revenues - 101.1 106.0 20.4 1.7 $(229.2) - ------- ------- ------- ------- ------- ----- ------- Total Revenues $621.0 $482.8 $2,056.4 $1,070.0 $7.7 $(229.2) $4,008.7 ------- ------- ------- ------- ------- ----- ------- Operating Profit (1) $(319.8) $239.1 $183.3 $107.7 $(13.5) $(7.7) $189.1 Depreciation and Amortization (1 67.3 58.5 34.4 28.3 27.1 - 215.6 Intangibles, net - 72.9 - - 395.1 - 468.0 Segment Assets (2) 1,023.4 1,275.5 757.8 964.0 457.1 (105.2) 4,372.6 Capital Expenditures (3) 63.5 308.7 87.8 45.3 - (55.9) 449.4 ------- ------- ------- ------- ------- ----- -------
- ------------------- See Notes on next page. IV-37 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 17: Segment Reporting - Concluded Certain 1997 and 1996 amounts have been reclassified to conform with the 1998 presentation. (1)Includes amortization arising from purchase accounting adjustments related to GM's acquisition of Hughes amounting to $3.3 million in each of the years for the Satellite Services segment and $17.7 million in each of the years in Other. (2)Assets of the Satellite Services segment and Other include the unamortized purchase accounting adjustments associated with GM's acquisition of Hughes. Satellite Services includes unamortized purchase accounting adjustments of $66.3 million in 1998, $69.6 million in 1997 and $72.9 million in 1996. Other includes unamortized purchase accounting adjustments of $360.3 million in 1998, $378.0 million in 1997 and $395.7 million in 1996. (3)Includes expenditures related to satellites in segments as follows: $70.2 million in 1998 for Direct-To-Home Broadcast segment and $726.3 million, $606.1 million and $259.2 million in 1998, 1997 and 1996, respectively, for Satellite Services segment. Satellite Services segment also includes $155.5 million in 1998 related to the early buy-out of satellite sale-leasebacks. A reconciliation of operating profit to income from continuing operations before income taxes, minority interests, extraordinary item and cumulative effect of accounting change, as shown in the Statement of Income and Available Separate Consolidated Net Income, follows: (Dollars in Millions) 1998 1997 1996 ----- ------ ----- Operating profit $249.1 $285.4 $189.1 Interest income 112.3 33.1 6.8 Interest expense (17.5) (91.0) (42.9) Other, net (153.1) 390.7 69.1 ----- ----- ------ Income from continuing operations before income taxes, minority interests, extraordinary item and cumulative effect of accounting change $190.8 $618.2 $222.1 ====== ====== ====== The following table presents revenues earned from customers located in different geographic areas. Property and satellites are grouped by their physical location. All satellites are reported as United States assets.
1998 1997 1996 -------------------- -------------------- -------------------- Net Net Net Total Property & Total Property & Total Property & (Dollars in Millions) Revenues Satellites Revenues Satellites Revenues Satellites -------- ---------- -------- ---------- -------- ---------- North America United States $3,534.3 $4,206.3 $2,851.1 $3,507.1 $2,613.1 $1,725.1 Canada and Mexico 136.7 2.0 101.3 - 27.4 - ------- ------- ------- ------- ------- -------- Total North America 3,671.0 4,208.3 2,952.4 3,507.1 2,640.5 1,725.1 ======= ======= ======= ======= ======= ======= Europe United Kingdom 842.4 14.1 583.3 10.4 336.2 8.0 Other 275.5 0.6 419.0 0.4 290.0 0.3 ------- ------- ------- ------- ------- -------- Total Europe 1,117.9 14.7 1,002.3 10.8 626.2 8.3 ======= ======= ======= ======= ======= ======= Latin America Brazil 184.9 4.6 131.2 - 48.6 - Other 104.2 11.2 90.4 - 23.1 - ------- ------- ------- ------- ------- -------- Total Latin America 289.1 15.8 221.6 - 71.7 - ======= ======= ======= ======= ======= ======= Asia Japan 185.9 0.6 147.9 0.5 119.7 0.4 India 83.4 14.7 46.5 12.7 8.0 11.7 China 63.4 1.7 154.5 1.5 125.2 1.4 Other 214.7 0.6 477.8 0.5 387.3 0.5 ------- ------- ------- ------- ------- -------- Total Asia 547.4 17.6 826.7 15.2 640.2 14.0 ======= ======= ======= ======= ======= ======= Total Middle East 284.3 - 77.7 - 1.2 - Total Africa 54.2 0.3 47.6 - 28.9 - ------- ------- ------- ------- ------- -------- Total $5,963.9 $4,256.7 $5,128.3 $3,533.1 $4,008.7 $1,747.4 ======= ======= ======= ======= ======= =======
IV-38 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 18: Commitments and Contingencies In connection with the 1997 spin-off of Hughes Defense and its subsequent merger with Raytheon, 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. 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 could 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. Hughes has entered into agreements to procure commercial satellite launches, a significant number of which are expected to be used in connection with satellites ordered by outside customers. The agreements provide for launches beginning in 1999 and also contain options for additional launch vehicles. The total amount of the commitments, which is dependent upon the number of options exercised, market conditions and other factors, could exceed $2.0 billion. Hughes has a long-term agreement for multiple launch services aboard expendable launch vehicles using the Sea Launch ocean-based commercial launch system. Hughes plans to use options under this agreement to deliver communications satellites in-orbit. Sea Launch is scheduled to demonstrate the capabilities of its ocean-based commercial launch system with its first launch in March 1999. The first launch will carry a demonstration payload having the same mission and physical characteristics (weight, size, etc.) as an HS 702 commercial communications satellite. If the first launch is not successful or delayed, Hughes could be required by customers to procure other launch vehicles to satisfy its contractual obligations, which may lead to higher operating costs. DIRECTV has an agreement with General Electric Capital Corporation ("GECC") under which GECC agreed to provide an open-end revolving credit program for consumer purchases of DIRECTV receiver equipment, installations and ancillary items at selected retail establishments. Funding under this program was discontinued effective September 10, 1996. The aggregate outstanding balance under this agreement at December 31, 1998 was approximately $190.0 million. Hughes has certain rights regarding the administration of the program, and the losses from qualifying accounts under this program accrue to Hughes, subject to certain indemnity obligations of GECC. Hughes has established allowances to provide for expected losses under the program. The allowances are subject to periodic review based on information regarding the status of the program. A complaint and counterclaim have been filed by the parties in the U.S. District Court for the District of Connecticut concerning GECC's performance and DIRECTV's obligation to act as a surety. GECC claims damages from DIRECTV in excess of $140.0 million. DIRECTV seeks damages from GECC in excess of $70.0 million. Hughes intends to vigorously contest GECC's allegations and pursue its own contractual rights and remedies. Hughes does not believe that the litigation will have a material adverse impact on Hughes' results of operations or financial position. Discovery is not yet completed in the case and no trial date has been set. In December 1994, former Hughes entered into an agreement with Computer Sciences Corporation ("CSC") whereby CSC provides a significant amount of data processing services required by the non-automotive businesses of former Hughes. Baseline service payments to CSC are expected to aggregate approximately $1.5 billion over the term of the eight-year agreement for former Hughes. Based on historical usage, approximately 17% of the costs incurred under the agreement are attributable to Hughes. The contract is cancelable by Hughes with early termination penalties. At December 31, 1998, minimum future commitments under noncancelable operating leases having lease terms in excess of one year, exclusive of satellite transponders leaseback payments disclosed in Note 4, are primarily for real property and aggregated $323.8 million, payable as follows: $56.6 million in 1999, $53.3 million in 2000, $52.3 million in 2001, $50.3 million in 2002, $29.4 million in 2003 and $81.9 million thereafter. Certain of these leases contain escalation clauses and renewal or purchase options. Rental expenses under operating leases were $62.0 million in 1998, $72.2 million in 1997 and $52.7 million in 1996. IV-39 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 18: Commitments and Contingencies - Concluded In conjunction with its performance on long-term contracts, Hughes is contingently liable under standby letters of credit and bonds in the amount of $294.3 million at December 31, 1998. In Hughes' past experience, no material claims have been made against these financial instruments. In addition, Hughes has guaranteed up to $204.6 million of bank debt, including $150.0 million related to American Mobile Satellite Corporation, and up to $22.1 million of capital lease obligations. $150.0 million of bank debt matures in March 2003; the remaining $54.6 million of bank debt matures in September 2007. The capital lease obligations are due in variable amounts over the next five years. In connection with the DTH broadcast businesses, Hughes has commitments related to certain programming agreements which are variable based upon the number of underlying subscribers and market penetration rates. Minimum payments over the terms of applicable contracts are anticipated to be approximately $700.0 million to $800.0 million. Hughes is subject to potential liability under government regulations and various claims and legal actions which are pending or may be asserted against it. The aggregate ultimate liability of Hughes under these claims and actions was not determinable at December 31, 1998. In the opinion of Hughes management, such liability is not expected to have a material adverse effect on Hughes' results of operations or financial position. Note 19: Subsequent Events Hughes entered into a contract with Asia-Pacific Mobile Telecommunications Satellite Pte. Ltd. ("APMT") effective May 15, 1998, whereby Hughes was to provide to APMT a satellite-based mobile telecommunications system consisting of two satellites, a ground segment, user terminals and associated equipment and software. As part of the contract, Hughes was required to obtain all necessary U.S. Government export licenses for the APMT system by February 15, 1999. On February 24, 1999, the Department of Commerce notified Hughes that it intends to deny the export licenses required by Hughes to fulfill its contractual obligation to APMT. Hughes has until March 16, 1999 to request reconsideration of the decision. As a result of Hughes failing to obtain the export licenses, APMT has the right to terminate the contract. At this time, there are ongoing discussions between Hughes and APMT regarding the contract, and between Hughes and the U.S. Government regarding the export licenses. If the U.S. Government ultimately denies the required export licenses or APMT terminates the contract, Hughes could be required to refund $45.0 million to APMT and record a pre-tax charge to earnings of approximately $100 million in 1999. On January 22, 1999, Hughes agreed to acquire Primestar, Inc.'s ("Primestar") 2.3 million-subscriber medium-power DTH business. In a related transaction, Hughes also agreed to acquire the high-power satellite assets and direct broadcast satellite ("DBS") orbital frequencies of Tempo, a wholly-owned subsidiary of TCI Satellite Entertainment, Inc. The acquisitions will be accounted for using the purchase method of accounting. The purchase price for the DTH business will be comprised of $1.1 billion in cash and 4,871,448 shares of GM Class H common stock, for a total purchase price of $1,325.0 million. The DTH transaction, pending regulatory and Primestar lender approval, is expected to close in early to mid-1999. The purchase price for the Tempo assets consists of $500.0 million in cash, $150.0 million of which is expected to be paid in early to mid-1999 and $350.0 million which is payable upon Federal Communications Commission approval of the transfer of the DBS orbital frequencies, which is expected in mid to late-1999. IV-40 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 19: Subsequent Events - Concluded 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 U.S. Court of Appeals for the Federal Circuit ("CAFC") reaffirmed earlier decisions in the Williams case including 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, was denied the request, and thereafter applied for certiorari to the U.S. Supreme Court. On March 1, 1999, the U.S. Supreme Court denied the U.S. Government's petition for certiorari. The case will be remanded back to the trial court (Court of Claims) for entry of the final judgment. While no amount has been recorded in the financial statements of Hughes to reflect the $114.0 million award or the interest accumulating thereon as of December 31, 1998, it is expected that resolution of this matter will result in the recognition of a pre-tax gain of approximately $150 million during 1999. The GGM transaction (discussed in Note 14) received regulatory approval and closed in February 1999. * * * IV-41 HUGHES ELECTRONICS CORPORATION SUPPLEMENTAL INFORMATION Selected Quarterly Data (Unaudited) 1st 2nd 3rd 4th - -------------------------------------------------------------------------------- (Dollars in Millions Except Per Share Amounts) 1998 Quarters Revenues $1,291.0 $1,369.0 $1,513.3 $1,790.6 ------- ------- ------- ------- Income from continuing operations before income taxes, minority interests, and cumulative effect of accounting change $78.5 $65.5 $45.7 $1.1 Income taxes 31.4 23.3 17.4 (116.8) Minority interests 1.3 8.6 9.3 5.2 Cumulative effect of accounting change (1) (9.2) - - - ---- ---- ---- ----- Net income 39.2 50.8 37.6 123.1 Earnings used for computation of available separate consolidated net income $44.5 $56.1 $42.9 $128.2 ==== ==== ==== ===== Average number of shares of General Motors Class H common stock outstanding (in millions) 104.1 105.2 105.7 105.9 Class H dividend base (in millions) 399.9 399.9 399.9 399.9 Available separate consolidated net income $11.5 $14.7 $11.4 $33.9 Earnings attributable to General Motors Class H common stock on a per share basis: Income from continuing operations before cumulative effect of accounting change $0.13 $0.14 $0.11 $0.32 Cumulative effect of accounting change (1) (0.02) - - - ---- ---- ---- ---- Earnings attributable to General Motors Class H common stock $0.11 $0.14 $0.11 $0.32 ==== ==== ==== ==== Stock price range of General Motors Class H common stock High $48.00 $57.88 $50.81 $42.38 Low $31.50 $42.75 $35.00 $30.38 - --------------- See Notes on next page. IV-42 HUGHES ELECTRONICS CORPORATION SUPPLEMENTAL INFORMATION Selected Quarterly Data (Unaudited) - Continued 1st 2nd 3rd 4th - -------------------------------------------------------------------------------- (Dollars in Millions Except Per Share Amounts) 1997 Quarters Revenues $1,024.0 $1,151.4 $1,258.3 $1,694.6 ------- ------- ------- ------- Income from continuing operations before income taxes, minority interests and extraordinary item $5.6 $518.6 $87.1 $6.9 Income taxes 2.2 207.5 34.8 (7.8) Minority interests 14.2 7.7 (5.1) 8.0 Income (loss) from discontinued operations 1.0 0.3 (0.1) 62.8 Extraordinary item - - - (20.6) ----- ------ ----- ------ Net income 18.6 319.1 47.1 64.9 Earnings used for pro forma computation of available separate consolidated net income $23.9 $324.4 $52.4 $70.0 ==== ===== ==== ==== Average number of shares of General Motors Class H common stock outstanding (in millions) 100.4 101.0 102.0 102.5 Class H dividend base (in millions) 399.9 399.9 399.9 399.9 Pro forma available separate consolidated net income $6.0 $82.0 $13.4 $18.0 Pro forma earnings attributable to General Motors Class H common stock on a per share basis: Pro forma income from continuing operations before extraordinary item $0.06 $0.81 $0.13 $0.07 Discontinued operations - - - 0.16 Extraordinary item - - - (0.05) ----- ----- ----- ---- Pro forma earnings attributable to General Motors Class H common stock $0.06 $0.81 $0.13 $0.18 ==== ==== ==== ==== Stock price range of General Motors Class H common stock High N/A N/A N/A (2) Low N/A N/A N/A (2) (1)Hughes adopted SOP 98-5, Reporting on the Costs of Start-Up Activities, effective January 1, 1998. The unfavorable cumulative effect of adopting SOP 98-5 was $9.2 million, or $0.02 million attributable to GM Class H common stock on a per share basis. The impact on the second, third and fourth quarters of 1998 was not significant. (2)The stock price range for GM Class H common stock, for the period December 18, 1997 through December 31, 1997, was a high of $40.00 and a low of $35.75. The GM Class H common stock was recapitalized as part of the Hughes Transactions on December 17, 1997. IV-43 HUGHES ELECTRONICS CORPORATION SUPPLEMENTAL INFORMATION - Concluded Selected Financial Data (Unaudited) 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (Dollars in Millions Except Per Share Amounts) Revenues $5,963.9 $5,128.3 $4,008.7 $3,152.8 $2,697.0 Earnings used for computation of available separate consolidated net income $271.7 $470.7 $183.5 $27.2 $62.2 Average number of shares of General Motors Class H common stock outstanding (in millions) 105.3 101.5 98.4 95.5 92.1 Class H dividend base (in millions) 399.9 399.9 399.9 399.9 399.9 Available separate consolidated net income $71.5 $119.4 $45.2 $6.5 $14.3 Earnings attributable to General Motors Class H common stock on a per share basis $0.68 $1.18 $0.46 $0.07 $0.16 Capital expenditures(1) $1,428.5 $826.6 $449.4 $442.3 $399.0 Cash and cash equivalents $1,342.1 $2,783.8 $6.7 $7.6 $5.8 Working capital $1,836.9 $3,323.3 $277.5 $311.9 $273.5 Total assets $13,435.0 $12,731.0 $4,372.6 $3,941.9 $3,609.3 Long-term debt $778.7 $637.6 $ - $ - $ - Minority interests $481.7 $607.8 $21.6 $40.2 $ - Return on equity (2) 3.1% 7.5% 6.7% 2.9% 4.6% Income before interest expense and income taxes as a percent of capitalization (3) 2.6% 12.8% 12.5% 6.6% 9.6% Pre-tax return on total assets (4) 1.6% 7.5% 6.6% 2.7% 4.5% - ------------------------- Certain amounts have been reclassified to conform with the 1998 presentation. (1)Includes expenditures related to satellites amounting to $929.5 million, $575.3 million, $187.9 million, $274.6 million and $255.8 million in 1998, 1997, 1996, 1995 and 1994, respectively. Also includes $155.5 million in 1998 related to the early buy-out of sale-leasebacks. (2)Income from continuing operations before extraordinary item and cumulative effect of accounting change divided by average owner's equity (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). (3)Income from continuing operations before interest expense, income taxes, extraordinary item and cumulative effect of accounting change divided by average owner's equity plus average debt. (4)Income from continuing operations before income taxes, extraordinary item and cumulative effect of accounting change divided by average total assets. IV-44 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS The following discussion excludes purchase accounting adjustments related to General Motors' acquisition of Hughes (see Supplemental Data beginning on page IV-55). Forward-looking statements made, including those concerning expected financial performance, ongoing financial performance strategies, and possible future actions, constitute forward-looking information. Actual results may differ materially from anticipated results due to numerous conditions, uncertainties and risk factors. The principal important risk factors include, but are not limited to, economic conditions, product demand and market acceptance, government action, competition, ability to achieve cost reductions and successfully integrate acquired businesses, technological risk, ability to address 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 General Motors Corporation ("GM"), the parent of Hughes Electronics, completed a series of transactions (the "Hughes Transactions") designed to address strategic challenges facing the three principal businesses of Hughes Electronics and unlock stockholder value in GM. The Hughes Transactions included the tax-free spin-off of the defense electronics business ("Hughes Defense") to holders of GM $1-2/3 par value and Class H common stocks, the transfer of Delco Electronics Corporation ("Delco"), the automotive electronics business, to GM's Delphi Automotive Systems unit and the recapitalization of GM Class H common stock into a new tracking stock, GM Class H common stock, that is linked to the remaining telecommunications and space business. The Hughes Transactions were followed immediately by the merger of Hughes Defense with Raytheon Company ("Raytheon"). For the periods prior to the consummation of the Hughes Transactions on December 17, 1997, Hughes Electronics, consisting of its defense electronics, automotive electronics and telecommunications and space businesses, is hereinafter referred to as former Hughes or Parent Company. In connection with the recapitalization of Hughes Electronics on December 17, 1997, the telecommunications and space business of former Hughes, consisting principally of its direct-to-home broadcast, satellite services, satellite systems and network systems businesses, were contributed to the recapitalized Hughes Electronics. Such telecommunications and space business, 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. For additional information on the basis of presentation, see Note 1 to the financial statements. As a result of the May 1997 PanAmSat Corporation ("PanAmSat") merger (see further discussion in Note 14 to the financial statements), Hughes' 1997 financial information includes PanAmSat's results of operations from the date of merger. During 1998, four Hughes-built satellites experienced the failure of a primary spacecraft control processor ("SCP"). Three of these satellites were owned and operated by PanAmSat and the fourth was owned by DIRECTV. With the exception of the Galaxy(R) 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, 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. 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 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. 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 or the displacement of other customers. PanAmSat is developing solutions for its customers that may include transition of certain services to other PanAmSat satellites or the launch of replacement satellites. IV-45 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS 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. Hughes entered into a contract with Asia-Pacific Mobile Telecommunications Satellite Pte. Ltd. ("APMT") effective May 15, 1998, whereby Hughes was to provide to APMT a satellite-based mobile telecommunications system consisting of two satellites, a ground segment, user terminals and associated equipment and software. As part of the contract, Hughes was required to obtain all necessary U.S. Government export licenses for the APMT system by February 15, 1999. On February 24, 1999, the Department of Commerce notified Hughes that it intends to deny the export licenses required by Hughes to fulfill its contractual obligation to APMT. Hughes has until March 16, 1999 to request reconsideration of the decision. As a result of Hughes failing to obtain the export licenses, APMT has the right to terminate the contract. At this time, there are ongoing discussions between Hughes and APMT regarding the contract, and between Hughes and the U.S. Government regarding the export licenses. If the U.S. Government ultimately denies the required export licenses or APMT terminates the contract, Hughes could be required to refund $45.0 million to APMT and record a pre-tax charge to earnings of approximately $100 million in 1999. 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 U.S. Court of Appeals for the Federal Circuit ("CAFC") reaffirmed earlier decisions in the Williams case including 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, was denied the request, and thereafter applied for certiorari to the U.S. Supreme Court. On March 1, 1999, the U.S. Supreme Court denied the U.S. Government's petition for certiorari. The case will be remanded back to the trial court (Court of Claims) for entry of the final judgment. While no amount has been recorded in the financial statements of Hughes to reflect the $114.0 million award or the interest accumulating thereon as of December 31, 1998, it is expected that resolution of this matter will result in the recognition of a pre-tax gain of approximately $150 million during 1999. Results of Operations 1998 compared to 1997 Revenues. Hughes reported that 1998 revenues increased 16.3% to $5,963.9 million compared with $5,128.3 million in 1997. Each of Hughes' four primary business segments contributed to the growth in revenue, including continued strong subscriber growth in the Direct-To-Home Broadcast segment, the effect of the PanAmSat merger and increased operating lease revenues for video, data and Internet-related services in the Satellite Services segment, increased sales of DIRECTV(TM) receiver equipment in the Network Systems segment and increased sales of commercial satellites in the Satellite Systems segment. Direct-To-Home Broadcast segment revenues for 1998 increased 42.2% to $1,816.1 million from $1,276.9 million in 1997. The large increase in revenues resulted from record U.S. subscriber growth, increased average monthly revenue per subscriber and low subscriber churn rates. Domestic DIRECTV was the biggest contributor to this growth with revenues of $1,604.1 million for 1998, a 45.4% increase over prior year's revenues of $1,103.3 million. Hughes' Latin American DIRECTV subsidiary, Galaxy Latin America, LLC ("GLA"), had revenues of $141.3 million compared with $70.0 million in 1997. Total DIRECTV subscribers as of December 31, 1998 were 4,458,000 in the United States and 484,000 in Latin America. In addition, Hughes' unconsolidated affiliate, DIRECTV Japan, which initiated its service in December 1997, had a total of 231,000 subscribers as of December 31, 1998. Revenues for the Satellite Services segment in 1998 increased 21.8% to $767.3 million from $629.9 million in 1997. The increase in revenues was due to the May 1997 PanAmSat merger and increased operating lease revenues from the commencement of service agreements for full-time video distribution, as well as short-term special events and an increase in data and Internet-related service agreements. The increase was partially offset by a decrease in sales and sales-type lease revenues. Satellite Systems segment revenues increased 13.6% in 1998 to $2,831.1 million from $2,491.9 million in 1997 primarily due to higher commercial satellite sales to customers such as Thuraya Satellite Telecommunications Company, PanAmSat, ICO Global Communications and Orion Asia Pacific Corporation. Revenues in 1998 for the Network Systems segment were $1,076.7 million compared with $1,011.3 million in 1997. The increase in revenues resulted from the growth in sales of DIRECTV receiver equipment and the increased sales of private business networks and satellite-based mobile telephony equipment offset by lower international sales of wireless telephone systems and private business networks, primarily in the Asia Pacific region. IV-46 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued Operating Profit. Operating profit, excluding amortization of purchase accounting adjustments related to GM's acquisition of Hughes, was $270.1 million in 1998 compared with $306.4 million in 1997. Full-year 1998 operating profit margin on the same basis was 4.5% compared with 6.0% in 1997. The lower 1998 operating profit and operating profit margin resulted principally from lower sales of wireless telephone systems and private business networks in the Asia Pacific region, as well as provisions for estimated losses at Hughes Network Systems ("HNS") associated with uncollectible amounts due from certain wireless customers. Also contributing to the decline was goodwill amortization associated with the May 1997 PanAmSat merger and the additional May 1998 investment in PanAmSat. The operating loss in the Direct-To-Home Broadcast segment in 1998 was $228.1 million compared with an operating loss of $254.6 million in 1997. The full-year 1998 operating loss for domestic DIRECTV was $100.0 million compared with $137.0 million in 1997. GLA's operating loss was $125.8 million in 1998 versus $116.0 million in 1997. The lower operating loss for domestic DIRECTV in 1998 was principally due to increased subscriber revenues which more than offset increased sales and marketing expenditures. As a result of the increased revenues described above, the Satellite Services segment operating profit increased 8.6% to $321.6 million in 1998, compared with prior year's operating profit of $296.2 million. Operating profit margin in 1998 declined to 41.9% from 47.0% in the prior year principally due to goodwill amortization associated with the PanAmSat merger, a provision for losses relating to the May 1998 failure of PanAmSat's Galaxy IV satellite and increased depreciation expense resulting from increased capital expenditures by PanAmSat. Operating profit for the Satellite Systems segment in 1998 was $246.3 million, an increase of 8.8% over $226.3 million in 1997. The increase was primarily due to the higher commercial satellite sales noted above. The operating profit margin for the year was 8.7% compared with the 9.1% margin earned in the prior year. The Network Systems segment operating profit in 1998 was $10.9 million versus $74.1 million in 1997 and operating profit margin declined to 1.0% from 7.3% last year. The decrease in operating profit and operating profit margin was primarily due to a $26 million provision for estimated losses associated with the bankruptcy filing by a customer, provision for uncollectible amounts due from certain wireless customers and lower international sales of wireless telephone systems and private business networks, primarily in the Asia Pacific region. Costs and Expenses. Selling, general and administrative expenses increased to $1,457.0 million in 1998 from $1,119.9 million in 1997. The increase in these expenses resulted primarily from increased marketing and subscriber acquisition costs in the Direct-To-Home Broadcast segment and increased expenditures to support the growth in the remaining business segments. The increase in depreciation and amortization expense to $433.8 million in 1998 from $296.4 million in 1997 resulted from increased goodwill amortization related to the May 1997 PanAmSat merger and the purchase of an additional 9.5% interest in PanAmSat in May 1998, and increased capital expenditures in the Direct-To-Home Broadcast and Satellite Services segments. Interest Income and Expense. Interest income increased to $112.3 million in 1998 compared to $33.1 million in 1997 due primarily to higher cash balances resulting from the Hughes Transactions. Interest expense decreased $73.5 million to $17.5 million in 1998 versus $91.0 million in 1997 resulting from the repayment of debt at the end of 1997, which originally resulted from the PanAmSat merger. Other, net. Other, net for 1998 relates primarily to losses from unconsolidated subsidiaries of $128.3 million, attributable principally to equity investments, including American Mobile Satellite Corporation and DIRECTV Japan, and a provision for estimated losses associated with bankruptcy filings by two customers. The amount for 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 $72.2 million. Income Taxes. The effective income tax rate was (21.1)% in 1998 and 37.0% in 1997. The effective income tax rate in 1998 benefited from the favorable adjustment relating to an agreement with the Internal Revenue Service regarding the treatment of research and experimentation costs for the years 1983 through 1995. Discontinued Operations and Extraordinary Item. On December 15, 1997, Hughes Avicom International, Inc. ("Hughes Avicom") was sold to Rockwell Collins, Inc., resulting in an after-tax gain of $62.8 million. Hughes recorded an extraordinary after-tax charge of $20.6 million in 1997 related to the refinancing of PanAmSat's debt (for additional information see Note 6 to the financial statements). IV-47 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued Accounting Changes. In 1998, Hughes adopted American Institute of Certified Public Accountants Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-Up Activities. SOP 98-5 requires that all start-up costs previously capitalized be written off and recognized as a cumulative effect of accounting change, net of taxes, as of the beginning of the year of adoption. On a prospective basis, these types of costs are required to be expensed as incurred. The unfavorable cumulative effect of this accounting change at January 1, 1998 was $9.2 million after-tax, or $0.02 per share of GM Class H common stock. Earnings. 1998 earnings were $271.7 million, or $0.68 per share of GM Class H common stock, compared with 1997 earnings of $470.7 million, $1.18 per share of GM Class H common stock on a pro forma basis. 1997 earnings per share are presented on a pro forma basis assuming the recapitalized GM Class H common stock was outstanding for all of 1997 (see further discussion in Note 13 to the financial statements). Backlog. The 1998 year-end backlog of $10,064.9 million decreased from the $10,337.6 million reported at the end of 1997, primarily due to a decrease in the Satellite Services segment. 1997 compared to 1996 Revenues. Hughes reported that 1997 revenues increased 27.9% to $5,128.3 million compared with $4,008.7 million in 1996. The increase reflects strong subscriber growth in the Direct-To-Home Broadcast segment, increased revenues in the Satellite Services segment resulting primarily from the PanAmSat merger and increased sales on commercial satellite programs in the Satellite Systems segment. Direct-To-Home Broadcast segment revenues more than doubled to $1,276.9 million from $621.0 million in 1996. This increase resulted from strong subscriber growth and continued low subscriber churn rates. Domestic DIRECTV fueled this growth with revenues of $1,103.3 million, a 78.5% increase over prior year's revenues of $618.2 million. GLA had revenues of $70.0 million compared with $2.7 million in 1996. Total DIRECTV subscribers as of December 31, 1997 were 3,301,000 in the United States and 300,000 in Latin America. DIRECTV Japan initiated its service in December 1997. Revenues for the Satellite Services segment in 1997 increased 30.5% to $629.9 million from $482.8 million in 1996. The increased revenues were due to the PanAmSat merger and increased operating lease revenues for both video distribution and business communications services. PanAmSat's services were expanded in 1997 with the successful launch of two dedicated direct-to-home ("DTH") satellites and a new cable TV distribution satellite in Latin America leading to an increase in total transmission capability since the May merger. Satellite Systems segment revenues increased 21.2% in 1997 to $2,491.9 million from $2,056.4 million in 1996 primarily due to higher commercial satellite sales within the High Powered product line of satellites and on the ICO Global Communications satellite contracts. Revenues in 1997 for the Network Systems segment were $1,011.3 million compared with $1,070.0 million in 1996. The decline was primarily due to lower domestic mobile cellular telephone equipment sales, which were partially offset by higher satellite-based mobile telephony equipment sales. Operating Profit. Operating profit for Hughes increased to $306.4 million in 1997 from $210.1 million in 1996. The 45.8% increase reflects reduced losses in the Direct-To-Home Broadcast segment, higher commercial satellite sales and the completion of the PanAmSat merger. The operating loss in the Direct-To-Home Broadcast segment in 1997 was $254.6 million compared with an operating loss of $319.8 million in 1996. The full-year 1997 operating loss for domestic DIRECTV was $137.0 million compared with $192.0 million in 1996. GLA's operating loss was $116.0 million in 1997 versus $131.0 million in 1996. The lower operating losses in 1997 were principally due to increased subscriber revenues which more than offset higher marketing and subscriber related expenditures. The Satellite Services segment operating profit was $296.2 million in 1997, an increase of 22.2% over the prior year's operating profit of $242.4 million. The increase resulted primarily from the PanAmSat merger and increased operating lease revenues for both video distribution and business communications services. Operating profit margin in 1997 declined to 47.0% from 50.2% in the prior year principally due to goodwill amortization associated with the PanAmSat merger. Operating profit for the Satellite Systems segment in 1997 was $226.3 million, an increase of 23.5% over $183.3 million in 1996. The increase was primarily due to the higher commercial program sales noted above. The operating profit margin for the year was 9.1% compared with 8.9% in the prior year. The Network Systems segment operating profit in 1997 was $74.1 million versus $107.7 million in 1996 and operating profit margin declined to 7.3% from 10.1% last year. These decreases were primarily the result of lower domestic mobile cellular telephone equipment sales, increased research and development expenditures and higher marketing expenditures associated with the launch of the DirecPC(R)/DirecDuo(TM) products. IV-48 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued Costs and Expenses. Selling, general and administrative expenses increased to $1,119.9 million in 1997 from $788.5 million in 1996. The increase resulted principally from the PanAmSat merger, increased programming and subscriber acquisition costs in the Direct-To-Home Broadcast segment and increased research and development and marketing expenditures in the Network Systems segment. The increase in depreciation and amortization expense to $296.4 million in 1997 from $194.6 million in 1996, resulted from increased goodwill amortization related to the PanAmSat merger and additional satellite depreciation in 1997. Interest Income and Expense. Interest income increased $26.3 million in 1997 compared to 1996 due primarily to higher cash balances resulting from the PanAmSat merger as well as increased cash resulting from the Hughes Transactions. Interest expense increased $48.1 million in 1997 versus 1996 due to the increased borrowings resulting from the PanAmSat merger. Other, net. The 1997 amount included a $489.7 million pre-tax gain related to the PanAmSat merger, partially offset by losses from unconsolidated subsidiaries of $72.2 million attributable principally to equity investments in American Mobile Satellite Corporation, DIRECTV Japan and SurFin Ltd. ("SurFin"). The 1996 amount included a $120.3 million pre-tax gain recognized from the sale of 2.5% of DIRECTV to AT&T, partially offset by losses from unconsolidated subsidiaries of $42.2 million, primarily related to American Mobile Satellite Corporation. Income Taxes. The effective income tax rate was 37.0% in 1997 and 43.1% in 1996. The decrease in the effective income tax rate in 1997 was due primarily to an increase in research and development credits and favorable resolution of certain tax contingencies in 1997. Discontinued Operations and Extraordinary Item. On December 15, 1997, Hughes Avicom was sold to Rockwell Collins, Inc., resulting in an after-tax gain of $62.8 million. Hughes recorded an extraordinary after-tax charge of $20.6 million in 1997 related to premiums paid for the refinancing of PanAmSat's debt (for additional information see Note 6 to the financial statements). Earnings. 1997 earnings were $470.7 million, or $1.18 per share of GM Class H common stock on a pro forma basis, compared with 1996 earnings of $183.5 million, $0.46 per share of GM Class H common stock on a pro forma basis. Earnings per share are presented on a pro forma basis assuming the recapitalized GM Class H common stock was outstanding during all periods presented (see further discussion in Note 13 to the financial statements). Backlog. The 1997 year-end backlog of $10,337.6 million increased from the $6,780.5 million reported at the end of 1996, primarily due to the PanAmSat merger. Liquidity and Capital Resources Cash and Cash Equivalents. Cash and cash equivalents were $1,342.1 million at December 31, 1998 compared to $2,783.8 million at December 31, 1997. The decrease in cash resulted primarily from the purchase of an additional 9.5% interest in PanAmSat, expenditures for PanAmSat and DIRECTV satellites, other equity investments and cash paid to General Motors for the Delco post-closing price adjustment, offset in part by proceeds from insurance claims related to the loss of the Galaxy IV and Galaxy X satellites. Cash provided by continuing operations was $875.2 million in 1998, compared to $10.5 million in 1997 and $367.4 million in 1996. The change in 1998 from 1997 resulted primarily from increased revenues and a decrease in working capital, while the change in 1997 from 1996 resulted primarily from an increase in working capital. Net cash used in investing activities was $2,253.3 million in 1998, $2,231.5 million in 1997 and $80.5 million in 1996. The increase in 1998 investing activities reflects the purchase of an additional 9.5% interest in PanAmSat, the early buy-out of satellite sale-leasebacks at PanAmSat and an increase in expenditures for satellites compared to 1997, offset in part by proceeds from insurance claims related to the loss of the Galaxy IV and Galaxy X satellites. The increase in 1997 investing activities reflects the repurchase of AT&T's 2.5% equity interest in DIRECTV, the PanAmSat merger, and an increase in satellites and equity investments compared to 1996, offset by proceeds received from the sale of Hughes Avicom and the sale of investments. Net cash used in financing activities was $63.6 million in 1998, compared with net cash provided by financing activities of $5,014.0 million in 1997 and net cash used in financing activities of $279.8 million in 1996. 1998 financing activities include the payment to General Motors for the Delco post-closing price adjustment stemming from the Hughes Transactions, offset in part by net long-term borrowings. 1997 financing activities reflect the impact of the PanAmSat merger, the Hughes Transactions and cash contributions from Parent Company, while the 1996 amount consisted of cash distributions to Parent Company. Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of current assets to current liabilities) at December 31, 1998 and 1997 was 1.91 and 3.29, respectively. Working capital decreased by $1,486.4 million to $1,836.9 million at December 31, 1998 from $3,323.3 million at December 31, 1997. The change in working capital resulted principally from the decrease in cash discussed above. IV-49 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued Property and Satellites. Property, net of accumulated depreciation, increased $169.5 million to $1,059.2 million in 1998 from the $889.7 million reported in 1997. Satellites, net of accumulated depreciation, increased $554.1 million to $3,197.5 million in 1998 from the $2,643.4 million reported in 1997. The increase in property and satellites resulted primarily from the construction of an additional broadcast center and increased capital expenditures for satellites. Capital expenditures, including expenditures related to satellites, increased to $1,428.5 million in 1998 from $826.6 million in 1997. The increase reflects additions to property and equipment to support revenue growth at various Hughes businesses, as well as additional satellites to support future operations, the replacement of certain satellites, including Galaxy X, and to provide spare satellites as part of Hughes' satellite sparing strategy. Dividend Policy and Use of Cash. As discussed in Note 13 to the financial statements, since the completion of the Hughes Transactions in late 1997, the GM Board has not paid, and does not currently intend to pay in the foreseeable future, cash dividends on GM Class H common stock. Future Hughes earnings, if any, are expected to be retained for the development of the businesses of Hughes. Expected cash requirements in 1999 relate to capital expenditures for property and equipment and expenditures for additional satellites of approximately $1.9 billion, the early buy-out of satellite sale-leasebacks, the funding of business acquisitions, including the acquisitions discussed below, and additional equity investments. These cash requirements are expected to be funded from a combination of existing cash balances, amounts available under existing credit facilities, additional borrowings and equity offerings, as needed. Also, although Hughes may be required to make a cash payment to or receive a cash payment from Raytheon, the amount of a cash payment to or from Raytheon, if any, is not determinable at this time. See further discussion in Note 18 to the financial statements. Debt and Credit Facilities. In January 1998, PanAmSat issued five, seven, ten and thirty-year notes totaling $750.0 million. The proceeds received were used by PanAmSat to repay the revolving credit facility of $500.0 million and bridge loan of $100.0 million outstanding at December 31, 1997. The outstanding principal balances and interest rates for the five, seven, ten and thirty-year notes as of December 31, 1998 were $200.0 million at 6.00%, $275.0 million at 6.13%, $150.0 million at 6.38% and $125.0 million at 6.88%, respectively. Principal on the notes is payable at maturity, while interest is payable semi-annually. At December 31, 1998, Hughes' 59.1% owned subsidiary, SurFin, had a total of $155.9 million outstanding under two separate $150.0 million unsecured revolving credit facilities. The first matures on April 30, 1999 and the second matures on July 31, 1999. Both credit facilities, which are expected to be renewed, are subject to a facility fee of 0.10% per annum. Borrowings under these credit facilities bear interest at the Eurodollar Rate plus 0.15%. At December 31, 1998, other long-term debt of $28.9 million, which consisted of notes bearing fixed rates of interest of 9.61% to 11.11%, was outstanding. Principal is payable at maturity in April 2007 while interest is payable semi-annually. Hughes has $1.0 billion of unused credit available under two unsecured revolving credit facilities, consisting of a $750.0 million multi-year facility and a $250.0 million 364-day facility. The multi-year credit facility provides for a commitment of $750.0 million through December 5, 2002, subject to a facility fee of 0.07% per annum. Borrowings bear interest at a rate which approximates the London Interbank Offered Rate ("LIBOR") plus 0.155%. The 364-day credit facility provides for a commitment of $250.0 million through December 1, 1999, subject to a facility fee of 0.05% per annum. Borrowings bear interest at a rate which approximates LIBOR plus 0.25%, with an additional 0.125% utilization fee when borrowings exceed 50% of the commitment. No amounts were outstanding under either facility at December 31, 1998. These facilities provide back-up capacity for Hughes' $1.0 billion commercial paper program. No amounts were outstanding under the commercial paper program at December 31, 1998. PanAmSat maintains a $500.0 million multi-year revolving credit facility that provides for short-term and long-term borrowings and a $500.0 million commercial paper program that provides for short-term borrowings. The multi-year revolving credit facility provides for a commitment through December 24, 2002, subject to a facility fee of 0.10% per annum. Borrowings bear interest at a rate which approximates LIBOR plus 0.30%. Borrowings under the credit facility and commercial paper program are limited to $500.0 million in the aggregate. No amounts were outstanding under either agreement at December 31, 1998. IV-50 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued Acquisitions and Divestitures. On January 22, 1999, Hughes agreed to acquire Primestar, Inc.'s ("Primestar") 2.3 million-subscriber medium-power DTH business. In a related transaction, Hughes also agreed to acquire the high-power satellite assets and direct broadcast satellite ("DBS") orbital frequencies of Tempo, a wholly-owned subsidiary of TCI Satellite Entertainment, Inc. The acquisitions will be accounted for using the purchase method of accounting. The purchase price for the DTH business will be comprised of $1.1 billion in cash and 4,871,448 shares of GM Class H common stock, for a total purchase price of $1,325.0 million. The DTH transaction, pending regulatory and Primestar lender approval, is expected to close in early to mid-1999. The purchase price for the Tempo assets consists of $500.0 million in cash, $150.0 million of which is expected to be paid in early to mid-1999, and $350.0 million which is payable upon Federal Communications Commission approval of the transfer of the DBS orbital frequencies, which is expected in mid to late-1999. In December 1998, Hughes agreed to acquire all of the outstanding capital stock of United States Satellite Broadcasting Company, Inc. ("USSB"). USSB provides DTH premium satellite programming in conjunction with DIRECTV's basic programming service. USSB launched its service in June 1994 and, as of December 31, 1998, had more than two million subscribers nationwide. The acquisition will be accounted for using the purchase method of accounting. The purchase price, consisting of cash and GM Class H common stock, will be determined at closing based upon an agreed-upon formula and will not exceed $1.6 billion in the aggregate. Subject to certain limitations in the merger agreement, USSB shareholders will be entitled to elect to receive cash or shares of GM Class H common stock. The amount of cash to be paid in the merger cannot be less than 30% or greater than 50% of the aggregate purchase price with the remaining consideration consisting of GM Class H common stock. The merger, which is subject to USSB shareholder approval and the receipt of appropriate regulatory approval, is expected to close in early to mid-1999. In October 1998, Hughes agreed to acquire, pending regulatory approval in Mexico, an additional ownership interest in Grupo Galaxy Mexicana, S.A. de C.V. ("GGM"), a GLA local operating company located in Mexico, from Grupo MVS, S.A. de C.V. ("MVS"). Hughes' equity ownership will represent 49.0% of the voting equity and all of the non-voting equity of GGM. The GGM transaction will be accounted for using the purchase method of accounting. As part of the GGM transaction, in October 1998 Hughes acquired from MVS an additional 10.0% interest in GLA, increasing its ownership interest to 70.0%, as well as an additional 19.8% interest in SurFin, a company providing financing of subscriber receiver equipment for certain local operating companies located in Latin America and Mexico, increasing its ownership percentage from 39.3% to 59.1%. The GLA and SurFin transactions were accounted for using the purchase method of accounting. The increased ownership in SurFin resulted in its consolidation since the date of acquisition. The aggregate purchase price for the transactions was $197.0 million in cash. The GGM transaction received regulatory approval and closed in February 1999. In May 1998, Hughes purchased an additional 9.5% interest in PanAmSat for $851.4 million in cash, increasing Hughes' ownership interest in PanAmSat from 71.5% to 81.0%. In May 1997, Hughes and PanAmSat completed the merger of their respective satellite service operations into a new publicly-held company, which retained the name PanAmSat Corporation. Hughes contributed its Galaxy(R) satellite services business in exchange for a 71.5% interest in the new company. Existing PanAmSat stockholders received a 28.5% interest in the new company and $1.5 billion in cash. Such cash consideration and other funds required to consummate the merger were funded by new debt financing totaling $1,725.0 million borrowed from GM, which was subsequently repaid in December 1997. On December 15, 1997, Hughes sold substantially all of the assets and liabilities of the Hughes Avicom business to Rockwell Collins, Inc. for cash, which resulted in an after-tax gain of $62.8 million. Hughes Avicom is treated as a discontinued operation for all periods presented. In March 1996, Hughes Electronics sold a 2.5% equity interest in DIRECTV to AT&T for $137.5 million, with options to increase their ownership interest under certain conditions. The sale resulted in a $120.3 million pre-tax gain, which was included in other income. In December 1997, Hughes repurchased from AT&T the 2.5% equity interest in DIRECTV for $161.8 million, ending AT&T's marketing agreement to distribute the DIRECTV(R) direct broadcast satellite television service and DIRECTV receiver equipment. IV-51 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued New Accounting Standards. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires all derivatives to be recorded as either assets or liabilities and the instruments to be measured at fair value. Gains or losses resulting from changes in the values of those derivatives are to be recognized immediately or deferred depending on the use of the derivative and whether or not it qualifies as a hedge. Hughes plans to adopt SFAS No. 133 by January 1, 2000, as required. Management is currently assessing the impact of this statement on Hughes' results of operations and financial position. 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' business operations 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, some of which are being conducted concurrently: (1)Awareness - establish project teams made up of project leaders from each Hughes operating company, assign responsibilities and establish awareness of 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 has been completed. 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 identified requiring remediation include satellite control and communication software, broadcast systems, systems utilized in customer service/billing, engineering and manufacturing operations. Hughes has also identified the need to upgrade network control software for customers who have maintenance agreements with Hughes. Hughes' in-orbit satellites do not have date dependent processing. (4)Remediation - modify, repair or replace categorized systems. Remediation has begun on many systems and is targeted for completion by the end of the second quarter of 1999, with the exception of satellite control software which is expected to be completed early in the fourth 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 remaining remediated systems will be put into operations during 1999. (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 by the end of 1999. However, Hughes is in the process of developing contingency plans to address the risk of any system not being Year 2000 compliant and expects to complete such plans in the third 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. The loss of real-time satellite control software functionality would be addressed through the use of back-dated processors or through manual procedures but could result in slightly higher operating costs until the Year 2000 problems are corrected. IV-52 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued 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 on schedule. Hughes has incurred and expensed approximately $2.0 million through 1997 and approximately $7.0 million during 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 $15 million to $19 million, with the majority of the expense expected to be incurred during the first half of 1999. Each Hughes operating company is funding its respective Year 2000 efforts with current and future operating cash flows. Hughes has mailed Year 2000 verification request letters to its suppliers and other third parties and is coordinating efforts 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 high percentage of the third parties have replied and a large number of Hughes' third parties' systems are Year 2000 compliant or are expected to be Year 2000 compliant in a timely manner. For those third party systems that 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. Security Ratings In March 1999, Standard and Poor's Rating Services ("S&P") lowered the long-term debt rating of Hughes from A- to BBB. The S&P BBB credit rating indicates the issuer has adequate capacity to pay interest and repay principal. Additionally, S&P affirmed its A-2 rating on Hughes' commercial paper. The A-2 commercial paper rating is the third highest category available and indicates a strong degree of safety regarding timely payment. S&P's ratings outlook for Hughes remains developing. In January 1999, Moody's Investors Service ("Moody's") lowered the long-term credit rating of Hughes from A-3 to Baa1. The Baa1 rating for senior debt is sixth highest within the 10 investment grade ratings available from Moody's for long-term debt. Moody's ratings for Hughes' commercial paper remained unchanged at P-2. The rating is the second highest rating available and indicates that the issuer has a strong ability for repayment relative to other issuers. Currently, the Moody's ratings are under review. Debt ratings by the various rating agencies reflect each agency's opinion of the ability of issuers to repay debt obligations punctually. The lowered ratings reflect increased financial leverage at Hughes resulting from a significant acceleration of its growth initiatives, including the recently announced USSB, Primestar and Tempo transactions. Lower ratings generally result in higher borrowing costs. A security rating is not a recommendation to buy, sell, or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization. Each rating should be evaluated independently of any other rating. Market Risk Disclosure The following discussion and the estimated amounts generated from the sensitivity analyses referred to below include forward-looking statements of market risk which assume for analytical purposes that certain adverse market conditions may occur. Actual future market conditions may differ materially from such assumptions because the amounts noted below are the result of analyses used for the purpose of assessing possible risks and the mitigation thereof. Accordingly, the forward-looking statements should not be considered projections by Hughes of future events or losses. General Hughes' cash flows and earnings are subject to fluctuations resulting from changes in foreign currency exchange rates, interest rates and changes in the market value of its equity investments. Hughes manages its exposure to these market risks through internally established policies and procedures and, when deemed appropriate, through the use of derivative financial instruments. Hughes' policy does not allow speculation in derivative instruments for profit or execution of derivative instrument contracts for which there are no underlying exposures. Hughes does not use financial instruments for trading purposes and is not a party to any leveraged derivatives. IV-53 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued Foreign Currency Risk Hughes generally conducts its business in U.S. dollars with a small amount of business conducted in a variety of foreign currencies and therefore is exposed to fluctuations in foreign currency exchange rates. Hughes' objective in managing the exposure to foreign currency changes is to reduce earnings and cash flow volatility associated with foreign exchange rate fluctuations to allow management to focus its attention on its core business issues and challenges. Accordingly, Hughes primarily enters into foreign exchange-forward contracts to protect the value of its existing assets, liabilities and firm commitments. Foreign exchange-forward contracts are legal agreements between two parties to purchase and sell a foreign currency, for a price specified at the contract date, with delivery and settlement in the future. At December 31, 1998, the impact of a hypothetical 10% adverse change in exchange rates on the fair values of foreign exchange-forward contracts and foreign currency denominated assets and liabilities would not be significant. Investments Hughes maintains investments in publicly-traded common stock of unaffiliated companies and is therefore subject to equity price risk. These investments are classified as available-for-sale and, consequently, are reflected in the balance sheet at fair value with unrealized gains or losses, net of tax, recorded as part of accumulated other comprehensive income (loss), a separate component of owner's equity. At December 31, 1998, the fair value of the investments in such common stock was $8.0 million. The investments were valued at the market closing price at December 31, 1998. No actions have been taken by Hughes to hedge this market risk exposure. A 20% decline in the market price of both investments would cause the fair value of the investments in common stock to decrease by $1.6 million. In December 1998, Hughes agreed to acquire all of the outstanding capital stock of USSB. The purchase price, consisting of cash and GM Class H common stock, will be determined at closing based upon an agreed-upon formula and will not exceed $1.6 billion in the aggregate. Subject to certain limitations in the merger agreement, USSB shareholders will be entitled to elect to receive cash or shares of GM Class H common stock. The amount of cash to be paid in the merger cannot be less than 30% or greater than 50% of the aggregate purchase price with the remaining consideration consisting of GM Class H common stock. The merger, which is subject to USSB shareholder approval and the receipt of appropriate regulatory approval, is expected to close in early to mid-1999. See further discussion in Note 14 to the financial statements. Interest Rate Risk Hughes is subject to interest rate risk related to its $934.8 million of debt outstanding at December 31, 1998. Debt, which is classified as held-to-maturity, consisted of PanAmSat's fixed-rate borrowings of $750.0 million, SurFin's variable rate borrowings of $155.9 million and Hughes' fixed-rate borrowings of $28.9 million. Hughes is subject to fluctuating interest rates which may adversely impact its results of operations and cash flows for its variable rate bank borrowings. Fluctuations in interest rates may also adversely effect the market value of Hughes' fixed-rate borrowings. At December 31, 1998, outstanding borrowings bore interest at rates ranging from 5.55% to 11.11%. The potential fair value loss resulting from a hypothetical 10% decrease in interest rates related to Hughes' outstanding debt would be approximately $32.5 million. In connection with debt refinancing activities by PanAmSat in 1997, PanAmSat entered into certain U.S. Treasury rate lock contracts to reduce its exposure to fluctuations in interest rates. The aggregate notional value of these contracts was $375.0 million and these contracts were accounted for as hedges. The cost to settle these instruments in 1998 was $9.1 million and is being amortized to interest expense over the term of the related debt securities. Credit Risk Hughes is exposed to credit risk in the event of non-performance by the counterparties to its foreign exchange-forward contracts. While Hughes believes this risk is remote, credit risk is managed through the periodic monitoring and approval of financially sound counterparties. IV-54 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued Supplemental Data The financial statements reflect the application of purchase accounting adjustments as described in Note 1 to the financial statements. 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 $21.0 million in 1998, 1997 and 1996. 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 common stock. Unamortized purchase accounting adjustments associated with GM's purchase of Hughes were $426.6 million, $447.6 million and $468.6 million at December 31, 1998, 1997 and 1996, respectively. 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 General Motors' 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. IV-55 HUGHES ELECTRONICS CORPORATION UNAUDITED SUMMARY PRO FORMA FINANCIAL DATA* PRO FORMA CONDENSED STATEMENT OF INCOME Years Ended December 31, ------------------------ 1998 1997 1996 --------- --------- -------- (Dollars in Millions Except Per Share Amounts) Total revenues $5,963.9 $5,128.3 $4,008.7 Total costs and expenses 5,693.8 4,821.9 3,798.6 ------- ------- ------- Operating profit 270.1 306.4 210.1 Non-operating (expense) income (58.3) 332.8 33.0 Income taxes (44.7) 236.7 104.8 Minority interests in net losses of subsidiaries 24.4 24.8 52.6 Income (loss) from discontinued operations - 64.0 (7.4) Extraordinary item - (20.6) - Cumulative effect of account change (9.2) - - --- ----- ----- Earnings Used for Computation of Available Separate Consolidated Net Income $271.7 $470.7 $183.5 ===== ===== ===== Earnings Attributable to General Motors Class H Common Stock on a Per Share Basis: Income from continuing operations before extraordinary item and cumulative effect of accounting change $0.70 $1.07 $0.48 Discontinued operations - 0.16 (0.02) Extraordinary item - (0.05) - Cumulative effect of accounting change (0.02) - - ---- ---- ---- Earnings Attributable to General Motors Class H Common Stock $0.68 $1.18 $0.46 ==== ==== ==== PRO FORMA CONDENSED BALANCE SHEET December 31, ------------ ASSETS 1998 1997 -------- -------- (Dollars in Millions) Total Current Assets $3,846.4 $4,773.1 Satellites, net 3,197.5 2,643.4 Property, net 1,059.2 889.7 Net Investment in Sales-type Leases 173.4 337.6 Intangible Assets, Investments and Other Assets, net 4,731.9 3,639.6 ------- ------- Total Assets $13,008.4 $12,283.4 ======== ======== LIABILITIES AND OWNER'S EQUITY Total Current Liabilities $2,009.5 $1,449.8 Long-Term Debt 778.7 637.6 Postretirement Benefits Other Than Pensions, Other Liabilities and Deferred Credits 1,783.2 1,724.1 Minority Interests 481.7 607.8 Total Owner's Equity (1) 7,955.3 7,864.1 ------- ------- Total Liabilities and Owner's Equity (1) $13,008.4 $12,283.4 ======== ======== - ------------------- Certain 1997 amounts have been reclassified to conform with the 1998 presentation. * The summary excludes purchase accounting adjustments related to GM's acquisition of Hughes. (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). IV-56 HUGHES ELECTRONICS CORPORATION UNAUDITED SUMMARY PRO FORMA FINANCIAL DATA* - Continued PRO FORMA SELECTED SEGMENT DATA Years Ended December 31, 1998 1997 1996 ---- ---- ---- (Dollars in Millions) Direct-To-Home Broadcast Total Revenues $1,816.1 $1,276.9 $621.0 Operating Loss (228.1) (254.6) (319.8) Depreciation and Amortization 102.3 86.1 67.3 Segment Assets 2,190.4 1,408.7 1,023.4 Capital Expenditures (1) 230.8 105.6 63.5 Satellite Services Total Revenues $767.3 $629.9 $482.8 Operating Profit 321.6 296.2 242.4 Operating Profit Margin 41.9% 47.0% 50.2% Depreciation and Amortization $231.7 $141.9 $55.2 Segment Assets 5,824.2 5,612.8 1,202.6 Capital Expenditures (2) 921.7 625.7 308.7 Satellite Systems Total Revenues $2,831.1 $2,491.9 $2,056.4 Operating Profit 246.3 226.3 183.3 Operating Profit Margin 8.7% 9.1% 8.9% Depreciation and Amortization $49.2 $39.4 $34.4 Segment Assets 1,491.2 1,312.6 757.8 Capital Expenditures 99.7 113.9 87.8 Network Systems Total Revenues $1,076.7 $1,011.3 $1,070.0 Operating Profit 10.9 74.1 107.7 Operating Profit Margin 1.0% 7.3% 10.1% Depreciation and Amortization $41.7 $32.0 $28.3 Segment Assets 1,299.0 1,215.6 964.0 Capital Expenditures 40.0 43.1 45.3 Eliminations and Other Total Revenues $(527.3) $(281.7) $(221.5) Operating (Loss) (80.6) (35.6) (3.5) Depreciation and Amortization 8.9 (3.0) 9.4 Segment Assets 2,203.6 2,733.7 (43.8) Capital Expenditures 136.3 (61.7) (55.9) Consolidated Total Total Revenues $5,963.9 $5,128.3 $4,008.7 Operating Profit 270.1 306.4 210.1 Operating Profit Margin 4.5% 6.0% 5.2% Depreciation and Amortization $433.8 $296.4 $194.6 Segment Assets 13,008.4 12,283.4 3,904.0 Capital Expenditures 1,428.5 826.6 449.4 Certain 1997 and 1996 amounts have been reclassified to conform with 1998 classifications. * The summary excludes purchase accounting adjustments related to GM's acquisition of Hughes. (1)Includes expenditures related to satellites amounting to $70.2 million in 1998. (2)Includes expenditures related to satellites amounting to $726.3 million, $606.1 million and $259.2 million, respectively. Also included in the 1998 amount is $155.5 million related to the early buy-out of satellite sale-leasebacks. IV-57 HUGHES ELECTRONICS CORPORATION UNAUDITED SUMMARY PRO FORMA FINANCIAL DATA* - Concluded PRO FORMA SELECTED FINANCIAL DATA Years Ended December 31, ------------------------ 1998 1997 1996 1995 1994 -------------------------------------- (Dollars in Millions) Operating profit $270 $306 $210 $172 $235 Income from continuing operations before income taxes, minority interests, extraordinary item and cumulative effect of accounting change $212 $639 $243 $119 $174 Earnings used for computation of available separate consolidated net income $272 $471 $184 $27 $62 Average number of GM Class H dividend base shares (in millions) (1) 399.9 399.9 399.9 399.9 399.9 Owner's equity $7,955 $7,864 $2,023 $2,119 $1,790 Working capital $1,837 $3,323 $278 $312 $274 Operating profit as a percen of revenues 4.5% 6.0% 5.2% 5.4% 8.7% Income from continuing operations before income taxes, minority interests, extraordinary item and cumulative effect of accounting change as a percent of revenues 3.6% 12.5% 6.1% 3.8% 6.5% Net income as a percent of revenues 4.6% 9.2% 4.6% 0.9% 2.3% Return on equity (2) 3.4% 9.5% 8.9% 1.4% 3.8% Income before interest expense and income taxes as a percent of capitalization (3) 3.2% 14.3% 16.3% 9.4% 14.0% Pre-tax return on total assets (4) 1.9% 8.2% 8.0% 3.8% 6.0% * The summary excludes purchase accounting adjustments related to GM's acquisition of Hughes. (1)Class H dividend base shares is used in calculating earnings attributable to GM Class H common stock on a per share basis. This is not the same as the average number of GM Class H shares outstanding, which was 105.3 million in 1998. (2)Earnings used for computation of available separate consolidated net income divided by average owner's equity (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). (3)Income from continuing operations before interest expense, income taxes, extraordinary item and cumulative effect of accounting change divided by average owner's equity plus average total debt. (4)Income from continuing operations before income taxes, extraordinary item and cumulative effect of accounting change divided by average total assets. * * * * * * * IV-58 EX-27 6 FINANCIAL DATA SCHEDULE FOR 1998
5 This schedule contains summary financial information extracted from General Motors Corporation December 31, 1998 Consolidated Financial Statements and is qualified in its entirety by reference to 1998 Form 10-K. 0000040730 General Motors Corporation 1,000,000 U.S. Dollars 12-MOS Dec-31-1998 Jan-01-1998 Dec-31-1998 1 10,869 9,155 79,846 0 12,207 44,363 80,589 43,016 257,389 47,806 114,152 220 1 1,103 13,880 257,389 140,433 161,315 117,973 130,055 119 463 6,893 4,612 1,463 2,956 0 0 0 2,956 4.26 4.18
EX-27.1 7 AMENDED FINANACIAL DATA FOR 1997
5 This schedule contains summary financial information extracted from General Motors Corporation December 31, 1997 Consolidated Financial Statements and is qualified in its entirety by reference to 1998 Form 10-K. 0000040730 General Motors Corporation 1,000,000 U.S. Dollars 12-MOS Dec-31-1997 Jan-01-1997 Dec-31-1997 1 11,262 11,722 65,882 0 12,102 43,327 76,033 41,854 231,752 46,371 93,027 222 1 1,166 16,339 231,752 153,683 178,252 130,028 146,416 228 523 6,113 7,792 1,069 6,698 0 0 0 6,698 8.70 8.62
EX-27.2 8 AMENDED FINANCIAL DATA FOR 1996
5 This schedule contains summary financial information extracted from General Motors Corporation December 31, 1996 Consolidated Financial Statements and is qualified in its entirety by reference to 1998 Form 10-K. 0000040730 General Motors Corporation 1,000,000 U.S. Dollars 12-MOS Dec-31-1996 Jan-01-1996 Dec-31-1996 1 14,063 8,199 63,912 0 11,895 43,939 78,590 41,289 224,866 42,561 85,300 0 1 1,271 22,147 224,866 145,341 163,885 123,195 134,885 150 669 5,695 6,492 1,723 4,953 10 0 0 4,963 6.06 6.02
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