-----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, O0yrvCthF4h15mPkqNhBKphUXia0pavmUzOFNSBrLScIolHq0LyNgefIA5b5Tt9F xTh7dR9oD75EPfUW9MIavw== 0000040730-99-000074.txt : 19990817 0000040730-99-000074.hdr.sgml : 19990817 ACCESSION NUMBER: 0000040730-99-000074 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENERAL MOTORS CORP CENTRAL INDEX KEY: 0000040730 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLES & PASSENGER CAR BODIES [3711] IRS NUMBER: 380572515 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-00143 FILM NUMBER: 99692887 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-Q 1 GENERAL MOTORS SECOND QUARTER 10-Q FOR 6-30-1999 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549-1004 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-143 GENERAL MOTORS CORPORATION (Exact name of registrant as specified in its charter) STATE OF DELAWARE 38-0572515 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 Renaissance Center, Detroit, Michigan 48243-7301 3044 West Grand Boulevard, Detroit, Michigan 48202-3091 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (313) 556-5000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . As of June 30, 1999, there were outstanding 644,175,179 shares of the issuer's $1-2/3 par value common stock and 112,363,444 shares of GM Class H $0.10 par value common stock. - 1 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES INDEX Page No. Part I - Financial Information (Unaudited) Item 1. Financial Statements Consolidated Statements of Income for the Three and Six Months Ended June 30, 1999 and 1998 3 Consolidated Balance Sheets as of June 30, 1999, December 31, 1998 and June 30, 1998 5 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999 and 1998 7 Notes to Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 22 Part II - Other Information (Unaudited) Item 1. Legal Proceedings 38 Item 4. Submission of Matters to a Vote of Security Holders 40 Item 6. Exhibits and Reports on Form 8-K 42 Signature 42 Exhibit 99 Hughes Electronics Corporation Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited) 43 Exhibit 27 Financial Data Schedule (for Securities and Exchange Commission information only) - 2 - PART I GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ---- ---- ---- ---- (Dollars in Millions Except Per Share Amounts) GENERAL MOTORS CORPORATION AND SUBSIDIARIES Manufactured products sales and revenues $39,261 $31,845 $75,881 $66,738 Financing revenues 3,571 3,420 7,080 6,730 Other income (Note 12) 2,235 2,007 4,541 3,828 ------- ------- ------- ------- Total net sales and revenues 45,067 37,272 87,502 77,296 ------ ------ ------ ------ Cost of sales and other operating expenses, exclusive of items listed below 32,284 27,724 62,950 57,329 Selling, general and administrative expenses 4,502 4,102 8,324 7,612 Depreciation and amortization expense 3,227 2,648 5,951 5,355 Interest expense 1,794 1,691 3,639 3,261 Other expenses (Note 12) 476 596 914 1,145 ------- ------- ------- ------- Total costs and expenses 42,283 36,761 81,778 74,702 Income from continuing operations before income taxes and minority interests 2,784 511 5,724 2,594 Income tax expense 956 159 1,985 854 Minority interests (7) - (21) (10) Losses of nonconsolidated associates (87) (46) (164) (56) ----- ---- ------ ------- Income from continuing operations 1,734 306 3,554 1,674 Income from discontinued operations (Note 2) 184 83 426 319 ----- ---- ------ ------- Net income 1,918 389 3,980 1,993 Dividends on preference stocks (7) (16) (23) (32) ----- ---- ------ ------ Earnings on common stocks $1,911 $373 $3,957 $1,961 ===== === ===== ===== Basic earnings (losses) per share attributable to common stocks (Note 11) $1-2/3 par value common stock Continuing operations $2.71 $0.41 $5.44 $2.40 Discontinued operations 0.28 0.13 0.65 0.48 ---- ---- ---- ---- Earnings per share attributable to $1-2/3 par value $2.99 $0.54 $6.09 $2.88 ===== ===== ===== ===== Earnings per share attributabl to Class H $(0.23) $0.14 $(0.04) $0.27 ===== ===== ===== ===== Diluted earnings (losses) per share attributable to common stocks (Note 11) $1-2/3 par value common stock Continuing operations $2.66 $0.40 $5.33 $2.35 Discontinued operations 0.28 0.12 0.64 0.47 ---- ---- ---- ---- Earnings per share attributable to $1-2/3 par value $2.94 $0.52 $5.97 $2.82 == = = ===== ===== ===== ===== Earnings per share attributable to Class H $(0.23) $0.14 $(0.04) $0.27 ===== ===== ===== ===== Reference should be made to the notes to consolidated financial statements. - 3 - CONSOLIDATED STATEMENTS OF INCOME - Concluded (Unaudited) Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ---- ---- ---- ---- (Dollars in Millions) AUTOMOTIVE, ELECTRONICS AND OTHER OPERATIONS Manufactured products sales and revenues $39,261 $31,845 $75,881 $66,738 Other income 856 826 1,759 1,503 Total net sales and revenues 40,117 32,671 77,640 68,241 ------ ------ ------ ------ Cost of sales and other operating expenses, exclusive of items listed below 32,284 27,724 62,950 57,329 Selling, general and administrative expenses 3,370 3,086 6,111 5,655 Depreciation and amortization expense 1,952 1,444 3,404 2,927 ----- ----- ----- ----- Total operating costs and expenses 37,606 32,254 72,465 65,911 ------ ------ ------ ------ Interest expense 180 277 374 472 Other expenses 149 186 207 376 Net expense (income) from transactions with Financing and Insurance Operations 66 6 160 (12) Income (loss) from continuing operations before income taxes and minority interests 2,116 (52) 4,434 1,494 Income tax expense (benefit) 720 (6) 1,508 522 Minority interests - 4 (6) - Losses of nonconsolidated associates (87) (46) (164) (56) --- -- ----- ---- Income (loss) from continuing operations 1,309 (88) 2,756 916 Income from discontinued operations (Note 2) 184 83 426 319 - --- -- --- --- Net income (loss) - Automotive, Electronics and Other Operations $1,493 $(5) $3,182 $1,235 ===== = ===== ===== Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ---- ---- ---- ---- (Dollars in Millions) FINANCING AND INSURANCE OPERATIONS Financing revenues $3,571 $3,420 $7,080 $6,730 Insurance, mortgage and other income 1,379 1,181 2,782 2,325 ----- ----- ----- ----- Total revenues and other income 4,950 4,601 9,862 9,055 ----- ----- ----- ----- Interest expense 1,614 1,414 3,265 2,789 Depreciation and amortization expense 1,275 1,204 2,547 2,428 Operating and other expenses 1,132 1,016 2,213 1,957 Provisions for financing losses 111 128 230 229 Insurance losses and loss adjustment expenses 216 282 477 540 --- --- --- --- Total costs and expenses 4,348 4,044 8,732 7,943 Net (income) expense from transactions with Automotive, Electronics and Other Operations (66) (6) (160) 12 ---- ----- ------ ------ Income before income taxes 668 563 1,290 1,100 Income tax expense 236 165 477 332 Minority interests (7) (4) (15) (10) ----- ----- ---- ---- Net income - Financing and Insurance Operations $425 $394 $798 $758 ==== ==== ==== ==== The above supplemental consolidating information is explained in Note 1. Reference should be made to the notes to consolidated financial statements. - 4 - CONSOLIDATED BALANCE SHEETS June 30, June 30, 1999 Dec. 31, 1998 GENERAL MOTORS CORPORATION AND SUBSIDIARIES (Unaudited) 1998 (Unaudited) --------- -------- --------- ASSETS (Dollars in Millions) Automotive, Electronics and Other Operations Cash and cash equivalents $11,997 $9,728 $7,569 Marketable securities 1,666 402 463 ------- -------- ------ Total cash and marketable securities 13,663 10,130 8,032 Accounts and notes receivable (less allowances) 6,349 4,750 3,845 Inventories (less allowances) (Note 3) 10,766 10,437 11,317 Net assets of discontinued operations (Note 2) - 77 359 Equipment on operating leases (less accumulated depreciation) 6,394 4,954 4,754 Deferred income taxes and other current assets 6,232 10,051 5,841 ------ ------ ------- Total current assets 43,404 40,399 34,148 Equity in net assets of nonconsolidated associates 1,691 950 1,098 Property - net (Note 4) 31,509 32,222 30,451 Intangible assets - net 11,934 9,994 11,330 Deferred income taxes 18,297 14,967 17,883 Other assets 14,016 16,062 15,085 ------ ------ ------ Total Automotive, Electronics and Other Operations assets 120,851 114,594 109,995 Financing and Insurance Operations Cash and cash equivalents 2,694 146 164 Investments in securities 8,499 8,748 7,932 Finance receivables - net 74,305 70,436 59,875 Investment in leases and other receivables 33,451 32,798 32,130 Other assets 16,660 18,807 12,688 Net receivable from Automotive, Electronics and Other Operations 478 816 1,154 --- --- ----- Total Financing and Insurance Operations assets 136,087 131,751 113,943 ------- ------- ------- Total assets $256,938 $246,345 $223,938 LIABILITIES AND STOCKHOLDERS' EQUITY Automotive, Electronics and Other Operations Accounts payable (principally trade) $15,814 $13,542 $10,311 Loans payable 854 1,204 1,907 Accrued expenses 34,530 30,548 29,239 Net payable to Financing and Insurance Operations 478 816 1,154 ------ ------ ------- Total current liabilities 51,676 46,110 42,611 Long-term debt 7,408 7,118 6,935 Postretirement benefits other than pensions (Note 5) 34,317 33,503 32,925 Pensions (Note 6) 3,149 4,410 2,925 Other liabilities and deferred income taxes 17,928 17,807 17,794 ------ ------ ------ Total Automotive, Electronics and Other Operations liabilities 114,478 108,948 103,190 Financing and Insurance Operations Accounts payable 4,786 4,148 3,982 Debt 110,135 107,753 91,081 Deferred income taxes and other liabilities 10,517 9,661 9,174 ------ ----- ----- Total Financing and Insurance Operations liabilities 125,438 121,562 104,237 Minority interests 591 563 510 General Motors - obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures of General Motors (Note 7) Series D 79 79 79 Series G 141 141 143 Stockholders' equity Preference stocks (Note 8) - 1 1 $1-2/3 par value common stock (issued, 645,004,212, 655,008,344 and 655,007,825 shares) (Note 9) 1,075 1,092 1,092 Class H common stock (issued, 112,425,599, 106,159,776 and 105,731,028 shares) 11 11 11 Capital surplus (principally additional paid-in capital) (Note 13) 15,533 12,661 12,773 Retained earnings 5,045 6,984 6,706 ------- ------- ------- Subtotal 21,664 20,749 20,583 Accumulated foreign currency translation adjustments (1,987) (1,089) (1,249) Net unrealized gains on securities 561 481 507 Minimum pension liability adjustment (Note 6) (4,027) (5,089) (4,062) Accumulated other comprehensive loss (5,453) (5,697) (4,804) ----- ----- ----- Total stockholders' equity 16,211 15,052 15,779 -------- -------- -------- Total liabilities and stockholders' equity $256,938 $246,345 $223,938 ======= ======= ======== Reference should be made to the notes to consolidated financial statements. - 5 - CONSOLIDATED BALANCE SHEETS - Concluded June 30, June 30, 1999 Dec. 31, 1998 AUTOMOTIVE, ELECTRONICS AND OTHER OPERATIONS (Unaudited) 1998 (Unaudited) --------- -------- --------- (Dollars in Millions) ASSETS Cash and cash equivalents $11,997 $9,728 $7,569 Marketable securities 1,666 402 463 ------- -------- ------ Total cash and marketable securities 13,663 10,130 8,032 Accounts and notes receivable (less allowances) 6,349 4,750 3,845 Inventories (less allowances) (Note 3) 10,766 10,437 11,317 Net assets of discontinued operations (Note 2) - 77 359 Equipment on operating leases (less accumulated depreciation) 6,394 4,954 4,754 Deferred income taxes and other current assets 6,232 10,051 5,841 ------ ------ ------- Total current assets 43,404 40,399 34,148 Equity in net assets of nonconsolidated associates 1,691 950 1,098 Property - net (Note 4) 31,509 32,222 30,451 Intangible assets - net 11,934 9,994 11,330 Deferred income taxes 18,297 14,967 17,883 Other assets 14,016 16,062 15,085 ------ ------ ------ Total Automotive, Electronics and Other Operations assets $120,851 $114,594 $109,995 ======== ======== ======== LIABILITIES AND GM INVESTMENT Accounts payable (principally trade) $15,814 $13,542 $10,311 Loans payable 854 1,204 1,907 Accrued expenses 34,530 30,548 29,239 Net payable to Financing and Insurance Operations 478 816 1,154 ------ ------ ------ Total current liabilities 51,676 46,110 42,611 Long-term debt 7,408 7,118 6,935 Postretirement benefits other than pensions (Note 5) 34,317 33,503 32,925 Pensions (Note 6) 3,149 4,410 2,925 Other liabilities and deferred income taxes 17,928 17,807 17,794 ------ ------ ------ Total Automotive, Electronics and Other Operations liabilities 114,478 108,948 103,190 Minority interests 524 511 467 GM investment in Automotive, Electronics and Other Operations 5,849 5,135 6,338 ----- ----- ----- Total Automotive, Electronics and Other Operations liabilities and GM investment $120,851 $114,594 $109,995 ======== ======== ======== June 30, June 30, 1999 Dec. 31, 1998 FINANCING AND INSURANCE OPERATIONS (Unaudited) 1998 (Unaudited) --------- -------- --------- (Dollars in Millions) ASSETS Cash and cash equivalents $2,694 $146 $164 Investments in securities 8,499 8,748 7,932 Finance receivables - net 74,305 70,436 59,875 Investment in leases and other receivables 33,451 32,798 32,130 Other assets 16,660 18,807 12,688 Net receivable from Automotive, Electronics and Other Operations 478 816 1,154 ------ ------ ------ Total Financing and Insurance Operations assets $136,087 $131,751 $113,943 ======== ======== ======== LIABILITIES AND GM INVESTMENT Accounts payable $4,786 $4,148 $3,982 Debt 110,135 107,753 91,081 Deferred income taxes and other liabilities 10,517 9,661 9,174 ------- ------- ------ Total Financing and Insurance Operations liabilities 125,438 121,562 104,237 Minority interests 67 52 43 GM investment in Financing and Insurance Operations 10,582 10,137 9,663 ------ ------ ----- Total Financing and Insurance Operations liabilities and GM investment $136,087 $131,751 $113,943 ======== ======== ======== The above supplemental consolidating information is explained in Note 1. Reference should be made to the notes to consolidated financial statements. - 6 - CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, 1999 1998 ------ ------ (Dollars in Millions) GENERAL MOTORS CORPORATION AND SUBSIDIARIES Net cash provided by operating activities $21,342 $4,405 Cash flows from investing activities Expenditures for property (3,125) (3,827) Investments in marketable securities - acquisitions (13,739) (12,969) Investments in marketable securities - liquidations 12,168 16,766 Mortgage servicing rights - acquisitions (662) (742) Mortgage servicing rights - liquidations 4 7 Finance receivables - acquisitions (90,613) (78,491) Finance receivables - liquidations 67,691 58,991 Proceeds from sales of finance receivables 18,683 17,356 Operating leases - acquisitions (12,814) (12,379) Operating leases - liquidations 6,896 7,556 Investments in companies, net of cash acquired (Note 13) (2,684) (424) Other 121 (185) --- ---- Net cash used in investing activities (18,074) (8,341) ------- ----- Cash flows from financing activities Net (decrease) increase in loans payable (6,035) 2,464 Increase in long-term debt 17,681 11,019 Decrease in long-term debt (9,360) (7,591) Repurchases of common and preference stocks (1,868) (3,071) Proceeds from issuing common and preference stocks 1,799 343 Cash dividends paid to stockholders (673) (702) ------ ------ Net cash provided by financing activities 1,544 2,462 ----- ----- Effect of exchange rate changes on cash and cash equivalents (123) (67) Net cash provided by (used in) continuing operations 4,689 (1,541) Net cash provided by (used in) discontinued operations 128 (999) ------ ------ Net increase (decrease) in cash and cash equivalents 4,817 (2,540) Cash and cash equivalents at beginning of the period 9,874 10,273 ------ ------ Cash and cash equivalents at end of the period $14,691 $7,733 ======= ====== Reference should be made to the notes to consolidated financial statements. - 7 - CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - Concluded (Unaudited)
Six Months Ended June 30, ------------------------- 1999 1998 ------------------------------------------------ Automotive, Financing Automotive, Financing Elecronics and Electronics and and Other Insurance and Other Insurance --------- --------- --------- --------- (Dollars in Millions) Net cash provided by operating activities $12,803 $8,539 $368 $4,037 Cash flows from investing activities Expenditures for property (3,019) (106) (3,753) (74) Investments in marketable securities - acquisitions (3,119) (10,620) (4,466) (8,503) Investments in marketable securities - liquidations 1,855 10,313 7,815 8,951 Mortgage servicing rights - acquisitions - (662) - (742) Mortgage servicing rights - liquidations - 4 - 7 Finance receivables - acquisitions - (90,613) - (78,491) Finance receivables - liquidations - 67,691 - 58,991 Proceeds from sales of finance receivables - 18,683 - 17,356 Operating leases - acquisitions (4,613) (8,201) (3,042) (9,337) Operating leases - liquidations 2,889 4,007 2,815 4,741 Investments in companies, net of cash acquired (Note 13) (2,558) (126) (409) (15) Net investing activity with Financing and Insurance Operations 75 - 150 - Other (876) 997 (1,049) 864 ---- --- ------ --- Net cash used in investing activities (9,366) (8,633) (1,939) (6,252) ----- ----- ----- ----- Cash flows from financing activities Net (decrease) increase in loans payable (393) (5,642) 898 1,566 Increase in long-term debt 2,433 15,248 2,648 8,371 Decrease in long-term debt (2,130) (7,230) (1,079) (6,512) Net financing activity with Automotive, Electronics and Other Operations - (75) - (150) Repurchases of common and preference stocks (1,868) - (3,071) - Proceeds from issuing common and preference stocks 1,799 - 343 - Cash dividends paid to stockholders (673) - (702) - --- ----- --- ----- Net cash (used in) provided by financing activities (832) 2,301 (963) 3,275 --- ----- --- ----- Effect of exchange rate changes on cash and cash equivalents (126) 3 (67) - Net transactions with Automotive/ Financing Operations (338) 338 1,473 (1,473) ---- --- ----- ------ Net cash provided by (used in) continuing operations 2,141 2,548 (1,128) (413) Net cash provided by (used in) discontinued operations 128 - (999) - ----- ----- ----- --- Net increase (decrease) in cash and cash equivalents 2,269 2,548 (2,127) (413) Cash and cash equivalents at beginning of the period 9,728 146 9,696 577 ----- --- ----- --- Cash and cash equivalents at end of the period $11,997 $2,694 $7,569 $164 ======= ====== ====== ====
The above supplemental consolidating information is explained in Note 1. Reference should be made to the notes to consolidated financial statements. - 8 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Financial Statement Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. The consolidated financial statements include the accounts of General Motors Corporation (hereinafter referred to as the "Corporation") and domestic and foreign subsidiaries that are more than 50% owned, principally General Motors Acceptance Corporation and Subsidiaries (GMAC) and Hughes Electronics Corporation (Hughes), (collectively referred to as "General Motors" or "GM"). The financial data related to Delphi Automotive Systems Corporation (Delphi) is presented as discontinued operations for all periods presented. In the opinion of management, all adjustments (consisting of only normal recurring items), which are necessary for a fair presentation have been included. The results for interim periods are not necessarily indicative of results which may be expected for any other interim period or for the full year. For further information, refer to the December 31, 1998 consolidated financial statements and notes thereto included in GM's Current Report on Form 8-K, dated April 12, 1999 and filed with the Securities and Exchange Commission on April 15, 1999, Hughes financial statements and notes thereto included as Exhibit 99 to GM's 1998 Annual Report on Form 10-K for the period ended December 31, 1998, the GMAC Annual Report on Form 10-K for the period ended December 31, 1998, the Hughes financial statements and notes thereto for the period ended June 30, 1999, included as Exhibit 99 to this GM Quarterly Report on Form 10-Q for the period ended June 30, 1999 and related Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission, and the GMAC Quarterly Report on Form 10-Q for the period ended June 30, 1999, filed with the Securities and Exchange Commission. 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, vehicle and homeowners insurance, and asset-backed lending. Transactions between businesses have been eliminated in the Corporation's consolidated statements of income. Certain amounts for 1998 were reclassified to conform with the 1999 classifications. Note 2. Discontinued Operations Delphi is a diverse supplier of automotive systems and components. Delphi offers products and services in the areas of electronics and mobile communication; safety, thermal and electrical architecture; and dynamics and propulsion. In February 1999, Delphi completed an initial public offering (IPO) of 100 million shares of its common stock, which represented 17.7% of its outstanding common shares. On April 12, 1999, the GM Board of Directors (GM Board) approved the complete separation of Delphi from GM by means of a tax-free spin-off. On May 28, 1999 GM distributed 80.1 percent of the ownership of Delphi, 0.69893 shares of Delphi common stock for each share of GM $1-2/3 par value common stock based on a record date of May 25, 1999. In addition, following the receipt of a favorable ruling from the Internal Revenue Service on May 3, 1999, GM contributed the other 2.2% of Delphi shares it owns, 12.4 million shares, to a Voluntary Employee Beneficiary Association (VEBA) trust to fund benefits to hourly retirees. The financial data related to GM's investment in Delphi through May 28, 1999 is classified as discontinued operations for all periods presented. The financial data of Delphi reflect the historical results of operations and cash flows of the businesses that were considered part of the Delphi business segment of GM during each respective period; they do not reflect many significant changes that will occur in the operations and funding of Delphi as a result of the separation from GM and the IPO. The Delphi financial data classified as discontinued operations reflect the assets and liabilities transferred to Delphi in accordance with the terms of a master separation agreement to which Delphi and GM are parties (the "Separation Agreement"). Delphi and Delco Electronics Corporation (Delco Electronics), the electronics and mobile communication business that was transferred to Delphi in December 1997, were under the common control of GM during such periods; therefore, the Delphi financial data include amounts relating to Delco Electronics for all periods presented, although Delco Electronics was not integrated with Delphi until December 1997. Delphi net sales (including sales to GM) included in discontinued operations totaled $5.0 billion and $7.1 billion for the quarters ended June 30, 1999 and 1998, respectively. Income from Delphi discontinued operations of $184 million and $83 million for the quarter ended June 30, 1999 and 1998, respectively, is reported net of income tax expense of $140 million and $16 million, respectively. Delphi net sales (including sales to GM) included in discontinued operations totaled $12.5 billion and $14.7 billion for the six months ended June 30, 1999 and 1998, respectively. Income from Delphi discontinued operations of $426 million and $319 million for the six months ended June 30, 1999 and 1998 is reported net of income tax expense of $314 million and $129 million, respectively. - 9 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (Unaudited) Note 2. Discontinued Operations (concluded) The net assets of Delphi were as follows (in millions): Dec. 31, June 30, 1998 1998 ---- ---- Current assets $6,405 $6,513 Property and equipment - net 4,965 4,842 Deferred income taxes and other assets 4,136 3,647 Current liabilities (4,057) (3,545) Long-term debt (3,141) (3,327) Other liabilities (8,299) (7,854) Accumulated translation adjustments 68 83 -- ---- Net assets of discontinued operations $77 $359 === ==== As a result of the complete separation of Delphi by means of the tax-free spin-off and VEBA trust contribution on May 28, 1999, GM recorded a decrease to stockholders' equity of $5.2 billion in the second quarter of 1999. This amount reflects the elimination of Delphi net assets of $3.4 billion, as well as a pension curtailment/settlement charge and other adjustments totaling $1.8 billion. In the first quarter of 1999, GM recorded an increase to stockholders' equity of $1.2 billion reflecting IPO proceeds of $1.7 billion, less the cost of GM's investment in Delphi sold in the IPO and the costs of the IPO and establishing Delphi as an independent entity. In total, the complete separation of Delphi, including a pension curtailment/settlement charge and other adjustments in the six-month period ending June 30, 1999, resulted in a reduction to stockholders' equity of $4.0 billion. Note 3. Inventories Inventories included the following for Automotive, Electronics and Other Operations (in millions): June 30, Dec. 31, June 30, 1999 1998 1998 ---- ---- ---- Productive material, work in process, and supplies $5,660 $5,377 $5,878 Finished product, service parts, etc. 7,008 6,962 7,276 ------ ------ ------ Total inventories at FIFO 12,668 12,339 13,154 Less LIFO allowance 1,902 1,902 1,837 ------- ------- ------- Total inventories (less allowances) $10,766 $10,437 $11,317 ====== ====== ====== Note 4. Property - Net Property - net included the following for Automotive, Electronics and Other Operations (in millions): June 30, Dec. 31, June 30, 1999 1998 1998 ---- ---- ---- Real estate, plants, and equipment $58,592 $59,565 $57,029 Less accumulated depreciation (34,169) (34,641) (33,397) ------ ------ ------ Real estate, plants, and equipment - net 24,423 24,924 23,632 Special tools - net 7,086 7,298 6,819 ------- ------- ------- Total property - net $31,509 $32,222 $30,451 ====== ====== ====== Financing and Insurance Operations had net property of $395 million, $386 million, and $266 million recorded in other assets at June 30, 1999, December 31, 1998, and June 30, 1998, respectively. Note 5. Postretirement Benefits Other than Pensions GM has disclosed in the consolidated financial statements certain amounts associated with estimated future postretirement benefits other than pensions and characterized such amounts as "accumulated postretirement benefit obligations," "liabilities," or "obligations." Notwithstanding the recording of such amounts and the use of these terms, GM does not admit or otherwise acknowledge that such amounts or existing postretirement benefit plans of GM (other than pensions) represent legally enforceable liabilities of GM. - 10 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (Unaudited) Note 6. Pensions As a result of the Delphi Separation, GM recognized a curtailment/settlement charge of $2.3 billion pre-tax related to the U.S. Hourly Pension plan as a reduction of stockholders' equity (see Note 2). Furthermore, the GM U.S. Hourly Pension plan has been remeasured as of May 28, 1999. The remeasurement was based on May 28, 1999 demographics, updated mortality assumptions, assets and liabilities adjusted for the plan split, and an updated discount rate of 7.0% compared to the December 31, 1998 discount rate of 6.8%. No change was made to the expected return on plan assets of 10.0% and the expected rate of compensation increase of 5.0%. Note 7. Preferred Securities of Subsidiary Trusts General Motors - Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts In July 1997, the General Motors Capital Trust D (Series D Trust) issued approximately $79 million of its 8.67% Trust Originated Preferred Securitiessm (TOPrSsm) Series D, (Series D Preferred Securities), in a one-for-one exchange for 3,055,255 of the outstanding GM Series D 7.92% Depositary Shares, each representing one-fourth of a share of GM Series D Preference Stock, $0.10 par value per share. In addition, the General Motors Capital Trust G (Series G Trust) issued approximately $143 million of its 9.87% TOPrS, Series G (Series G Preferred Securities), in a one-for-one exchange for 5,064,489 of the outstanding GM Series G 9.12% Depositary Shares, each representing one-fourth of a share of GM Series G Preference Stock, $0.10 par value per share. Concurrently with the exchanges and the related purchases by GM from the Series D and Series G Trusts (Trusts) of the common securities of such Trusts, which represent approximately 3 percent of the total assets of such Trusts, GM issued to the wholly-owned Trusts, as the Series D Trust's sole assets its 8.67% Junior Subordinated Deferrable Interest Debentures, Series D, due July 1, 2012 and as the Series G Trust's sole assets, its 9.87% Junior Subordinated Deferrable Interest Debentures, Series G, due July 1, 2012 (the "Series D Debentures" and "Series G Debentures" or collectively the "Debentures"), having aggregate principal amounts equal to the aggregate stated liquidation amounts of the Series D and Series G Preferred Securities and the related common securities, respectively ($79 million with respect to the Series D Debentures and $131 million with respect to the Series G Debentures). The Series D Debentures are redeemable, in whole or in part, at GM's option on or after August 1, 1999, at a redemption price equal to 100% of the outstanding principal amount of the Series D Debentures plus accrued and unpaid interest. 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. - 11 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (Unaudited) Note 8. America Online's Investment in GM Preference Stock On May 11, 1999, it was announced that DIRECTV and Hughes Network Systems (HNS) will collaborate with America Online (AOL) on a new service that will combine digital satellite television programming from DIRECTV with AOL's new interactive television Internet service. HNS will design and build the initial dual-purpose DIRECTV/AOL receiver equipment. The new service will be suited for both frequent Internet users and the mass market consumer who wants to connect to the Internet. On June 21, 1999, Hughes announced a more extensive strategic alliance with AOL to develop and market digital entertainment and Internet services nationwide. The new alliance is expected to accelerate subscriber growth and revenue-per-subscriber for DIRECTV and DirecPC, as well as expand the subscriber base for AOL's developing AOL TV and AOL-Plus services. As part of the alliance, Hughes and AOL plan to jointly develop new content and interactive services for U.S. and international markets. Additionally, an extensive cross-marketing initiative will be instituted to market each company's products through their respective retail outlets and to their respective subscribers. As part of the marketing initiative, Hughes has committed to spend over the next three years for sales and marketing activities more than $500 million for DirecPC/AOL-Plus, up to approximately $500 million for DlRECTV, approximately $400 million for DlRECTV/AOL TV, and approximately $100 million for DirecDuo. As part of the alliance, AOL invested $1.5 billion in return for approximately 2.7 million shares of GM Series H 6.25% Automatically Convertible Preference Stock, par value $0.10 per share. This preference stock will automatically convert into GM Class H common stock in three years, based upon a variable conversion factor linked to the GM Class H common stock price at the time of conversion, and accrues quarterly dividends at a rate of 6.25% per year. It may be converted earlier in certain limited circumstances. GM immediately invested the $1.5 billion received from AOL into shares of Hughes Series A Preferred Stock designed to correspond to the financial terms of the GM Series H 6.25% Automatically Convertible Preference Stock. Dividends on the Hughes Series A Preferred Stock are payable to GM quarterly at an annual rate of 6.25%. These preferred stock dividends payable to GM will reduce Hughes' earnings used for computation of the ASCNI of Hughes, which will have an equivalent effect to the payment of dividends on the Series H preference stock as if those dividends were paid by Hughes. Upon conversion of the GM Series H 6.25% Automatically Convertible Preference Stock into GM Class H common stock, Hughes will redeem the Series A Preferred Stock through a cash payment to GM equal to the fair market value of GM Class H common stock issuable upon the conversion. Simultaneous with GM's receipt of the cash redemption proceeds, GM will make a capital contribution to Hughes of the same amount. In connection with this capital contribution, the denominator of the fraction used in the computation of ASCNI of Hughes will be increased by the corresponding number of shares of GM Class H common stock issued. Accordingly, upon conversion of the GM Series H 6.25% Automatically Convertible Preference Stock into GM Class H common stock, both the numerator and denominator used in the computation of ASCNI will increase by the amount of the GM Class H common stock issued. Note 9. Stock Repurchases During the six months ended June 30, 1999, GM used $798 million to acquire approximately 10 million shares of $1-2/3 par value common stock under the Corporation's $4.0 billion stock repurchase program announced in February 1998. GM also used approximately $569 million to repurchase shares of $1-2/3 par value common stock for certain employee benefit plans and $501 million to repurchase and retire Series B preference stock during the six months ended June 30, 1999. - 12 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (Unaudited) Note 10. Comprehensive Income GM's total comprehensive income was as follows (in millions): Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ---- ---- ---- ---- Net income $1,918 $389 $3,980 $1,993 Other comprehensive income (loss): Foreign currency translation adjustments (205) (77) (898)(1) (439) Unrealized gains (losses) on securities 103 (32) 80 3 Minimum pension liability adjustment (2) 1,062 - 1,062 - ----- ------ ----- ----- Other comprehensive income (loss) 960 (109) 244 (436) ----- --- ----- ----- Total comprehensive income $2,878 $280 $4,224 $1,557 ===== === ===== ===== (1)Includes approximately $450 million of translation adjustments associated with the devaluation of the Brazilian Real in the first quarter of 1999. (2)Adjustment due to remeasurement of the U.S. Hourly Pension Plan as of May 28, 1999 of $614 million (see Note 6) and a curtailment/settlement of $448 million (see Note 2). Note 11. Earnings Per Share Attributable to Common Stocks Earnings per share attributable to each class of GM common stock was determined based on the attribution of earnings to each such class of common stock for the period divided by the weighted-average number of common shares for each such class outstanding during the period. Diluted earnings per share attributable to each class of GM common stock considers the impact of potential common shares, unless the inclusion of the potential common shares would have an antidilutive effect. The attribution of earnings to each class of GM common stock was as follows (in millions): Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ---- ---- ---- ---- Earnings attributable to common stocks $1-2/3 par value Continuing operations $1,754 $275 $3,535 $1,613 Discontinued operations 184 83 426 319 ----- ---- ------ ----- Earnings attributable to $1-2/3 par value $1,938 $358 $3,961 $1,932 (Losses) earnings attributable to Class H $(27) $15 $(4) $29 Earnings attributable to $1-2/3 par value common stock for the period represent the earnings attributable to all GM common stocks for the period, reduced by the ASCNI of Hughes for the respective period and dividends on preference stocks. Losses attributable to GM Class H common stock for the three and six months ended June 30, 1999 represent the ASCNI of Hughes. Losses used for computation of the ASCNI of Hughes is based on the separate consolidated net income (loss) of Hughes, excluding the effects of purchase accounting adjustments arising at the time of the Corporation's acquisition of Hughes Aircraft Company (HAC) which remains after the spin-off of Hughes Defense, reduced by the amount of dividends accrued on the Series A Preferred Stock of Hughes (as an equivalent measure of the effect that GM's payment of dividends on the GM Series H 6.25% Automatically Convertible Preference Stock would have if paid by Hughes). The calculated losses used for computation of the ASCNI of Hughes is then multiplied by a fraction, the numerator of which was a number equal to the weighted-average number of shares of GM Class H common stock outstanding during the three and six months ended June 30, 1999 (121 million and 114 million, respectively) and the denominator of which was a number equal to the weighted-average number of shares of GM Class H common stock, which if issued and outstanding would represent 100% of the tracking stock interest in the earnings of Hughes (Average Class H dividend base). The Average Class H dividend base was 415 million and 408 million during the three and six months ended June 30, 1999, respectively. - 13 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (Unaudited) Note 11. Earnings Per Share Attributable to Common Stocks (continued) Earnings attributable to GM Class H common stock for the three and six months ended June 30, 1998 represent the ASCNI of Hughes, excluding the effects of purchase accounting adjustments arising at the time of the Corporation's acquisition of HAC which remains after the spin-off of Hughes Defense, calculated for such period and multiplied by a fraction, the numerator of which was a number equal to the weighted-average number of shares of GM Class H common stock outstanding for each of the periods (105 million) and the denominator of which was a number equal to the weighted-average number of shares of GM Class H common stock which if issued and outstanding, would represent 100% of the tracking stock interest in the earnings of Hughes (Average Class H dividend base). The Average Class H dividend base was 400 million during both the three and six months ended June 30, 1998. In connection with the PRIMESTAR and USSB transactions (see further discussion in Note 13), GM contributed, or will contribute, to Hughes an amount of cash at least sufficient to enable Hughes to purchase from GM, for fair value as determined by the GM Board, the number of shares of GM Class H common stock delivered, or to be delivered, by Hughes. In accordance with the GM certificate of incorporation, the GM Class H dividend base will be increased to reflect that number of shares. The number of shares issued as part of the PRIMESTAR acquisition and the number of shares to be issued as part of the USSB merger have been included in the calculation of both the numerator and denominator of the fraction described above since the consummation dates of the transactions. The denominator used in determining the ASCNI of Hughes may be adjusted from time-to-time as deemed appropriate by the GM Board to reflect subdivisions or combinations of the GM Class H common stock and to reflect certain transfers of capital to or from Hughes, the contribution of shares of capital stock of GM to or for the benefit of Hughes employees and the retirement of GM Class H common stock purchased by Hughes. The GM Board's discretion to make such adjustments is limited by criteria set forth in the Corporation's Restated Certificate of Incorporation. - 14 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited) Note 11. Earnings Per Share Attributable to Common Stocks (concluded) Prior to January 1, 1999, the assumed exercise of stock options had no effect on GM Class H common stock earnings per share, because to the extent that shares of GM Class H common stock deemed to be outstanding would increase, such increased shares would also increase the numerator of the fraction used to determine ASCNI. Effective January 1, 1999, shares of GM Class H common stock delivered by GM in connection with the award of such shares to and the exercise of stock options by employees of Hughes will increase the denominator of the fraction referred to above. 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):
$1-2/3 Par Value Common Stock Class H Common Stock Per Share Per Share Income Shares Amount Income Shares Amount ------ ------ ------ ------ ------ ------ Three Months Ended June 30, 1999 Income (loss) from continuing operations $1,761 $(27) Less:Dividends on preference stocks 7 - ----- --- Basic EPS Income (loss) from continuing operations available to common stockholders 1,754 648 $2.71 (27) 121 $(0.23) ==== ==== Effect of Dilutive Securities Assumed exercise of dilutive stock options - 12 - - ------ ----- ---- ---- Diluted EPS Adjusted income (loss) from continuing operations available to common stockholders $1,754 660 $2.66 $(27) 121 $(0.23) ===== === ==== == === ==== Three Months Ended June 30, 1998 Income from continuing operations $291 $15 Less:Dividends on preference stocks 16 - ---- --- Basic EPS Income from continuing operations available to common stockholders 275 661 $0.41 15 105 $0.14 ==== ==== Effect of Dilutive Securities Assumed exercise of dilutive stock options (1) 11 1 6 ---- ---- --- ---- Diluted EPS Adjusted income from continuing operations available to common stockholders $274 672 $0.40 $16 111 $0.14 === === ==== == === ==== Six Months Ended June 30, 1999 Income (loss) from continuing operations $3,558 $(4) Less:Dividends on preference stocks 23 - ----- --- Basic EPS Income (loss) from continuing operations available to common stockholders 3,535 651 $5.44 (4) 114 $(0.04) ==== ==== Effect of Dilutive Securities Assumed exercise of dilutive stock options - 13 - - ------ --- ---- ---- Diluted EPS Adjusted income (loss) from continuing operations available to common stockholders $3,535 664 $5.33 $(4) 114 $(0.04) ===== === ==== = === ==== Six Months Ended June 30, 1998 Income from continuing operations $1,645 $29 Less:Dividends on preference stocks 32 - ------ ---- Basic EPS Income from continuing operations available to common stockholders 1,613 672 $2.40 29 105 $0.27 ==== ==== Effect of Dilutive Securities Assumed exercise of dilutive stock options (2) 10 2 5 ------ ---- ---- ---- Diluted EPS Adjusted income from continuing operations available to common stockholders $1,611 682 $2.35 $31 110 $0.27 ===== === ==== == === ====
- 15 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (Unaudited) Note 12. Other Income and Other Expenses Other income and other expenses consisted of the following (in millions): Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ------- ------- ------- -------- Other income Interest income $604 $532 $1,148 $1,108 Insurance premiums 334 369 674 738 Rental car lease revenue 452 328 900 665 Mortgage operations investment income and servicing fees 658 489 1,342 933 Other 187 289 477 384 ------ ------ ------ ------ Total other income $2,235 $2,007 $4,541 $3,828 ===== ===== ===== ===== Other expenses Provision for financing losses $111 $128 $230 $229 Insurance losses and loss adjustment expenses 216 282 477 540 Other 149 186 207 376 --- --- --- ------ Total other expenses $476 $596 $914 $1,145 === === === ===== Note 13. Acquisitions On January 22, 1999, Hughes agreed to acquire PRIMESTAR's 2.3 million subscriber medium-power direct-to-home satellite business and the high-power satellite assets and direct-broadcast satellite orbital frequencies of Tempo Satellite, a wholly-owned subsidiary of TCI Satellite Entertainment, Inc. On April 28, 1999, the acquisition of PRIMESTAR's direct-to-home business was completed. The purchase price consisted of $1.1 billion in cash and 4.9 million shares of GM Class H common stock, for a total purchase price of $1.3 billion, based on the average market price of $47.87 per share of GM Class H common stock at the time the acquisition agreement was signed. The purchase price will be adjusted based upon the final adjusted net working capital of PRIMESTAR at the date of closing. The purchase price for the Tempo Satellite assets consisted of $500 million in cash. Of this purchase price, $150 million was paid on March 10, 1999 for a satellite that has not yet been launched and the remaining $350 million was paid on June 4, 1999 for an in-orbit satellite and 11 related satellite orbital frequencies. In December 1998, Hughes agreed to acquire all of the outstanding capital stock of United States Satellite Broadcasting Company, Inc. (USSB). USSB provided direct-to-home premium satellite programming in conjunction with DIRECTV's basic programming service. The purchase price, consisting of cash and GM Class H common stock, was approximately $1.6 billion, consisting of approximately $360 million in cash and 22.6 million shares of GM Class H common stock. The USSB acquisition was closed on May 20, 1999 and has been accounted for using the purchase method of accounting. Payment and delivery of shares were made to the former USSB shareholders in July 1999. As such, approximately $1.3 billion of GM Class H common stock to be issued was included in capital surplus as of June 30, 1999. The financial information presented as of and for the periods ended June 30, 1999 reflect the effects of the PRIMESTAR, Tempo Satellite and USSB transactions, discussed below, from their respective dates of acquisition. These transactions have been accounted for using the purchase method of accounting; however the adjustments made in the June 30, 1999 financial statements reflect a preliminary allocation of the purchase price for the transactions based upon information currently available. Adjustments relating to the tangible assets (i.e., satellites, equipment located on customer premises, etc.), intangible assets (i.e., licenses granted by the Federal Communications Commission, customer lists, dealer network, etc.), and accrued liabilities for programming contracts and leases with above-market rates are estimates pending the completion of independent appraisals currently in process. Additionally, the adjustment to recognize the benefit of net operating loss carry forwards of USSB represents a preliminary estimate pending further review and analysis by the management of Hughes. These appraisals, valuations and studies are expected to be completed by December 31, 1999. Accordingly, the final purchase price allocations may be different from the amounts reflected herein. - 16 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (Unaudited) Note 13. Acquisitions (concluded) As the GM 1999 financial statements include only USSB's and PRIMESTAR's results of operations since the date of acquisition, the following selected unaudited pro forma information is provided to present a summary of the combined results of GM, USSB and PRIMESTAR as if the acquisitions had occurred as of the beginning of the respective periods, giving effect to purchase accounting adjustments. The pro forma data is presented for informational purposes only and may not necessarily reflect the results of operations of GM had USSB and PRIMESTAR operated as part of GM for the six months ended June 30, 1999 and June 30 1998, nor are they necessarily indicative of the results of future operations. The proforma information is as follows (in millions except per share amounts): Six Months Ended Six months Ended June 30, 1999 June 30, 1998 ----------------------------------- Total net sales and revenues $88,292 $78,103 ------ ------ Net income from continuing operations 3,558 1,642 Net income from discontinued operations 426 319 ------ ------ Net income $3,984 $1,961 ====== ====== Basic earnings (losses) per share attributable to common stocks $1-2/3 par value common stock Continuing operations $5.40 $2.32 Discontinued operations 0.65 0.48 ---- ---- Earnings per share attributable to $1-2/3 par value $6.05 $2.79 Earnings per share attributable to Class H (1) $(0.13) $0.05 ===== ===== Diluted earnings (losses) per share attributable to common stocks $1-2/3 par value common stock Continuing operations $5.29 $2.28 Discontinued operations 0.64 0.47 ---- ---- Earnings per share attributable to $1-2/3 par value $5.93 $2.75 ===== ===== Earnings per share attributable to Class H (1) $(0.13) $0.05 ===== ===== (1) Both periods include the pro forma effect of dividends amounting to $47 million related to the Hughes Series A Preferred Stock as if the preferred stock had been outstanding as of the beginning of the respective periods. - 17 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (Unaudited) Note 14. Segment Reporting GM's reportable operating segments within its Automotive, Electronics and Other Operations business consist of GM Automotive (GMA), which is comprised of four regions: GM North America (GMNA), GM Europe (GME), GM Asia/Pacific (GMAP), and GM Latin America/Africa/Mid-East (GMLAAM); Hughes, and Other. GM's reportable operating segments within its Financing and Insurance Operations business consist of GMAC and Other. Selected information regarding GM's reportable operating segments and regions are as follows:
Elimin- Total Other Total GMNA GME GMLAAM GMAP ations GMA Hughes Other Automotive GMAC Financing Financing ---- --- ------ ---- ------ --- ------ --------------------- ------------------- (in millions) For the Three Months Ended June 30, 1999 Manufactured products sales & revenues: External customers $28,198 $6,790 $1,156 $637 $ - $36,781 $1,765 $715 $39,261 $ - $ - $ - Intersegment 475 91 50 50 (666) - 11 (11) - - - - ------ ----- ------ ----- --- ------- ------- ---- ------ ----- ----- ----- Total manufactured products 28,673 6,881 1,206 687 (666) 36,781 1,776 704 39,261 - - - Financing revenues - - - - - - - - - 3,361 210 3,571 Other income (a) 813 120 9 28 1 971 8 (123) 856 1,540 (161) 1,379 ------- ----- ------ ---- ---- ----- ------ ---- ------ ----- ----- ----- Total net sales and revenues $29,486 $7,001 $1,215 $715 $(665)$37,752 $1,784 $581 $40,117 $4,901 $49 $4,950 ====== ===== ===== === === ====== ===== === ====== ===== == ===== Interest income (a) $307 $96 $9 $1 $1 $414 $5 $(169) $250 $409 $(55) $354 Interest expense $295 $76 $20 $3 $1 $395 $12 $(227) $180 $1,538 $76 $1,614 Net income (loss) $1,473 $187 $(38) $(81) $10 $1,551 $(92)(c) $34(b) $1,493 $391 $34 $425 Segment assets $76,676$18,800 $4,139 $1,382$(2,034)$98,963 $17,857(d) $4,031 $120,851$135,998 $89 $136,087 For the Three Months Ended June 30, 1998 Manufactured products sales & revenues: External customers $21,233 $5,830 $2,118 $749 $ - $29,930 $1,366 $549 $31,845 $ - $ - $ - Intersegment 671 397 75 7 (1,150) - 3 (3) - - - - ------- ----- ------ ---- ---- ----- ------ ---- ------ ----- ----- ----- Total manufactured products 21,904 6,227 2,193 756 (1,150) 29,930 1,369 546 31,845 - - - Financing revenues - - - - - - - - - 3,204 216 3,420 Other income (a) 657 197 62 3 - 919 (6) (87) 826 1,324 (143) 1,181 ------- ----- ------ ---- ---- ----- ------ ---- ------ ----- ----- ----- Total net sales and revenues $22,561 $6,424 $2,255 $759$(1,150)$30,849 $1,363 $459 $32,671 $4,528 $73 $4,601 ======= ===== ====== ==== ===== ====== ===== ==== ====== ===== ===== ===== Interest income (a) $164 $136 $33 $3 $ - $336 $30 $(168) $198 $366 $(32) $334 Interest expense $258 $97 $24 $2 $(1) $380 $3 $(106) $277 $1,455 $(41) $1,414 Net (loss) income $(194) $124 $48 $(36) $34 $(24) $56(c) $(37)(b) $(5) $365 $29 $394 Segment assets $64,349$18,065 $5,737 $1,333 $(599)$88,885 $12,347(d) $8,763 $109,995$114,338 $(395) $113,943
(a)Interest income is included in other income. (b)The amount reported for Other net income (loss) includes income from discontinued operations of $184 million and $83 million for the three months ended June 30, 1999 and 1998, respectively. (c)The amount reported for Hughes excludes amortization of GM purchase accounting adjustments of approximately $5 million for both 1999 and 1998, 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)The amount reported for Hughes excludes the unamortized GM purchase accounting adjustments of approximately $416 million and $437 million, for 1999 and 1998, respectively, related to GM's acquisition of Hughes Aircraft Company. These adjustments were allocated to GM's Other segment which is consistent with the basis upon which the segments are evaluated. - 18 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (Unaudited) Note 14. Segment Reporting (concluded)
Elimin- Total Other Total GMNA GME GMLAAM GMAP ations GMA Hughes Other Automotive GMAC Financing Financing ---- --- ------ ---- ------ --- ------ --------------------- ------------------- (in millions) (in millions) For the Six Months Ended June 30, 1999 Manufactured products sales & revenues: External customers $55,014$12,856 $2,123 $1,220 $ - $71,213 $3,208 $1,460 $75,881 $ - $ - $ - Intersegment 977 159 105 87 (1,328) - 20 (20) - - - - ------- ----- ------ ---- ---- ----- ------ ---- ------ ----- ----- ----- Total manufactured products 55,991 13,015 2,228 1,307 (1,328) 71,213 3,228 1,440 75,881 - - - Financing revenues - - - - - - - - - 6,638 442 7,080 Other income (a) 1,563 263 20 55 1 1,902 191 (334) 1,759 3,090 (308) 2,782 ------- ----- ------ ---- ---- ----- ------ ---- ------ ----- ----- ----- Total net sales and revenues $57,554$13,278 $2,248 $1,362$(1,327)$73,115 $3,419 $1,106 $77,640 $9,728 $134 $9,862 ======= ===== ====== ==== ===== ====== ===== ==== ====== ===== ===== ===== Interest income (a) $502 $198 $25 $4 $1 $730 $19 $(329) $420 $822 $(94) $728 Interest expense $601 $153 $35 $7 $1 $797 $19 $(442) $374 $3,051 $214 $3,265 Net income (loss) $2,881 $361 $(63) $(141) $23 $3,061 $(14)(c) $135(b) $3,182 $783 $15 $798 For the Six Months Ended June 30, 1998 Manufactured products sales & revenues: External customers $46,318$11,042 $4,113 $1,477 $ - $62,950 $2,651 $1,137 $66,738 $ - $ - $ - Intersegment 1,475 582 104 7 (2,168) - 9 (9) - - - - ------- ----- ------ ---- ---- ----- ------ ---- ------ ----- ----- ----- Total manufactured products 47,793 11,624 4,217 1,484 (2,168) 62,950 2,660 1,128 66,738 - - - Financing revenues - - - - - - - - - 6,311 419 6,730 Other income (a) 1,195 333 126 29 - 1,683 42 (222) 1,503 2,537 (212) 2,325 ------ ----- ------ ---- ---- ----- ------ ---- ------ ----- ----- ----- Total net sale and revenues $48,988$11,957 $4,343 $1,513$(2,168)$64,633 $2,702 $906 $68,241 $8,848 $207 $9,055 ======= ===== ====== ==== ===== ====== ===== ==== ====== ===== ===== ===== Interest income (a) $281 $272 $61 $4 $- $618 $68 $(292) $394 $717 $(3) $714 Interest expense $407 $201 $50 $4 $(1) $661 $6 $(195) $472 $2,839 $(50) $2,789 Net income (loss) $647 $223 $101 $(30) $27 $968 $110 (c) $157(b) $1,235 $714 $44 $758
(a) Interest income is included in other income. (b)The amount reported for Other net income (loss) includes income from discontinued operations of $426 million and $319 million for the six months ended June 30, 1999 and 1998, respectively. (c)The amount reported for Hughes excludes amortization of GM purchase accounting adjustments of approximately $11 million for both 1999 and 1998, 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. 1998 results exclude the cumulative effect of accounting change of $9 million due to Hughes' adoption of SOP 98-5. GM had reported the $9 million change in fourth quarter 1998 results and Hughes reported the change as a restatement of first quarter 1998 results. - 19 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited) Note 15. Contingent Matters In connection with the 1997 spin-off of the defense electronics business of Hughes' predecessor and the subsequent merger of that business with Raytheon Company, the terms of the merger agreement provided a process for resolving disputes that might arise in connection with post-closing financial adjustments that were also called for by the terms of the merger agreement. Such financial adjustments might require a cash payment from Raytheon to Hughes or vice versa. A dispute currently exists regarding the post-closing adjustments which Hughes and Raytheon have proposed to one another and related issues regarding the adequacy of disclosures made by Hughes to Raytheon in the period prior to consummation of the merger. In an attempt to resolve the dispute, Hughes gave notice to Raytheon to commence an arbitration process pursuant to the procedures under the merger agreement. Raytheon responded by filing an action in Delaware Chancery Court which seeks to enjoin the arbitration as premature. That litigation is now inactive and Raytheon and Hughes are now proceeding with the dispute resolution process. It is possible that the ultimate resolution of the post-closing financial adjustment and of related disclosure issues may result in Hughes making a payment to Raytheon that would be material to Hughes. However, the amount of any payment that either party might be required to make to the other cannot be determined at this time. Hughes intends to vigorously pursue resolution of the disputes through the arbitration processes, opposing the adjustments proposed by Raytheon, and seeking the payment from Raytheon that it has proposed. General Electric Capital Corporation (GECC) and DIRECTV, Inc. entered into a contract on July 31, 1995, in which GECC agreed to provide financing for consumer purchases of DIRECTV hardware and related programming. Under the contract, GECC also agreed to provide certain related services to DIRECTV, including credit risk scoring, billing and collections services. DIRECTV agreed to act as a surety for loans complying with the terms of the contract. Hughes guaranteed DIRECTV's performance under the contract. A complaint and counterclaim have been filed by the parties in the U.S. District Court for the District of Connecticut concerning GECC's performance and DIRECTV's obligation to act as a surety. GECC claims damages from DIRECTV in excess of $140 million. DIRECTV is seeking damages from GECC in excess of $70 million. Hughes intends to vigorously contest GECC's allegations and pursue Hughes' own contractual rights and remedies. Hughes does not believe that the litigation will have a material adverse impact on Hughes' results of operations or financial position. Pretrial discovery is not yet completed in the case and no trial date has been set. As part of a marketing agreement entered into with AOL on June 21, 1999, Hughes committed to increase its sales and marketing expenditures over the next three years by approximately $1.5 billion relating to DirecPC/AOL-Plus, DlRECTV, DlRECTV/AOL TV and DirecDuo. Hughes Space and Communications International (HSCI) has a contract with ICO Global Communications Operations to build the satellites and related components for a global wireless communications system. Hughes owns approximately 2.6% of the equity in its parent company, ICO Global Communications (Holdings) (ICO). ICO has indicated in its public disclosure that it requires substantial additional financing to continue operating its business and to fund the construction of its communications network. ICO also has indicated that it currently is attempting to obtain financing through its existing stockholders including Hughes, and/or third parties. There can be no assurance that ICO will be successful in obtaining adequate financing to continue operating its business or to complete construction of its communications network. If ICO is unable to obtain the necessary additional financing, it and its subsidiary would likely be unable to pay the remaining amounts due to HSCI under the contract. If ICO fails to pay HSCI these remaining amounts, HSCI could terminate the contract for non-payment. In the event of non-payment, Hughes would expect to record a pre-tax charge to earnings of approximately $500 million. - 20 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited) Note 15. Contingent Matters (concluded) On July 9, 1999, a jury in a Los Angeles Superior Court in the matter of Anderson et. al, v. General Motors Corporation, returned a verdict of $4.9 billion against GM in a product liability lawsuit involving a post-collision, fuel fed fire in a 1979 Chevrolet Malibu. The award consisted of $102 million in compensatory damages and $4.8 billion in punitive damages. The Anderson case arose out of an accident on December 24,1993. While the plaintiffs were stopped at a red light, they were struck in the rear by a 1977 Buick Regal going approximately 70 mph. The driver of the Regal was intoxicated, having a blood alcohol level of .20, almost three times the California limit. The ensuing post-crash fire burned all of the occupants of the Malibu with the children receiving the most severe burns. Plaintiffs claimed that the Malibu's fuel tank, which was located behind the rear axle, should have been located over the axle. Alternatively they claimed the tank should have been shielded or incorporated a bladder. GM believes that, by any measure, the 1979 Malibu was a safe passenger car. The Malibu's fuel tank location was similar to that in most other vehicles of the same size and vintage and its design met or exceeded the applicable FMVSS 301 standard, having passed a 50 mph rear-impact test that few other cars on the market in 1979 would have passed. Even the alternative designs suggested by the plaintiffs would have been compromised in such a severe crash. GM was not allowed to introduce other compelling evidence that the Malibu's fuel system was well-designed. Lastly, although the jury was asked to apportion the non-economic compensatory damages between GM and the driver of the Regal, they were not informed about his intoxication. GM will vigorously pursue post-trial motions and its right of appeal. GM believes that the design of the subject Chevrolet Malibu was not responsible for plaintiff's injuries, that numerous evidentiary and procedural reversible errors occurred at the trial and that as a matter of law, GM's conduct does not support any punitive damages. The cost of any bond GM may have to post is not expected to be material to the Corporation's financial results. 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 condition or results of operations. Note 16. Subsequent Event On July 6, 1999, as part of the USSB merger, Hughes paid approximately $0.4 billion in cash and issued approximately 22.6 million shares of GM Class H common stock to the former USSB shareholders. On July 22, 1999, GMAC completed the acquisition of the asset-based lending and factoring business unit of The Bank of New York for approximately $1.8 billion. GMAC also completed the acquisition of the full service leasing business of Arriva Automotive Solutions Limited, on July 30, 1999. Both transactions were accounted for using the purchase method of accounting. On July 28, 1999, Galaxy Latin America (GLA), Hughes' 70% owned subsidiary, acquired Galaxy Brasil, Ltda., the exclusive distributor of DIRECTV services in Brazil, from Tevecap S.A. for approximately $114 million plus the assumption of debt. In connection with the transaction, Tevecap sold its 10% equity interest in GLA to Hughes and Cisneros Group, the remaining GLA partners. Hughes' share of the purchase amounted to approximately $101 million and increased Hughes' ownership of GLA to 77.8%. * * * * * * - 21 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following management's discussion and analysis of financial condition and results of operations (MD&A) should be read in conjunction with the consolidated financial statements and notes thereto along with the MD&A included in GM's Current Reports on Form 8-K, dated April 12, 1999 and filed with the Securities and Exchange Commission on April 15, 1999 and April 21, 1999, respectively, Hughes Electronics Corporation (Hughes) financial statements and MD&A for the period ended December 31, 1998, included as Exhibit 99 to GM's 1998 Annual Report on Form 10-K, the General Motors Acceptance Corporation (GMAC) Annual Report on Form 10-K for the period ended December 31, 1998, the Hughes financial statements and MD&A for the period ended June 30, 1999, included as Exhibit 99 to this GM Quarterly Report on Form 10-Q for the period ended June 30, 1999 and related Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission, and the GMAC Quarterly Report on Form 10-Q for the period ended June 30, 1999, filed with the Securities and Exchange Commission. All earnings per share amounts included in the MD&A are reported as diluted. GM presents separate supplemental consolidating financial information for the following businesses: Automotive, Electronics and Other Operations and Financing and Insurance Operations. GM's reportable operating segments within its Automotive, Electronics and Other Operations business consist of: . GM Automotive (GMA), is comprised of four regions: GM North America (GMNA), GM Europe (GME), GM Asia/Pacific (GMAP), and GM Latin America/Africa/Mid-East (GMLAAM). GMNA designs, manufactures, and markets vehicles primarily in North America under the following nameplates: Chevrolet, Pontiac, GMC, Oldsmobile, Buick, Cadillac, and Saturn. GME, GMAP and GMLAAM meet the demands of customers outside North America with vehicles designed, manufactured and marketed under the following nameplates: Opel, Vauxhall, Holden, Isuzu, Saab, Chevrolet, GMC, and Cadillac. . Hughes includes activities relating to designing, manufacturing, and marketing advanced technology electronic systems, products, and services for the satellite & wireless communications 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, vehicle and homeowners insurance, and asset-backed lending. 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. - 22- GENERAL MOTORS CORPORATION AND SUBSIDIARIES RESULTS OF OPERATIONS In the second quarter of 1999, GM's consolidated income from continuing operations totaled $1.7 billion or $2.66 per share of $1-2/3 par value common stock, which represents an increase of $1.4 billion compared with $306 million or $0.40 per share of $1-2/3 par value common stock in the second quarter of 1998. GM's net income from continuing operations for the six months ended June 30, 1999 was $3.6 billion or $5.33 per share of $1-2/3 par value common stock, which represents an increase of $1.9 billion compared with $1.7 billion or $2.35 per share of $1-2/3 par value common stock for the six months ended June 30, 1998. On April 12, 1999, the GM Board of Directors (GM Board) approved the complete separation of Delphi from GM by means of a tax-free spin-off which was completed on May 28,1999 and, accordingly, the financial results related to Delphi for all periods presented are reported as discontinued operations. GM's net income for the second quarter of 1999, including the income from discontinued operations totaled $1.9 billion or $2.94 per share of $1-2/3 par value common stock compared with $389 million or $0.52 per share of $1-2/3 par value common stock in the second quarter of 1998. GM's net income for the six months ended June 30, 1999, including the income from discontinued operations totaled $4.0 billion or $5.97 per share of $1-2/3 par value common stock compared with $2.0 billion or $2.82 per share of $1-2/3 par value common stock for the six months ended June 30, 1998. Additional information regarding the spin-off of Delphi is contained in Note 2 to the GM consolidated financial statements. Additionally, refer to Note 13 of the GM consolidated financial statements for financial information regarding the effect of the current year acquisitions. Automotive, Electronics and Other Operations Highlights of financial performance by GM's Automotive, Electronics and Other Operations business were as follows: Three Months Ended Six Months Ended June 30, June 30, ------------------- ------------------ 1999 1998 1999 1998 -------- --------- ------- --------- (Dollars in Millions) Manufactured products sales and revenues GMA $36,781 $29,930 $71,213 $62,950 Hughes 1,776 1,369 3,228 2,660 Other 704 546 1,440 1,128 -------- -------- ------- ------- Manufactured products sales and revenues $39,261 $31,845 $75,881 $66,738 Net income (loss) GMA $1,551 $(24) $3,061 $968 Hughes (92) 56 (14) 110 Other (150) (120) (291) (162) ------ --- ------ --- Income (loss) from continuing operations 1,309 (88) 2,756 916 Discontinued operations 184 83 426 319 ------ -- ------ ------ Net income (loss) $1,493 $(5) $3,182 $1,235 ===== = ===== ===== - 23- GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMA Financial Highlights Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------- 1999 1998 1999 1998 ------- -------- ------- -------- (Dollars in Millions) GMNA Manufactured products sales and revenues $28,673 21,904 $55,991 $47,793 Pre-tax income (loss) 2,122 (335) 4,219 889 Income tax expense (benefit) 670 (124) 1,335 262 Earnings of nonconsolidated associates and minority interests 21 17 (3) 20 ----- ---- ----- ---- GMNA income (loss) $1,473 $(194) $2,881 $647 ===== === ===== === GME Manufactured products sales and revenues $6,881 $6,227 $13,015 $11,624 ----- ----- ------ ------ Pre-tax income 272 244 553 447 Income tax expense 84 129 189 220 Earnings of nonconsolidated associates and minority interests (1) 9 (3) (4) ----- ----- ----- ----- GME income $187 $124 $361 $223 === === === === GMLAAM Manufactured products sales and revenues $1,206 $2,193 $2,228 $4,217 ----- ----- ----- ----- Pre-tax (loss) income (87) 17 (145) 33 Income tax benefit (33) (10) (69) (29) Earnings of nonconsolidated associates and minority interests 16 21 13 39 -- -- -- ---- GMLAAM (loss) income $(38) $48 $(63) $101 == == == === GMAP Manufactured products sales and revenues $687 $756 $1,307 $1,484 --- --- ----- ----- Pre-tax (loss) income (36) 4 (61) (4) Income tax (benefit) expense (13) 4 (19) 4 Earnings of nonconsolidated associates and minority interests (58) (36) (99) (22) -- -- ---- -- GMAP (loss) $(81) $(36) $(141) $(30) == == === == GMA (1) Manufactured products sales and revenues $36,781 $29,930 $71,213 $62,950 Pre-tax income (loss) 2,288 (15) 4,603 1,407 Income tax expense 715 21 1,450 473 Earnings of nonconsolidated associates and minority interests (22) 12 (92) 34 ----- -- ----- ---- GMA income (loss) $1,551 $(24) $3,061 $968 ===== == ===== === (1) GMA's results include eliminations of transactions among GMNA, GME, GMLAAM, and GMAP. - 24 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Vehicle Unit Deliveries of Cars and Trucks - GMA Three Months Ended June 30, 1999 1998 ------------------------ ------------------------ GM as GM as a % of a % of Industry GM Industry Industry GM Industry -------- -- -------- -------- -- -------- (Units in Thousands) GMNA United States Cars 2,411 727 30.2 2,332 750 32.1 Trucks 2,325 669 28.8 2,209 683 30.9 ----- ------ ----- ------ Total United States 4,736 1,396 29.5 4,541 1,433 31.6 Canada and Mexico 636 178 28.0 683 193 28.3 ------ ------ ------ ------ Total GMNA 5,372 1,574 29.3 5,224 1,626 31.1 GME 5,362 538 10.0 4,899 451 9.2 GMLAAM 812 131 16.1 1,052 177 16.8 GMAP 2,691 109 4.0 2,573 118 4.6 ------- ------ ------- ------ Total Worldwide 14,237 2,352 16.5 13,748 2,372 17.3 ====== ===== ====== ===== Six Months Ended June 30, 1999 1998 ------------------------ ------------------------ GM as GM as a % of a % of Industry GM Industry Industry GM Industry -------- -- -------- -------- -- -------- (Units in Thousands) GMNA United States Cars 4,431 1,355 30.6 4,205 1,320 31.4 Trucks 4,336 1,203 27.7 3,959 1,207 30.5 ----- ----- ----- ----- Total United States 8,767 2,558 29.2 8,164 2,527 30.9 Canada and Mexico 1,179 330 28.0 1,207 331 27.5 ----- ------ ----- ------ Total GMNA 9,946 2,888 29.0 9,371 2,858 30.5 GME 10,707 1,048 9.8 9,920 943 9.5 GMLAAM 1,611 256 15.9 2,125 350 16.5 GMAP 5,768 209 3.6 5,555 253 4.5 ------- ------ ------- ------ Total Worldwide 28,032 4,401 15.7 26,971 4,404 16.3 ====== ===== ====== ===== Three Months Ended Six Months Ended June 30, June 30, ------------------ ----------------- 1999 1998 1999 1998 ------- -------- ------- ------- (Units in Thousands) Wholesale Sales GMNA Cars 754 637 1,537 1,303 Trucks 783 554 1,502 1,234 ----- ------ ----- ----- Total GMNA 1,537 1,191 3,039 2,537 ----- ----- ----- ----- GME Cars 520 555 954 938 Trucks 36 34 71 71 ---- ---- ----- ----- Total GME 556 589 1,025 1,009 --- --- ----- ----- GMLAAM Cars 93 116 168 224 Trucks 43 64 90 134 ---- ---- ---- --- Total GMLAAM 136 180 258 358 --- --- --- --- GMAP Cars 36 50 75 95 Trucks 62 48 116 118 -- -- --- --- Total GMAP 98 98 191 213 -- -- --- --- Total Worldwide 2,327 2,058 4,513 4,117 ===== ===== ===== ===== - 25 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMA Financial Review GMA reported income of $1.6 billion for the 1999 second quarter compared with a loss of $24 million for the prior year quarter. The increase in income from the prior year quarter was primarily due to continued improvement in the profitability of new vehicles and lower production at GMNA in the prior year quarter due to the work stoppages at two component plants in Flint, Michigan that halted production of wholesale units at 26 of 29 assembly plants in North America. These factors also contributed to the strong improvement in GMA's net margin to 4.2% for the second quarter of 1999 from (0.1%) for the second quarter of 1998. Income for the six months ended June 30, 1999 totaled $3.1 billion compared with income of $968 million for the prior year six-month period. The increase in income from the prior year six-month period was primarily due to improvement in the profitability of new vehicles, lower production at GMNA in the prior year quarter due to the work stoppages, and lower material and engineering costs. Manufactured products sales and revenues for GMA in the second quarter of 1999 were $36.8 billion compared with $30.0 billion in the second quarter of 1998. GMA's manufactured products sales and revenues for the six months ended June 30, 1999 totaled $71.2 billion compared with $63.0 billion for the prior year six-month period. These increases were primarily due to increases in wholesale sales volumes of 269,000 units from the prior year second quarter and 396,000 units from the prior year six months ended June 30, 1998. These increases in wholesale sales volumes are primarily due to GMNA's work stoppages in the prior year periods. Pre-tax income for the second quarter of 1999 increased to $2.3 billion compared with the prior year quarter pre-tax loss of $15 million and pre-tax income for the six months ended June 30, 1999 increased to $4.6 billion from $1.4 billion in the prior year period. These increases in pre-tax income were primarily due to continued improvement in the profitability of new vehicles and lower production at GMNA in the prior year quarter due to the work stoppages. GMA's worldwide vehicle deliveries were 2,352,000 for the second quarter of 1999, which represented a market share of 16.5% compared with 2,372,000 for the second quarter of 1998, which represented a market share of 17.3%. GMNA's market share for the second quarter of 1999 was 29.3% compared with 31.1% for the second quarter of 1998. For the six months ended June 30, 1999, GMNA's market share was 29.0% compared with 30.5% for the prior year six-month period. GMNA reported income of $1.5 billion for the 1999 second quarter compared with a loss of $(194) million for the prior year quarter. The improvement in GMNA's 1999 second quarter income was primarily due to the prior year's work stoppages, higher wholesale sales volumes, and lower material and engineering costs, partially offset by increased manufacturing costs and pre-production and launch costs associated with the new LeSabre, Impala, Monte Carlo, and Saturn LS models. Income for the six months ended June 30, 1999 totaled $2.9 billion compared with $647 million for the prior year six-month period. The improvement in income for the first six months of 1999 was primarily due to the prior year's work stoppages, higher wholesale sales volumes, continued improvement in the cost and profitablility of new vehicles, and lower material and engineering costs. This improvement was partially offset by increased manufacturing costs and pre-production and launch costs associated with the new vehicles mentioned above. Net price was slightly lower for the quarter at negative 0.2% year over year. Net price comprehends the percent increase/decrease a customer pays in the current period for the same comparably equipped vehicle produced in the previous year's period. GME reported income of $187 million for the 1999 second quarter compared with $124 million in the prior year quarter. The improvement in GME's 1999 second quarter income was primarily due to increased volumes primarily related to the Astra and Zafira and continued material cost improvements as a result of GM's global purchasing efforts. These factors were partially offset by competitive pricing pressure and by increased engineering expense associated with the model year 2000 mid lifecycle enhancements for the Vectra and Omega and the new model year 2001 Corsa. Income for the six months ended June 30, 1999 totaled $361 million compared with $223 million for the prior year six-month period. The improvement in income for the first six months of 1999 was primarily due to higher wholesale sales volumes. These improvements were partially offset by competitive pricing pressure during the second quarter and by increased engineering expense associated with the model year 2000 mid lifecycle enhancements for the Vectra and Omega and the new model year 2001 Corsa. GMLAAM reported a loss of $38 million for the 1999 second quarter compared with income of $48 million for the prior year quarter. The decrease in 1999 second quarter earnings compared to 1998 second quarter results was primarily due to significantly lower industry volumes due to the ongoing economic crisis throughout Latin America, partially offset by reduced material and structural costs. These factors also contributed to the losses for the six months ended June 30, 1999 which totaled $63 million compared with income of $101 million for the prior year six-month period. - 26 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMA Financial Review (concluded) GMAP reported a loss of $81 million for the 1999 second quarter compared with a loss of $36 million for the prior year quarter. The decrease in 1999 second quarter earnings compared to 1998 second quarter results was primarily due to decreased wholesale sales in the region, as well as decreased equity earnings due to ramp-up costs at Shanghi as Buick production gets underway and the finalization of the terms of our investment in India. Losses for the six months ended June 30, 1999 totaled $141 million compared with losses of $30 million for the prior year six-month period. The decrease in income for the first six-month period in 1999 was primarily due to decreased volumes in the region, decreased equity earnings at Isuzu due to the economic downturn in Asia, and continued spending associated with GMAP's growth strategy. Hughes Financial Highlights Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 1999 1998 1999 1998 ------- --------- ------- ------- (Dollars in Millions Except Per Share Amounts) Revenues $1,776 $1,369 $3,228 $2,660 ----- ----- ----- ----- Pre-tax (loss) income (113) 88 20 195 Income tax (benefit) expense (43) 24 (7) 55 Minority interests 6 9 13 10 Losses in nonconsolidated associates (34) (22) (65) (51) -- -- -- -- Net (loss) income $(98) $ 51 $ (25) $ 99 == == == == (Loss) Earnings used for computation of Available Separate Consolidated Net (Loss) Income (1) (2) $(94) $56 $(16) $110 (Loss) Earnings per share attributable to Class H common stock - Basic and Diluted (2) $(0.23) $0.14 $(0.04) $0.27 - ------------ (1)Excludes amortization of GM purchase accounting adjustments of $5 million for the second quarters of 1999 and 1998 and $11 million for the six-month periods ended June 30, 1999 and 1998, related to GM's acquisition of Hughes Aircraft Company (HAC) in 1985. Includes accrued preferred stock dividends of $2 million in 1999. (2)1998 results exclude the cumulative effect of accounting change of $9 million, after tax, due to Hughes' adoption of SOP 98-5, Reporting on the Costs of Start-Up Activities. GM has reported the $9 million charge in fourth quarter 1998 results and Hughes reported the change as a restatement of first quarter 1998 results. Hughes Financial Review Second quarter revenues increased 29.7% to $1.8 billion, compared with $1.4 billion in the second quarter of 1998. Revenues for the first six months of 1999 increased 21.3% to $3.2 billion compared with $2.7 billion in the same period of 1998. Revenue growth for the second quarter and first six months of 1999 compared to the same period in 1998 was primarily attributable to continued strong subscriber growth and higher average monthly revenues per subscriber for the DIRECTV(R) businesses, revenues from the PRIMESTAR medium-power direct-to-home and United States Satellite Broadcasting Company, Inc. (USSB) businesses, which were acquired on April 28, 1999 and May 20, 1999, respectively, increased sales of DIRECTV(TM) receiver equipment by Hughes Network Systems (HNS) and increased PanAmSat revenues from operating leases. These increases were offset by a decrease in Hughes Space and Communications (HSC) revenues due to contract revenue adjustments and delayed revenue recognition that resulted from increased costs and schedule delays on several new product lines. Hughes reported an operating loss, excluding amortization of purchase accounting adjustments related to GM's acquisition of HAC, of $97 million for the second quarter of 1999 compared with an operating profit, on the same basis, of $78 million for the second quarter of 1998. The operating loss for the first six months of 1999 was $133 million compared with an operating profit of $162 million for the first six months of 1998. The operating loss for the second quarter of 1999 was principally a result of the increased development costs and schedule delays at HSC that, resulted in a second quarter 1999 pre-tax charge of $125 million, higher goodwill amortization that resulted from the second quarter 1999 acquisitions of USSB and PRIMESTAR, and higher depreciation expense related to additions to PanAmSat's satellite fleet in late 1998 and early 1999. The operating loss for the first six months of 1999 also included a one-time pre-tax charge of $92 million that resulted from the termination of the Asia-Pacific Mobile Telecommunications satellite system contract due to export licenses not being issued. - 27 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Hughes Financial Review (continued) Hughes reported a pre-tax loss of $113 million for the second quarter of 1999, compared with pre-tax income of $88 million for the same period of 1998. Pre-tax income was $20 million for the first six months of 1999, compared with pre-tax income of $195 million for the first six months of 1998. The pre-tax loss for the second quarter of 1999 and the decrease in pre-tax income for the first six months of 1999 resulted primarily from the operating losses described above, lower interest income due to a decrease in cash and cash equivalents and increased interest expense related to increased borrowings. These losses were offset by the $155 million pre-tax gain that resulted from the settlement of the Williams patent infringement case. Taxes for the second quarter and first six months of 1999 and 1998 benefited from the favorable resolution of tax contingencies related to prior years. The income tax benefit recorded for the six months of 1999 resulted from the effect of these benefits on the low level of pre-tax income recognized in 1999 compared to 1998. Earnings (loss) used for computation of available separate consolidated net income (loss) for the second quarter of 1999 was a loss of $94 million, compared with earnings of $56 million for the second quarter of 1998, and a loss of $16 million for the first six months of 1999, compared with earnings of $110 million for the first six months of 1998. On July 28, 1999, Galaxy Latin America (GLA), Hughes' 70% owned subsidiary, acquired 77.8% of Galaxy Brasil, Ltda., the exclusive distributor of DIRECTV services in Brazil, from Tevecap S.A. for approximately $89 million plus the assumption of debt. In connection with the transaction, Tevecap sold its 10% equity interest in GLA to Hughes and the Cisneros Group, the remaining Galaxy Latin America partners. Our share of the purchase amounted to approximately $101 million and increased Hughes' ownership of GLA to 77.8%. On January 22, 1999, Hughes agreed to acquire PRIMESTAR's 2.3 million subscriber medium-power direct-to-home satellite business and the high-power satellite assets and direct-broadcast satellite orbital frequencies of Tempo Satellite, a wholly-owned subsidiary of TCI Satellite Entertainment, Inc. On April 28, 1999, the acquisition of PRIMESTAR's direct-to-home business was completed. The purchase price consisted of $1.1 billion in cash and 4.9 million shares of GM Class H common stock, for a total purchase price of $1.3 billion, based on the average market price of $47.87 per share of GM Class H common stock at the time the acquisition agreement was signed. The purchase price will be adjusted based upon the final adjusted net working capital of PRIMESTAR at the date of closing. The purchase price for the Tempo Satellite assets consisted of $500 million in cash. Of this purchase price, $150 million was paid on March 10, 1999 for a satellite that has not yet been launched and the remaining $350 million was paid on June 4, 1999 for an in-orbit satellite and 11 related satellite orbital frequencies. In December 1998, Hughes agreed to acquire all of the outstanding capital stock of USSB. USSB provided direct-to-home premium satellite programming in conjunction with DIRECTV's basic programming service. The purchase price, consisting of cash and GM Class H common stock, was approximately $1.6 billion, consisting of approximately $360 million in cash and 22.6 million shares of GM Class H common stock. The USSB acquisition was completed on May 20, 1999 and payment and delivery of GM shares were made to the former USSB shareholders in July 1999. Hughes has filed a shelf registration statement with the Securities and Exchange Commission with respect to an issuance up to $2.0 billion of debt securities from time to time. Subject to market conditions, Hughes expects to issue up to $1.0 billion of these securities in the third quarter of 1999. Hughes will use these funds principally to repay commercial paper borrowings incurred in connection with the PRIMESTAR, Tempo Satellite and USSB transactions and to fund short-term working capital requirements. On May 11, 1999, it was announced that Hughes will collaborate with America Online (AOL) on a new service that will combine digital satellite television programming from DIRECTV with AOL's new interactive television Internet service. HNS will design and build the initial dual purpose DIRECTV/AOL receiver equipment. The new service will be suited for both frequent Internet users and the mass market consumer who wants to connect to the Internet. On June 21, 1999, Hughes announced a more extensive strategic alliance with AOL to develop and market digital entertainment and Internet services nationwide. The new alliance is expected to accelerate subscriber growth and revenue-per-subscriber for the DIRECTV and DirecPC services, as well as expand the subscriber base for AOL's developing AOL TV and AOL-Plus broadband services. As part of the alliance, Hughes and AOL plan to jointly develop new content and interactive services for U.S. and international markets. Additionally, an extensive cross-marketing initiative will be instituted to market each company's products through their respective retail outlets and to their respective subscribers. As part of its marketing initiative with AOL, Hughes has committed to increase its sales and marketing expenditures over the next three years by approximately $1.5 billion for its DirecPC/AOL-Plus, DlRECTV, DlRECTV/AOL TV, and DirecDuo products and services. - 28 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Hughes Financial Review (concluded) As part of the alliance, AOL invested $1.5 billion in shares of GM Series H 6.25% Automatically Convertible Preference Stock. GM immediately invested the $1.5 billion received from AOL into shares of Hughes Series A Preferred Stock designed to correspond to the financial terms of the GM Series H 6.25% Automatically Convertible Preference Stock. For further discussion, refer to Note 8 to the GM consolidated financial statements. Financing and Insurance Operations Highlights of financial performance by GM's Financing and Insurance Operations business were as follows: Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------- 1999 1998 1999 1998 ------- -------- ------- ------- (Dollars in Millions) Financing revenues GMAC $3,361 $3,205 $6,638 $6,311 Other 210 215 442 419 ------ ------ ------ ------ Total $3,571 $3,420 $7,080 $6,730 ===== ===== ===== ===== Net income GMAC $391 $365 $783 $714 Other 34 29 15 44 ---- ---- ---- ---- Total $425 $394 $798 $758 === === === === - 29 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMAC Financial Highlights Three Months Ended Six Months Ended June 30, June 30, ------------------- ------------------ 1999 1998 1999 1998 ------ --------- ------ ------- (Dollars in Millions) Financing revenues Retail and lease financing $1,069 $950 $2,075 $1,852 Operating leases 1,797 1,809 3,592 3,594 Wholesale and term loans 495 446 971 865 ------ ------ ------ ------ Total automotive financing revenues 3,361 3,205 6,638 6,311 Interest and discount 1,538 1,455 3,051 2,839 Depreciation on operating leases 1,162 1,161 2,350 2,339 ----- ----- ----- ----- Net automotive financing revenue 661 589 1,237 1,133 Insurance premiums earned 442 480 889 951 Mortgage revenue 730 500 1,458 918 Other income 366 337 740 668 ------ ------ ------ ------ Net financing revenue and other 2,199 1,906 4,324 3,670 Expenses 1,559 1,378 3,043 2,627 ----- ----- ----- ----- Pre-tax income 640 528 1,281 1,043 Income tax expense 249 163 498 329 --- --- --- --- Net income $391 $365 $783 $714 === === === === Net income from automotive financing operations $275 $288 $504 $534 Net income from insurance operations 50 54 115 134 Net income from mortgage operations 66 23 164 46 ---- ---- --- ---- Net income $391 $365 $783 $714 === === === === GMAC Financial Review Consolidated net income for the second quarter and first six months of 1999 increased by 7% and 10% compared to the same periods during 1998. Net income from automotive financing operations declined 5% during the second quarter of 1999, compared to the same period in 1998. The reduction in earnings was primarily a result of a significantly lower effective income tax rate for the same period in 1998. Earnings from insurance operations decreased by 7% during the second quarter of 1999, compared to the same period during 1998. Earnings were lower primarily due to lower underwriting results in the current quarter, partially offset by higher capital gains. Net income from mortgage operations during the second quarter was $43 million higher than the second quarter of 1998. The increase was primarily attributable to improved liquidity in the capital markets coupled with unusually low earnings in the second quarter of 1998, which were negatively impacted by accelerated prepayment experience on mortgage assets. During the three months and six months ended June 30, 1999, GMAC financed 33.1% and 32.4% of new GM vehicles delivered in the U.S., respectively, down from 36.5% and 35.7% for the same periods in 1998. The decline in financing penetration was primarily the result of a reduction in retail rate incentive programs sponsored by GM during 1999 and competitive market conditions. In the United States, inventory financing was provided for 860,000 and 1,728,000 new GM vehicles during the second quarter and first six months of 1999, respectively, compared with 643,000 and 1,367,000 new GM vehicles during the respective periods in 1998. The primary cause of the increase in new GM vehicles financed was due to work stoppages at two GM component plants in June of last year that halted production of wholesale units at 26 of 29 assembly plans in North America. GMAC's wholesale financing represented 65.0% of all GM U.S. vehicle sales to dealers during the first six months of 1999, up from 63.1% for the comparable period a year ago. The increase in wholesale penetration levels was a result of competitive pricing strategies by GMAC. Automotive financing revenue totaled $3.4 billion and $6.6 billion in the second quarter and first six months of 1999, respectively, compared to $3.2 billion and $6.3 billion for the same periods in 1998. The increase was mainly due to higher average retail and other loan receivable balances which resulted from continued retail financing incentives sponsored by GM. Additionally, increased wholesale revenues resulting from higher average wholesale balances contributed to the change. The increased wholesale balances were primarily attributable to the 1998 work stoppages previously mentioned. Insurance premiums earned, mortgage revenue and other income totaled $1.5 billion and $3.1 billion for the second quarter and six months ended June 30, 1999, respectively, compared to $1.3 billion and $2.5 billion during the comparable 1998 periods. The increase in 1999 over 1998 was primarily the result of substantial increases in mortgage servicing and processing fees. These increases were slightly offset by a reduction in insurance premiums earned due to a decline in personal line coverages. - 30 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMAC Financial Review (concluded) GMAC's worldwide cost of borrowing for the second quarter and first six months of 1999 averaged 5.53% and 5.52%, respectively, a decrease of 51 and 55 basis points from the comparable periods of a year ago. Total borrowing costs for U.S. operations averaged 5.45% for both the second quarter and first six months of 1999, compared to 5.96% and 6.03% for the respective periods in 1998. The lower average borrowing costs for the first six months of 1999 are largely a result of lower market interest rates. Consolidated salaries and other operating expenses totaled $1.1 billion and $2.1 billion for the second quarter and first six months of 1999, respectively, compared to $870 million and $1.7 billion for the comparable periods last year. The increase was mainly attributable to continued growth. Annualized net retail losses were 0.51% and 0.61% of total average serviced automotive receivables during the second quarter and first six months of 1999, respectively, compared to 0.73% and 0.88% for the same periods last year. The provision for credit losses totaled $230 million and $229 million for the six- month periods ended June 30, 1999 and 1998, respectively. Although comparable period loss rates declined, the higher loss provision reflects an increase in retail receivables during the first six months of 1999 and favorable wholesale loss provision adjustments during the first quarter of 1998. The effective income tax rate for the first six months of 1999 was 38.8%, compared to 31.6% and 31.5% for the periods ended December 31, 1998 and June 30, 1998, respectively. The increase in the effective tax rate can be attributed to a significantly lower effective tax rate for the first six months of 1998 due to a decrease in U.S. and foreign taxes assessed on foreign source income. On March 8, 1999, GMAC announced it acquired a majority interest in On:Line Finance Holdings and its subsidiaries. The acquisition will expand GMAC's range of finance products available through dealers to automotive customers. On:Line Finance is one of the largest independent retail used car finance providers in the United Kingdom. On June 8, 1999, GMAC announced an agreement to acquire the asset-based lending and factoring business of The Bank of New York for approximately $1.8 billion. The purchase of BNY Financial Corporation (BNYFC) will enable GMAC to expand its existing asset-based lending internationally and enter the factoring business in a substantial way. BNYFC is one of the leading asset-based lending and factoring operations in North America and the United Kingdom. The transaction was completed on July 22, 1999. The name of the new GMAC subsidiary is GMAC Commercial Credit LLC. On June 11, 1999, GMAC announced it has agreed to terms for the purchase of Arriva Automotive Solutions Limited, a leading contract leasing provider in the United Kingdom. The transaction, including debt refinancing, is valued at (pound)484 million (approximately $775 million at the June 30, 1999 exchange rate), and was completed on July 30, 1999. Year 2000 Computers, software applications and microprocessors (embedded in a variety of products either made or used by GM) have the potential for operational problems if they lack the capability to handle the transition to the Year 2000. Because this issue has the potential to cause disruption of GM's business operations, GM has implemented 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 established communications and site assessments with its suppliers, its dealers and other third parties 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 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, back to when GM began installing microprocessors capable of processing date information. Most of the microprocessors reviewed have no date-related functionality and, accordingly, have no Year 2000 issues. Of the vehicles with microprocessors that perform date-related functions, none were found to have any Year 2000 issues. GM has multiple Year 2000 program teams 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), GM's primary information technology supplier, pursuant to a Master Service Agreement with GM. The expenditures and other figures contained herein have been adjusted to reflect the spin-off of Delphi Automotive Systems. - 31 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Year 2000 (continued) The Year 2000 program is being implemented in seven phases, some of which are being conducted concurrently: Inventory -- This first phase consisted of the identification and validation of an inventory of all systems that could be affected by the Year 2000 issue. The inventory phase began in earnest in 1996 and is complete. The effort identified approximately 6,100 business information systems and about 1.4 million infrastructure items and embedded systems. Assessment -- The assessment phase included the initial testing, code scanning, and supplier contacts to determine whether remediation was needed and, if so, the development of a remediation plan. The assessment of business information systems is completed and included the determination that about one quarter of these systems were "critical" based on criteria such as the potential for business disruption. The assessment of infrastructure items and embedded systems is also complete. Remediation -- This phase involves the design and execution of a remediation plan, followed by testing for adherence to the design. GM has substantially completed the remediation of its systems. Remediation of remaining systems is scheduled for completion by the end of September 1999. System Test -- The system test phase involves testing of remediated items to ensure that they function normally after being replaced in their original operating environment. System test is closely related to the remediation phase and follows essentially the same schedule. Implementation -- Implementation is the 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 -- This phase includes the planning for and testing of integrated systems in a Year 2000 ready environment, including ongoing auditing and follow-up. Three distinct types of readiness tests are being conducted: (1) individual system tests; (2) tests of groups of related systems that comprise a major business process or manufacturing function; and (3) running plant floor systems while production is in process. The readiness test phase began in the fourth quarter of 1998. To date, individual system tests have been completed on more than 99% of GM's critical applications. Approximately 300 integrated business process tests and 900 integrated manufacturing system tests have been completed. More than 100 live production tests have also been completed and adjudged to be successful. All readiness testing is scheduled for completion by the end of September 1999. In addition to GM readiness testing, a third party Independent Validation & Verification (IV&V) process is being used to examine remediated code to identify potential oversights or errors in select mission-critical systems. While the IV&V process is ongoing, the results to date have validated the success of GM's testing program. Contingency Planning -- This final step involves the development and execution of plans that focus on areas of significant concern and the concentration of resources to address those issues both proactively and reactively. GM 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's contingency planning has identified systems, business processes and some suppliers that it believes are potentially vulnerable to Year 2000 problems. GM contingency planning also has addressed 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 has focused on minimizing the scope and duration of any disruptions by developing comprehensive, detailed plans. These reactive plans permit a flexible, real-time response to specific problems that may arise at individual locations around the world. - 32- GENERAL MOTORS CORPORATION AND SUBSIDIARIES Year 2000 (continued) A natural extension of GM's contingency planning is the deployment of a command center structure, that is scheduled to begin limited operations in September 1999. The Global Command Center at the GM Technical Center will have redundant communication and other systems, allowing for uninterrupted operations and connectivity with other GM command centers strategically located around the world. Detailed plans and procedures are currently being developed and will be validated during the fourth quarter of 1999. The centers will be staffed with appropriate personnel 24 hours a day, seven days a week beginning the week of December 27, 1999. Operation will continue for as long as conditions warrant. 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 90,000 supplier sites that service GM throughout the world. Responses to these questionnaires, which were generally sent to GM's principal suppliers, were 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. However, GM is not relying on the receipt of responses to questionnaires or written assurances from suppliers regarding their Year 2000 readiness. GM has its own review and assistance program for suppliers considered to be critical to GM's operations, including more than 4,200 on-site assessments to date and more than 2,500 Year 2000 program management workshops for more than 2,500 supplier companies. GM's 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. Additionally, GM has established a program to provide further remediation assistance to suppliers that, based upon GM's assessment efforts, are believed to be at high risk of non-compliance. This supplier assistance program currently includes providing remediation consultants to work with suppliers on developing, implementing and accelerating their own Y2K readiness efforts. With specific regard to the "off-shore" component of critical suppliers, GM's readiness activities are being managed by a global Y2K supplier readiness organization with regional offices and personnel in Mexico City, Mexico; Russelsheim, Germany; Sao Paulo, Brazil; Melbourne, Australia; and Singapore, in addition to the supplier readiness program headquarters in Detroit. Of the critical supplier sites being tracked globally in 54 countries for specific risk management action, approximately 40% are outside of North America. Of the high-risk suppliers who have received or are receiving direct remediation assistance, approximately 77% are outside of North America. For the small percentage of suppliers still judged to be "failure-likely" after completion of the remediation assistance program, GM is currently taking proactive steps to minimize the possibility of business interruption. These steps include, among other actions, deploying further intensive supplier assistance and follow-up, establishing buffer inventories, and working with supplier personnel to develop internal supplier contingency plans to deal with likely failure scenarios. To address uncertainties in GM's risk management process and Y2K readiness factors outside the direct control of GM or its suppliers, GM has developed reactive contingency plans to minimize business disruption related to these uncertainties. These initiatives include emergency response teams, allocation plans, strategically located Command Centers, and "early warning" communication links with key suppliers during the millennium transition. GM is placing a high priority on contingency planning, Command Centers and in-depth risk management for those countries and global regions that, as a result of prior assessment activities, show a high concentration of failure-likely suppliers or utility sites. 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. EDS is providing these services as part of normal fixed price services and other ongoing payments. - 33 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Year 2000 (concluded) GM's current forecast is that its total direct expenditures, plus the value of services performed by EDS attributable to GM's Year 2000 program, will be between $564 million and $624 million. This amount includes the following: - an estimated $360 million to $420 million in direct GM expenditures. This estimate includes a $62 million payment from GM 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 material financial loss to GM due to the millennium change; - and an estimated $204 million representing the value of Year 2000 services that EDS is providing to GM as part of normal fixed price services and other ongoing payments to EDS under the Master Service Agreement. This estimate does not include the $62 million additional payment from GM to EDS at the end of the first quarter of 2000 mentioned above. GM has incurred approximately $142 million of direct spending during 1997 and 1998, and approximately $96 million in 1999 through the end of the second quarter. The estimated value of services provided to GM by EDS under the Master Service Agreement from January 1997 through the end of the second quarter of 1999 attributable to work performed in connection with GM's Year 2000 program was approximately $233 million. Thus, the total direct expenditures by GM, and value of Year 2000-related services performed by EDS attributable to GM's Year 2000 program, for the period from January 1997 through June 1999, amounted to approximately $471 million. Despite the incremental Year 2000 spending expected to be incurred throughout the Corporation, GM's current business plan projects declining information technology expenses. GM's total Year 2000 costs noted above do not include the cost of information technology projects that have been delayed due to Year 2000, which are estimated to be approximately $27 million or information technology projects that have been accelerated due to Year 2000 which are estimated to be approximately $20 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. As previously stated, the financial and other data contained herein have been adjusted to reflect the spin-off of Delphi Automotive Systems. Statements made herein regarding 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 June 30, 1999 totaled $16.7 billion compared with $11.0 billion at June 30, 1998 and $13.1 billion at December 31, 1998. The increase in cash and marketable securities from June 30, 1998 and December 31, 1998 to June 30, 1999 was primarily due to stronger operating cash flows in the first six months of 1999 versus 1998 due to the work stoppages during 1998. The total VEBA assets in the VEBA trust used to pre-fund part of GM's other postretirement benefits liability approximated $4.9 billion at June 30, 1999 and $4.6 billion at December 31, 1998, and June 30, 1998. - 34 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Automotive, Electronics and Other Operations (concluded) Net liquidity, calculated as cash and marketable securities less the total of loans payable and long-term debt, was $5.4 billion at June 30, 1999, compared with $1.8 billion at December 31, 1998 and $(810) million at June 30, 1998. GM previously indicated that it had a goal of maintaining $13.0 billion of cash and marketable securities in order to continue funding product development programs throughout the next downturn in the business cycle. This $13.0 billion target includes cash to pay certain costs that were pre-funded in part by VEBA contributions. Long-term debt was $7.4 billion at June 30, 1999, compared to $7.1 billion at December 31, 1998 and $6.9 billion at June 30, 1998. The ratio of long-term debt to long-term debt and GM investment in Automotive, Electronics and Other Operations was 55.9% at June 30, 1999, compared to 58.1% at December 31, 1998 and 52.2% at June 30, 1998. The ratio of long-term debt and short-term loans payable to the total of this debt and GM investment was 58.6% at June 30, 1999, compared to 61.8% at December 31, 1998 and 58.2% at June 30, 1998. Financing and Insurance Operations GM's Financing and Insurance Operations primarily consist of GMAC. At June 30, 1999, GMAC owned assets and serviced automotive receivables totaling $146.7 billion, $8.0 billion above year-end 1998, and $21.9 billion above June 30, 1998. Earning assets totaled $127.1 billion at June 30, 1999, compared to $125.1 billion and $108.1 billion at December 31 and June 30, 1998, respectively. The higher balances compared to second quarter of last year was primarily attributable to increases in serviced wholesale, retail, and term loan receivables as well as continued growth in mortgage related assets. GMAC's finance receivables, including sold receivables, totaled $87.3 billion at June 30, 1999, $7.4 billion above December 31, 1998 levels and $14.8 billion above June 30, 1998 levels. The change from December 31, 1998 can be attributed to a $3.5 billion increase in serviced retail receivables, and a $2.3 billion increase in serviced wholesale receivables. Additionally, on-balance sheet term loans increased by $2.0 billion. The year-to-year increase was a result of a $6.9 billion increase in serviced wholesale receivables, and a $5.0 billion increase in serviced retail receivables. In addition, other finance receivables increased by $3.3 billion. The increase in retail receivable balances over December 31 and June 30, 1998 was due to continued retail financing incentives sponsored by GM. The increase in wholesale receivable balances over December 31 and June 30, 1998 was a result of the 1998 work stoppages previously mentioned and higher penetration. 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 June 30, 1999 totaled $109.1 billion, compared with $106.2 billion at December 31, 1998 and $89.6 billion at June 30, 1998. GMAC's ratio of debt to total stockholder's equity at June 30, 1999 was 10.5:1, compared to 10.8:1 at December 31, 1998 and 9.6:1 at June 30, 1998. The higher borrowings were used to fund increased earning asset levels. GMAC and its subsidiaries maintain substantial bank lines of credit which totaled $45.6 billion at June 30, 1999, compared to $42.9 billion at year-end 1998 and $40.7 billion at June 30, 1998. The unused portion of these credit lines totaled $35.8 billion at June 30, 1999, $2.6 billion and $3.9 billion higher than December 31 and June 30, 1998, respectively. Book Value Per Share Book value per share of $1-2/3 par value common stock was $20.02 at June 30, 1999, compared with $20.00 at December 31, 1998 and $21.02 at June 30, 1998. Book value per share of GM Class H common stock was $12.01 at June 30, 1999, compared with $12.00 at December 31, 1998 and $12.61 at June 30, 1998. Book value per share was determined based on the liquidation rights of the various classes of common stock. Return on Net Assets (RONA) As part of its shareholder value initiatives, GM has adopted RONA as a performance measure to heighten management's focus on balance sheet investments and the return on those investments. GM's RONA calculation is based on principles established by management and approved by the Board of Directors. GM's 1999 second quarter RONA for continuing operations on an annualized basis, excluding Hughes, was 16.3%. - 35 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES CASH FLOWS Automotive, Electronics and Other Operations Net cash provided by operating activities was $12.8 billion during the six months ended June 30, 1999 compared with $368 million for the prior year period. The increase in net cash provided by operating activities was primarily the result of increased income from continuing operations and the net changes in operating assets and liabilites. These were primarily related to increases in accounts payable resulting from an extension of payment terms and increases in accrued and other liabilities. Net cash used in investing activities amounted to $9.4 billion during the six months ended June 30, 1999 compared with $1.9 billion in the prior year period. The increase in net cash used in investing activities was primarily attributable to increased cash used for investments in companies, investments in marketable securities, and operating leases. Net cash used in financing activities was $832 million during the six months ended June 30, 1999 compared with $963 million in the prior year period. The decrease in cash used for financing activities during the first six months of 1999 was primarily due to net decreases in long-term debt and reduced stock repurchases and proceeds from issuing preference stock in the second quarter of 1999 partially offset by larger decreases in long-term debt and short-term loans payable. Financing and Insurance Operations Cash provided by operating activities totaled $8.5 billion and $4.0 billion during the six months ended June 30, 1999 and 1998, respectively. The additional operating cash flow was primarily the result of increased proceeds on the sale of mortgage loans and mortgage related securities held for trading and decreases in other miscellaneous assets and investments. These inflows were partially offset by increases in purchases of mortgage loans and mortgage related securities held for trading. Cash used for investing activities during the six months ended June 30, 1999 totaled $8.6 billion, a $2.4 billion increase in cash used compared to the same period last year. Cash usage increased primarily as a result of net increases in acquisitions of finance receivables compared to liquidations of such receivables, partially offset by higher proceeds from sales of finance receivables. Cash provided by financing activities during the six months ended June 30, 1999 totaled $2.3 billion, compared with cash provided of $3.3 billion during the comparable 1998 period. The change was primarily the result of a reduction in short-term debt, partially offset by an increase in long-term debt. 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. On August 2, 1999, the GM Board declared a quarterly cash dividend of $0.50 per share on $1-2/3 par value common stock, payable September 10, 1999, to holders of record as of August 2, 1999. The GM Board also declared quarterly dividends on the Series D and Series G Depositary Shares of $0.495 and $0.57 per share, respectively, payable November 1, 1999, to holders of record on October 4, 1999. The Series B preference stock was redeemed on April 5, 1999, and as a result, the amount paid out on that date to the Series B shareholders of record included accrued and unpaid dividends as part of the total redemption price. With respect to GM Class H common stock, the GM Board determined that it will not pay any cash dividends at this time in order to allow the earnings of Hughes to be retained for investment in its telecommunications and space businesses. On August 2, 1999 the GM Board declared two dividends on the GM Series H 6.25% Automatically Convertible Preference Stock. A dividend of $0.5853 per share of GM Series H 6.25% Automotically Convertible Preference Stock is payable on August 2, 1999, to the sole holder of record on that date for the period between the close of the transaction and the end of the second quarter. A quarterly dividend of $8.7793 per share for the GM Series H 6.25% Automatically Convertible Preference Stock is payable November 1, 1999, to the holder of record on October 4, 1999. - 36 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Employment and Payrolls Worldwide employment at June 30, (in thousands) 1999 1998 ---- ---- GMNA 219 231 GME 83 81 GMLAAM 22 26 GMAP 10 9 GMAC 26 22 Hughes 18 15 Other 12 11 ---- ----- Total employees 390 395 === === Three Months Ended Six Months Ended June 30, June 30, ------------------- ------------------ 1999 1998 1999 1998 ------- ------- ------- ------ Worldwide payrolls - (in billions) $5.6 $5.0 $11.0 $10.3 === === ==== ==== New Accounting Standard In June 1999, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 - an Amendment of FASB Statement No. 133. This statement defers, for one year, the effective date of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, to those fiscal years beginning after June 15, 2000. SFAS No. 133 requires all derivatives to be recorded as either assets or liabilities and the instruments to be measured at fair value. Gains or losses resulting from changes in the values of those derivatives are to be recognized immediately or deferred depending on the use of the derivative and whether or not it qualifies as a hedge. GM will adopt SFAS No. 133 by January 1, 2001, as required. Management is currently assessing the impact of this statement on GM's results of operations and financial position. - 37 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES PART II ITEM 1. LEGAL PROCEEDINGS (a) Material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Corporation became, or was, a party during the quarter ended June 30, 1999 or subsequent thereto, but before the filing of this report are summarized below. With respect to the previously reported putative class actions alleging defects in vehicle paint, two additional suits have been filed involving similar factual and legal issues. On May 16, 1999, the Corporation was served with a putative class action filed in the Court of Common Pleas of Philadelphia County, Pennsylvania (Scott Haverdink v. General Motors Corporation). The named plaintiff purports to represent a class of Pennsylvania residents who purchased or leased model year 1985 through 1997 GM vehicles which have exhibited peeling paint and alleges that vehicles painted using a application process which omits a primer surfacer layer are inherently defective. The Complaint includes claims of breach of express warranty, breach of contract and alleged violation of the Pennsylvania Unfair Trace Practices Consumer Protection Law. On June 2, 1999, a statement of claim against General Motors Corporation and General Motors of Canada Limited was filed in support of a putative class action in the Supreme Court of British Columbia. (Darryl Oshanek v. General Motors Corporation). The named plaintiff purports to represent a class of consumers resident in British Columbia who purchased 1986 through 1997 model year GM vehicles which have experienced peeling paint and asserts a single count under British Columbia's Deceptive Trade Practices Act. No determination has been made as to whether either case may proceed as a class action. * * * With respect to the previously reported nationwide settlement of the class action involving the 1973-1987 model Chevrolet and GMC full-size pickup trucks with fuel tanks mounted outside the frame rails, the Louisiana trial court has given final approval to that settlement. No appeals from the approval were filed. However, after the appeal time had run, over GM's objections, plaintiffs obtained an order from the trial court modifying certain express provisions of the approved settlement. Those changes are directly contrary to the order approving the settlement and two prior consent orders. GM appealed to the Louisiana Court of Appeal which granted a stay of the order modifying the settlement and ordered that the appeal be permitted. * * * On June 3, 1999, the National Rural Telecommunications Cooperative (NRTC) filed a lawsuit against DIRECTV, Inc. and Hughes Communications Galaxy, Inc. (together, "DIRECTV") in United States District Court for the Central District of California, alleging that DIRECTV has breached the DBS Distribution Agreement (the "Agreement") with the NRTC. The Agreement provides the NRTC with exclusive distribution rights, in certain specified portions of the United States, to DIRECTV programming delivered over 27 of the 32 frequencies at the 101 degrees west longitude orbital location. The NRTC claims that DIRECTV has wrongfully deprived it of the exclusive right to distribute programming formerly provided by USSB over the other 5 frequencies at 101 degrees. DIRECTV denies that the NRTC is entitled to exclusive distribution rights to the former USSB programming because the NRTC's exclusive distribution rights are limited to programming distributed over 27 of the 32 frequencies at 101 degrees. The NRTC's complaint seeks, in the alernative, the right to distribute former USSB programming on a non-exclusive basis. DIRECTV maintains that the NRTC's right under the Agreement is to market and sell the former USSB programming as its agent. DIRECTV intends to vigorously defend the NRTC claims. DIRECTV has also filed a counterclaim against the NRTC seeking a declaration of the parties' rights under the Agreement in connection with two issues: the term of the Agreement and the NRTC's right of first refusal. DIRECTV contends that the term of the Agreement is measured by the life of the DBS-1 satellite and that the term of the Agreement ends when either the fuel on board DBS-1 is depleted to less than 6% of the initial fuel mass or fewer than 8 transponders are capable of meeting performance specifications. The NRTC contends that the term of the Agreement is measured by some combination of the lives of DBS-1 and the other satellites at 101 degrees. Upon the expiration of DBS-1, the NRTC has a right of first refusal under the Agreement to distribute in its territories a 20-channel video service for which it will have to secure programming rights. The NRTC contends that the right of first refusal would permit it to contunue its business as currently conducted. DIRECTV seeks a declaration that the NRTC's right of first refusal is limited to what is set forth in the Agreement. * * * - 38 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 1. LEGAL PROCEEDINGS - (concluded) In connection with the previously reported matter filed before the International Trade Commission (ITC) by Personalized Media Communications, Inc. (PMC) against DIRECTV, U.S. Satellite Broadcasting Company, Hughes Network Systems and other manufacturers of receivers for the DIRECTV system alleging infringement of one of PMC's patents, PMC moved for dismissal of the proceeding, which was granted, terminating the action. The related action filed by PMC in the U.S. District for the Northern District of California, which was stayed pending outcome of the ITC proceeding, remains outstanding. * * * On July 9, 1999, a jury in a Los Angeles Superior Court in the matter of Anderson et. al, v. General Motors Corporation, returned a verdict of $4.9 billion against General Motors in a product liability lawsuit involving a post-collision, fuel fed fire in a 1979 Chevrolet Malibu. The award consisted of $102 million in compensatory damages and $4.8 billion in punitive damages. This case arose out of an accident on December 24,1993. While the plaintiffs were stopped at a red light, they were struck in the rear by a 1977 Buick Regal going approximately 70 mph. The driver of the Regal was intoxicated, having a blood alcohol level of .20, almost three times the California limit. The ensuing post-crash fire burned all of the occupants of the Malibu with the children receiving the most severe burns. Plaintiffs claimed that the Malibu's fuel tank, which was located behind the rear axle, should have been located over the axle. Alternatively they claimed the tank should have been shielded or incorporated a bladder. GM believes that, by any measure, the 1979 Malibu was a safe passenger car. The Malibu's fuel tank location was similar to that in most other vehicles of the same size and vintage and its design met or exceeded the applicable FMVSS 301 standard, having passed a 50 mph rear-impact test that few other cars on the market in 1979 would have passed. Even the alternative designs suggested by the plaintiffs would have been compromised in such a severe crash. GM was not allowed to introduce other compelling evidence that the Malibu's fuel system was well-designed. Lastly, although the jury was asked to apportion the non-economic compensatory damages between GM and the driver of the Regal, they were not informed about his intoxication. GM will vigorously pursue post-trial motions and it's right of appeal. GM believes that the design of the subject Chevrolet Malibu was not responsible for plaintiff's injuries, that numerous evidentiary and procedural reversible errors occurred at the trial and that as a matter of law, GM's conduct does not support any punitive damages. The cost of any bond GM may have to post, if any, is not expected to be material to the Corporation's financial results. 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 condition or results of operations. * * * * * * - 39 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS a) The annual meeting of stockholders of the Registrant was held on June 7, 1999. At that meeting, the following matters were submitted to a vote of the stockholders of General Motors Corporation: 1999 General Motors Annual Meeting Final Voting Results (All classes of common stock) Proposal Voting Results - -------- -------------- Votes* Percent** ------ --------- Item No. 1 Nomination and Election of Directors The Judges subscribed and delivered a certificate reporting that the following nominees for directors had received the number of votes* set opposite their respective names. Percy N. Barnevik For 539,701,037 98.2% Withheld 9,943,505 1.8 John H. Bryan For 537,705,273 97.8 Withheld 11,939,269 2.2 Thomas E. Everhart For 539,462,782 98.1 Withheld 10,181,760 1.9 Charles T. Fisher, III For 537,450,910 97.8 Withheld 12,193,633 2.2 George M. C. Fisher For 539,583,839 98.2 Withheld 10,060,703 1.8 Karen Katen For 539,640,392 98.2 Withheld 10,004,150 1.8 J. Willard Marriott, Jr. For 537,531,107 97.8 Withheld 12,113,435 2.2 Ann D. McLaughlin For 537,110,060 97.7 Withheld 12,534,482 2.3 Harry J. Pearce For 537,546,040 97.8 Withheld 12,098,502 2.2 Eckhard Pfeiffer For 539,681,075 98.2 Withheld 9,963,467 1.8 John G. Smale For 539,251,944 98.1 Withheld 10,392,698 1.9 John F. Smith, Jr. For 539,640,443 98.2 Withheld 10,004,099 1.8 Louis W. Sullivan For 539,172,056 98.1 Withheld 10,472,486 1.9 G. Richard Wagoner, Jr. For 539,736,414 98.2 Withheld 9,908,128 1.8 Dennis Weatherstone For 539,605,894 98.2 Withheld 10,038,648 1.8 Item No. 2 A proposal of the Board of For 545,162,088 99.2% Directors that the stockholders Against 2,160,204 0.4 ratify the selection of Abstain 2,322,049 0.4 Deloitte & Touche LLP as independent public accountants for the year 1999. - 40 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - Concluded Proposal Voting Results - -------- -------------- Votes* Percent** ------ --------- Item No. 3 A stockholder proposal that the For 23,966,618 5.1% Board of Directors take necessary Against 443,018,481 93.7 steps to identify by name and Abstain 5,896,913 1.2 corporate title those executive officers who are contractually entitled to receive in excess of $250,000 annually. Item No. 4 A stockholder proposal that the For 20,807,472 4.4% Officers and Board of Directors Against 445,982,796 94.3 consider the discontinuance of all Abstain 6,081,081 1.3 bonuses immediately, and options, rights, SAR's, etc. after termination of any existing programs for top management. Item No. 5 A stockholder proposal regarding For 20,541,768 4.4% global warming on our public Against 429,395,033 90.8 health and welfare. Abstain 22,827,068 4.8 Item No. 6 A stockholder proposal regarding For 127,113,345 26.9% steps necessary to provide for Against 323,132,436 68.3 cumulative voting in the election Abstain 22,603,150 4.8 of directors. Item No. 7 A stockholder proposal to limit For 31,860,929 6.8% the outside board memberships Against 435,198,586 92.0 of GM directors. Abstain 5,812,021 1.2 Item No. 8 A stockholder proposal to have For 18,818,674 4.0% the board nominate an employee Against 447,623,101 94.6 director, chosen from one of Abstain 6,429,677 1.4 the company's recognized labor unions. Item No. 9 A stockholder proposal to have For 63,055,754 13.3% only independent directors Against 403,328,008 85.3 be eligible for key board Abstain 6,470,228 1.4 committees. * Numbers represent the aggregate voting power of all votes cast with holders of $1-2/3 par value common stock casting one vote per share and holders of GM Class H common stock casting 0.6 vote per share. ** Percentages represent the aggregate voting power of both classes of GM common stock cast for each item. * * * * * * - 41 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS (Including Those Incorporated by Reference). Exhibit Number Exhibit Name Page No. - ------ ------------ -------- 99 Hughes Electronics Corporation Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations 43 27 Financial Data Schedule (for Securities and Exchange Commission information only) (b) REPORTS ON FORM 8-K. Eleven reports on Form 8-K, dated April 5, 1999, April 9, 1999, April 12, 1999 (3), April 14, 1999, April 28, 1999, May 12, 1999, May 25, 1999, May 28, 1999 and June 21, 1999 were filed during the quarter ended June 30, 1999 reporting matters under Item 5, Other Events and reporting certain agreements under Item 7, Financial Statements, Pro Forma Financial Information, and Exhibits. * * * * * * SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. GENERAL MOTORS CORPORATION -------------------------- (Registrant) Date August 16, 1999 /s/Peter R. Bible - -------------------- ----------------- (Peter R. Bible, Chief Accounting Officer) - 42 - EX-99 2 HUGHES INFORMATION EXHIBIT 99 HUGHES ELECTRONICS CORPORATION ITEM 1. FINANCIAL STATEMENTS STATEMENTS OF INCOME (LOSS) AND AVAILABLE SEPARATE CONSOLIDATED NET INCOME (LOSS) (Unaudited) Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ---------- -------- -------- --------- (Dollars in Millions Except Per Share Amounts) Revenues Direct broadcast, leasing and other services $1,065.1 $606.4 $1,800.8 $1,205.3 Product sales 710.9 762.6 1,427.0 1,454.7 ------- ------- ------- ------- Total Revenues 1,776.0 1,369.0 3,227.8 2,660.0 ------- ------- ------- ------- Operating Costs and Expenses Cost of products sold 685.7 580.6 1,354.9 1,122.9 Broadcast programming and other costs 478.6 250.8 770.2 515.6 Selling, general and administrative expenses 548.5 359.2 953.3 661.8 Depreciation and amortization 159.8 100.2 282.8 197.9 Amortization of GM purchase accounting adjustments 5.3 5.3 10.6 10.6 ------- ------- ------- ------- Total Operating Costs and Expenses 1,877.9 1,296.1 3,371.8 2,508.8 ------- ------- ------- ------- Operating Profit (Loss) (101.9) 72.9 (144.0) 151.2 Interest income 4.9 30.6 18.5 68.1 Interest expense (12.4) (2.9) (19.3) (5.9) Other, net (37.5) (35.1) 100.2 (69.4) -------- ------- -------- ------- Income (Loss) Before Income Taxes, Minority Interests and Cumulative Effect of Accounting Change (146.9) 65.5 (44.6) 144.0 Income tax provision (benefit) (42.5) 23.3 (6.7) 54.7 Minority interests in net losses of subsidiaries 6.8 8.6 13.3 9.9 -------- ------- -------- ------- Income (Loss) before cumulative effect of accounting change (97.6) 50.8 (24.6) 99.2 Cumulative effect of accounting change, net of taxes - - - (9.2) ------- ------- ------- ------- Net Income (Loss) (97.6) 50.8 (24.6) 90.0 Adjustments to exclude the effect of GM purchase accounting adjustments 5.3 5.3 10.6 10.6 ------ ----- ----- ------ Earnings (Loss) excluding the effect of GM purchase accounting adjustments (92.3) 56.1 (14.0) 100.6 Preferred stock dividends (1.6) - (1.6) - ------ ------- ----- --------- Earnings (Loss) Used for Computation of Available Separate Consolidated Net Income (Loss) $(93.9) $56.1 $(15.6) $100.6 ====== ==== ====== ===== Available Separate Consolidated Net Income (Loss) Average number of shares of General Motors Class H Common Stock outstanding (in millions) (Numerator) 121.0 105.2 113.6 104.7 Average Class H dividend base (in millions) (Denominator) 414.9 399.9 407.5 399.9 Available Separate Consolidated Net Income (Loss) $(27.4) $14.7 $(4.3) $26.2 ====== ==== ===== ==== Earnings (Loss) Attributable to General Motors Class H Common Stock on a Per Share Basis - Basic and Diluted $(0.23) $0.14 $(0.04) $0.25 ===== ==== ===== ==== Reference should be made to the Notes to Financial Statements. - 43 - HUGHES ELECTRONICS CORPORATION BALANCE SHEETS June 30, 1999 December 31, ASSETS (Unaudited) 1998 ----------- ---- (Dollars in Millions) Current Assets Cash and cash equivalents $858.7 $1,342.1 Accounts and notes receivable (less allowances) 1,345.0 922.4 Contracts in process, less advances and progress payments of $24.7 and $27.0 690.6 783.5 Inventories 653.8 471.5 Prepaid expenses and other, including deferred income taxes of $96.7 and $33.6 591.5 326.9 -------- -------- Total Current Assets 4,139.6 3,846.4 Satellites, net 3,515.8 3,197.5 Property, net 1,303.0 1,059.2 Net Investment in Sales-type Leases 162.0 173.4 Intangible Assets, net of accumulated amortization of $486.7 and $413.2 7,420.0 3,552.2 Investments and Other Assets 1,732.6 1,606.3 --------- --------- Total Assets $18,273.0 $13,435.0 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities Accounts payable $1,020.4 $764.1 Advances on contracts 178.0 291.8 Deferred revenues 94.7 43.8 Current portion of long-term debt 184.4 156.1 Accrued liabilities 1,542.2 753.7 ------- -------- Total Current Liabilities 3,019.7 2,009.5 Long-Term Debt 1,239.6 778.7 Deferred Gains on Sales and Leasebacks 59.6 121.5 Postretirement Benefits Other Than Pensions 153.9 150.7 Other Liabilities and Deferred Credits 1,495.1 867.1 Deferred Income Taxes 447.2 643.9 Commitments and Contingencies Minority Interests 502.2 481.7 Stockholder's Equity Capital stock and additional paid-in capital 9,689.8 8,146.1 Preferred stock 1,485.0 - Net income retained for use in the business 231.6 257.8 -------- ------- Subtotal Stockholder's Equity 11,406.4 8,403.9 -------- ------- Accumulated Other Comprehensive Income (Loss) Minimum pension liability adjustment (37.1) (37.1) Accumulated unrealized gains (losses) on securities (8.0) 16.1 Accumulated foreign currency translation adjustments (5.6) (1.0) Accumulated other comprehensive loss (50.7) (22.0) -------- ------- Total Stockholder's Equity 11,355.7 8,381.9 -------- -------- Total Liabilities and Stockholder's Equity $18,273.0 $13,435.0 ======== ======== Reference should be made to the Notes to Financial Statements. - 44 - HUGHES ELECTRONICS CORPORATION CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, 1999 1998 ---- ---- (Dollars in Millions) Cash Flows from Operating Activities Net Cash (Used in) Provided by Operating Activities $(15.3) $157.1 ------ ----- Cash Flows from Investing Activities Investment in companies, net of cash acquired (1,784.4) (908.0) Expenditures for property (170.8) (121.4) Increase in satellites (384.8) (255.5) Early buyout of satellite under sale and leaseback (141.3) (155.5) Proceeds from disposal of property 5.1 46.7 -------- -------- Net Cash Used in Investing Activities (2,476.2) (1,393.7) -------- -------- Cash Flows from Financing Activities Net increase in notes and loans payable 28.3 100.0 Long-term debt borrowings 2,422.0 875.3 Repayment of long-term debt (1,961.1) (725.0) Net proceeds from issuance of preferred stock 1,485.0 - Stock options exercised 42.8 - Purchase and retirement of GM Class H common stock (8.9) - Payment to General Motors for Delco post-closing price adjustment - (204.7) -------- -------- Net Cash Provided by Financing Activities 2,008.1 45.6 -------- -------- Net decrease in cash and cash equivalents (483.4) (1,191.0) Cash and cash equivalents at beginning of the period 1,342.1 2,783.8 -------- ------- Cash and cash equivalents at end of the period $858.7 $1,592.8 ======== ======= Reference should be made to the Notes to Financial Statements. - 45 - HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS (Unaudited) Note 1. Basis of Presentation The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting. In the opinion of management, all adjustments (consisting only of normal recurring items) which are necessary for a fair presentation have been included. The results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year. For further information, refer to the financial statements and notes thereto included in the General Motors (GM) 1998 Annual Report on Form 10-K, the unaudited information relating to Hughes filed as Exhibit 99 in GM's Quarterly Report on Form 10-Q dated March 31, 1999, and Current Reports on Form 8-K filed subsequent to the filing date for the GM 1998 Annual Report on Form 10-K. The 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. 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 was $9.2 million after-tax, or $0.02 per share of GM Class H common stock in the first quarter of 1998. Note 2. Inventories Major Classes of Inventories June 30, December 31, (Dollars in Millions) 1999 1998 ---- ---- Productive material and supplies $80.6 $73.4 Work in process 463.8 285.1 Finished goods 109.4 113.0 ----- ----- Total $653.8 $471.5 ===== ===== Note 3. Comprehensive Income Hughes' total comprehensive income was as follows: Three Months Ended Six Months Ended June 30, June 30, (Dollars in Millions) 1999 1998 1999 1998 ---- ---- ---- ---- Net income (loss) $(97.6) $50.8 $(24.6) $90.0 Other comprehensive loss: Foreign currency translation adjustments (1.1) (2.2) (4.6) (2.5) Unrealized loss on securities: Unrealized holding gains (losses) (19.5) 1.6 (24.1) 1.0 Less: reclassification adjustment for unrealized gains included in net income - (7.3) - (7.3) ----- ------ ----- ------ Unrealized loss on securities (19.5) (5.7) (24.1) (6.3) ----- ------ ------ ------ Other comprehensive loss (20.6) (7.9) (28.7) (8.8) ------ ----- ------ ----- Total comprehensive income (loss) $(118.2) $42.9 $(53.3) $81.2 ======= ==== ====== ==== - 46 - HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS--Continued (Unaudited) Note 4. Earnings (Loss) Per Share Attributable to GM Class H Common Stock and Available Separate Consolidated Net Income (Loss) Earnings (Loss) attributable to GM Class H common stock on a per share basis 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 (Loss) ("ASCNI") of Hughes. The ASCNI of Hughes is determined quarterly and is equal to the separate consolidated net income (loss) of Hughes, excluding the effects of GM purchase accounting adjustments arising from GM's acquisition of Hughes and including the effects of preferred dividends paid and/or payable to GM (earnings (loss) used for computation of ASCNI), multiplied by a fraction, the numerator of which is equal to the weighted-average number of shares of GM Class H common stock outstanding during the period (121.0 million and 105.2 million during the second quarters of 1999 and 1998, respectively) and the denominator of which is a number equal to the weighted- average number of shares of GM Class H common stock which, if issued and outstanding, would represent 100% of the tracking stock interest in the earnings of Hughes (Average Class H dividend base). The Average Class H dividend base was 414.9 million and 399.9 million during the second quarters of 1999 and 1998, respectively. Upon conversion of the General Motors Series H preference stock into General Motors Class H common stock, both the numerator and the denominator used in the computation of ASCNI will increase by the number of shares of the General Motors Class H common stock issued (see further discussion in Note 5). In addition, the denominator used in determining the ASCNI of Hughes may be adjusted from time-to-time as deemed appropriate by the GM Board of Directors ("GM Board") to reflect subdivisions or combinations of the GM Class H common stock, certain transfers of capital to or from Hughes, the contribution of shares of capital stock of GM to or for the benefit of Hughes employees and the retirement of GM Class H common stock purchased by Hughes. The GM Board's discretion to make such adjustments is limited by criteria set forth in GM's Restated Certificate of Incorporation. In connection with the PRIMESTAR and USSB transactions (see further discussion in Note 7), GM contributed to Hughes an amount of cash sufficient to enable Hughes to purchase from GM, for fair value as determined by the GM Board, the number of shares of GM Class H common stock delivered by Hughes. In accordance with the GM certificate of incorporation, the Class H dividend base was increased to reflect that number of shares. The number of shares issued as part of the PRIMESTAR acquisition and the number of shares to be issued as part of the USSB merger have been included in the calculation of both the numerator and denominator of the fraction described above since the consummation dates of the transactions. Effective January 1, 1999, shares of Class H common stock delivered by GM in connection with the award of such shares to and the exercise of stock options by employees of Hughes increases the numerator and denominator of the fraction referred to above. Prior to January 1, 1999, there was no dilutive effect resulting from the assumed exercise of stock options, because the exercise of stock options did not affect the GM Class H dividend base (denominator). From time to time, in anticipation of exercises of stock options, Hughes purchases Class H common stock from the open market. Upon purchase, these shares are retired and therefore decrease the numerator and denominator of the fraction referred to above. For the three and six months ended June 30, 1999, diluted loss per share have not been presented as the assumed exercise of stock options and the assumed conversion of the preferred shares in the computation of diluted loss per share would have been anti-dilutive. - 47 - HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS--Continued (Unaudited) Note 5. Hughes Series A Preferred Stock On June 24, 1999, as part of a strategic alliance with Hughes, America Online ("AOL") invested $1.5 billion in shares of General Motors Series H 6.25% Automatically Convertible Preference Stock. The General Motors Series H preference stock will automatically convert into Class H common stock in three years based upon a variable conversion factor linked to the Class H common stock price at the time of conversion, and accrues quarterly dividends at a rate of 6.25% per year. It may be converted earlier in certain limited circumstances. General Motors immediately invested the $1.5 billion received from AOL in shares of Hughes Series A Preferred Stock designed to correspond to the financial terms of the General Motors Series H preference stock. Dividends on the Hughes Series A Preferred Stock are payable to General Motors quarterly at an annual rate of 6.25%. These preferred stock dividends payable to General Motors will reduce Hughes' earnings used for computation of the ASCNI of Hughes, which will have an equivalent effect to the payment of dividends on the Series H preference stock as if those dividends were paid by Hughes. Upon conversion of the General Motors Series H preference stock into General Motors Class H common stock, Hughes will redeem the Series A Preferred Stock through a cash payment to General Motors equal to the fair market value of the Class H common stock issuable upon the conversion. Simultaneous with General Motors' receipt of the cash redemption proceeds, General Motors will make a capital contribution to Hughes of the same amount. In connection with this capital contribution, the denominator of the fraction used in the computation of the ASCNI of Hughes will be increased by the corresponding number of shares of General Motors Class H common stock issued. Accordingly, upon conversion of the General Motors Series H preference stock into General Motors Class H common stock, both the numerator and denominator used in the computation of ASCNI will increase by the amount of the General Motors Class H common stock issued. Note 6. Other Postretirement Benefits Hughes has disclosed in the financial statements certain amounts associated with estimated future postretirement benefits other than pensions and characterized such amounts as "accumulated postretirement benefit obligations," "liabilities" or "obligations." Notwithstanding the recording of such amounts and the use of these terms, Hughes does not admit or otherwise acknowledge that such amounts or existing postretirement benefit plans of Hughes (other than pensions) represent legally enforceable liabilities of Hughes. - 48 - HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS--Continued (Unaudited) Note 7. Acquisitions On January 22, 1999, Hughes agreed to acquire PRIMESTAR's 2.3 million subscriber medium-power direct-to-home satellite business and the high-power satellite assets and direct-broadcast satellite orbital frequencies of Tempo Satellite, a wholly-owned subsidiary of TCI Satellite Entertainment, Inc. On April 28, 1999, the acquisition of PRIMESTAR's direct-to-home business was completed. The purchase price consisted of $1.1 billion in cash and 4.9 million shares of GM Class H common stock, for a total purchase price of $1.3 billion, based on the average market price of $47.87 per share of Class H common stock at the time the acquisition agreement was signed. The purchase price will be adjusted based upon the final adjusted net working capital of PRIMESTAR at the date of closing. The purchase price for the Tempo Satellite assets consisted of $500 million in cash. Of this purchase price, $150 million was paid on March 10, 1999 for a satellite that has not yet been launched and the remaining $350 million was paid on June 4, 1999 for an in-orbit satellite and 11 related satellite orbital frequencies. In December 1998, Hughes agreed to acquire all of the outstanding capital stock of United States Satellite Broadcasting Company, Inc. ("USSB"). USSB provided direct-to-home premium satellite programming in conjunction with DIRECTV's basic programming service. The purchase price was approximately $1.6 billion, consisting of approximately $360 million in cash and 22.6 million shares of Class H common stock. The USSB acquisition was closed on May 20, 1999 and the payment of cash and delivery of shares was made to the former USSB shareholders in July 1999. The financial information presented as of and for the periods ended June 30, 1999 reflect the effects of the PRIMESTAR, Tempo Satellite and USSB transactions, discussed above, from their respective dates of acquisition. These transactions have been accounted for using the purchase method of accounting; however, the adjustments made in the June 30, 1999 financial statements reflect a preliminary allocation of the purchase price for the transactions based upon information currently available. Adjustments relating to the tangible assets (i.e., satellites, equipment located on customer premises, etc.), intangible assets (i.e., licenses granted by the Federal Communications Commission, customer lists, dealer network, etc.), and accrued liabilities for programming contracts and leases with above-market rates are estimates pending the completion of independent appraisals currently in process. Additionally, the adjustment to recognize the benefit of net operating loss carryforwards of USSB represents a preliminary estimate pending further review and analysis by the management of Hughes. These appraisals, valuations and studies are expected to be completed by December 31, 1999. Accordingly, the final purchase price allocations may be different from the amounts reflected herein. As the Hughes 1999 financial statements include only USSB's and PRIMESTAR's results of operations since the date of acquisition, the following selected unaudited pro forma information is provided to present a summary of the combined results of Hughes, USSB and PRIMESTAR as if the acquisitions had occurred as of the beginning of the respective periods, giving effect to purchase accounting adjustments. The pro forma data is presented for informational purposes only and may not necessarily reflect the results of operations of Hughes had USSB and PRIMESTAR operated as part of Hughes for the six months ended June 30, 1999 and June 30, 1998, nor are they necessarily indicative of the results of future operations. The pro forma information excludes the effect of non-recurring charges. Six Months Ended Six Months Ended June 30, 1999 June 30, 1998 - -------------------------------------------------------------------------------- (Dollars in Millions Except Per Share Amounts) Total revenues $4,017.6 $3,466.5 Income (Loss) before cumulative effect of accounting Change (20.7) 66.8 Net income (loss) (20.7) 57.6 Pro forma available separate consolidated net loss (1) (17.7) 6.6 Pro forma loss per share attributable to GM Class H common stock on a per share basis (1) $(0.13) $0.05 (1) Both periods include the pro forma effect of dividends amounting to $46.9 million related to the Hughes Series A Preferred Stock as if the preferred stock had been outstanding as of the beginning of the respective periods. - 49 - HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS--Continued (Unaudited) Note 8. 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 telephony systems, mobile cellular digital packet data systems and DIRECTV(TM) receiver equipment. Other includes the corporate office and other entities. Selected information for Hughes' operating segments for the three and six months ended June 30, 1999 and 1998, are reported as follows: Operating Segments: Direct-To- Home Satellite Satellite Network Elimin- Broadcast Services Systems Systems Other ations Total - -------------------------------------------------------------------------------- (Dollars in Millions) For the Three Months Ended: June 30, 1999 External Revenues $869.3 $167.3 $462.4 $277.0 - - $1,776.0 Intersegment Revenues 0.9 33.1 91.4 64.1 $0.1 ($189.6) - - -------------------------------------------------------------------------------- Total Revenues $870.2 $200.4 $553.8 $341.1 $0.1 $(189.6)$1,776.0 - -------------------------------------------------------------------------------- Operating Profit (Loss)(1) $(68.4) $82.4 $(133.0) $11.3 $(26.5) $32.3 $(101.9) - -------------------------------------------------------------------------------- For the Three Months Ended: June 30, 1998 External Revenues $401.5 $161.6 $593.0 $207.0 $5.9 - $1,369.0 Intersegment Revenues - 29.5 81.8 14.7 0.6 $(126.6) - - -------------------------------------------------------------------------------- Total Revenues $401.5 $191.1 $674.8 $221.7 $6.5 $(126.6)$1,369.0 - -------------------------------------------------------------------------------- Operating Profit (Loss)(1) $(40.2) $73.6 $60.0 $(25.2) $(0.6) $5.3 $72.9 - -------------------------------------------------------------------------------- For the Six Months Ended: June 30, 1999 External Revenues$1,425.3 $327.0 $998.0 $477.5 - - $3,227.8 Intersegment Revenues 1.5 66.9 186.1 94.5 $0.3 $(349.3) - - -------------------------------------------------------------------------------- Total Revenues $1,426.8 $393.9 $1,184.1 $572.0 $0.3 $(349.3)$3,227.8 - -------------------------------------------------------------------------------- Operating Profit (Loss)(1) $(91.8) $160.7 $(147.4) $(6.5) $(39.9) $(19.1) $(144.0) - -------------------------------------------------------------------------------- For the Six Months Ended: June 30, 1998 External Revenues $789.4 $328.7 $1,146.7 $386.1 $9.1 - $2,660.0 Intersegment Revenues - 55.4 152.4 20.3 0.9 $(229.0) - - ------------------------------------------------------------------------------- Total Revenues $789.4 $384.1 $1,299.1 $406.4 $10.0 $(229.0)$2,660.0 - -------------------------------------------------------------------------------- Operating Profit (Loss)(1) $(71.8) $158.5 $115.1 $(37.1) $(11.4) $(2.1) $151.2 - -------------------------------------------------------------------------------- (1)Includes amortization arising from purchase accounting adjustments related to GM's acquisition of Hughes amounting to $0.8 million in each of the three-month periods and $1.6 million in each of the six-month periods for the Satellite Services segment and $4.5 million in each of the three-month periods and $9.0 million in each of the six-month periods for Other. - 50 - HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS--Continued (Unaudited) Note 9. Commitments and Contingencies In connection with the 1997 spin-off of the defense electronics business of Hughes' predecessor and the subsequent merger of that business with Raytheon Company, the terms of the merger agreement provided processes for resolving disputes that might arise in connection with post-closing financial adjustments that were also called for by the terms of the merger agreement. Such financial adjustments might require a cash payment from Raytheon to Hughes or vice versa. A dispute currently exists regarding the post-closing adjustments which Hughes and Raytheon have proposed to one another and related issues regarding the adequacy of disclosures made by Hughes to Raytheon in the period prior to consummation of the merger. Hughes and Raytheon are proceeding with the dispute resolution process. It is possible that the ultimate resolution of the post-closing financial adjustment and of related disclosure issues may result in Hughes making a payment to Raytheon that would be material to Hughes. However, the amount of any payment that either party might be required to make to the other cannot be determined at this time. Hughes intends to vigorously pursue resolution of the disputes through the arbitration processes, opposing the adjustments proposed by Raytheon, and seeking the payment from Raytheon that it has proposed. General Electric Capital Corporation ("GECC") and DIRECTV, Inc. entered into a contract on July 31, 1995, in which GECC agreed to provide financing for consumer purchases of DIRECTV hardware and related programming. Under the contract, GECC also agreed to provide certain related services to DIRECTV, including credit risk scoring, billing and collections services. DIRECTV agreed to act as a surety for loans complying with the terms of the contract. Hughes guaranteed DIRECTV's performance under the contract. A complaint and counterclaim have been filed by the parties in the U.S. District Court for the District of Connecticut concerning GECC's performance and DIRECTV's obligation to act as a surety. GECC claims damages from DIRECTV in excess of $140 million. DIRECTV is seeking damages from GECC in excess of $70 million. Hughes intends to vigorously contest GECC's allegations and pursue Hughes' own contractual rights and remedies. Hughes does not believe that the litigation will have a material adverse impact on Hughes' results of operations or financial position. Pretrial discovery is not yet completed in the case and no trial date has been set. As part of a marketing agreement entered into with AOL on June 21, 1999, Hughes committed to increase its sales and marketing expenditures over the next three years by approximately $1.5 billion relating to DirecPC/AOL-Plus, DlRECTV, DlRECTV/AOL TV and DirecDuo. Hughes Space and Communications International ("HSCI") has a contract with ICO Global Communications Operations to build the satellites and related components for a global wireless communications system. Hughes owns approximately 2.6% of the equity in its parent company, ICO Global Communications (Holdings) ("ICO"). ICO has indicated in its public disclosure that it requires substantial additional financing to continue operating its business and to fund the construction of its communications network. ICO also has indicated that it currently is attempting to obtain financing through its existing stockholders, including Hughes, and/or third parties. There can be no assurance that ICO will be successful in obtaining adequate financing to continue operating its business or to complete construction of its communications network. If ICO is unable to obtain the necessary additional financing, it and its subsidiary would likely be unable to pay the remaining amounts due to HSCI under the contract. If ICO fails to pay HSCI these remaining amounts, HSCI could terminate the contract for non-payment. In the event of non-payment, Hughes would expect to record a pre-tax charge to earnings of approximately $500.0 million. - 51 - HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS--Continued (Unaudited) Note 10. Subsequent Event On July 28, 1999, Galaxy Latin America ("GLA"), Hughes' 70% owned subsidiary, acquired Galaxy Brasil, Ltda., the exclusive distributor of DIRECTV services in Brazil, from Tevecap S.A. for approximately $114.0 million plus the assumption of debt. In connection with the transaction, Tevecap sold its 10% equity interest in GLA to Hughes and the Cisneros Group, the remaining GLA partners. Hughes' share of the purchase amounted to approximately $101.1 million and increased Hughes' ownership of GLA to 77.8%. On July 6, 1999, as part of the USSB merger, Hughes paid approximately $0.4 billion in cash and issued approximately 22.6 million shares of Class H common stock to the former USSB shareholders. - 52 - HUGHES ELECTRONICS CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following management's discussion and analysis should be read in conjunction with the Hughes management's discussion and analysis included in the General Motors (GM) 1998 Annual Report to the Securities and Exchange Commission (SEC) on Form 10-K, the management's discussion and analysis relating to Hughes included in Exhibit 99 to GM's Quarterly Report on Form 10-Q dated March 31, 1999, and Current Reports on Form 8-K filed subsequent to the filing date for GM's 1998 Form 10-K. In addition, the following discussion excludes purchase accounting adjustments related to GM's acquisition of Hughes (see Supplemental Data beginning on page 64). This Quarterly Report may contain certain statements that Hughes believes are, or may be considered to be, "forward-looking statements", within the meaning of Section 27 A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally can be identified by use of statements that include phrases such as we "believe," "expect," "anticipate," "intend," "plan," "foresee" or other similar words or phrases. Similarly, statements that describe our objectives, plans or goals also are forward-looking statements. All of these forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those contemplated by the relevant forward-looking statement. The principal important risk factors which could cause actual performance and future actions to differ materially from forward-looking statements made herein include economic conditions, product demand and market acceptance, government action, ability to obtain export licenses, competition, ability to achieve cost reductions, technological risk, ability to address the year 2000 issue, interruptions to production attributable to causes outside of Hughes' control, the success and timeliness of satellite launches, in-orbit performance of satellites, ability of customers to obtain financing and Hughes' ability to access capital to maintain its financial flexibility. Additionally, Hughes and its 81.0% owned subsidiary, PanAmSat Corporation ("PanAmSat"), have experienced satellite anomalies in the past and may experience satellite anomalies in the future that could lead to the loss or reduced capacity of such satellites that could materially affect Hughes' operations. Readers are urged to consider these factors carefully in evaluating the forward-looking statements. The forward-looking statements included in this Quarterly Report are made only as of the date of this Quarterly Report and we undertake no obligation to publicly update these forward-looking statements to reflect subsequent events or circumstances. The financial information presented as of and for the period ended June 30, 1999 reflect the effects of the PRIMESTAR, Tempo Satellite and USSB transactions, discussed below, from their respective dates of acquisition. These transactions have been accounted for using the purchase method of accounting; however, the adjustments made in the June 30, 1999 financial statements reflect a preliminary allocation of the purchase price for the transactions based upon information currently available. Adjustments relating to the tangible assets (i.e., satellites, equipment located on customer premises, etc.), intangible assets (i.e., licenses granted by the Federal Communications Commission, customer lists, dealer network, etc.), and accrued liabilities for programming contracts and leases with above-market rates are estimates pending the completion of independent appraisals currently in process. Additionally, the adjustment to recognize the benefit of net operating loss carryforwards of USSB represents a preliminary estimate pending further review and analysis by the management of Hughes. These appraisals, valuations and studies are expected to be completed by December 31, 1999. Accordingly, the final purchase price allocations may be different from the amounts reflected herein. General In 1998, PanAmSat adopted a comprehensive satellite expansion and restoration plan pursuant to which PanAmSat would expand its fleet of satellites in 1999 and 2000. The additional satellites are intended to meet the expected demand for additional satellite capacity, replace capacity affected by satellite anomalies, and provide added backup to existing capacity. In connection with the plan, seven satellites are under construction by Hughes Space and Communications Company ("HSC"). As a result of manufacturing delays being experienced by HSC, however, it is expected that there will be delays in the launch of these satellites. PanAmSat now expects to launch one additional satellite in 1999, followed by five satellites in 2000 and one in 2001. It is expected that these delays will result in 1999 revenues and earnings at PanAmSat that are significantly lower than previously anticipated. A substantial portion of these revenues and earnings previously anticipated in 1999 are expected to be recognized in future years after the satellites commence commercial service. - 53 - HUGHES ELECTRONICS CORPORATION On February 24, 1999, the Department of Commerce notified Hughes that it intended to deny a U.S. government export license Hughes was required to obtain in connection with a contract with Asia-Pacific Mobile Telecommunications Satellite Pte. Ltd. ("APMT") for the provision of a satellite-based mobile telecommunications system. As a result, APMT and Hughes terminated the contract on April 9, 1999, resulting in a pre-tax charge to Hughes' earnings of $92 million in the first quarter of 1999. This charge represents the write-off of receivables and inventory, with no alternative use, related to the contract. Hughes had maintained a lawsuit against the U.S. government since September 1973 regarding the U.S. government's infringement and use of a Hughes patent covering "Velocity Control and Orientation of a Spin Stabilized Body," principally satellites (the "Williams Patent"). On April 7, 1998, the U.S. Court of Appeals for the Federal Circuit reaffirmed earlier decisions in the Williams Patent case, including an award of $114.0 million in damages, plus interest. In March 1999, Hughes received and recognized as income a $154.6 million payment from the U.S. government as a final settlement of the suit. There is a pending grand jury investigation into whether Hughes should be accused of criminal violations of the export control laws arising out of the participation of two of its employees on a committee formed to review the findings of Chinese engineers regarding the failure of a Long March rocket in China in 1996. Hughes is also subject to the authority of the State Department to impose sanctions for non-criminal violations of the Arms Export Control Act. The possible criminal and/or civil sanctions could include fines as well as debarment from various export privileges and participation in government contracts. Hughes does not expect the grand jury investigation or State Department review to result in a material adverse effect upon its business. However, there can be no assurance as to those conclusions. In addition, a congressional committee chaired by Representative Cox released a report in May 1999 containing negative commentary about the compliance of U.S. satellite manufacturers, including Hughes, with export control laws. Hughes is uncertain of the impact that this report will have on the satellite manufacturing and launching industries. Many of Hughes' satellite launches, including those of PanAmSat, are scheduled for non-U.S. launch providers. We cannot assure you that future satellite launches by non-U.S. launch providers will not be adversely affected by this investigation and report, including the possibility of significant launch delays. On May 11, 1999, it was announced that Hughes will collaborate with America Online ("AOL") on a new service that will combine digital satellite television programming from DIRECTV with AOL's new interactive television Internet service. Hughes Network Systems ("HNS") will design and build the initial dual purpose DIRECTV/AOL receiver equipment. The new service will be suited for both frequent Internet users and the mass market consumer who wants to connect to the Internet. On June 21, 1999, Hughes announced a more extensive strategic alliance with AOL to develop and market digital entertainment and Internet services nationwide. The new alliance is expected to accelerate subscriber growth and revenue-per-subscriber for the DIRECTV and DirecPC services, as well as expand the subscriber base for AOL's developing AOL TV and AOL-Plus broadband services. As part of the alliance, Hughes and AOL plan to jointly develop new content and interactive services for U.S. and international markets. Additionally, an extensive cross-marketing initiative will be instituted to market each company's products through their respective retail outlets and to their respective subscribers. As part of its marketing initiative with AOL, Hughes committed to increase its sales and marketing expenditures over the next three years by approximately $1.5 billion relating to its DirecPC/AOL-Plus, DlRECTV, DlRECTV/AOL TV and DirecDuo products and services. As part of the alliance, AOL invested $1.5 billion in shares of General Motors Series H 6.25% Automatically Convertible Preference Stock. General Motors immediately invested the $1.5 billion received from AOL in shares of Hughes Series A Preferred Stock designed to correspond to the financial terms of the General Motors Series H preference stock. Dividends on the Hughes Series A Preferred Stock are payable to General Motors quarterly at an annual rate of 6.25%. See further discussion in Notes 4 and 5 to the financial statements. Hughes Space and Communications International ("HSCI") has a contract with ICO Global Communications Operations to build the satellites and related components for a global wireless communications system. Hughes owns approximately 2.6% of the equity in its parent company, ICO Global Communications (Holdings) ("ICO"). ICO has indicated in its public disclosure that it requires substantial additional financing to continue operating its business and to fund the construction of its communications network. ICO also has indicated that it currently is attempting to obtain financing through its existing stockholders, incluidng Hughes, and/or third parties. There can be no assurance that ICO will be successful in obtaining adequate financing to continue operating its business or to complete the construction of its ommunications network. If ICO is unable to obtain the necessary additional financing, it and its subsidiary would likely be unable to pay the remaining amounts due to HSCI under the contract. If ICO fails to pay HSCI these remaining amounts, HSCI could terminate the contract for non-payment. In the event of non-payment, Hughes would expect to record a pre-tax charge to earnings of approximately $500.0 million. - 54 - HUGHES ELECTRONICS CORPORATION Results of Operations Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998 Revenues. Second quarter 1999 revenues increased 29.7% to $1,776.0 million compared with $1,369.0 million for the second quarter of 1998. The increase reflects continued subscriber growth for the DIRECTV(R) businesses, revenues from the medium-power direct-to-home business ("PRIMESTAR") and the premium movie channels and pay-per-view services business of United States Satellite Broadcasting Company, Inc. ("USSB"), increased sales of DIRECTV(TM) receiver equipment by HNS and increased PanAmSat revenues from operating leases. These increases were partially offset by a decrease in Satellite Systems segment revenues primarily due to contract revenue adjustments and delayed revenue recognition that resulted from increased costs and schedule delays on several new product lines. The Direct-To-Home Broadcast segment's second quarter 1999 revenues more than doubled to $870.2 million from $401.5 million in the second quarter of 1998, an increase of 116.7%. The increase resulted from continued strong subscriber growth and higher average monthly revenue per subscriber, as well as added revenues from the PRIMESTAR and USSB businesses. Domestic DIRECTV contributed significantly to this growth with quarterly revenues of $778 million, a 111.4% increase over last year's second quarter revenues of $368 million. With its best-ever second quarter, domestic DIRECTV added 369,000 net new subscribers, excluding subscribers added through the PRIMESTAR and USSB transactions, compared to 227,000 net new subscribers for the second quarter of 1998, a 63% increase. Total domestic DIRECTV(R) subscribers, including 2,244,000 subscribers acquired as part of the PRIMESTAR and USSB transactions, grew to 7,375,000 as of June 30, 1999. Hughes' Latin American DIRECTV businesses which include Hughes' subsidiary, Galaxy Latin America ("GLA"), more than doubled revenues to $77 million for the second quarter of 1999 from $32 million for the second quarter of 1998, an increase of 140.6%. This increase in revenues was due to continued subscriber growth and additional revenues resulting from the consolidation of SurFin Ltd. ("SurFin"), beginning in November 1998, and Grupo Galaxy Mexicana, S.A. de C.V. ("GGM"), beginning in February 1999. GLA added 47,000 net new subscribers for the second quarter, compared to 49,000 net new subscribers acquired for the same period last year, bringing the total cumulative DIRECTV subscribers in Latin America to 601,000 as of June 30, 1999. The Satellite Services segment's second quarter 1999 revenues increased to $200.4 million compared with $191.1 million for the prior year. The 4.9% increase in revenues resulted primarily from the commencement of new service agreements for full-time video distribution services and growth in data and Internet-related services. For the second quarter of 1999, revenues for the Satellite Systems segment decreased to $553.8 million from revenues of $674.8 million for the same period in 1998. This decrease in revenues was principally due to contract revenue adjustments and delayed revenue recognition that resulted from increased costs and schedule delays on several new product lines. Second quarter 1999 revenues for the Network Systems segment were $341.1 million compared with $221.7 million for the same period last year, an increase of 53.9%. This increase in revenues was primarily due to higher sales of DIRECTV receiver equipment. Costs and Expenses. Selling, general and administrative expenses increased to $548.5 million in the second quarter of 1999 from $359.2 million for the same period of 1998. The increase resulted primarily from higher marketing and subscriber acquisition costs in the Direct-To-Home Broadcast segment, added costs from the PRIMESTAR and USSB businesses, and the consolidation of GGM and SurFin. The increase in depreciation and amortization expense to $159.8 million in the second quarter of 1999 from $100.2 million in the same period of 1998 resulted primarily from higher depreciation due to increased capital expenditures for property and equipment, additions to PanAmSat's satellite fleet and additional goodwill amortization of $16.1 million that resulted from the PRIMESTAR, USSB and GGM transactions. Operating Profit (Loss). Hughes incurred an operating loss of $96.6 million for the second quarter of 1999 compared with operating profit, on the same basis, of $78.2 million for the second quarter of 1998. The operating loss for the second quarter of 1999 was principally a result of a pre-tax charge, after intercompany eliminations, of $125.0 million that resulted from increased development costs and schedule delays experienced by the Satellite Systems segment and higher depreciation and amortization expenses discussed above. - 55 - HUGHES ELECTRONICS CORPORATION The operating loss in the Direct-To-Home Broadcast segment for the second quarter of 1999 was $68.4 million compared with an operating loss of $40.2 million for the second quarter of 1998. The increased operating loss for the second quarter of 1999 was principally due to increased marketing and subscriber acquisition costs and increased depreciation and amortization costs related to the acquisitions of PRIMESTAR and USSB, partially offset by increased subscriber revenues discussed above. Domestic DIRECTV reported an operating loss for the second quarter of 1999 of $39 million compared with an operating loss of $7 million for the second quarter of 1998. GLA's operating loss for second quarter of 1999 was $23 million compared with an operating loss of $32 million for the same period of 1998. DIRECTV's cost of acquiring new subscribers has increased due to, among other things, incentives granted by USSB to manufacturers of DIRECTV receiving equipment which were assumed by DIRECTV in connection with its merger with USSB in May 1999. Subscriber acquisition costs are expected to increase further due to increased incentives to dealers and consumers. In addition, in connection with the AOL alliance, DIRECTV's subscriber acquisition costs will increase with respect to both the DIRECTV service and the new DIRECTV/AOL TV service. In the future, subscriber acquisition costs will continue to be largely determined by the competitive environment. The Satellite Services segment's operating profit for the second quarter of 1999 increased 11.8% to $83.2 million from $74.4 million for the same period of 1998. The increase in operating profit was primarily due to the increase in revenues discussed above, offset by increased depreciation due to additions to the satellite fleet. Also affecting the comparison was a second quarter 1998 provision for losses related to the May 1998 failure of PanAmSat's Galaxy IV satellite. The Satellite Systems segment reported an operating loss for the second quarter of 1999 of $133.0 million compared to operating profit of $60.0 million and operating profit margin of 8.9% for the second quarter of 1998. The operating loss for the second quarter of 1999 resulted from a pre-tax charge, before intercompany eliminations, of $178.0 million that resulted from increased development costs and schedule delays on several new product lines. The Network Systems segment's operating income for the second quarter of 1999 was $11.3 million compared with an operating loss of $25.2 million for the second quarter of 1998. The increase in operating income for the second quarter of 1999 was primarily due to higher sales of DIRECTV receiver equipment and a second quarter 1998 provision of $26.0 million associated with the bankruptcy filing by a customer. Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"). EBITDA is defined as operating profit (loss), plus depreciation and amortization. EBITDA is not presented as an alternative measure of operating results or cash flow from operations, as determined in accordance with generally accepted accounting principles. However, Hughes believes EBITDA is a meaningful measure of the company's performance and that of its business units. EBITDA is a performance measurement commonly used by other communications, entertainment and media service providers and therefore can be used to analyze and compare Hughes' financial performance to that of its competitors. EBITDA is also a measurement used for certain of Hughes' debt covenants and is used by rating agencies in determining credit ratings. EBITDA does not give effect to cash used for debt service requirements and thus does not reflect funds available for investment in the business of Hughes, dividends or other discretionary uses. EBITDA margin is calculated by dividing EBITDA by total revenues. For the second quarter of 1999, EBITDA was $63.2 million versus $178.4 million for the same period in 1998. EBITDA margin on the same basis was 3.6% for the second quarter of 1999 compared to 13.0% for the second quarter of 1998. The Direct-To-Home Broadcast segment had a negative EBITDA for the second quarter of 1999 of $6.8 million compared with negative EBITDA of $16.7 million for the second quarter of 1998. Domestic DIRECTV's EBITDA was $13 million for the second quarter of 1999 compared to $12 million for the second quarter of 1998. The slight increase in domestic DIRECTV's EBITDA was due to EBITDA contributions from the USSB and PRIMESTAR businesses, which were mostly offset by higher marketing and advertising expenses. GLA reported negative EBITDA for the second quarter of 1999 of $13 million compared to negative EBITDA of $26 million for the same period of 1998. The improvement in GLA's EBITDA for the second quarter of 1999 was due to higher revenue growth and EBITDA contributions resulting from the consolidation of SurFin. - 56 - HUGHES ELECTRONICS CORPORATION For the Satellite Services segment, EBITDA for the second quarter of 1999 was $151.0 million compared with $133.1 million for the same period of last year. EBITDA margin increased to 75.3% versus 69.6% for last year's second quarter. The increases in EBITDA and EBITDA margin were principally due to the higher revenues discussed above and lower satellite leaseback expenses resulting from the exercise of certain early buy-out options under sale-leaseback agreements during the second quarter of 1999. Also affecting the comparison was a second quarter 1998 provision for losses related to the May 1998 failure of PanAmSat's Galaxy IV satellite. The Satellite Systems segment had a negative EBITDA of $119.6 million for the second quarter of 1999, compared with EBITDA and EBITDA margin of $71.5 million and 10.6% for the second quarter of 1998. The decrease in EBITDA for the second quarter of 1999 was due to a second quarter 1999 pre-tax charge, before intercompany eliminations, of $178.0 discussed above. Network Systems segment EBITDA grew to $25.0 million for the second quarter of 1999, compared to a negative EBITDA of $15.3 million for the second quarter of 1998. EBITDA margin for the second quarter of 1999 was 7.3%. The increase in EBITDA and EBITDA margin was primarily due to higher sales of DIRECTV receiver equipment and a second quarter 1998 provision of $26.0 million associated with the bankruptcy filing by a customer. Interest Income and Expense. Interest income decreased to $4.9 million for the second quarter of 1999 compared with $30.6 million for the second quarter of 1998. The decrease in interest income was due to lower cash balances in the second quarter of 1999 compared to 1998. Interest expense increased $9.5 million for the second quarter of 1999 from the same period in 1998 due to the increase of $184.2 million in borrowings. Other, net. Other, net for the second quarter of 1999 reflects losses from unconsolidated subsidiaries of $34.1 million that are primarily attributable to equity investments in DIRECTV Japan and American Mobile Satellite Corporation ("AMSC"). The second quarter 1998 amount reflects losses from unconsolidated subsidiaries of $22.0 million, primarily related to DIRECTV Japan and AMSC, and $17.5 million of estimated losses associated with bankruptcy filings by two unaffiliated customers. Income Taxes. In the second quarter of 1999, Hughes recorded an income tax benefit at an effective income tax rate of 30.0% while in the second quarter of 1998, Hughes recorded an income tax provision of 32.9%. Accounting Change. In 1998, Hughes adopted American Institute of Certified Public Accountants Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-Up Activities. SOP 98-5 requires that all start-up costs previously capitalized be written off and recognized as a cumulative effect of accounting change, net of taxes, as of the beginning of the year of adoption. On a prospective basis, these types of costs are required to be expensed as incurred. The unfavorable cumulative effect of this accounting change was $9.2 million after-tax, or $0.02 per share of GM Class H common stock in the first quarter of 1998. Earnings (Loss). Second quarter 1999 loss and loss per share, including the effect of preferred stock dividends, were $92.3 million and $0.23, respectively, compared to second quarter 1998 earnings and earnings per share of $56.1 million and $0.14, respectively. - 57 - HUGHES ELECTRONICS CORPORATION Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998 Revenues. For the first six months of 1999, revenues increased 21.3% to $3,227.8 million compared to $2,660.0 million for the first six months of 1998. This increase in revenues was primarily the result of continued subscriber growth in the DIRECTV businesses, revenues from PRIMESTAR and USSB which were acquired on April 28, 1999 and May 20, 1999, respectively, increased sales of DIRECTV receiver equipment by HNS and increased PamAmSat operating lease revenues. These increases were partially offset by a decrease in HSC revenues principally due to contract revenue adjustments and delayed revenue recognition that resulted from increased costs and schedule delays on several new product lines. Direct-To-Home Broadcast segment revenues for the first six months of 1999 increased 80.7% to $1,426.8 million from $789.4 million for the same period of 1998. The increase resulted from continued record subscriber growth and higher average monthly revenue per subscriber, as well as added revenues from the PRIMESTAR and USSB businesses. For the first six months of 1999, the Satellite Services segment's revenues increased to $393.9 million compared with $384.1 million for the prior year. The slight increase in revenues resulted primarily from growth in data and Internet-related services. Revenues for the first six months of 1999 for the Satellite Systems segment decreased to $1,184.1 million from revenues of $1,299.1 million for the same period in 1998. This decrease in revenues was principally due to the contract revenue adjustments and delayed revenue recognition discussed above. Network Systems segment revenues for the first six months of 1999 were $572.0 million compared with $406.4 million for the same period last year, an increase of 40.7%. This increase in revenues was primarily due to higher sales of DIRECTV receiver equipment. Costs and Expenses. Selling, general and administrative expenses increased to $953.3 million for the first six months of 1999 from $661.8 million for the same period of 1998. The increase resulted primarily from higher marketing and subscriber acquisition costs in the Direct-To-Home Broadcast segment, added costs for the PRIMESTAR and USSB businesses, and the consolidation of GGM and SurFin. The increase in depreciation and amortization expense to $282.8 million for the first six months of 1999 from $197.9 million for the same period of 1998 resulted primarily from higher depreciation due to additions to PanAmSat's satellite fleet, increased goodwill amortization related to the 1998 purchase of an additional 9.5% interest in PanAmSat and amortization of goodwill and depreciation for PRIMESTAR, USSB and GGM. Operating Profit (Loss). Hughes incurred an operating loss of $133.4 million for the first six months of 1999 compared with operating profit, on the same basis, of $161.8 million for the first six months of 1998. The operating loss for the first six months of 1999 was principally a result of the $125.0 million pre-tax charge at the Satellite Systems segment, $84.9 million of higher depreciation and amortization expense discussed above and a one-time pre-tax charge of $92.0 million resulting from the termination of the Asia-Pacific Mobile Telecommunications Satellite Pte. Ltd. ("APMT") contract due to export licenses not being issued. The operating loss in the Direct-To-Home Broadcast segment for the first six months of 1999 was $91.8 million compared with an operating loss of $71.8 million for the first six months of 1998. The increase in operating loss in 1999 was principally due to increased programming, marketing and subscriber acquisition costs and increased depreciation and amortization costs that resulted from the acquisition of PRIMESTAR and USSB, partially offset by increased subscriber revenues discussed above. The Satellite Services segment operating profit for the first six months of 1999 was $162.3 million compared to $160.1 million for the same period of 1998. The slight improvement in operating profit was primarily due to the increase in revenues discussed above, offset by higher depreciation due to additions to the satellite fleet. Also affecting the comparison was a second quarter 1998 provision for losses related to the May 1998 failure of PanAmSat's Galaxy IV satellite. The Satellite Systems segment reported an operating loss for the first six months of 1999 of $147.4 million compared to operating profit of $115.1 million and operating profit margin of 8.9% for the first six months of 1998. The operating loss for the first six months of 1999 resulted from a pre-tax charge, before intercompany eliminations, of $178.0 million that resulted from increased development costs and schedule delays on several new product lines and a one-time pre-tax charge of $81.0 million resulting from the termination of the APMT contract. - 58 - HUGHES ELECTRONICS CORPORATION The Network Systems segment's operating loss for the first six months of 1999 was $6.5 million compared with an operating loss of $37.1 million for the first six months of 1998. The lower operating loss was primarily due to higher sales of DIRECTV receiver equipment and satellite-based mobile telephony systems and a second quarter 1998 provision of $26.0 million associated with the bankruptcy filing by a customer, partially offset by a one-time pre-tax charge in 1999 of $11.0 million resulting from the termination of the APMT contract. EBITDA. For the first six months of 1999, EBITDA was $149.4 million versus $359.7 million for the same period in 1998. EBITDA margin on the same basis was 4.6% for the first six months of 1999 compared to 13.5% for the first six months of 1998. The Direct-To-Home Broadcast segment had a negative EBITDA for the first six months of 1999 of $2.9 million compared with negative EBITDA of $25.8 million for the first six months of 1998. This improvement in EBITDA for the first six months of 1999 was primarily due to continued strong subscriber growth in the domestic DIRECTV business, the contributions from PRIMESTAR and USSB from their dates of acquisition and the consolidation of SurFin. The Satellite Services segment's EBITDA for the first six months of 1999 was $296.9 million compared with $273.3 million for the same period of last year. EBITDA margin increased to 75.4% versus 71.2% for last year's first six months. The increases in EBITDA and EBITDA margin were principally due to higher revenues discussed above, and lower satellite leaseback expenses resulting from the 1999 exercise of certain early buy-out options under sale-leaseback agreements. Also affecting the comparison was a second quarter 1998 provision for losses related to the May 1998 failure of PanAmSat's Galaxy IV satellite. The Satellite Systems segment had a negative EBITDA of $121.0 million for the first six months of 1999, compared with EBITDA and EBITDA margin of $137.3 million and 10.6% for the first six months of 1998. The decrease in EBITDA for the first six months of 1999 was due to the second quarter 1999 $178.0 million pre-tax charge, before intercompany eliminations, discussed above and the first quarter 1999 pre-tax charge of $81.0 million that resulted from the termination of the APMT contract. Network Systems segment EBITDA increased to $19.1 million for the first six months of 1999, compared to a negative EBITDA of $18.7 million for the first six months of 1998. EBITDA margin for the first six months of 1999 was 3.3%. The increase in EBITDA and EBITDA margin for the first six months of 1999 was primarily due to the higher sales discussed above, partially offset by the first quarter 1999 pre-tax charge of $11.0 million related to the termination of the APMT contract under which HNS was providing ground network equipment and handsets. The second quarter of 1998 included a $26.0 million provision associated with the bankruptcy filing by a customer. Interest Income and Expense. Interest income decreased to $18.5 million for the first six months of 1999 compared with $68.1 million for the first six months of 1998. The decrease in interest income was due to lower cash balances for the first six months of 1999 compared to 1998. Interest expense increased $13.4 million for the first six months of 1999 from the same period in 1998 due to the increase of $184.2 million in borrowings. Other, net. Other, net for the first six months of 1999 reflects a $154.6 million pre-tax gain that resulted from the settlement of the Williams Patent infringement case offset by losses from unconsolidated subsidiaries of $64.7 million attributable principally to equity investments in DIRECTV Japan and AMSC. The first six months of 1998 includes losses from unconsolidated subsidiaries of $50.9 million, primarily related to DIRECTV Japan and AMSC and $17.5 million of losses associated with bankruptcy filings by two unaffiliated customers. Income Taxes. For the first six months of 1999, Hughes recorded an income tax benefit at an effective income tax rate of 19.7%, while Hughes recorded an income tax provision at an effective income tax rate of 35.4% for the first six months of 1998. The effective income tax rates in each period benefited from the favorable resolution of tax contingencies; however, the lower effective income tax rate for 1999 resulted from the effect of the benefits on lower expected pre-tax earnings for the year compared to 1998. Earnings (Loss). Loss and loss per share, including the effect of preferred stock dividends, for the first six months ended June 30, 1999 were $14.0 million and $0.04, respectively, compared to earnings and earnings per share of $100.6 million and $0.25, respectively, for the comparable period in 1998. - 59 - HUGHES ELECTRONICS CORPORATION Liquidity and Capital Resources Cash and Cash Equivalents. Cash and cash equivalents were $858.7 million at June 30, 1999 compared to $1,342.1 million at December 31, 1998. The $483.4 million decrease was due to increased investments in companies, net of cash acquired, which included the acquisition of PRIMESTAR and Tempo Satellite assets (see "Acquisitions"), the early buy-out of a satellite sale-leaseback by PanAmSat, additional capital expenditures for satellites and property and equipment and general working capital requirements, partially funded by GM's $1.5 billion investment in Hughes as part of the alliance with AOL and the $154.6 million received related to the settlement of the Williams Patent infringement case. Cash used in operating activities for the first six months of 1999 was $15.3 million, compared to cash provided by operating activities of $157.1 million in the same period of 1998. This decrease was due primarily to the decrease in net income for the first six months of 1999 and an increase in prepaid dealer commissions and prepaid marketing expenditures of the DIRECTV businesses. Net cash used in investing activities was $2,476.2 million for the six months ended June 30, 1999 and $1,393.7 million for the same period in 1998. The substantial increase in 1999 compared to 1998 resulted from increased investments in companies, net of cash acquired, which included the acquisition of PRIMESTAR and the Tempo Satellite assets (see "Acquisitions"), and an increase in capital expenditures for satellites and property and equipment. Net cash provided by financing activities was $2,008.1 million for the first six months of 1999, compared with $45.6 million for the same period in 1998. The substantial increase was primarily due to an increase in net borrowings compared to 1998 and proceeds received in 1999 from the issuance of preferred stock to GM related to the AOL transaction. Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of current assets to current liabilities) at June 30, 1999 and December 31, 1998 was 1.37 and 1.91, respectively. Working capital decreased by $717.0 million to $1,119.9 million at June 30, 1999 from $1,836.9 million at December 31, 1998. Common Stock Dividend Policy and Use of Cash. Since the completion of the recapitalization of Hughes in late 1997, the GM Board has not paid, and does not currently intend to pay in the foreseeable future, cash dividends on its GM Class H common stock. Similarly, since such time, Hughes has not paid dividends on its common stock to GM and does not currently intend to do so in the foreseeable future. Future Hughes earnings, if any, are expected to be retained for the development of the businesses of Hughes. Expected cash requirements for the remainder of 1999 relate to capital expenditures for property and equipment and expenditures for additional satellites of approximately $1.0 billion, the early buy-out of satellite sale-leasebacks, the funding of business acquisitions, payment of preferred stock dividends, additional equity investments and increases in working capital. These cash requirements are expected to be funded from a combination of existing cash balances, amounts available under existing credit facilities and debt 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. Additionally, DIRECTV Japan is in the process of seeking shareholder approval of its funding needs through March 2000. At this time, not all shareholders have agreed to fund their pro rata share of the capital call. In the event that all shareholders do not all elect to continue funding the business, remaining shareholders, including Hughes, could face increased future cash requirements. Debt and Credit Facilities. At June 30, 1999, Hughes' 59.1% owned subsidiary, SurFin, had a total of $184.2 million outstanding under a $400.0 million unsecured revolving credit facility expiring in June 2002. 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 $600.0 million of outstanding borrowings. PanAmSat maintains a $500.0 million multi-year revolving credit facility and a $500.0 million commercial paper program. The multi-year revolving credit facility provides for a commitment through December 24, 2002. Borrowings under the credit facility and commercial paper program are limited to $500.0 million in the aggregate and are expected to be used to fund PanAmSat's satellite expansion program. No amounts were outstanding under the credit facility at June 30, 1999. $85.0 million was outstanding under the commercial paper program at June 30, 1999. At June 30, 1999, other long-term debt of $21.6 million was outstanding. - 60 - HUGHES ELECTRONICS CORPORATION 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 and the 364-day credit facility provides for a commitment of $250.0 million through December 1, 1999. No amounts were outstanding under either facility at March 31, 1999. These facilities provide backup capacity for Hughes' $1.0 billion commercial paper program. $383.0 million was outstanding under the commercial paper program at June 30, 1999. Hughes has filed a shelf registration statement with the Securities and Exchange Commission with respect to an issuance of up to $2.0 billion of debt securities from time to time. Subject to market conditions, Hughes expects to issue up to $1.0 billion of these securities in the third quarter of 1999. Hughes will use these funds principally to repay commercial paper borrowings incurred in connection with recent acquisitions and to fund short-term working capital requirements. Acquisitions. On July 28, 1999, GLA, Hughes' 70% owned subsidiary, acquired Galaxy Brasil, Ltda., the exclusive distributor of DIRECTV services in Brazil, from Tevecap S.A. for approximately $114.0 million plus the assumption of debt. In connection with the transaction, Tevecap sold its 10% equity interest in GLA to Hughes and Cisneros Group, the remaining GLA partners. Hughes' share of the purchase amounted to approximately $101.1 million and increased Hughes' ownership of GLA to 77.8%. On January 22, 1999, Hughes agreed to acquire PRIMESTAR's 2.3 million subscriber medium-power direct-to-home satellite business and the high-power satellite assets and direct-broadcast satellite orbital frequencies of Tempo Satellite, a wholly-owned subsidiary of TCI Satellite Entertainment, Inc. On April 28, 1999, the acquisition of PRIMESTAR's direct-to-home business was completed. The purchase price consisted of $1.1 billion in cash and 4.9 million shares of GM Class H common stock, for a total purchase price of $1.3 billion, based on the average market price of $47.87 per share of Class H common stock at the time the acquisition agreement was signed. The purchase price will be adjusted based upon the final adjusted net working capital of PRIMESTAR at the date of closing. The purchase price for the Tempo Satellite assets consisted of $500 million in cash. Of this purchase price, $150 million was paid on March 10, 1999 for a satellite that has not yet been launched and the remaining $350 million was paid on June 4, 1999 for an in-orbit satellite and 11 related satellite orbital frequencies. In December 1998, Hughes agreed to acquire all of the outstanding capital stock of USSB. USSB provided direct-to-home premium satellite programming in conjunction with DIRECTV's basic programming service. The purchase price, consisting of cash and GM Class H common stock, was approximately $1.6 billion, consisting of approximately $360 million in cash and 22.6 million shares of Class H common stock. The USSB acquisition was closed on May 20, 1999 with the payment of cash and delivery of shares made to the former USSB shareholders in July 1999. The number of shares issued as part of the PRIMESTAR acquisition and the number of shares issued in July 1999 as part of the USSB merger have been included in the calculation of both the numerator and denominator of the fraction used to calculate the Available Separate Consolidated Net Income (Loss) ("ASCNI") of Hughes. See further discussion of ASCNI in Note 4 to the financial statements. 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, 2001, as required. Management is currently assessing the impact of this statement on Hughes' results of operations and financial position. - 61 - HUGHES ELECTRONICS CORPORATION 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 includes 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 and 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 tasks have been completed on many systems, with the exception of the following: satellite control and communication software, the customer service call center purchased in April 1999 from Tele-Communications, Inc., upgrades of software used in the broadcast control system, including the uplinking and encoding systems, customer service systems and laboratory system and upgrades of network and telecommunication equipments, which are expected to be completed in the fourth quarter of 1999. The remediation tasks for the satellite ground control software and ground stations delivered by Hughes are being coordinated with Raytheon, the supplier. (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 six months. 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 large 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 for the HSC built satellites. The loss of real-time satellite control software functionality for these satellites would be addressed through the use of back-dated processors or through manual procedures. These alternative procedures would restore any loss in functionality but could result in slightly higher operating costs until the Year 2000 problems are corrected. - 62 - HUGHES ELECTRONICS CORPORATION Hughes is utilizing both internal and external resources for the remediation and testing of its systems that are undergoing Year 2000 modification. Hughes has incurred and expensed approximately $11.0 million during the first six months of 1999 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, including estimated Year 2000 remediation costs related to PRIMESTAR, are currently estimated to be from $15 million to $17 million, with the majority of the expense expected to be incurred early in the fourth quarter 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 June 1999, Standard and Poor's Rating Services ("S&P") affirmed Hughes' long-term debt rating of 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 April 1999, Moody's Investors Service ("Moody's") lowered Hughes' long-term credit rating from Baa1 to Baa2, which was subsequently affirmed in June 1999. The Baa2 rating for senior debt indicates medium-grade obligations with adequate likelihood of interest and principal payment and principal security. 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. Debt ratings by the various rating agencies reflect each agency's opinion of the ability of issuers to repay debt obligations punctually. The lowered rating reflects increased financial leverage at Hughes resulting from a significant acceleration of its growth initiatives, including the PRIMESTAR, Tempo Satellite and USSB transactions, PanAmSat's satellite deployment and restoration plan, the previously announced increased development costs and schedule delays experienced by HSC and the investment in Spaceway. 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. - 63 - HUGHES ELECTRONICS CORPORATION Supplemental Data The financial statements reflect the application of purchase accounting adjustments as previously discussed. However, as provided in GM's Restated Certificate of Incorporation, the earnings attributable to GM Class H common stock for purposes of determining the amount available for the payment of dividends on GM Class H common stock specifically excludes such adjustments. More specifically, amortization of the intangible assets associated with GM's purchase of Hughes amounted to $10.6 million for the first six months of 1999 and 1998. 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 $416.0 million at June 30, 1999 and $426.6 million at December 31, 1998. In order to provide additional analytical data to the users of Hughes' financial information, supplemental data in the form of unaudited summary pro forma financial data are provided. Consistent with the basis on which earnings of Hughes available for the payment of dividends on the GM Class H common stock is determined, the pro forma data exclude purchase accounting adjustments related to GM's acquisition of Hughes. Included in the supplemental data are certain financial ratios which provide measures of financial returns excluding the impact of purchase accounting adjustments. The pro forma data are not presented as a measure of GM's total return on its investment in Hughes. - 64 - HUGHES ELECTRONICS CORPORATION Unaudited Summary Pro Forma Financial Data* Pro Forma Condensed Statement of Income (Loss) Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ---- ---- ---- ---- (Dollars in Millions Except Per Share Amounts) Total revenues $1,776.0 $1,369.0 $3,227.8 $2,660.0 Total operating costs and expenses 1,872.6 1,290.8 3,361.2 2,498.2 ------- ------- ------- ------- Operating profit (loss) (96.6) 78.2 (133.4) 161.8 Non-operating income (loss) (45.0) (7.4) 99.4 (7.2) Income tax provision (benefit) (42.5) 23.3 (6.7) 54.7 Minority interests in net losses of subsidiaries 6.8 8.6 13.3 9.9 Cumulative effect of accounting change, net of taxes - - - (9.2) Preferred stock dividends (1.6) - (1.6) - ------- ----- ------- ------- Earnings (Loss) Used for Computation of Available Separate Consolidated Net Income (Loss) (1) $(93.9) $56.1 $(15.6) $100.6 ====== ==== ====== ===== Earnings (Loss) Attributable to General Motors Class H Common Stock on a Per Share Basis- Basic and Diluted $(0.23) $0.14 $(0.04) $0.25 ====== ==== ====== ==== Pro Forma Condensed Balance Sheet June 30, December 31, Assets 1999 1998 ---- ---- (Dollars in Millions) Total Current Assets $4,139.6 $3,846.4 Satellites, net 3,515.8 3,197.5 Property, net 1,303.0 1,059.2 Net Investment in Sales-type Leases 162.0 173.4 Intangible Assets, Investments and Other Assets, net 8,736.6 4,731.9 -------- -------- Total Assets $17,857.0 $13,008.4 ======== ======== Liabilities and Stockholder's Equity Total Current Liabilities $3,019.7 $2,009.5 Long-Term Debt 1,239.6 778.7 Postretirement Benefits Other Than Pensions, Other Liabilities and Deferred Credits 2,155.8 1,783.2 Minority Interests 502.2 481.7 Total Stockholder's Equity (2) 10,939.7 7,955.3 -------- --------- Total Liabilities and Stockholder's Equity (2) $17,857.0 $13,008.4 ======== ======== * The summary excludes purchase accounting adjustments related to GM's acquisition of Hughes. (1)Includes accrued preferred stock dividends of $1.6 million in 1999. (2)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). - 65 - HUGHES ELECTRONICS CORPORATION Unaudited Summary Pro Forma Financial Data* - Continued Pro Forma Selected Segment Data Direct-To- Elimin- Home Satellite Satellite Network ations Broadcast Services Systems Systems and Other Total - -------------------------------------------------------------------------------- (Dollars in Millions) For the Three Months Ended: June 30, 1999 Total Revenues $870.2 $200.4 $553.8 $341.1 $(189.5) $1,776.0 - -------------------------------------------------------------------------------- Operating Profit (Loss) $(68.4) $83.2 $(133.0) $11.3 $10.3 $(96.6) Operating Profit Margin - 41.5% - 3.3% - - EBITDA (3) $(6.8) $151.0 $(119.6) $25.0 $13.6 $63.2 EBITDA Margin(3) - 75.3% - 7.3% - 3.6% - -------------------------------------------------------------------------------- Depreciation and Amortization $61.6 $67.8 $13.4 $13.7 $3.3 $159.8 Capital Expenditures $78.2(1)$135.4(2) $22.8 $15.5 $36.7 $288.6 - -------------------------------------------------------------------------------- June 30, 1998 Total Revenues $401.5 $191.1 $674.8 $221.7 $(120.1) $1,369.0 - -------------------------------------------------------------------------------- Operating Profit (Loss) $(40.2) $74.4 $60.0 $(25.2) $9.2 $78.2 Operating Profit Margin - 38.9% 8.9% - - 5.7% EBITDA(3) $(16.7) $133.1 $71.5 $(15.3) $5.8 $178.4 EBITDA Margin(3) - 69.6% 10.6% - - 13.0% - -------------------------------------------------------------------------------- Depreciation and Amortization $23.5 $58.7 $11.5 $9.9 $(3.4) $100.2 Capital Expenditures $34.4 $164.7(2) $21.6 $10.9 $10.0 $241.6 - -------------------------------------------------------------------------------- For the Six Months Ended: June 30, 1999 Total Revenues $1,426.8 $393.9 $1,184.1 $572.0 $(349.0) $3,227.8 - -------------------------------------------------------------------------------- Operating Profit (Loss) $(91.8) $162.3 $(147.4) $(6.5) $(50.0) $(133.4) Operating Profit Margin - 41.2% - - - - EBITDA(3) $(2.9) $296.9 $(121.0) $19.1 $(42.7) $149.4 EBITDA Margin(3) - 75.4% - 3.3% - 4.6% - -------------------------------------------------------------------------------- Depreciation and Amortization $88.9 $134.6 $26.4 $25.6 $7.3 $282.8 Capital Expenditures $155.8(1)$475.2(2) $35.1 $17.7 $4.5 $688.3 - -------------------------------------------------------------------------------- June 30, 1998 Total Revenues $789.4 $384.1 $1,299.1 $406.4 $(219.0) $2,660.0 - -------------------------------------------------------------------------------- Operating Profit (Loss) $(71.8) $160.1 $115.1 $(37.1) $(4.5) $161.8 Operating Profit Margin - 41.7% 8.9% - - 6.1% EBITDA(3) $(25.8) $273.3 $137.3 $(18.7) $(6.4) $359.7 EBITDA Margin(3) - 71.2% 10.6% - - 13.5% - -------------------------------------------------------------------------------- Depreciation and Amortization $46.0 $113.2 $22.2 $18.4 $(1.9) $197.9 Capital Expenditures $48.1 $414.3(2) $32.3 $15.7 $135.9 $646.3 * The Financial Statements reflect the application of purchase accounting adjustments related to GM's acquisition of Hughes. However, as provided in the General Motors' Restated Certificate of Incorporation, the earnings attributable to GM Class H common stock for purposes of determining the amount available for the payment of dividends on GM Class H common stock specifically excludes such adjustments. In order to provide additional analytical data, the above unaudited pro forma selected segment data, which exclude the purchase accounting adjustments related to GM's acquisition of Hughes, are presented. (1)Includes satellite expenditures amounting to $22.5 million and $75.5 million in the second quarter and first six months of 1999, respectively. (2)Includes satellite expenditures amounting to $125.9 million, $94.4 million, $315.6 million and $240.0 million, respectively. Also included are expenditures related to the early buy-out of satellite sale-leasebacks totaling $58.9 million for the second quarter of 1998 and $141.3 million and $155.5 million for the first six months of 1999 and 1998, respectively. (3)EBITDA is defined as operating profit (loss), plus depreciation and amortization. EBITDA is not presented as an alternative measure of operating results or cash flow from operations, as determined in accordance with generally accepted accounting principles. EBITDA margin is calculated by dividing EBITDA by total revenues. See discussion in Management's Discussion and Analysis of Financial Condition and Results of Operations. - 66 - HUGHES ELECTRONICS CORPORATION Unaudited Summary Pro Forma Financial Data* - Concluded Pro Forma Selected Financial Data Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ---- ---- ---- ---- (Dollars in Millions Except Per Share Amounts) Operating profit (loss) $(97) $78 $(133) $162 EBITDA (1) $63 $178 $149 $360 EBITDA margin (2) 3.6% 13.0% 4.6% 13.5% Income (Loss) before income taxes, minority interests and cumulative effect of accounting change $(142) $71 $(34) $155 Earnings (Loss) used for computation of available separate consolidated net income (loss) (3) $(94) $56 $(16) $101 Average number of GM Class H dividend base shares (4) 414.9 399.9 407.5 399.9 Stockholder's equity $10,940 $7,783 $10,940 $7,783 Working capital $1,120 $2,324 $1,120 $2,324 Operating profit as a percent of revenues N/A 5.7% N/A 6.1% Income before income taxes, minority interests and cumulative effect of accounting change as a percent of revenues N/A 5.2% N/A 5.8% Net income as a percent of revenues N/A 4.1% N/A 3.8% * The summary excludes purchase accounting adjustments related to GM's acquisition of Hughes. (1)EBITDA is defined as operating profit (loss), plus depreciation and amortization. EBITDA is not presented as an alternative measure of operating results or cash flow from operations, as determined in accordance with generally accepted accounting principles. See discussion in Management's Discussion and Analysis of Financial Condition and Results of Operations. (2)EBITDA margin is calculated by dividing EBITDA by total revenues. (3)Includes accrued preferred stock dividends of $1.6 million in 1999. (4)Average 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 121.0 million and 105.2 million for the second quarter of 1999 and 1998, respectively, and 113.6 million and 104.7 million for the six months ended June 30, 1999 and 1998, respectively. * * * * * - 67 - EX-27 3 FDS -- FOR JUNE 30, 1998
5 This schedule contains summary financial information extracted from General Motors Corporation June 30, 1998 Consolidated Financial Statements and is qualified in its entirety by reference to Second Quarter 1999 Form 10-Q 0000040730 General Motors Corporation 1,000,000 U.S. Dollars 6-MOS Dec-31-1998 Jan-01-1998 Jun-30-1998 1 7,733 8,395 63,720 0 11,317 34,148 63,848 33,397 223,938 42,611 99,923 222 1 1,103 14,675 223,938 66,738 77,296 57,329 62,635 49 229 3,261 2,594 854 1,674 319 0 0 1,993 2.88 2.82
EX-27 4 FDS -- FOR JUNE 30, 1999
5 This schedule contains summary financial information extracted from General Motors Corporation June 30, 1999 Consolidated Financial Statements and is qualified in its entirety by reference to Second Quarter 1999 Form 10-Q 0000040730 General Motors Corporation 1,000,000 U.S. Dollars 6-MOS Dec-31-1999 Jan-01-1999 Jun-30-1999 1 14,691 10,165 80,654 0 10,766 43,404 65,678 34,169 256,938 51,676 118,397 220 0 1,086 15,125 256,938 75,881 87,502 62,950 68,822 79 230 3,639 5,724 1,985 3,554 426 0 0 3,980 6.09 5.97
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