-----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, U7Op4efAIfTyo3/v2hRmn1DZHDL/7AIP4fgCSF2nAQ9SqEwEFlUW+q6fPI/NL1zs eKgToEwU4r9qxV9kpRMaQg== 0000950124-98-001456.txt : 19980323 0000950124-98-001456.hdr.sgml : 19980323 ACCESSION NUMBER: 0000950124-98-001456 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980320 SROS: CSX SROS: NASD SROS: NYSE SROS: PHLX SROS: PCX FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENERAL MOTORS CORP CENTRAL INDEX KEY: 0000040730 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLES & PASSENGER CAR BODIES [3711] IRS NUMBER: 380572515 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-00143 FILM NUMBER: 98569355 BUSINESS ADDRESS: STREET 1: 100 RENAISSANCE CTR STREET 2: 3044 W GRAND BLVD CITY: DETROIT STATE: MI ZIP: 48243-7301 BUSINESS PHONE: 3135565000 10-K 1 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549-1004 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF --- 1934 For the fiscal year ended December 31, 1997 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 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Each Class Which Registered - ---------------------------------------------- ---------------------------- Common, $1-2/3 par value (678,564,579 shares outstanding as of February 28, 1998) New York Stock Exchange, Inc. Class H Common, $0.10 par value (104,368,924 shares outstanding as of February 28, 1998) New York Stock Exchange, Inc. Preference, $0.10 par value, Series B 9-1/8% Depositary Shares, stated value $25 per share, dividends cumulative (20,020,586 depositary shares outstanding as of February 28, 1998) New York Stock Exchange, Inc. Preference, $0.10 par value, Series D 7.92% Depositary Shares, stated value $25 per share, dividends cumulative (3,014,654 depositary shares outstanding as of February 28, 1998) New York Stock Exchange, Inc. Preference, $0.10 par value, Series G 9.12% Depositary Shares, stated value $25 per share, dividends cumulative (5,015,410 depositary shares outstanding as of February 28, 1998) New York Stock Exchange, Inc. General Motors Capital Trust D 8.67% Trust Originated Preferred Securities (sm) (TOPrS (sm)), Series D (3,149,748 shares outstanding as of February 28, 1998) New York Stock Exchange, Inc. General Motors Capital Trust G 9.87% Trust Originated Preferred Securities (sm) (TOPrS (sm)), Series G (5,221,123 shares outstanding as of February 28, 1998) New York Stock Exchange, Inc.
Note: The $1-2/3 par value common stock of the Registrant is also listed for trading on: Chicago Stock Exchange, Inc. Chicago, Illinois Pacific Exchange, Inc. San Francisco, California Philadelphia Stock Exchange, Inc. Philadelphia, Pennsylvania Montreal Stock Exchange Montreal, Quebec, Canada Toronto Stock Exchange Toronto, Ontario, Canada Borse Frankfurt am Main Frankfort on the Main, Germany Borse Dusseldorf Dusseldorf, Germany Bourse de Bruxelles Brussels, Belgium Courtiers en Valeurs Mobilieres Paris, France The London Stock Exchange London, England
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) The aggregate market value (based upon the average of the highest and lowest sales prices on the Composite Tape on February 27, 1998) of General Motors Corporation $1-2/3 par value and Class H common stocks held by nonaffiliates on February 27, 1998 was approximately $46.6 billion and $4.3 billion, respectively. Documents incorporated by reference are as follows:
Part and Item Number of Form Document 10-K into Which Incorporated - -------- ----------------------------- General Motors Notice of Annual Meeting of Stockholders and Proxy Statement for the Annual Meeting of Stockholders to be held June 1, 1998 Part III, Items 10 through 13
- ------------------------ (sm) "Trust Originated Preferred Securities" and "TOPrS" are service trademarks of Merrill Lynch & Co. COVER PAGE 2 PART I GENERAL MOTORS CORPORATION AND SUBSIDIARIES THE CORPORATION General Motors Corporation, incorporated in 1916 under the laws of the State of Delaware, is hereinafter sometimes referred to as the "Registrant" or the "Corporation" and, together with its subsidiaries, is hereinafter sometimes referred to as "General Motors" or "GM." ITEM 1. BUSINESS GENERAL The following information is incorporated herein by reference to the indicated pages in Part II:
Item Page(s) ---- ------- Wholesale Sales II-45 and II-48 Employment and Payrolls II-64 Note 24 of Notes to Consolidated Financial Statements (Segment Reporting) II-36
While the major portion of GM's operations is derived from the automotive industry, GM also has financing and insurance operations and produces products and provides services in other industries. GM participates in the automotive industry through the activities of its automotive business operating segments: GM-North American Operations (GM-NAO); Delphi Automotive Systems (Delphi); and GM International Operations (GMIO). GM-NAO designs, manufactures, and markets vehicles primarily in North America under the following nameplates: Chevrolet, Pontiac, GMC, Oldsmobile, Buick, Cadillac, and Saturn. Delphi is a diverse supplier of automotive systems and components. Delphi offers products and services in the areas of chassis, interior, lighting, electronics, power and signal distribution, energy and engine management, steering, and thermal systems. GMIO meets 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. GM's financing and insurance operations primarily relate to General Motors Acceptance Corporation (GMAC). GMAC provides a broad range of financial services, including consumer vehicle financing, full-service leasing and fleet leasing, dealer financing, car and truck extended service contracts, residential and commercial mortgage services, and vehicle and homeowners insurance. GM's other operations relate to its Hughes Electronics Corporation subsidiary (Hughes) and the design, manufacturing and marketing of locomotives and heavy-duty transmissions. On December 17, 1997, GM completed a series of related transactions (Hughes Transactions) that were designed to address strategic challenges facing the three principal businesses of Hughes and unlock stockholder value in GM. The Hughes Transactions included the tax-free spin-off of the defense electronics business of Hughes (Hughes Defense) to holders of $1-2/3 par value and Class H common stocks, which was then followed immediately by the merger of Hughes Defense with Raytheon Company (Raytheon). Concurrently, Delco Electronics, the automotive electronics subsidiary of Hughes, was transferred from Hughes to Delphi. Finally, Class H common stock was recapitalized into a GM tracking stock, Class H common stock, that is linked to the telecommunications and space businesses of Hughes. Additional information regarding the Hughes Transactions is contained in Note 22 to the GM consolidated financial statements. Substantially all automotive-related products are marketed through retail dealers and through distributors and jobbers in the United States, Canada, and Mexico, and through distributors and dealers overseas. At December 31, 1997, there were approximately 8,500 GM vehicle dealers in the United States, 900 in Canada and Mexico, and 5,500 outlets overseas. RAW MATERIALS AND SERVICES GM purchases materials, parts, supplies, freight transportation, energy, and other services from numerous unaffiliated firms. Interruptions in production or delivery of these goods or services could adversely affect GM. BACKLOG OF ORDERS Shipments of GM automotive products are made as promptly as possible after receipt of firm sales orders; therefore, no significant backlog of unfilled orders accumulates. Hughes had a $10.3 billion and $6.8 billion backlog of commercial contracts relating to its telecommunications and space businesses at the end of 1997 and 1996, respectively. I-1 3 GENERAL MOTORS CORPORATION AND SUBSIDIARIES COMPETITIVE POSITION GM's principal competitors in passenger cars and trucks in the United States and Canada include Ford Motor Company, Chrysler Corporation, Toyota Corporation, Nissan Motor Corporation, Ltd., Honda Motor Company, Ltd., Mazda Motor Corporation, Mitsubishi Motors Corporation, Fuji Heavy Industries, Ltd. (Subaru), Volkswagen A.G., Hyundai Motor Company, Ltd., Daimler-Benz A.G. (Mercedes), Bayerische Motoren Werke AG (BMW), and Volvo AB. All but Volkswagen and Hyundai currently operate vehicle manufacturing facilities in the United States or Canada. Toyota and GM operate the New United Motor Manufacturing, Inc. facility in Fremont, California as a joint venture which currently builds passenger cars and light-duty trucks. Wholesale unit sales of GM passenger cars and trucks during the three years ended December 31, 1997 are summarized in Management's Discussion and Analysis in Part II. Total industry new motor vehicle (passenger cars, trucks, and buses) registrations of domestic and foreign makes and GM's competitive position during the years ended December 31, 1997, 1996, and 1995, respectively, were as follows:
1997(1) 1996 1995 ---- ---- ---- (Units in Thousands) Total industry registrations In the United States 15,417 15,486 15,219 In Canada and Mexico 1,919 1,535 1,343 In other countries 36,125 34,789 32,853 ------ ------ ------ Total industry registrations - all countries 53,461 51,810 49,415 ====== ====== ====== 1997(1) 1996 1995 ---- ---- ---- (Percent of Total Industry) GM's registrations In the United States 31% 31% 32% In Canada and Mexico 31 31 32 In other countries 9 9 9 Total GM's registrations - all countries 16 16 17
- -------------------- (1) Preliminary The above information on registrations of new cars, trucks, and buses was obtained from outside sources and that pertaining to GM's registrations includes units which are manufactured overseas by other companies and which are imported and sold by GM and affiliates. RESEARCH AND DEVELOPMENT In 1997, GM spent $8.2 billion for research, manufacturing engineering, product engineering, and development activities related primarily to the development of new products or services or the improvement of existing products or services, including activities related to vehicle emissions control, improved fuel economy, and the safety of persons using GM products. In addition, $1.5 billion was spent for customer-sponsored activities, the majority of which were government related. Comparable data for 1996 were $8.9 billion for company-sponsored activities and $1.6 billion for customer-sponsored activities and for 1995 were $8.2 billion for company-sponsored activities and $1.4 billion for customer-sponsored activities, respectively. ENVIRONMENTAL MATTERS Automotive Emissions Control Both the federal and California governments currently impose stringent emission control requirements on motor vehicles sold in their respective jurisdictions. These requirements include pre-production testing of vehicles, testing of vehicles after assembly, the imposition of emission defect and performance warranties, and the obligation to recall and repair customer-owned vehicles determined to be non-compliant with emissions requirements. Both the U.S. Environmental Protection Agency (EPA) and the California Air Resources Board (CARB) continue to place great emphasis on compliance testing of customer-owned vehicles. Failure to comply with the emission standards or defective emission control hardware discovered during such testing can lead to substantial cost for GM related to emissions recalls. New CARB and federal requirements will increase the time and mileage periods over which manufacturers are responsible for a vehicle's emission performance. I-2 4 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Automotive Emissions Control (concluded) Both the EPA and the CARB emission requirements will become even more stringent in the future. A new tier of exhaust emission standards for cars and light-duty trucks, the "Tier 1" standards began phasing in for California vehicles in the 1993 model year and for federal vehicles in the 1994 model year. The phase-in of these "Tier 1" standards was completed in the 1997 model year. In addition to the Tier 1 standards is the CARB Low Emission Vehicle (LEV) Program that began with the 1994 model year and defines requirements through model year 2003 and beyond. This program sets even more stringent exhaust emission standards for cars and trucks sold in California. GM will have to meet the LEV Program requirements by marketing a mix of vehicles complying with the Tier 1 standards, Transitional Low Emission Vehicles (TLEVs), Low Emission Vehicles (LEVs), Ultra-Low Emission Vehicles (ULEVs), or Zero Emission Vehicles (ZEVs). From model years 2003 and later, 10% of cars and small light-duty trucks (up to 3,750 lb. Loaded Vehicle Weight) sold in California must be ZEVs. Also, GM and six other major vehicle manufacturers signed Memorandum of Agreements (MOAs) with CARB to provide for a more market driven-introduction of ZEVs. The MOAs include provisions for an advanced battery ZEV demonstration program of 3,750 vehicles in the 1998-2000 time frame, a National LEV program or an alternative that provides equivalent emission benefits in California, the capability to produce specified numbers of ZEVs as warranted by demand, and continued research and development of advanced batteries. California is now considering additional reductions in vehicle emissions beginning with the 2004 model year. The Clean Air Act permits states that have areas with air quality problems to adopt the California car and truck emission standards in lieu of the federal requirements and six states have done so. In addition, the Ozone Transport Commission (OTC), representing twelve Northeast states and the District of Columbia, has recommended the OTC jurisdictions to impose the California LEV program requirements throughout the Northeast Ozone Transport Region (OTR). This could mean that vehicles designed for the California LEV program, including ZEVs, would have to be offered for sale in that region of the country. As an alternative, the auto industry has proposed a National LEV (NLEV) program, which would require the phase-in of TLEVs and LEVs in the northeast starting in 1999, and vehicles in all states outside California meeting LEV standards on average starting in 2001. The EPA issued a final rule which would implement the NLEV program as a voluntary alternative available to automakers providing the OTC jurisdictions and the manufacturers formally opt-in to the agreement. On March 2, 1998, the EPA declared that the NLEV program was "in effect" for 1999 and later model years after all manufacturers and all the Northeast states except New York, Massachusetts, Maine, and Vermont opted to participate in the program. In addition to the above-mentioned exhaust emission programs, enhanced onboard diagnostic (OBD) devices, used to diagnose problems with emission control systems, were required both federally and in California effective with the 1996 model year. This new system has the potential of increasing warranty costs and the chance for recall. New evaporative emission control requirements for cars and trucks began phasing in with the 1995 model year in California and the 1996 model year federally. Systems will need to be further modified to accommodate federal onboard refueling vapor recovery (ORVR) control standards. ORVR phases in on passenger cars in the 1998 through 2000 model years and on light-duty trucks in the 2001 through 2006 model years. Starting in the 2000 model year, test procedures for exhaust emissions will become more complex with vehicles required to meet two additional test requirements: 1) measuring exhaust emissions over a new test cycle with the air conditioner operating; and 2) measuring exhaust emissions over a new high speed (80 mph) and high load cycle. Both of these requirements have the potential of adding hardware (and thus costs) to many vehicles. Also, the EPA, in accordance with the Clean Air Act Amendment of 1990, is studying the need, cost, and feasibility of further tightening of vehicle emission standards as early as the 2004 model year. The EPA adopted new National Ambient Air Quality standards for ozone and particulates in 1997 which are expected to enhance the need for additional emission reductions from both mobile and industrial sources. Industrial Environmental Control GM is subject to various laws relating to the protection of the environment including laws regulating air emissions, water discharge, waste management, and environmental cleanup. GM is in various stages of investigation or remediation for sites where contamination has been alleged and has recorded a liability of $610 million at December 31, 1997 and $646 million at December 31, 1996 for worldwide environmental investigation and remediation as summarized below: . GM has been identified as a potentially responsible party at sites identified by the EPA and state regulatory agencies for investigation and remediation under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and similar state statutes. GM voluntarily and actively participates in cleanup activity where such involvement is verified. The foreseeable total liability for 1997 and beyond for sites involving GM is estimated to be $186 million, which was recorded at December 31, 1997. This compares to $209 million at December 31, 1996. I-3 5 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Industrial Environmental Control (concluded) . For closed or closing plants owned by the Corporation, an estimated liability for environmental investigation and remediation is typically recognized at the time of the closure decision. Such liability, which is based on an environmental assessment of the plant property, was estimated at $122 million at December 31, 1997. This compares to $121 million at December 31, 1996. . GM is involved in investigations and remediation activities at additional locations worldwide with a foreseeable liability of approximately $302 million, which was recorded at December 31, 1997. This compares to $316 million at December 31, 1996. The cost impact of the Clean Air Act Amendments under Title V are the annual emission fees of approximately $9 million per year. Additionally, the cost of obtaining Title V permits are approximately $5 million for 1996 and an estimated $2 million for 1997, not including any internal labor costs. Additional programs under the Clean Air Act, including Hazardous Air Pollutant standards, and Compliance Assurance Monitoring requirements are estimated to cost $500 to $700 million through the year 2003. Expenditures by GM in the United States for industrial environmental control facilities during the years ended December 31, 1997, 1996, and 1995, respectively, were as follows (in millions): 1997-$108; 1996-$117; and 1995-$116. The Corporation currently estimates that future expenditures for industrial environmental control facilities through 2001 will be (in millions): 1998-$118; 1999-$74; 2000 and 2001-$156. Specific environmental expenses are difficult to isolate since expenditures may be made for more than one purpose, making precise classification difficult. Vehicular Noise Control The Federal Truck Regulation preempts all state/local noise regulations for trucks over 10,000 lb. Gross Vehicle Weight Rating (GVWR). All jurisdictions regulating noise levels of school buses which are built on medium-duty truck chassis have adopted standards compatible with federal regulations for medium-duty trucks. The Federal Truck Regulations contain label and owner's manual requirements. Passenger cars and light-duty trucks are subject to state and local motor vehicle noise regulations. The current standard for vehicles in these classes is 80 dB as measured at 50 feet. Future implementation of more stringent exhaust emission regulations and more stringent fuel economy regulations will require an assessment of increased costs of noise control. Safety Affairs and Regulations Expenditures to maintain the operational safety, occupant protection, and vehicle theft deterrence capability of new GM models continue. These expenditures include amounts for the study of alternative approaches for meeting the needs of all three areas. GM is meeting the government requirement for passive restraints by installing driver and passenger supplemental inflatable restraints (air bags) on all passenger cars and selected light trucks and vans. Driver air bags have been approved for all remaining light trucks and vans during the 1997 and 1998 model years, with a phase-in of dual front passenger air bags in these same vehicles through the 1999 model year. This will meet the requirements of NHTSA's final rule specifying that air bags be the only means used to meet the automatic restraint requirements for passenger cars and light trucks and vans on a phased-in basis beginning September 1, 1996 and culminating September 1, 1998. GM is working with NHTSA and suppliers to introduce, during the 1998 model year on all GM cars and light trucks, less aggressive air bags in order to address concerns about inflation injuries, particularly to children and smaller adult passengers who are not properly restrained. GM also will be making available, starting in the 1998 model year, air bag on-off switches for those customers who request them and also are eligible under the requirements of the new NHTSA regulation allowing these devices. New dynamic side impact protection requirements similar to those for cars will apply to certain light trucks and vans beginning September 1, 1998. Side structure and interior trim designs of future models will continue to be affected. Additional market pressure and future model design effects are likely regarding side impact performance at higher crash speeds. This will result as the federal government continues its consumer information side impact crash test program at an elevated impact speed for passenger cars, and possibly adds certain light-duty trucks to the test program after September 1, 1998. A new government requirement for vehicle interior impact protection was proposed in 1993. The final rule, similar to the proposal, was promulgated in August 1995. This rule will significantly affect upper body structure and interior trim designs of future model passenger cars and light trucks and vans. The phase-in for this rulemaking begins in the 1999 model year and will apply to all these vehicles in the 2003 model year. The NHTSA currently is considering the effects of fuel system crash integrity requirements of the Federal Motor Vehicle Safety Standard 301. If any of the considerations ultimately are adopted as final rules, some undetermined redesign, cost, and weight increase along with additional crash testing procedures could be expected for most of GM's vehicles. See Item 3, Legal Proceedings, Other Matters. With the passage of the Anti-Car Theft Act of 1992, implementation costs affect approximately 22 passenger car assembly plants and 4 light-duty truck plants. For the affected truck plants, the major expenditures were for new label printer installations and additional stamping equipment. I-4 6 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Automotive Fuel Economy The Energy Policy and Conservation Act passed in 1975 provided for production-weighted average fuel economy standards for passenger cars for 1978 and thereafter. Based on EPA combined city-highway test data, the GM 1997 model year domestic passenger car fleet is projected to attain a Corporate Average Fuel Economy (CAFE) of 28.2 miles per gallon (mpg) versus the standard of 27.5 mpg. The CAFE estimate for 1998 model year passenger cars is projected at 27.8 mpg versus the standard of 27.5 mpg. Fuel economy standards for light-duty trucks became effective in 1979. GM's light truck CAFE fleet average for the 1996 model year reached 20.9 mpg versus a standard of 20.7 mpg. For the 1997 model year, GM's truck CAFE is projected to be 20.2 mpg versus a standard of 20.7 mpg. GM's 1998 model year truck CAFE is projected at 21.2 mpg versus a standard of 20.7 mpg. Projected shortfalls to the standard are expected to be offset by credits from future model years. GM's ability to meet increased CAFE standards is contingent on various future economic, consumer, legislative, and regulatory factors that GM cannot control and cannot predict with certainty. If GM could not comply with any new CAFE standards, GM could be subject to sizable civil penalties and could have to close plants or severely restrict product offerings to remain in compliance. It is expected that the Kyoto agreement on global warming will lead to continued pressure to increase fuel economy levels. SEASONAL NATURE OF BUSINESS In the automotive business, there are retail sales fluctuations of a seasonal nature, so that production varies from month to month. In addition, the changeover period related to the annual new model introduction has traditionally occurred in the third quarter of each year. For this reason, third quarter operating results are, in general, less favorable than those in the other three quarters of the year, depending on the magnitude of the changeover needed to commence production of new models incorporating, for example, design modifications related to more fuel-efficient vehicle packaging, stricter government standards for safety and emission controls, and consumer-oriented improvements in performance, comfort, convenience, and style. SEGMENT REPORTING DATA Operating and geographic segment data for 1997, 1996, and 1995 are summarized in Note 24 of Notes to Consolidated Financial Statements in Part II. * * * * * * The Registrant makes no attempt herein to predict the future trend of its business and earnings or the effect thereon of the results of changes in general economic, industrial, regulatory, and international conditions. ITEM 2. PROPERTIES The Corporation, excluding General Motors Acceptance Corporation, has 292 locations operating in 33 states and 145 cities in the United States. Of these, 24 are engaged in the final assembly of GM cars and trucks; 35 are service parts operations responsible for distribution or warehousing; 8 major plants, offices, and research facilities relate to the operations of Hughes Electronics Corporation; and the remainder are offices or involved primarily in the testing of vehicles or the manufacture of automotive components and power products. In addition, the Corporation has 20 locations in Canada and assembly, manufacturing, distribution, or warehousing operations in 54 other countries, including equity interests in associated companies which conduct assembly, manufacturing, or distribution operations. The major facilities outside the United States and Canada, which are principally vehicle manufacturing and assembly operations, are located in Germany, the United Kingdom, Brazil, Mexico, Australia, Belgium, and Spain. Most facilities are owned by the Corporation or its subsidiaries. Leased properties consist primarily of warehouses and administration, engineering, and sales offices. The leases for warehouses generally provide for an initial period of five years and contain renewal options. Leases for sales offices are generally for shorter periods. Properties of the Registrant and its subsidiaries include facilities which, in the opinion of management, are suitable and adequate for the manufacture, assembly, and distribution of their products. Additional information regarding worldwide expenditures for plants and equipment is presented under Management's Discussion and Analysis in Part II. I-5 7 GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 3. LEGAL PROCEEDINGS (a) Material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Corporation became, or was, a party during the year ended December 31, 1997, or subsequent thereto, but before the filing of this report are summarized below. ENVIRONMENTAL MATTERS In March 1993, the Michigan Department of Environmental Quality (MDEQ) notified the Corporation's Powertrain Group (GMPTG) that MDEQ was making a referral to the Michigan Attorney General for resolution of allegations by MDEQ that a GMPTG Malleable Iron facility in Saginaw, Michigan had failed to conduct a timely environmental investigation to MDEQ's satisfaction of a landfill and certain other areas at the facility's property, and that the facility's on-site water recycling basins were improperly discharging contaminants into the groundwater and the Saginaw River. The Corporation has reached a settlement of this matter whereby it will pay a civil penalty of $200,000 and contribute $200,000 toward environmental projects in the Saginaw, Michigan area. The Corporation has entered into a consent judgment which documents the settlement and it is anticipated that it will be lodged within 90 days. * * * On June 28, 1994, the Attorney General for the State of Michigan, on behalf of the Michigan Department of Natural Resources (MDNR), filed a complaint in Circuit Court of the 30th Judicial Circuit in Ingham County, Michigan alleging that several of GM's plants released polychlorinated biphenyls (commonly referred to as "PCBs") into the Saginaw River thereby causing damage to natural resources in the river and Saginaw Bay. The State has not asserted that it is seeking fines or penalties and no amount is specified in the complaint as damages, but the State is seeking reimbursement of all its past and future response costs, including enforcement costs, and natural resource damages relating to the Saginaw River and Bay. In this regard, representatives of the State have indicated that the State will be seeking "tens of millions of dollars" in damages as well as several million dollars in past response costs. GM is currently in discussions with representatives of the Michigan Attorney General and the MDNR regarding this matter. GM has also been advised that the U.S. Department of Interior (DOI) may be conducting an investigation of these matters and any related damage to the environment, and that DOI may pursue independent claims against GM, the City of Saginaw and Bay City. * * * In August, 1997, the Delaware Department of Natural Resources & Environmental Control (DDNREC) issued a Notice of Administrative Penalty Assessment to the GM Wilmington Assembly Plant seeking civil penalties in excess of $100,000 for alleged violations of the Delaware volatile organic compound rules. GM filed a request for hearing, and is pursuing discussions with DDNREC to resolve the matter. * * * In December, 1997 the Ohio Environmental Protection Agency (OEPA) and the Ohio Attorney General proposed to settle alleged violations by the GM Powertrain Group Defiance Foundry of certain Ohio air pollution rules for a civil penalty in excess of $100,000. The primary violations alleged by OEPA are that the Defiance Foundry failed to timely perform a stack test on certain equipment, failed to comply with an air permit variance granted to the foundry, did not comply with the "Prevention of Significant Deterioration" regulations in connection with the installation of certain equipment, and exceeded certain air emission limits set forth in a number of permits. GM is pursuing settlement discussions with OEPA and the Ohio Attorney General. * * * The Illinois Environmental Protection Agency (IEPA) and U.S. Environmental Protection Agency (EPA) assert that portions of a facility maintained by the Electro-Motive Division of GM (EMD) at LaGrange, Illinois, for the purpose of providing reliability and durability engine testing is required to secure permits under Title I of the Clean Air Act. EMD has long considered the facility to be exempt from the permitting and other requirements of Title I of the Clean Air Act. Without conceding this point, and in the interest of expeditiously resolving this matter, EMD has obtained a "Prevention of Significant Deterioration" permit for these units. The IEPA has referred this matter to the Illinois Attorney General's office, and a judicial consent order is being finalized. A penalty of between $100,000 and $150,000 and a supplemental environmental project with a value of approximately $200,000 is anticipated. * * * I-6 8 GENERAL MOTORS CORPORATION AND SUBSIDIARIES ENVIRONMENTAL MATTERS (CONCLUDED) In August, 1996, the California Air Resources Board (CARB) ordered General Motors to recall about 11,500 1992 MY "S" Trucks. (These trucks are known by their emissions engine family designator as N3G4.3TBXEB2.) The CARB claims that these trucks exceeded the applicable new motor vehicle emissions standard for oxides of nitrogen (Nox). In addition to the ordered recall, the CARB threatened civil penalties of up to $57 million. General Motors believes that it has valid defenses to all CARB's claims and has requested an administrative review of the penalties and ordered recall. General Motors' defenses include the failure of CARB's outside contractor test laboratory to comply with the Federal Test Procedure used to identify non-compliant engine families. The administrative case is in the discovery stage, and a hearing is not likely until sometime in 1999. * * * OTHER MATTERS U.S. Government contracts held by the Corporation and its subsidiaries are subject to termination by the U.S. Government either for its convenience or for default by the contractor. The costs recovered for terminations for convenience do not always fully reimburse the contractor, and the profit or fee received by the contractor may be lower than that which it had expected for the portion of the contract performed. In cases of termination for default, normal contract remedies generally apply. In addition, the U.S. Government has broad discretion to suspend or debar a contractor from engaging in new government business, including discretion as to the period of suspension and activities affected. A contractor may be debarred based on a conviction or civil judgment involving certain offenses, including fraud in connection with obtaining or performing a public contract, or subcontract thereunder, and may be suspended if indicted for such an offense or if there is other adequate evidence that such an offense has been committed. Like other government contractors, GM and its subsidiaries are subject to civil audits and criminal investigations relating to their contracting activity. * * * Hughes has maintained a suit against the U.S. Government since September 1973 regarding the Government's infringement and use of a Hughes patent (the "Williams Patent") covering "Velocity Control and Orientation of a Spin Stabilized Body," principally satellites. On June 17, 1994, the U.S. Court of Claims awarded Hughes damages of $114 million. Because Hughes believed that the record supported a higher royalty rate, it appealed that decision. The U.S. Government, contending that the award was too high, also appealed. On June 19, 1996, the Court of Appeals for the Federal Circuit (CAFC) affirmed the decision of the Court of Claims which awarded Hughes $114 million in damages, together with interest. The U.S. Government petitioned the CAFC for a rehearing. That petition was denied in October 1996. The U.S. Government then filed a petition with the U.S. Supreme Court seeking certiorari. On April 21, 1997, the U.S. Supreme Court, citing a recent decision it had rendered in Warner-Jenkinson v. Hilton Davis, remanded Hughes' suit over the Williams Patent back to the CAFC in order to have the CAFC determine whether the ruling in the Williams Patent matter was consistent with the U.S. Supreme Court's decision in the Warner-Jenkinson case. The previous liability decision of the Court of Claims in the Williams Patent matter, and its $114 million damage award to Hughes, currently remain in effect pending reconsideration of the case by the CAFC. Hughes is unable to estimate the duration of this reconsideration process. While no amount has been recorded in the financial statements of Hughes to reflect the $114 million award or the interest accumulating thereon, a resolution of this matter could result in a gain that would be material to the earnings of GM attributable to Class H common stock. * * * In October, 1994, as previously reported, a California jury awarded a total of $89.5 million in damages against Hughes, which include $9.5 million of actual damages and punitive damages of $40 million to each of two former Hughes employees, Lane (race discrimination/retaliation) and Villalpando (retaliation), based on claims of mistreatment and denials of promotions. The trial court granted Hughes' motion to set aside the verdicts because of insufficient evidence. On January 6, 1997, the Court of Appeal reversed the trial court's decision to set aside the verdicts and reinstated the jury verdicts, but reduced the two $40 million punitive damage awards to $5 million and $2.83 million, resulting in an aggregate judgment of $17.33 million. Hughes' petition for review by the California Supreme Court was granted in November, 1997. Hughes filed its opening brief in January, 1998, but no decision is expected earlier than late 1998. * * * I-7 9 GENERAL MOTORS CORPORATION AND SUBSIDIARIES OTHER MATTERS (CONTINUED) In January, 1992, five retired employees of Hughes filed Jacobson, et al v. Hughes Aircraft Co. et al, in the U.S. District Court in Arizona, subsequently transferred to Los Angeles, as a putative class action to obtain increased retirement benefits from excess assets in the Hughes Non-Bargaining Retirement Plan (the "Plan"). The complaint alleges that the Plan had been constructively terminated and split into two separate plans by virtue of action by Hughes in 1991 in which it amended the Plan in order to implement a non-contributory benefit formula for certain participants and newly hired employees. The complaint further alleges that an effect of another Plan amendment is that assets of the Plan have been used improperly to provide an early retirement program for certain participants. On January 23, 1997, the U.S. Court of Appeals for the 9th Circuit reversed and remanded a decision of the U.S. District Court in Los Angeles in which the District Court had dismissed the plaintiff's complaint without leave to amend, for failure to state a claim. In February 1998, Hughes filed a petition for writ of certiorari in the United States Supreme Court seeking that court's review of the Ninth Circuit decision. Because certiorari is in the discretion of the Supreme Court, no assurance can be given that the case will be accepted for review. Hughes anticipates that in the second quarter of 1998 the Supreme Court will issue its decision to grant or deny certiorari. * * * On or about October 25, 1996, an action was commenced by Comsat Corporation against PanAmSat, News Corporation Limited (News Corp.) and Grupo Television, S.A., in the United States District Court for the Central District of California. The Complaint alleges that News Corp. wrongfully terminated an agreement with Comsat for the lease of transponders on an Intelsat satellite over the term of a five-year lease, breached certain alleged promises related to such agreement, and breached its alleged obligations under a tariff filed by Comsat with the Federal Communications Commission (FCC). As to PanAmSat, the complaint alleges that PanAmSat, alone and in conspiracy with Televisa, intentionally interfered with the alleged agreement and with Comsat's economic relationship with News Corp. Comsat had previously filed a similar action in the United States District Court for the District of Maryland. By order dated October 10, 1996, the Maryland District Court dismissed without prejudice the complaint in that action on the ground that the court lacked personal jurisdiction over all of the defendants. The complaint in the present action seeks actual and consequential damages, and punitive or exemplary damages in an amount to be determined at trial. PanAmSat believes this action is without merit. It intends to vigorously contest this matter although there can be no assurance that PanAmSat will prevail. If PanAmSat were not to prevail, the amounts involved could be material to PanAmSat. * * * Two suits, Stephen A. Solomon v. General Motors Corporation, et al. and TRV Holding Company v. General Motors Corporation, et al., (collectively "Solomon/TRV"), were filed in Delaware Chancery Court on May 13 and 18, 1994, respectively, challenging GM's split-off of Electronic Data Systems Corporation (EDS). Such actions have been consolidated and a consolidated amended complaint was filed on April 2, 1996. In addition, on May 10, 1996, a second amended and supplemental consolidated complaint (the "Second Amended Complaint") was filed by plaintiffs in this action. Another lawsuit, Ward et al., as Trustees for the Eisenberg Children's Irrevocable Trust II v. General Motors Corporation, et al. (Ward), was filed in Delaware Chancery Court on November 15, 1995. On May 17, 1996, Solomon/TRV and Ward (collectively, "Solomon/TRV/Ward") were consolidated and the Second Amended Complaint was adopted as the complaint for the consolidated action. Solomon/TRV/Ward purports to be a class action brought on behalf of former holders of Class E common stock, $0.10 par value per share (the "Class E Common Stock"), of General Motors against certain present and former directors of General Motors, as well as a double derivative action brought on behalf of EDS against certain present and former directors of General Motors and certain former directors of EDS (all of whom are also directors or officers of General Motors). EDS is named in the complaint only as a nominal defendant with respect to the double derivative action. The Second Amended Complaint alleges that defendants have breached and are continuing to breach their fiduciary duties in connection with their conduct with respect to EDS and the proposed split-off of EDS from General Motors (the "Split-Off"). In particular, the complaint alleges that the process of establishing terms for the Split-Off, including the consideration of alternatives to such transaction and the negotiating process in connection therewith, was unfairly dominated and controlled by General Motors and that the resulting terms unfairly benefit General Motors and its continuing shareholders, including the holders of common stock, $1-2/3 par value per share (the "$1-2/3 Common Stock"), and the Class H common stock, $0.10 par value per share (the "Class H Common Stock"), of General Motors, to the detriment of EDS and the former holders of Class E Common Stock. The complaint also alleges that the split-off would unfairly effect a disposition of EDS I-8 10 GENERAL MOTORS CORPORATION AND SUBSIDIARIES OTHER MATTERS (CONTINUED) because it would not provide for a recapitalization of the Class E Common Stock into $1-2/3 Common Stock at a 120% exchange ratio, as had been provided in the General Motors Certificate of Incorporation upon a disposition by General Motors of substantially all of the business of EDS. Furthermore, the complaint alleges that the solicitation of consents by General Motors with respect to the proposed split-off is wrongfully coercive and the solicitation statement being used in connection therewith is materially deficient. The Second Amended Complaint seeks monetary damages from the defendants, as well as an injunction against further action in connection with the split-off. In addition, the complaint seeks an order appointing independent representatives to act on behalf of and protect the interests of EDS and the former holders of Class E Common Stock. The complaint also seeks an order requiring the defendants to disseminate completely all material information to the former holders of Class E Common Stock in connection with the split-off. On May 10, 1996, the plaintiffs in the consolidated action filed a motion for expedited proceedings, including a request for a hearing on their application for a preliminary injunction against further action in connection with the split-off. As a result of such application, a hearing on the plaintiffs' application for a preliminary injunction had been scheduled for May 30, 1996. On May 23, 1996, after limited discovery, the plaintiffs' counsel informed the court that plaintiffs had concluded that adequate relief could be afforded to the plaintiff class members after the split-off was consummated and were withdrawing their application for expedited proceedings including a preliminary injunction hearing. Thus, plaintiffs abandoned their pursuit of an injunction to prevent consummation of the split-off. On June 7, 1996, having received consent of a majority of the holders of each class of its common stock, General Motors split-off EDS to former General Motors Class E stockholders. (See Tabulation of consents at Item 4, page 36 of the Form 10-Q filed by General Motors for the Quarter Ended June 30, 1996). On December 1, 1997, plaintiffs served a Third Amended and Supplemental Consolidated Complaint which makes essentially the same allegations as the Second Amended Complaint. The complaint seeks monetary damages, including recissory damages, and an accounting for any special benefits obtained by defendants. On December 11, 1997, defendants filed a motion to dismiss the complaint. * * * On April 26 and 27, 1996, two purported class actions, Keith McGill v. General Motors Corporation and Richard Dolowich v. General Motors Corporation, were filed against General Motors in the Supreme Court of the State of New York, Counties of Bronx and Suffolk, alleging defective rear disc brake caliper pins in the "GM W-Body car". These actions have been consolidated in the Supreme Court of the State of New York, County of Bronx. The Dolowich suit is brought on behalf of all persons and entities in the United States who currently own or lease or previously owned or leased a 1988-1993 Buick Regal, Oldsmobile Cutlass Supreme, Pontiac Grand Prix or Chevrolet Lumina. The McGill suit includes the same model year vehicles, but is brought on behalf of persons and entities residing in the State of New York who purchased or leased such vehicles and still own them. Three additional purported nationwide class actions, brought on behalf of current and previous owners of the same vehicles, have been filed in federal courts in New Jersey, Garcia v. General Motors, and Pennsylvania, Neff v. General Motors and Marcel v. General Motors. Two additional purported class actions involving the same vehicles were filed, one in the Superior Court of New Jersey for Burlington County, Bishop v. General Motors Corporation and another in the United States District Court for the Eastern District of Pennsylvania, Cohen v. General Motors Corporation. Together, the complaints allege violation of state consumer protection laws, fraud, negligent misrepresentation, and breach of express and implied warranty, and seek unspecified amounts of economic damages, punitive damages not less than $20 million, attorneys' fees and costs, and injunctive relief. The Neff, Marcel and Cohen actions have been consolidated in Pennsylvania State Court. The Garcia and Bishop actions have been consolidated in New Jersey State Court. On November 11, 1996, the New Jersey state court rendered a decision certifying a class of all past and present owners of 1988 through 1993 model year Buick Regals, Chevrolet Luminas, Oldsmobile Cutlass Supremes and Pontiac Grand Prix. The New Jersey Appellate Division denied GM's motion for leave to appeal, but noted that the trial court is required to monitor compliance with the requirements to maintain a class. * * * The following nine lawsuits were filed in the Delaware Court of Chancery during the first quarter of 1997: Jules Levine v. General Motors Corporation, et al., on February 6, 1997; Steven Verkouteren v. General Motors Corporation, et al., on February 6, 1997; Malcolm Rosenwald v. General Motors Corporation, et al., on February 7, 1997; Richard Strauss v. General Motors Corporation, et al., on February 7, 1997; Jeanette Whited, et al. v. General Motors Corporation, et al., on February 26, 1997; Andrew Carlucci, I.R.A. v. General Motors Corporation, et al., on March 3, 1997; Dr. Joseph Mantel v. General Motors Corporation, et al., on March 5, 1997; John P. McCarthy Profit Sharing Plan v. General Motors Corporation, et al., on March 6, 1997; and Patinkin v. General Motors Corporation, et al., on I-9 11 GENERAL MOTORS CORPORATION AND SUBSIDIARIES OTHER MATTERS (CONTINUED) March 31, 1997. Each suit was denominated as a class action and was purportedly brought on behalf of specified holders of GM Class H common stock against the defendants, General Motors and its directors. The complaints made essentially the same allegations, namely, that the defendants have breached and are continuing to breach their fiduciary and alleged contractual duties to specified holders of GM Class H common stock in connection with the Hughes transactions. All of these lawsuits have been consolidated under the caption, In Re General Motors Class H Shareholders Litigation. Following a hearing on November 24, 1997, the Delaware Court of Chancery denied plaintiffs' request for expedited discovery and for the scheduling of a hearing on a motion for a preliminary injunction. On December 17, 1997, having received consent of a majority of the holders of each class of its common stock, the Hughes transactions were consummated. (See Tabulation of consents at Item 4, page I-13 of the Form 10-K filed by General Motors for the Year Ended December 31, 1997). On December 1, 1997, plaintiffs filed a Second Consolidated Amended Complaint which asserts three claims against General Motors and its directors. The first claim alleges that General Motors is breaching contractual obligations to GM Class H common stockholders by effecting a disposition of the defense electronics business of Hughes Electronics without providing for a recapitalization of the GM Class H common stock into $1-2/3 common stock at a 120% exchange ratio, as currently provided for under certain circumstances in the GM Certificate of Incorporation. Plaintiffs contend that any amendment of the GM Certificate of Incorporation as part of the Hughes transactions would be invalid because stockholders are being coerced into approving such a change. Plaintiffs' second claim alleges that GM's directors have breached their fiduciary duties (1) by failing to act in an informed manner and (2) by failing to act independently to protect the interests of both classes of GM common stockholders. In particular, this claim alleges that no processes were employed to ensure that the interests of GM Class H common stockholders were adequately represented in connection with the various aspects of the Hughes transactions. Plaintiffs' third claim is that GM's directors have breached their duty of candor by using false and misleading solicitation materials to obtain approval of the Hughes transactions. This claim alleges, among other things, that the Solicitation Statement fails to disclose the consideration that GM Class H common stockholders would have received in the event the Hughes transactions triggered the provision in the GM Certificate of Incorporation for nondiscretionary recapitalization of GM Class H common stock into GM $1-2/3 common stock at a 120% exchange ratio; misstates that there is substantial uncertainty regarding application of this provision to the Hughes transactions; and misleadingly portrays the Hughes transactions as being fair to GM Class H common stockholders. The complaint alleges that GM Class H common stockholders would be irreparably damaged if the Hughes transactions were to be consummated as structured because they would lose their alleged right to receive a 20% premium in the event of a disposition of Hughes Aircraft. Plaintiffs sought, among other things, an injunction against the consummation of the Hughes transactions, an order requiring defendants to implement certain procedures designed to protect the interests of GM Class H common stockholders, or, in the event the transaction closes (it has now closed), rescission and/or compensatory damages against the defendants. On December 17, 1997, defendants filed a motion to dismiss the complaint. * * * Thirty-nine class actions have been filed in state, federal, and Canadian courts against the Corporation, claiming that 1973-1987 model Chevrolet and GMC full-size pickup trucks are defective because their fuel tanks are mounted below the cab and outside the frame rails. Twenty-four federal court class actions were transferred to the federal court in Philadelphia, Pennsylvania by the Judicial Panel on Multidistrict Litigation. In these actions, plaintiffs claimed that the fuel tank locations make the vehicles unreasonably susceptible to fuel-fed fires following side-impact collisions. Plaintiffs alleged breach of contract and warranty, negligence, fraud and negligent misrepresentation, as well as violation of various state consumer protection laws. The lawsuits seek compensatory and punitive damages and injunctions requiring notice to owners, repairs, retrofitting and "disgorgement" of revenues. An agreement for a nationwide settlement of the class actions pending in federal and state courts received final court approval on December 19, 1996, by a state court in Louisiana. The settlement, which is not expected to have a material effect on the consolidated financial statements of General Motors, provides for owners of 1973 to 1991 full-size pickup trucks and cab chassis with outside-the-frame fuel tanks, as of July 3, 1996, to receive certificates for $1,000 toward the purchase of any new General Motors passenger car or light truck, except Saturns. The certificates can be used for the first 15 months at $1,000 or transferred one time, whereupon the transferee would be able to use the certificate for $500 ($250 if used with a General Motors rebate) toward the purchase of an eligible vehicle until expiration of the 15-month period. After the first 15 months, original recipients of the certificates may use them for an additional 18 months at $500 or transfer them, whereupon the transferee would be able to use the certificates for $250 towards the purchase of an eligible vehicle. For fleets and governmental entities, after the first 15 months, the certificates are reduced to $250 for an additional 35 months, but are not transferable, except to other departments or agencies of the same governmental entity. I-10 12 GENERAL MOTORS CORPORATION AND SUBSIDIARIES OTHER MATTERS (CONTINUED) The settlement also provides for $4.1 million to fund motor vehicle fire safety research. Research funds will be used to benefit motor vehicle safety generally, and research will not be done on the pickup trucks. The court ordered General Motors to pay plaintiffs' attorneys' fees and costs totaling $27.875 million. Various appeals have been filed, including an appeal by General Motors seeking to reduce the award of fees and costs to plaintiffs' attorneys. Certificates will not be issued until appeals are concluded and the approval of the settlement is final. General Motors cannot estimate the amount of time required to resolve the various appeals. There are also pending individual product liability claims and lawsuits involving allegations of defects in the design of such vehicles resulting in fuel-fed fires following side-impact collisions. GM intends to defend these cases vigorously. * * * On December 2, 1996, a purported class action, Alma Rose Rangel, et al. v. General Motors Corporation, was filed in District Court, Webb County, Texas, claiming that the Type III door latches used in approximately 40 million 1978 to 1986 model GM passenger cars and light trucks are defective. Plaintiffs allege breaches of express and implied warranties, negligence and gross negligence and seek compensatory and punitive damages and attorneys' fees. No determination has been made that the case can proceed as a class action. GM has removed the case to the United States District Court, Southern District of Texas, Laredo Division and intends to oppose certification of a class and defend the case vigorously. Separately, a petition to open a defect investigation of the Type III door latches was denied by the National Highway Safety Traffic Administration. * * * Eleven purported class actions alleging that certain antilock braking systems on 1989 to 1996 light-duty GM trucks are defective were consolidated by the Judicial Panel on Multidistrict Litigation for coordinated pretrial proceedings as In Re General Motors Anti-Lock Brake Products Liability Litigation, USDC, Eastern District of Missouri, Eastern Division. On June 11, 1997, GM's motion to dismiss the consolidated complaint was granted. Plaintiffs have appealed to the federal court of appeals for the Eighth Circuit. * * * Three class actions have recently been filed against General Motors, as well as a number of other vehicle manufacturers and dealers, claiming that the front seat air bags installed in 1993 to 1997 model vehicles are defective: Eloisa Rodriguez, et al. v. General Motors Corporation, Ford Motor Company, Chrysler Corporation, Volvo of North America, Inc., Armadillo Motor Company, Inc., and Wickstrom Chevrolet Co., Inc., filed on April 11, 1997, in the District Court of Maverick County, Texas; Ellen Smith, et al. v. General Motors Corporation, Ford Motor Company, Chrysler Motors Corporation, Sylacauga Auto Plex, et al., filed on April 25, 1997, in Circuit Court of Coosa County, Alabama: and Frederick Lewis, et al. v. Volvo of North America, Inc., General Motors Corporation, Ford Motor Corporation, Chrysler Motors Corporation, and Spinato Chrysler Plymouth, Inc. dba Bergeron Volvo filed in Civil District Court of the Parish of Orleans, Louisiana. In essence, the complaints allege the bags are defective because, when deployed, they are likely to injure small-statured adults and children. The Texas and Louisiana matters purport to be statewide classes, while the Alabama state court entered an order conditionally certifying a nationwide class but made no determination that plaintiffs have met the requirements for maintaining the case as a class action. GM has the right to challenge the order and will oppose the class action status of the case. The complaints generally seek compensatory damages, the cost of repair or replacement of the allegedly defective air bags, and plaintiffs' attorney fees. Two of the matters, those in Louisiana and Texas, have been removed to federal court, and are consolidated for pre-trial proceedings in the federal court in New Orleans. After removal, the Alabama matter was remanded by the federal court back to Alabama state court. The defendants have filed motions for change of venue and dismissal of the complaint in the Alabama matter which are under submission to the court. Motions to dismiss the Texas and Louisiana matters will be filed pursuant to a schedule established by the court later this spring. GM intends to vigorously defend these actions. * * * I-11 13 GENERAL MOTORS CORPORATION AND SUBSIDIARIES OTHER MATTERS (CONTINUED) Four separate putative class actions have been filed alleging defects in the paint applied by GM on various vehicles which it distributed. Two of those cases have been dismissed. No determination has been made as to whether either of the two pending cases may proceed as a class action. On March 24, 1995, a purported nationwide class action, Christian Amedee and Louis Fuxan v. General Motors Corporation, et al., was filed in the Civil District Court for the Parish of New Orleans, State of Louisiana, alleging the paint or paint application process used by GM at several unspecified North American assembly plants was defective due to the omission of a surface layer primer, allegedly causing the paint to prematurely delaminate, deteriorate, and peel. Plaintiffs seek unspecified compensatory damages, equitable relief, interest, costs, and attorneys' fees. On May 3, 1995, another purported class action, Barney Kizzire v. General Motors Corporation and Bynum Oldsmobile-Pontiac-Cadillac-GMC, Inc., was filed in the Circuit Court for Fayette County, Alabama, on behalf of a proposed class of Alabama residents who purchased 1989 GMC pickup trucks alleging that the paint was defective. That case was subsequently removed to federal court and the named plaintiff's claims were all dismissed with prejudice on November 27, 1996. On July 12, 1996, the Corporation was served with a putative class action filed in the Circuit Court of Greene County, Alabama, Robert J. Reining, et al. v. General Motors Corporation. The complaint alleged that the paint systems used in the 1985 through 1995 model years are defective or potentially defective because GM switched to "water-based primers" which could result in various problems with vehicle finish. On September 11, 1997, the Court dismissed the case without prejudice at the request of the plaintiffs. On January 29, 1997, the Corporation was served with a putative class action, Karpowicz v. General Motors Corporation, filed in the Circuit Court of the Sixteenth Judicial Circuit in Kane County, Illinois. This case, purportedly brought on behalf of Illinois purchasers of new vehicles which experienced peeling paint, alleges that GM broke a promise to repair paint conditions for six years from the date of purchase and failed to implement fair and uniform corrective measures. Subsequently, the Court dismissed each of plaintiff's claims except for an allegation that paint conditions are covered under GM's six-year corrosion warranty. The complaint seeks unspecified compensatory damages, statutory damages, and penalties; an injunction halting the practices alleged; and attorneys' fees, litigation expenses, and costs. * * * (b) Previously reported legal proceedings which have been terminated, either during the quarter ended December 31, 1997, or subsequent thereto, but before the filing of this report are summarized below: On March 1, 1993, the U.S. EPA Region V issued a civil administrative complaint alleging that stormwater from the Chevrolet-Pontiac-GM of Canada Group's Pontiac Fiero plant in Pontiac, Michigan exceeded the facility's National Pollutant Discharge System Permit from May 1989 through May 1992. On June 28, 1996, an EPA Administrative Law Judge (ALJ) made a determination that General Motors is liable for stormwater discharges from the closed Fiero assembly plant in Pontiac, Michigan which exceed the 1988 permit limits for copper, lead and zinc. The ALJ rejected General Motors' arguments that the permit (a) was void by Act of Congress, (b) had expired in 1990, and (c) in any event, did not apply because the source of the metals is not industrial operations but rather from (1) ambient rainfall and (2) dissolving by acid rain of copper gutters, lead solder and flashing, and galvanized roof decking. Ruling that copper, lead and zinc are pollutants for which dischargers are strictly responsible regardless of their source, the ALJ found General Motors liable for 92 permit exceedances. General Motors came into compliance in 1992 by coating the metal on the roof. The EPA sought the $125,000 maximum administrative penalty; the ALJ supervised negotiations between the EPA and General Motors regarding the amount of the penalty and recommended a penalty of $62,500. On December 24, 1997, the U.S. EPA Appeal Board affirmed the ALJ's ruling awarding a $62,500 penalty. The Appeal Board ruled that GM should have challenged its permit within 60 days of issuance and is now barred from challenging its intent or effect. GM is appealing the ruling to the U.S. Court of Appeals for the D.C. Circuit, but will no longer report on this matter in its SEC filings because the penalty has been established at a level below the threshold for reporting under Regulation S-K. * * * * * * I-12 14 GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ACTIONS BY WRITTEN CONSENT OF GENERAL MOTORS STOCKHOLDERS A Solicitation Statement/Prospectus of General Motors (GM), dated November 10, 1997, was distributed to holders of $1-2/3 par value and Class H common stocks in order to obtain their written consent to the proposed "Hughes Transactions" relating to the three principal businesses of GM's Hughes Electronics subsidiary (Hughes). The proposed Hughes Transactions consisted of the following: - The spin-off of the Hughes defense electronics business (Hughes Defense), approximately 58.7% to Class H common stockholders and approximately 41.3% to $1-2/3 par value common stockholders (estimated based on stock prices as of November 7, 1997). Immediately after the spin-off, this business would merge with Raytheon Company. - The transfer of the automotive electronics business (Delco) from Hughes to GM. As a result, the approximate 25.6% tracking stock interest in this business held by Class H common stockholders would in effect be allocated to $1-2/3 par value common stockholders. - The recapitalization of Class H common stock into a new tracking stock interest of approximately 25.6% in the telecommunications and space businesses of Hughes. This business would also be provided with a substantial amount of new capital funding. The $1-2/3 par value and Class H common stockholders gave their consent to the Hughes Transactions. Action in respect of the Hughes Transactions was taken by GM on December 17, 1997. The responses of GM stockholders to the consent solicitation are tabulated below. PROPOSAL FOR THE HUGHES TRANSACTIONS
Consent Withhold Abstain Total ------- -------- ------- ----- CLASS OF STOCK (Final tabulation as of December 17, 1997) $1-2/3 par value common stock, voting as a separate class: Shares 433,712,572 3,002,064 4,710,876 441,425,512 Percent of Outstanding 61.3% 0.4% 0.7% 62.4% Percent of Voting 98.2% 0.7% 1.1% 100.0% Class H common stock, voting as a separate class: Shares 74,350,326 3,641,974 4,217,592 82,209,892 Percent of Outstanding 72.4% 3.6% 4.1% 80.1% Percent of Voting 90.5% 4.4% 5.1% 100.0% Combined $1-2/3 par value and Class H common stocks, voting together as a single class: Votes 470,887,736 4,823,050 6,819,672 482,530,458 Percent of Outstanding 62.1% 0.6% 0.9% 63.6% Percent of Voting 97.6% 1.0% 1.4% 100.0%
* * * * * * I-13 15 PART II GENERAL MOTORS CORPORATION AND SUBSIDIARIES CROSS REFERENCE SHEET
10-K ITEM PAGE (AND CAPTION) IN PART II --------- ----------------------------- 5. Market for Registrant's Common Equity and Related Stockholder Matters (a) Market information II-40 - Selected Quarterly Data (b) Approximate number of holders of common stocks II-40 - Selected Quarterly Data (c) Dividends (1) History II-40 - Selected Quarterly Data (2) Policy II-32 - Dividends on Common Stocks 6. Selected Financial Data II-44 - Selected Financial Data 7. Management's Discussion and Analysis of Financial Condition and Results of Operations II-45 - Management's Discussion and Analysis 8. Financial Statements and Supplementary Data II-2 - Responsibilities for Consolidated Financial Statements II-3 - Independent Auditors' Report II-4 - Consolidated Statements of Income for the Years Ended December 31, 1997, 1996, and 1995 II-5 - Consolidated Balance Sheets, December 31, 1997 and 1996 II-6 - Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996, and 1995 II-7 - Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996, and 1995 II-8 - Notes to Consolidated Financial Statements II-40 - Selected Quarterly Data 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None
II-1 16 RESPONSIBILITIES FOR CONSOLIDATED FINANCIAL STATEMENTS The following consolidated financial statements of General Motors Corporation and subsidiaries were prepared by management, which is responsible for their integrity and objectivity. The statements have been prepared in conformity with generally accepted accounting principles and, as such, include amounts based on judgments of management. Management is further responsible for maintaining internal control designed to provide reasonable assurance that the books and records reflect the transactions of the companies and that established policies and procedures are carefully followed. From a stockholder's point of view, perhaps the most important feature in internal control is that it is continually reviewed for effectiveness and is augmented by written policies and guidelines, the careful selection and training of qualified personnel, and a strong program of internal audit. Deloitte & Touche LLP, an independent auditing firm, is engaged to audit the consolidated financial statements of General Motors Corporation and subsidiaries and issue reports thereon. The audit is conducted in accordance with generally accepted auditing standards that comprehend the consideration of internal control and tests of transactions to the extent necessary to form an independent opinion on the financial statements prepared by management. The Independent Auditors' Report appears on the next page. The Board of Directors, through the Audit Committee (composed entirely of non-employee Directors), is responsible for assuring that management fulfills its responsibilities in the preparation of the consolidated financial statements. The Audit Committee selects the independent auditors annually in advance of the Annual Meeting of Stockholders and submits the selection for ratification at the Meeting. In addition, the Audit Committee reviews the scope of the audits and the accounting principles being applied in financial reporting. The independent auditors, representatives of management, and the internal auditors meet regularly (separately and jointly) with the Audit Committee to review the activities of each, to ensure that each is properly discharging its responsibilities, and to assess the effectiveness of internal control. It is management's conclusion that internal control at December 31, 1997 provides reasonable assurance that the books and records reflect the transactions of the companies and that established policies and procedures are complied with. To ensure complete independence, Deloitte & Touche LLP has full and free access to meet with the Audit Committee, without management representatives present, to discuss the results of the audit, the adequacy of internal control, and the quality of financial reporting. /s/John F. Smith, Jr. /s/J. Michael Losh John F. Smith, Jr. J. Michael Losh Chairman, Chief Executive Officer, Chief Financial Officer and President II-2 17 INDEPENDENT AUDITORS' REPORT General Motors Corporation, its Directors, and Stockholders: We have audited the Consolidated Balance Sheets of General Motors Corporation and subsidiaries as of December 31, 1997 and 1996 and the related Consolidated Statements of Income, Cash Flows, and Stockholders' Equity for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedule listed at Item 14. These financial statements and the financial statement schedule are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of General Motors Corporation and subsidiaries at December 31, 1997 and 1996 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As discussed in Note 1 to the financial statements, effective January 1, 1995 the Corporation changed its method of accounting for sales to daily rental car companies. /s/DELOITTE & TOUCHE LLP - ------------------------ DELOITTE & TOUCHE LLP Detroit, Michigan January 26, 1998 II-3 18 GENERAL MOTORS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, ------------------------------------------------- 1997 1996 1995 ---- ---- ---- (Dollars in Millions Except Per Share Amounts) NET SALES AND REVENUES (Note 1) Manufactured products $153,683 $145,341 $143,666 Financial services 12,762 12,674 11,664 Other income (Note 23) 11,729 5,998 4,924 -------- -------- -------- TOTAL NET SALES AND REVENUES 178,174 164,013 160,254 -------- -------- -------- COSTS AND EXPENSES Cost of sales and other operating charges, exclusive of items listed below 130,028 123,195 121,300 Selling, general and administrative expenses 16,192 14,580 12,550 Depreciation and amortization expenses (Notes 1 and 2) 16,616 11,840 11,213 Interest expense (Note 10) 6,113 5,695 5,182 Other deductions (Note 23) 1,511 2,083 1,678 -------- -------- -------- TOTAL COSTS AND EXPENSES 170,460 157,393 151,923 -------- -------- -------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTERESTS 7,714 6,620 8,331 Income taxes (Note 6) 1,069 1,723 2,316 Minority interests 53 56 18 -------- -------- -------- INCOME FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 6,698 4,953 6,033 Income from discontinued operations (Note 1) - 10 900 Cumulative effect of accounting change (Note 1) - - (52) -------- -------- -------- NET INCOME 6,698 4,963 6,881 Premium on exchange of/tender offer for preference stocks (Notes 17 and 18) 26 - 153 Dividends on preference stocks (Note 18) 72 81 211 -------- -------- -------- EARNINGS ON COMMON STOCKS $6,600 $4,882 $6,517 ======== ======== ======== BASIC EARNINGS PER SHARE ATTRIBUTABLE TO COMMON STOCKS (NOTE 19) $1-2/3 par value common stock Continuing operations $8.70 $6.07 $7.21 Discontinued operations - (0.01) 0.14 Cumulative effect of accounting change - - (0.07) -------- -------- -------- Earnings per share attributable to $1-2/3 par value $8.70 $6.06 $7.28 ======== ======== ======== Income from discontinued operations attributable to Class E $ - $0.04 $1.96 -------- -------- -------- Earnings per share attributable to Class H (prior to its recapitalization on December 17, 1997) (Note 22) $3.17 $2.88 $2.77 -------- -------- -------- Earnings per share attributable to Class H (subsequent to its recapitalization on December 17, 1997) (Note 22) $0.02 $ - $ - -------- -------- -------- DILUTED EARNINGS PER SHARE ATTRIBUTABLE TO COMMON STOCKS (NOTE 19) $1-2/3 par value common stock Continuing operations $8.62 $ 6.03 $7.14 Discontinued operations - (0.01) 0.14 Cumulative effect of accounting change - - (0.07) -------- -------- -------- Earnings per share attributable to $1-2/3 par value $8.62 $6.02 $7.21 ======== ======== ======== Income from discontinued operations attributable to Class E $ - $0.04 $1.96 -------- -------- -------- Earnings per share attributable to Class H (prior to its recapitalization on December 17, 1997) (Note 22) $3.17 $2.88 $2.77 -------- -------- -------- Earnings per share attributable to Class H (subsequent to its recapitalization on December 17, 1997) (Note 22) $0.02 $ - $ - -------- -------- --------
Reference should be made to the notes to consolidated financial statements. II-4 19 GENERAL MOTORS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, ------------------------ ASSETS 1997 1996 ----------- ----------- (Dollars in Millions) Cash and cash equivalents $11,262 $14,063 Other marketable securities 11,722 8,199 -------- -------- Total cash and marketable securities (Notes 1 and 3) 22,984 22,262 Finance receivables - net (Note 4) 58,870 57,550 Accounts and notes receivable (less allowances) 7,493 6,557 Inventories (less allowances) (Note 5) 12,102 11,898 Deferred income taxes (Note 6) 22,478 19,510 Equipment on operating leases (less accumulated depreciation) (Note 7) 33,302 30,112 Property - net (Note 8) 34,567 37,504 Intangible assets - net (Notes 1 and 9) 11,469 12,691 Other assets 25,623 24,058 -------- -------- TOTAL ASSETS $228,888 $222,142 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Accounts payable (principally trade) $15,782 $14,221 Notes and loans payable (Note 10) 93,027 85,300 Deferred income taxes (Note 6) 2,923 3,196 Postretirement benefits other than pensions (Note 13) 41,168 43,190 Pensions (Note 14) 7,043 7,581 Accrued expenses and other liabilities (Note 15) 50,490 45,144 -------- -------- TOTAL LIABILITIES 210,433 198,632 -------- -------- Minority interests 727 92 General Motors - obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures of General Motors (Note 17) Series D 79 - Series G 143 - STOCKHOLDERS' EQUITY (Notes 18 and 20) Preference stocks 1 1 Common stocks $1-2/3 par value (issued, 693,456,394 and 756,619,625 shares) 1,156 1,261 Class H (Note 22, issued, 100,075,000 shares) - 10 Class H (Note 22, issued, 103,885,803 shares) 10 - Capital surplus (principally additional paid-in capital) 15,369 19,189 Retained earnings 5,416 6,137 -------- -------- Subtotal 21,952 26,598 Accumulated foreign currency translation adjustments (888) (113) Net unrealized gains on securities 504 423 Minimum pension liability adjustment (4,062) (3,490) -------- -------- Accumulated other comprehensive loss (4,446) (3,180) -------- -------- TOTAL STOCKHOLDERS' EQUITY 17,506 23,418 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $228,888 $222,142 ========= ========
Reference should be made to the notes to consolidated financial statements. II-5 20 GENERAL MOTORS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ---------------------------------- 1997 1996 1995 ---- ---- ---- (Dollars in Millions) CASH FLOWS FROM OPERATING ACTIVITIES Income from continuing operations before cumulative effect of accounting change $6,698 $4,953 $6,033 Adjustments to reconcile income from continuing operations before cumulative effect of accounting change to net cash provided by operating activities Depreciation and amortization expenses 16,616 11,840 11,213 Gain on Hughes Defense spin-off (Note 22) (4,269) - - Postretirement benefits other than pensions, net of payments and VEBA contribution (1,425) 1,575 1,684 Pensions expense, net of contributions 240 801 (2,932) Originations and purchases of mortgage loans (30,878) (19,455) (12,086) Proceeds on sales of mortgage loans 28,543 18,157 11,613 Originations and purchases of mortgage securities (2,516) (970) (515) Proceeds on sales of mortgage securities 1,449 758 533 Change in other investments and miscellaneous assets (1,269) (713) (510) Change in other operating assets and liabilities (Note 1) 2,237 184 751 Other 1,028 1,379 765 -------- -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 16,454 18,509 16,549 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Expenditures for property (10,320) (9,949) (8,786) Investments in other marketable securities - acquisitions (30,897) (27,431) (17,794) Investments in other marketable securities - liquidations 29,279 24,966 17,254 Finance receivables - acquisitions (163,614) (155,477) (163,033) Finance receivables - liquidations 129,577 120,253 134,265 Proceeds from sales of finance receivables 31,191 36,657 25,389 Operating leases - acquisitions (21,073) (18,494) (15,125) Operating leases - liquidations 12,467 10,507 6,268 Proceeds from borrowings of Hughes Defense prior to the Hughes Defense spin-off (Note 22) 4,006 - - Investments in companies, net of cash acquired (2,296) (167) (381) Special inter-company payment from EDS (Note 1) - 500 - Other 723 1,292 (114) -------- -------- -------- NET CASH USED IN INVESTING ACTIVITIES (20,957) (17,343) (22,057) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in loans payable 5,069 662 6,227 Increase in long-term debt 14,971 15,933 11,242 Decrease in long-term debt (12,454) (12,810) (9,580) Repurchases of common and preference stocks (4,365) (251) (1,681) Proceeds from issuing common stocks 614 480 453 Cash dividends paid to stockholders (1,620) (1,530) (1,328) -------- -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 2,215 2,484 5,333 -------- -------- -------- Effect of exchange rate changes on cash and cash equivalents (513) (185) 146 -------- -------- -------- NET CASH (USED IN) PROVIDED BY CONTINUING OPERATIONS (2,801) 3,465 (29) NET CASH PROVIDED BY DISCONTINUED OPERATIONS - 103 193 -------- -------- -------- Net (decrease) increase in cash and cash equivalents (2,801) 3,568 164 Cash and cash equivalents at beginning of the year 14,063 10,495 10,331 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF THE YEAR $11,262 $14,063 $10,495 ======== ======== =========
Reference should be made to the notes to consolidated financial statements. II-6 21 GENERAL MOTORS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
ACCUMULATED TOTAL OTHER TOTAL CAPITAL CAPITAL COMPREHENSIVE RETAINED COMPREHENSIVE STOCKHOLDERS' STOCK SURPLUS INCOME EARNINGS INCOME (LOSS) EQUITY ------- -------- ------------- -------- ------------- ------------- BALANCE AT JANUARY 1, 1995 $1,294 $13,149 $ 1,785 $(3,404) $12,824 Shares reacquired (17) (1,511) - - (1,528) Shares issued 31 6,785 - - 6,816 Reclassification of shares formerly subject to repurchase 2 448 - - 450 Comprehensive income: Net income - - $ 6,881 6,881 - 6,881 --------- Other comprehensive income (loss): Foreign currency translation adjustments - - 323 - - - Unrealized gains on securities - - 249 - - - Minimum pension liability adjustment - - (1,188) - - - --------- Other comprehensive loss - - (616) - (616) (616) --------- Comprehensive income - - $ 6,265 - - - ========= Cash dividends - - (1,328) - (1,328) Redemption price of preference stock in excess of stated value - - (153) - (153) ------ ------- ------- --------- -------- BALANCE AT DECEMBER 31, 1995 1,310 18,871 7,185 (4,020) 23,346 Shares reacquired (8) (243) - - (251) Shares issued 14 519 - - 533 Series C conversion 5 (7) - - (2) EDS split-off (49) 49 (4,481) - (4,481) Comprehensive income: Net income - - $ 4,963 4,963 - 4,963 --------- Other comprehensive income (loss): Foreign currency translation adjustments - - (336) - - - Unrealized losses on securities - - (70) - - - Minimum pension liability adjustment - - 1,246 - - - --------- Other comprehensive income - - 840 - 840 840 --------- Comprehensive income - - $ 5,803 - - - ========= Cash dividends - - (1,530) - (1,530) ------ ------- ------- --------- -------- BALANCE AT DECEMBER 31, 1996 1,272 19,189 6,137 (3,180) 23,418 Shares reacquired (122) (4,243) - - (4,365) Shares issued 17 619 - - 636 Preference stock exchange - (196) (26) - (222) Hughes Defense spin-off - - (5,773) - (5,773) Comprehensive income: Net income - - $ 6,698 6,698 - 6,698 --------- Other comprehensive income (loss): Foreign currency translation adjustments - - (775) - - - Unrealized gains on securities - - 81 - - - Minimum pension liability adjustment (572) - --------- Other comprehensive loss - - (1,266) - (1,266) (1,266) --------- Comprehensive income $ 5,432 - - - ========= Cash dividends - - (1,620) - (1,620) ------ ------- ------- --------- -------- BALANCE AT DECEMBER 31, 1997 $1,167 $15,369 $ 5,416 $(4,446) $17,506 ====== ======= ======= ========= ========
Reference should be made to the notes to consolidated financial statements. II-7 22 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of General Motors Corporation (hereinafter referred to as the Corporation) and domestic and foreign subsidiaries that are more than 50% owned, principally General Motors Acceptance Corporation and Subsidiaries (GMAC) and Hughes Electronics Corporation and Subsidiaries, prior to the December 17, 1997 restructuring of the company (hereinafter referred to as "former Hughes") and subsequent to the December 17, 1997 restructuring of the company (hereinafter referred to as "Hughes") (Note 22) (collectively referred to as "General Motors or GM"). General Motors' share of earnings or losses of associates, in which at least 20% of the voting securities is owned, is included in the consolidated operating results using the equity method of accounting. GM encourages reference to the GMAC Annual Report on Form 10-K for the period ended December 31, 1997, filed with the Securities and Exchange Commission, and the Hughes consolidated financial statements included as Exhibit 99 to the GM Annual Report on Form 10-K for the period ended December 31, 1997. Certain amounts for 1996 and 1995 have been reclassified to conform with the 1997 classifications. Use of Estimates in the Preparation of the Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that differ from those estimates. Revenue Recognition Sales are generally recorded when products are shipped or when services are rendered to independent dealers or other third parties. Provisions for normal dealer sales incentives, returns and allowances, and GM Card rebates are made at the time of vehicle sale. Costs related to special sales incentive programs are recognized as reductions to sales when determinable. To conform to the consensus reached by the Emerging Issues Task Force of the Financial Accounting Standards Board on Issue No. 95-1, Revenue Recognition on Sales with a Guaranteed Minimum Resale Value, the Corporation modified its revenue recognition policy on sales to daily rental car companies, effective January 1, 1995, which resulted in an unfavorable cumulative effect of $52 million after-tax or $0.07 per share of $1-2/3 par value common stock. Financing revenue is recorded over the terms of the receivables using the interest method. Certain loan origination costs are deferred and amortized to financing revenue over the lives of the related loans using the interest method. Income from operating lease assets is recognized on a straight-line basis over the scheduled lease term. Certain operating lease origination costs are deferred and amortized to financing revenue over the lives of the related operating leases using the straight-line method. Insurance premiums are earned on a basis related to coverage provided over the terms of the policies. Commission, premium taxes, and other costs incurred in acquiring new business are deferred and amortized over the terms of the related policies on the same basis as premiums are earned. The liability for losses and loss expenses includes a provision for unreported losses, based on past experience, net of the estimated salvage and subrogation recoverable. Product-Related Expenses Advertising and sales promotion, research and development, and other product-related costs are charged to expense as incurred. Provisions for estimated expenses related to product warranty are made at the time the products are sold. Advertising expense was $4.1 billion in 1997, $3.4 billion in 1996, and $3.1 billion in 1995. Research and development expense was $8.2 billion in 1997, $8.9 billion in 1996, and $8.2 billion in 1995. Depreciation and Amortization Depreciation is provided based on the estimated useful lives of groups of property generally using accelerated methods, which accumulate depreciation of approximately two-thirds of the depreciable cost during the first half of the estimated useful lives. Leasehold improvements are amortized over the period of the lease or the life of the property, whichever is shorter, with the amortization applied directly to the asset account. Depreciation on capitalized leases with terms of five years or less is provided using the straight-line method; leases with terms in excess of five years are depreciated using the foregoing accelerated methods. II-8 23 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Depreciation and Amortization (concluded) Depreciation of vehicles and other equipment on operating leases or in GM's use is provided generally on a straight-line basis. The difference between the net book value and the proceeds of sale or salvage on items disposed of is accounted for as a charge against or credit to the provision for depreciation. Expenditures for special tools are amortized over their estimated useful lives, primarily using the units of production method. Amortization is applied directly to the asset account. Replacement of special tools for reasons other than changes in products is charged directly to cost of sales. Depreciation and amortization expenses were as follows (in millions):
Years Ended December 31, -------------------------- 1997 1996 1995 ------ ------ ------ Depreciation (Note 2) $10,702 $ 8,825 $ 7,746 Amortization of special tools (Note 2) 5,674 2,856 3,212 Amortization of intangible assets (Note 9) 240 159 255 ------ ------ ------ Total $16,616 $11,840 $11,213 ====== ====== ======
Foreign Currency Translation Foreign currency exchange transaction and translation losses on an after-tax basis included in consolidated net income in 1997, 1996, and 1995, pursuant to Statement of Financial Accounting Standards (SFAS) No. 52, Foreign Currency Translation, amounted to $429 million, $380 million, and $381 million, respectively. Discontinued Operations On June 7, 1996 GM split-off Electronic Data Systems Corporation (EDS) to GM Class E stockholders on a tax-free basis for U.S. federal income tax purposes. Under the terms of the split-off, each share of GM former Class E common stock was exchanged for one share of EDS common stock. In addition, GM and EDS entered into a new 10-year agreement, under which EDS will continue to be GM's principal provider of information technology services and EDS made a special inter-company payment of $500 million to GM. The financial data related to EDS prior to the June 7, 1996 split-off from GM are classified as discontinued operations. The financial results of EDS, including assets and liabilities, subsequent to the split-off are not included in GM's consolidated financial statements. EDS systems and other contracts revenues from outside customers included in income from discontinued operations totaled $4.3 billion and $8.5 billion for the years ended December 31, 1996, and 1995, respectively. Income from discontinued operations of $10 million and $900 million for the years ended December 31, 1996 and 1995, is reported net of income tax expense of $14 million and $528 million, respectively. Income from discontinued operations for 1996 also includes split-off expenses attributable to $1-2/3 par value common stock of $15 million after-tax or $0.02 per share of $1-2/3 par value common stock. Income from discontinued operations for 1995 includes $39 million, or $0.05 per share of $1-2/3 par value common stock of expense associated with purchase accounting adjustments made at the time of GM's purchase of EDS. Cash and Cash Equivalents Cash equivalents are defined as short-term, highly liquid investments with original maturities of 90 days or less. Statement of Cash Flows Supplementary Information
Years Ended December 31, ------------------------------ 1997 1996 1995 ------- ------ ------- (Dollars in Millions) Changes in other operating assets and liabilities were as follows: Accounts receivable $(1,907) $(178) $(331) Prepaid expenses and other deferred charges 1,046 (134) (607) Inventories (716) (757) (1,214) Accounts payable 1,777 1,530 980 Deferred taxes and income taxes payable (1,925) (562) 1,892 Accrued expenses and other liabilities 3,962 285 31 ----- --- --- Total $2,237 $184 $751 ===== === === Cash paid for interest and income taxes was as follows: Interest $5,950 $5,792 $5,927 Income taxes $1,423 $2,338 $447
II-9 24 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Allowance for Financing Losses An allowance for financing losses is generally established during the period in which receivables are acquired and is maintained in amounts considered by management to be appropriate in relation to receivables outstanding. Losses arising from the sale of repossessed collateral are charged to the allowance for financing losses. Where repossession has not been effected, losses are charged off as soon as it is determined that the collateral cannot be repossessed, generally not more than 150 days after default. Repossessed Property and Impaired Loans Losses arising from repossession of the collateral supporting doubtful accounts and property supporting defaulted operating leases are recognized upon repossession. Repossessed assets are recorded at the lower of historical cost or estimated realizable value in other assets and the related adjustments to the valuation allowance are included in operating expense. Nonretail finance receivables are reduced to the estimated fair value of collateral when determined to be impaired or uncollectible. Valuation of Long-Lived Assets GM periodically evaluates the carrying value of long-lived assets to be held and used, including goodwill and other intangible assets, when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost to dispose. Derivative Instruments GM is party to a variety of foreign exchange, interest rate, and commodity forward contracts and options entered into in connection with the management of its exposure to fluctuations in foreign exchange rates, interest rates, and certain commodities prices. These financial exposures are managed in accordance with corporate policies and procedures. GM established the Risk Management Committee to develop and monitor the Corporation's financial risk strategies, policies and procedures. The Committee reviews and approves all new risk management strategies, establishes approval authority guidelines for approved programs and monitors compliance and performance of existing risk management programs. GM does not enter into derivative transactions for trading purposes. As part of the hedging program approval process, GM's management is required to identify the specific financial risk which the derivative transaction will minimize, the appropriate hedging instrument to be used to reduce the risk, and the correlation between the financial risk and the hedging instrument. Purchase orders, letters of intent, vehicle production forecasts, capital planning forecasts, and historical data are used as the basis for determining the anticipated values of the transactions to be hedged. Generally, GM does not enter into derivative transactions that do not have a high correlation with the underlying financial risk. In the infrequent instances in which a derivative transaction is entered into that does not have a high correlation with the underlying exposure, then the derivative is marked to market for accounting purposes. The hedge positions, as well as the correlation between the transaction risks and the hedging instruments, are reviewed by management on an ongoing basis. Foreign exchange forward and option contracts are accounted for as hedges to the extent they are designated, and are effective, as hedges of firm foreign currency commitments. Additionally, certain foreign exchange option contracts receive hedge accounting treatment to the extent such contracts hedge certain anticipated foreign currency transactions. Other such foreign exchange contracts and options are marked to market on a current basis. Interest rate swaps and options that are designated, and are effective, as hedges of underlying debt obligations are not marked to market, but are used to adjust interest expense recognized over the lives of the underlying debt agreements. Gains and losses from terminated hedge contracts are deferred and amortized over the remaining period of the original swap or the remaining term of the underlying exposure, whichever is shorter. Open interest rate contracts are reviewed regularly to ensure that they remain effective as hedges of interest rate exposure. Written options (including swaptions, interest rate caps and collars, and swaps with embedded swaptions) and other swaps that do not qualify for hedge accounting are marked to market on a current basis. II-10 25 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONCLUDED) Derivative Instruments (concluded) GM also enters into commodity forward and option contracts. Since GM has the discretion to settle these transactions either in cash or by taking physical delivery, these contracts are not considered financial instruments for accounting purposes. Commodity forward contracts and options are accounted for as hedges to the extent they are designated, and are effective, as hedges of firm or anticipated commodity purchase contracts. Other commodity forward contracts and options are marked to market on a current basis. Postemployment Benefits and Employee Termination Benefits GM's postemployment benefits primarily relate to GM's extended-disability benefit program in the United States and employee job security and supplemental unemployment compensation benefits (mainly pursuant to union or other contractual agreements). Extended disability benefits are accrued on a service-driven basis and employee job security and supplemental unemployment compensation benefits are accrued on an event-driven basis. Accruals for postemployment benefits represent the discounted future cash expenditures expected during the period between the idling of affected employees and the time when such employees are redeployed, retire or otherwise terminate their employment. Voluntary termination benefits are accrued when the employees accept the offer. Involuntary termination benefits are accrued when management has committed to a termination plan and the benefit arrangement is communicated to affected employees. Environmental Liabilities GM recognizes environmental liabilities when a loss is probable and can be reasonably estimated. Such liabilities are generally not subject to insurance coverage. The cost of each environmental liability is estimated by engineering, financial, and legal specialists within GM based on current law. Such estimates are based primarily upon the estimated cost of investigation and remediation required and the likelihood that other potentially responsible parties (PRPs) will be able to fulfill their commitments at the sites where GM may be jointly and severally liable. At sites being addressed under the U.S. Comprehensive Environmental Response, Compensation and Liability Act or similar state laws (the Superfund Sites), GM typically recognizes a loss once it has been named as a PRP and has determined that some loss is probable and estimable. The Superfund Sites are primarily multi-PRP sites not owned or operated by GM. For GM's operating plants, an estimated liability is typically recognized either upon completion of an environmental assessment or when GM proposes an agreement with the appropriate regulatory agency to take action at a site. For closed or closing plants owned by GM and properties being sold, an estimated liability is typically recognized at the time the closure decision is made or sale is recorded and is based on an environmental assessment of the plant property. GM's estimates for environmental obligations are dependent primarily on the nature and extent of historical information and physical data relating to a contaminated site, the complexity of the site, uncertainty as to what remedy and technology will be required, the outcome of discussions with regulatory agencies and other PRPs at multi-party sites, the number and financial viability of other PRPs, and the timing of expenditures; accordingly, such estimates could change materially as GM periodically evaluates and revises such estimates based on expenditures against established reserves and the availability of additional information. Labor Force GM, on a worldwide basis, has a concentration of its labor supply in employees working under union collective bargaining agreements, a majority of which will expire in 1999. NOTE 2. COMPETITIVENESS STUDIES The global automotive industry, including the automotive components and systems market, has become increasingly competitive and is presently undergoing significant restructuring and consolidation activities. All of the major industry participants are continuing to increase their focus on efficiency and cost improvements, while announced capacity increases for the North American market and excess capacity in the European market have led to continuing price pressures. As a result, GM-North American Operations (GM-NAO), Delphi Automotive Systems (Delphi), Delco Electronics Corporation (Delco), and GM-International Operations (GMIO) initiated studies in 1997 concerning the long-term competitiveness of all facets of their businesses (Competitiveness Studies). These studies were performed in conjunction with GM's current business planning cycle and were substantially completed in December 1997. II-11 26 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 2. COMPETITIVENESS STUDIES (CONCLUDED) Based on the results of these Competitiveness Studies, GM recorded pre-tax charges against income totaling $6.4 billion ($4.0 billion after-tax, or $5.59 per share of $1-2/3 par value common stock). Following are the components of the charges:
Pre-tax After-tax ------------ ------------ $3.7 billion $2.4 billion Underperforming assets, including both vehicle and component-manufacturing assets $1.4 billion $0.8 billion Capacity reductions $0.5 billion $0.3 billion Assets held for disposal $0.8 billion $0.5 billion Other
The charges were comprised of $3.8 billion ($2.4 billion after-tax) for GM-NAO, $1.4 billion ($870 million after-tax) for Delphi and Delco, $1 billion ($658 million after-tax) for GMIO, and $205 million ($128 million after-tax) for GM's other sector. Overall, these charges had the effect of reducing net sales and revenues by $548 million and increasing cost of sales, depreciation and amortization, and other deductions by $1.7 billion, $4.1 billion and $72 million, respectively. The amount included for underperforming assets represents charges recorded pursuant to GM's policy for the valuation of long-lived assets. GM re-evaluated the carrying values of its long-lived assets as events and circumstances of the industry changed. This re-evaluation was performed using product specific cash flow information, which was developed by GMIO during 1997 and refined for GM-NAO, Delphi, and Delco in connection with the separation of Delphi from GM-NAO and the transfer of Delco from former Hughes to Delphi. As a result, the carrying values of certain long-lived assets were determined to be impaired as the separately identifiable, anticipated, undiscounted future cash flows from such assets were less than their respective carrying values. The resulting pre-tax impairment charges represented the amount by which the carrying values of such assets exceeded their respective fair market values. The amount included for capacity reductions represents post-employment benefits payable to employees, pursuant to contractual agreements, and costs associated with the disposal of assets at facilities subject to capacity reductions. This includes the previously announced actions concerning GM-NAO's Buick City Assembly and V-6 Powertrain plants in Flint, Michigan; Detroit Truck Assembly in Detroit, Michigan; Delphi's leaf-spring plant in Livonia, Michigan; and certain GMIO facilities in Europe. Assets held for disposal primarily related to Delphi's seating, lighting, and coil spring operations, which were announced for sale during 1997. The related pre-tax charges represented the amount by which the carrying values of such assets exceeded the estimated sales value, net of related costs to sell. The amount included as other primarily represents losses on contracts associated with pricing pressures on used vehicles and the related effect on GM's retail-lease commitments. These pricing pressures are primarily a result of increased industry sales incentives on new vehicles. In connection with the Competitiveness Studies, GM reviewed the remaining previously recorded reserve for plant closings. The amounts remaining in the plant closings reserve at December 31, 1997, which primarily related to accrued expenses for postemployment benefits (mainly pursuant to union or other contractual arrangements), other liabilities and asset writedowns, were reclassified to the consolidated balance sheet accounts that reflect the nature of the specific reserve components. In addition, favorable 1996 adjustments to the plant closings reserve totaling $789 million were reclassified to cost of sales. Of this amount, $409 million reflected GM's decision to utilize its Wilmington, Delaware facility for the assembly of a new generation Saturn vehicle, and $380 million was primarily due to revised estimates of postemployment benefit costs to be incurred in connection with plant closings. Separately, GM recorded pre-tax plant closings charges of $80 million in 1997 and $62 million in 1996. The components of these charges were recorded in accounts that reflect the nature of the charges, including postemployment benefits, other liabilities, and asset writedowns. NOTE 3. MARKETABLE AND OTHER SECURITIES Marketable securities held by GM are classified as available-for-sale, except for certain mortgage related securities of GMAC, which are classified as trading securities. The aggregate excess of fair value over cost, net of related income taxes, for available-for-sale securities is included as a separate component of stockholders' equity. The excess of fair value over cost for trading securities is included in income on a current basis. GM determines cost on the specific identification basis. II-12 27 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 3. MARKETABLE AND OTHER SECURITIES (CONCLUDED) Investments in marketable securities were as follows (in millions):
December 31, 1997 ------------------------------------------------- Fair Unrealized Unrealized Type of Security Cost Value Gains Losses -------- ------- ---------- ---------- Bonds, notes, and other securities United States government and governmental agencies and authorities $1,308 $1,317 $9 $- States, municipalities, and political subdivisions 1,576 1,686 121 11 Mortgage-backed securities 110 113 3 - Other 5,589 5,644 65 10 ------ ------ --- -- Total debt securities available for sale 8,583 8,760 198 21 Mortgage-backed securities held for trading purposes 2,063 2,063 - - ------ ------ --- -- Total debt securities 10,646 10,823 198 21 Equity securities 523 899 416 40 ------ ------ --- -- Total investment in securities $11,169 $11,722 $614 $61 ====== ====== === ==
December 31, 1996 -------------------------------------------------- Fair Unrealized Unrealized Type of Security Cost Value Gains Losses ------ ------ ---------- ---------- Bonds, notes, and other securities United States government and governmental agencies and authorities $1,702 $1,705 $5 $2 States, municipalities, and political subdivisions 1,573 1,648 85 10 Mortgage-backed securities 62 64 2 - Other 3,410 3,442 40 8 ----- ----- --- -- Total debt securities available for sale 6,747 6,859 132 20 Mortgage-backed securities held for trading purposes 697 697 - - ----- ----- --- -- Total debt securities 7,444 7,556 132 20 Equity securities 328 643 326 11 ----- ----- --- -- Total investment in securities $7,772 $8,199 $458 $31 ===== ===== === ==
Debt securities totaling $1.2 billion mature within one year, $4.7 billion mature after one through five years, $1.6 billion mature after five years through 10 years, and $3.1 billion mature after 10 years. Proceeds from sales and maturities of marketable securities totaled $13.6 billion in 1997, $5.7 billion in 1996, and $6.2 billion in 1995. The gross gains and (losses) related to sales of marketable securities were $297 million and $(96) million, $236 million and $(33) million, and $118 million and $(29) million in 1997, 1996, and 1995, respectively. Other securities classified as cash equivalents, which consisted primarily of commercial paper, repurchase agreements, and certificates of deposit, were $10.3 billion and $13.5 billion at December 31, 1997 and 1996, respectively. II-13 28 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 4. FINANCE RECEIVABLES - NET Finance receivables-net included the following (in millions):
December 31, ---------------- 1997 1996 ------- ------- U.S. Retail $26,570 $26,708 Wholesale 15,213 13,609 Leasing and lease financing 716 1,131 Term loans to dealers and others 3,436 3,305 ------ ------ Total U.S. 45,935 44,753 ------ ------ Canada, Mexico and International Retail 8,059 8,745 Wholesale 6,475 5,942 Leasing and lease financing 2,069 2,015 Term loans to dealers and others 619 564 ------ ------ Total Canada, Mexico and International 17,222 17,266 ------ ------ Total finance receivables 63,157 62,019 Less-Unearned income (3,384) (3,547) -Allowance for financing losses (903) (922) ------ ------ Total finance receivables - net $58,870 $57,550 ====== ======
The aggregate amount of total finance receivables maturing in each of the five years following December 31, 1997 is as follows: 1998-$36.8 billion; 1999-$10.6 billion; 2000-$8.1 billion; 2001-$4.9 billion; 2002-$2.1 billion; and 2003 and thereafter-$765 million. GMAC participates in various sales of receivables programs and sold retail finance receivables through special purpose subsidiaries with principal aggregating $5.4 billion in 1997 and $2.2 billion in 1996. These subsidiaries generally retain a subordinated investment of no greater than 7.5% of the total receivables pool and market the remaining portion. These subordinated investments absorb losses related to sold receivables to the extent that such losses are greater than the excess cash flows from those receivables and cash reserves related to the sale transaction. GMAC continues to service these receivables for a fee and earns other related ongoing income. GMAC's retail finance receivable servicing portfolio amounted to $6.0 billion and $4.3 billion at December 31, 1997 and 1996, respectively. GMAC also sold wholesale receivables that it continues to service for a fee. The wholesale receivables servicing portfolio totaled $6.3 billion and $5.4 billion at December 31, 1997 and 1996, respectively. Additionally, GMAC is committed to sell eligible wholesale receivables, on a revolving basis, arising in certain dealer accounts. NOTE 5. INVENTORIES Inventories included the following (in millions):
December 31, --------------------- 1997 1996 ------- ------- Productive material, work in process, and supplies $7,023 $7,686 Finished product, service parts, etc. 7,347 6,558 ------- ------- Total inventories at FIFO 14,370 14,244 Less LIFO allowance 2,268 2,346 ------- ------- Total inventories (less allowances) $12,102 $11,898 ======= =======
Inventories are stated generally at cost, which is not in excess of market. The cost of substantially all U.S. inventories other than the inventories of Saturn Corporation (Saturn), Delco, and Hughes is determined by the last-in, first-out (LIFO) method. The cost of non-U.S., Saturn, Delco, and Hughes inventories is determined generally by either the first-in, first-out (FIFO) or average cost methods. II-14 29 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 6. INCOME TAXES Income from continuing operations before income taxes and minority interests included the following (in millions):
Years Ended December 31, -------------------------------- 1997 1996 1995 ------- ------- -------- U.S. income $3,433 $1,691 $3,622 Foreign income 4,281 4,929 4,709 ----- ----- ----- Total $7,714 $6,620 $8,331 ===== ===== =====
The provision for income taxes was estimated as follows (in millions):
Years Ended December 31, ---------------------------- 1997 1996 1995 -------- -------- -------- Income taxes estimated to be payable (refundable) currently U.S. federal $1,307 $(357) $(1,000) Foreign 1,793 1,607 1,314 U.S. state and local 198 197 16 ----- ----- ----- Total payable currently 3,298 1,447 330 ----- ----- ----- Deferred income tax (credit) expense - net U.S. federal (1,467) 477 2,007 Foreign (396) (147) (88) U.S. state and local (332) (15) 136 ----- ----- ----- Total deferred (2,195) 315 2,055 ----- ----- ----- Investment tax credits (34) (39) (69) ----- ----- ----- Total income taxes $1,069 $1,723 $2,316 ===== ===== =====
Annual tax provisions include amounts considered sufficient to pay assessments that may result from examination of prior year tax returns; however, the amount ultimately paid upon resolution of issues raised may differ materially from the amount accrued. Provisions are made for estimated U.S. and foreign income taxes, less available tax credits and deductions, which may be incurred on the remittance of the Corporation's share of subsidiaries' undistributed earnings not deemed to be permanently invested. Taxes have not been provided on foreign subsidiaries' earnings, which are deemed essentially permanently reinvested, of approximately $8.7 billion at December 31, 1997 and December 31, 1996. Quantification of the deferred tax liability, if any, associated with permanently reinvested earnings is not practicable. A reconciliation of the provision for income taxes compared with the amounts at the U.S. federal statutory rate was as follows (in millions):
Years Ended December 31, ---------------------------- 1997 1996 1995 -------- ------- ------- Tax at U.S. federal statutory income tax rate $2,700 $2,336 $2,922 Hughes Defense spin-off (1,494) - - Foreign rates other than 35% (123) (285) (220) Taxes on unremitted earnings of subsidiaries 44 49 139 Sale of net assets of National Car Rental System - - (258) Tax effect of the 1995 contribution of Class E common stock to the U.S. hourly pension plan - (245) - Research and experimentation credits (311) (165) (74) Other adjustments 253 33 (193) ----- ----- ----- Total income tax $1,069 $1,723 $2,316 ===== ===== =====
Deferred income tax assets and liabilities for 1997 and 1996 reflect the impact of temporary differences between amounts of assets and liabilities for financial reporting purposes and the bases of such assets and liabilities as measured by tax laws. The net deferred tax asset in the U.S. was $20.3 billion and $17.5 billion at December 31, 1997 and 1996, respectively. II-15 30 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 6. INCOME TAXES (CONCLUDED) Temporary differences and carryforwards that gave rise to deferred tax assets and liabilities included the following (in millions):
December 31, --------------------------------------------------------- 1997 1996 ---- ---- Deferred Tax Deferred Tax ------------------------- -------------------------- Assets Liabilities Assets Liabilities ------- ----------- ------- ----------- Postretirement benefits other than pensions $15,683 $- $16,392 $- Minimum pension liability adjustment 2,423 - 2,036 - Employee benefit plans 2,226 6,047 2,139 6,575 Policy and warranty reserves 2,445 - 2,293 - Sales and product reserves 1,977 8 1,505 12 Profits on long-term contracts 156 143 371 142 Alternative minimum tax credit carryforwards 673 - 625 - Depreciation and amortization 900 3,130 513 4,682 Capitalized research and experimentation 285 - 370 - U.S. state net operating loss carryforwards 559 - 494 - Financing losses 361 - 323 - Tax credit carryforwards 467 - 396 - Lease transactions - 3,075 - 2,415 Tax on unremitted profits - 339 - 576 Other U.S. 6,700 3,016 6,104 2,802 Miscellaneous foreign 1,850 692 1,525 492 ------ ------ ------- ------ Subtotal 36,705 16,450 35,086 17,696 Valuation allowances (700) - (1,076) - ------ ------ ------ ------ Total deferred taxes $36,005 $16,450 $34,010 $17,696 ====== ====== ====== ======
Realization of the net deferred tax assets is dependent on future reversals of existing taxable temporary differences and adequate future taxable income, exclusive of reversing temporary differences and carryforwards. Although realization is not assured, management believes that it is more likely than not that the net deferred tax assets will be realized. The amount of the net deferred tax assets considered realizable, however, could be reduced in the near term if actual future taxable income is lower than estimated, or if there are differences in the timing or amount of future reversals of existing taxable temporary differences. The alternative minimum tax credit can be carried forward indefinitely. The U.S. state net operating loss carryforwards will expire in the years 1998 - 2012 if not utilized; however, a substantial portion will not expire until after the year 2002. The tax credit carryforwards will expire in the years 2000 - 2012 if not utilized. NOTE 7. EQUIPMENT ON OPERATING LEASES The value of GM's net equipment on operating leases is based on estimated residual values of the leased equipment, which are calculated on the lease inception dates, less accumulated depreciation of $7.9 billion and $7.7 billion as of December 31, 1997 and 1996, respectively. Realization of the residual values is dependent on GM's future ability to market the equipment under then prevailing market conditions. Although realization is not assured, management believes it is more likely than not that the estimated residual values will be realized. The lease payments to be received related to equipment on operating leases maturing in each of the five years following December 31, 1997 are as follows: 1998-$6.3 billion; 1999-$4.2 billion; 2000-$2.2 billion; 2001-$711 million; and 2002-$512 million. II-16 31 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 8. PROPERTY - NET Property - net included the following (in millions):
Estimated December 31, Useful ------------------------ Lives (Years) 1997 1996 ------------- -------- -------- Land - $703 $720 Land improvements 10-30 1,805 1,888 Leasehold improvements - less amortization 3-10 209 297 Buildings 29-45 12,733 13,433 Machinery and equipment 3-30 47,145 46,629 Furniture and office equipment 3-20 1,275 1,144 Capitalized leases 5-40 1,137 1,441 Construction in progress - 4,673 4,218 ------ ------ Real estate, plants, and equipment 69,680 69,770 Less accumulated depreciation (41,915) (41,298) ------ ------ Real estate, plants, and equipment - net 27,765 28,472 Special tools - net 6,802 9,032 ------ ------ Total property - net $34,567 $37,504 ====== ======
NOTE 9. INTANGIBLE ASSETS - NET Intangible assets - net included the following (in millions):
December 31, ------------------ 1997 1996 ------- ------- Pensions $7,683 $8,969 Intangible assets relating to acquisition of HAC 448 2,723 Goodwill relating to all other acquisitions 3,338 999 ------ ------ Total intangible assets - net $11,469 $12,691 ====== ======
Intangible assets relating to the acquisition of Hughes Aircraft Company (HAC) as of December 31, 1997 are applicable to Hughes. Such intangible assets relate to patents and related technology and other intangible assets that were originally recorded in 1985 and are being amortized over 40 years. During 1997, approximately $2.2 billion of intangible assets relating to the acquisition of HAC was eliminated in connection with the Hughes Transactions (Note 22). Goodwill resulting from other acquisitions is amortized over periods not exceeding 40 years. Such goodwill includes $2.4 billion associated with the 1997 merger of the respective satellite service operations of Hughes and PanAmSat Corporation (PAS) (Note 22) and approximately $500 million relating to GMAC's acquisition of Integon Corporation (Integon). GMAC acquired Integon in October 1997, and the purchase price was allocated to the net assets acquired, including goodwill, based on estimated fair market values at the date of acquisition. Integon is primarily a non-standard automobile insurance provider. NOTE 10. NOTES AND LOANS PAYABLE Notes and loans payable were as follows (in millions):
December 31, Weighted-Average --------------------- Interest Rate(1) 1997 1996 ---------------- ------- ------- Notes and loans Payable within one year Current portion of long-term debt 6.6% $11,478 $12,469 Commercial paper (2) 5.6% 27,490 22,678 All other (2) 5.2% 12,087 12,079 Payable beyond one year 1998 - - 10,318 1999 6.8% 12,143 7,860 2000 7.3% 6,903 5,048 2001 6.4% 6,389 4,400 2002 6.5% 7,038 2,119 2003 and after 7.5% 10,213 9,295 Unamortized discount (714) (966) ------- ------- Total notes and loans payable $93,027 $85,300 ======= =======
II-17 32 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 10. NOTES AND LOANS PAYABLE (CONCLUDED) - ---------------------------- (1) The weighted-average interest rate for 1997 includes the impact of interest rate swap agreements. (2) The 1996 weighted-average interest rate for commercial paper and all other short-term borrowings was 5.8% and 5.5%, respectively. After consideration of foreign currency swaps, the above 1997 maturities, payable beyond one year, included $7.3 billion in currencies other than the U.S. Dollar, primarily the Canadian Dollar ($3.2 billion), the German Mark ($1.2 billion), the British Pound ($1.2 billion) and the Australian Dollar ($0.9 billion). At December 31, 1997 and 1996, notes and loans payable included $72 billion and $70 billion of obligations with fixed interest rates and $21 billion and $15 billion of obligations with variable interest rates (predominantly based on the London Interbank Offering Rate - i.e., LIBOR), after considering the impact of interest rate swap agreements. To achieve its desired balance, within prescribed limits, between fixed and variable rate debt, GM has entered into interest rate swap, cap, collar, option, and swaption agreements. The notional amounts of such agreements as of December 31, 1997 were approximately $12.1 billion ($6.8 billion pay variable and $5.3 billion pay fixed), $1.3 billion, $50 million, $6.5 billion, and $nil, respectively. The notional amounts of such agreements as of December 31, 1996 were approximately $13.2 billion ($6 billion pay variable and $7.2 billion pay fixed), $3.9 billion, $50 million, $6 billion, and $891 million, respectively. GM and its subsidiaries maintain substantial bank lines of credit with various banks that totaled $50.3 billion at December 31, 1997, of which $29.7 billion represented short-term credit facilities and $20.6 billion represented long-term credit facilities. At December 31, 1996, bank lines of credit totaled $53.6 billion, of which $32.5 billion represented short-term credit facilities and $21.1 billion represented long-term credit facilities. The unused short-term and long-term portions of the credit lines totaled $20.2 billion and $18.7 billion at December 31, 1997, compared with $22 billion and $19 billion at December 31, 1996. Certain bank lines of credit contain covenants with which the Corporation and applicable subsidiaries were in compliance during the year ended December 31, 1997. NOTE 11. DERIVATIVE FINANCIAL INSTRUMENTS AND RISK MANAGEMENT GM is a party to financial instruments with off-balance-sheet risk. These financial instruments are used in the normal course of business to manage the Corporation's exposure to fluctuations in interest rates and foreign exchange rates, and to meet the financing needs of its customers. The primary classes of derivatives used by GM are foreign exchange forward contracts and options, interest rate swaps and options, and forward contracts to purchase or sell mortgages or mortgage-backed securities. Those instruments involve, to varying degrees, market risk, as the instruments are subject to rate and price fluctuations, and elements of credit risk in the event a counterparty should default. Credit risk is managed through the approval and periodic monitoring of financially sound counterparties. Derivative transactions are entered to hedge underlying business exposures. Market risk in these instruments is offset by opposite movements in the underlying exposure. Cash receipts or payments on these contracts normally occur at maturity, or for interest rate swap agreements, at periodic contractually defined intervals. Foreign Exchange Forward Contracts and Options GM is an international corporation with operations in over 50 countries and has foreign currency exposures at these operations related to buying, selling, and financing in currencies other than the local currency. GM's most significant foreign currency exposures relate to Canada, Mexico, Western European countries (primarily Germany, United Kingdom, Spain, Italy, Belgium and France), Australia, Japan, and Brazil. The magnitude of these exposures significantly varies over time depending upon the strength of local automotive markets and sourcing decisions. GM enters into agreements by which it seeks to manage certain of its foreign exchange exposures in accordance with established policy guidelines. These agreements primarily hedge cash flows such as debt, firm commitments and anticipated transactions involving vehicles, components, fixed assets, and subsidiary dividends. As a general practice, GM has not hedged the foreign exchange exposure related to either the translation of overseas earnings into U.S. dollars, or the translation of overseas equity positions back to U.S. dollars. GM uses foreign exchange forward contracts as well as purchased and written foreign exchange options. Foreign exchange forward contracts are legal agreements between two parties to purchase or to sell a foreign currency, for a price specified at the contract date, with delivery and settlement in the future. Cross-currency swaps are included in this category and relate to interest rate swaps in which the underlying notional principal amounts are in different currencies. At December 31, 1997 and 1996, GM held foreign exchange forward contracts of $10.1 billion and $8.3 billion (including cross-currency swaps of $2.1 billion and $2.4 billion), respectively. At December 31, 1997 and 1996, GM had entered into foreign exchange options of $2.9 billion and $3.5 billion, respectively. II-18 33 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 11. DERIVATIVE FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED) Deferred hedging (losses) gains on outstanding foreign exchange forward contracts hedging firm commitments to purchase inventory or fixed assets totaled $(8) million and $14 million at December 31, 1997 and 1996, respectively. Deferred hedging losses on outstanding purchased foreign exchange option contracts hedging firm and anticipated transactions to purchase inventory or fixed assets totaled $20 million and $15 million at December 31, 1997 and 1996, respectively. Such deferred amounts on outstanding foreign exchange forward and option contracts will be included in the cost of such assets when purchased, and subsequently recognized in operations as part of the basis of these assets. In the event the contract is terminated early or the anticipated transaction is no longer likely to occur, the derivative is then marked to market. Foreign exchange forward contracts, which hedge foreign exchange exposures of anticipated inventory or fixed asset transactions, are marked to market and recognized with other gains or losses on foreign exchange transactions in the consolidated statement of income. GM's firm commitments typically extend for periods of up to three years. Interest Rate Swaps and Options GM's financing and cash management activities subject it to market risk from exposure to changes in interest rates. GM has entered into various financial instrument transactions to maintain the desired level of exposure to the risk of interest rate fluctuations and to minimize interest expense. To achieve this objective, GM will at times use written options in the management of these exposures. In a limited number of cases, interest rate swaps are matched to the anticipated roll-over of investments, wholesale assets or debt, and are executed over terms of up to five years on a portfolio basis to achieve specific interest rate management objectives. Swaps are also matched to operating lease payments where interest rate exposure exists. The differential paid or received on such swaps is recorded as an adjustment to expense or income over the term of the underlying agreement or matched portfolio. Interest rate swaps are contractual agreements between GM and another party to exchange fixed and floating interest rate payments periodically over the life of the agreements without the exchange of underlying principal amounts. Interest rate options, including swaptions and interest rate caps and floors may result in the future exchange of interest payments if market interest rates reach certain levels. At December 31, 1997 and 1996, the total notional amount of such agreements with off-balance-sheet risk was $29.5 billion and $30.8 billion, respectively. Interest rate swaps used to hedge an underlying debt obligation are not marked to market, but are used to adjust interest expense recognized over the life of the underlying debt agreement. Gains and losses on terminated interest rate swaps are deferred and recognized as a yield adjustment on the underlying debt. Unamortized net gains on interest rate swaps totaled approximately $40 million and $33 million at December 31, 1997 and 1996, respectively. Written options, including those embedded in interest rate swaps, written interest rate caps, interest rate collars, and written swaptions, and interest rate swaps that do not meet settlement accounting criteria are marked to market with related gains and losses recognized in income on a current basis. Mortgage Contracts GMAC has also entered into contracts to purchase and sell mortgages at specific future dates and has entered into certain exchange traded futures and option contracts to reduce exposure to interest rate risk. At December 31, 1997 and 1996, commitments to sell mortgage loans and securities totaled $3.9 billion and $1.5 billion, respectively, and commitments to purchase or originate mortgage loans totaled $4.1 billion and $2.6 billion, respectively. GMAC's exchange traded futures and option contracts, which are used to hedge mortgage loans held for sale, had notional values of $2.2 billion and $2.4 billion at December 31, 1997 and 1996, respectively. Gains and losses on derivatives, including exchange traded futures and option contracts, used to hedge interest rate risk associated with rate locked funding commitments and mortgage loans held for sale, are deferred and considered in the reporting of the underlying mortgages on a lower of cost or market basis. The notional values of derivatives used to hedge price and interest rate risk associated with mortgage related securities totaled $1.4 billion and $4.8 billion at December 31, 1997 and 1996, respectively. Gains and losses associated with these instruments are recognized in the current period on a mark to market basis. Derivatives used to hedge mortgage servicing rights had notional values of $8 billion and $11 billion at December 31, 1997 and 1996, respectively. Gains and losses on such contracts are recorded as an adjustment to amortization expense. GMAC has also entered into interest rate swaps in an effort to stabilize short-term borrowing costs and to maintain a minimum return on certain mortgage loans held for investment. Amounts received or paid under such interest rate swaps are recorded as an adjustment to interest expense. At December 31, 1997 and 1996, the notional values of such instruments totaled $264 million and $327 million, respectively. II-19 34 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 11. DERIVATIVE FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONCLUDED) Credit Risk The forward contracts, swaps, options, and lines of credit previously discussed contain an element of risk that the counterparties may be unable to meet the terms of the agreements. However, GM minimizes such risk exposure for forward contracts, swaps and options by limiting the counterparties to major international banks and financial institutions who meet established credit guidelines and by limiting the amount of its risk exposure with any one bank or financial institution. Management also reduces its credit risk for unused lines of credit by applying the same credit policies in making commitments as it does for extending loans. Management does not expect to incur any losses as a result of counterparty default. GM generally does not require or place collateral for these financial instruments, except for the lines of credit it extends. GM has business activities with customers, dealers, and associates around the world. The Corporation's receivables from, and guarantees to, such parties are well diversified, and when warranted, are secured by collateral. Consequently, in management's opinion, no significant concentration of credit risk exists for GM. NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value of financial instruments has been determined by GM using available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value; therefore, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange. The effect of using different market assumptions and/or estimation methodologies may be material to the estimated fair value amounts. Fair value information presented herein is based on information available at December 31, 1997 and 1996. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been updated since those dates and, therefore, the current estimates of fair value at dates subsequent to December 31, 1997 and 1996 may differ significantly from these amounts. Book and estimated fair values of financial instruments, for which it is practicable to estimate fair value, were as follows (in millions):
December 31, ------------------------------------------------- 1997 1996 ---- ---- Book Fair Book Fair Value Value Value Value ------- ------- ------- ------- ASSETS Cash and marketable securities $22,984 $22,984 $22,262 $22,262 Finance receivables - net $58,800 $59,248 $57,545 $57,584 Accounts and notes receivable (less allowances) $7,394 $7,394 $6,485 $6,485 Other assets $11,033 $11,041 $7,191 $7,294 LIABILITIES Accounts payable $15,782 $15,782 $14,221 $14,221 Notes and loans payable Payable within one year $51,055 $51,096 $47,024 $47,080 Payable beyond one year $41,972 $43,196 $38,276 $41,113 Other liabilities $593 $626 $624 $635 Preferred securities of subsidiary trusts (Note 17) $222 $233 $- $-
II-20 35 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The prior table excludes the book value and estimated fair value of financial instrument derivatives which were as follows (in millions):
Fair Value of Open Contracts (1) at December 31, ------------------------------------------------------------------ 1997 1996 ---- ---- Asset Liability Asset Liability Position Position Position Position -------- --------- -------- --------- Foreign exchange forward contracts (2) $227 $409 $190 $410 Foreign exchange options $46 $7 $38 $11 Interest rate swaps $120 $99 $107 $152 Interest rate options $2 $2 $1 $12 Mortgage contracts $53 $30 $40 $34
(1) The related asset (liability) recorded on the balance sheet for foreign exchange forward contracts, foreign exchange options, interest rate swaps, and interest rate options totaled $(78) million, $43 million, $(14) million, and $(1) million, respectively, at December 31, 1997 and $(24) million, $42 million, $(57) million, and $(11) million, respectively, at December 31, 1996. The related asset recorded on the balance sheet for mortgage contracts was $20 million and $12 million at December 31, 1997 and 1996, respectively. (2) Foreign exchange forward contracts included certain derivatives with both foreign exchange and interest rate exposures which had a fair value of $(177) million and $(94) million at December 31, 1997 and 1996, respectively. The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Cash and Marketable Securities The fair value of cash equivalents and marketable securities is determined principally based on quoted market prices. Finance Receivables The fair value is estimated by discounting the future cash flows using applicable spreads to approximate current rates applicable to each category of finance receivables. The carrying value of wholesale receivables and other receivables whose interest rates adjust on a short-term basis with applicable market indices (generally the prime rate) are assumed to approximate fair value either due to their short maturities or due to the interest rate adjustment feature. Accounts and Notes Receivable and Accounts Payable For receivables and payables with short maturities the book values approximate fair values. Other Assets and Accrued Expenses and Other Liabilities Other assets reported at December 31, 1997 and 1996 include various financial instruments (e.g., long-term receivables and certain investments) having a fair value based on discounted cash flows, market quotations, and other appropriate valuation techniques. The fair values of retained subordinated interests in trusts and excess servicing assets (net of deferred costs) are derived by discounting expected cash flows using current market rates. Estimated values of Industrial Development Bonds, included in accrued expenses and other liabilities, are based on quoted market prices for the same or similar issues. Notes and Loans Payable The fair value of the debt payable within one year is determined by using quoted market prices, if available, or calculating the estimated value of each bank loan, note, or debenture in the portfolio at the applicable rate in effect. Commercial paper, master notes, and demand notes have an original term of less than 90 days and; therefore, the carrying amount of these liabilities is considered fair value. Debt payable beyond one year has an estimated fair value based on quoted market prices for the same or similar issues or based on the current rates offered to GM for debt of similar remaining maturities. Foreign Exchange Forward Contracts and Options The fair value of foreign exchange forward contracts is determined by using current exchange rates. The fair value of foreign exchange options is estimated using pricing models with indicative quotes obtained for the market variables. II-21 36 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONCLUDED) Preferred Securities of Subsidiary Trusts The fair value of the GM-obligated mandatorily redeemable preferred securities of subsidiary trusts (Note 17) is determined based on quoted market prices. Interest Rate Swaps and Options The fair value of interest rate swaps, including contracts with optionality, is estimated using pricing models based upon current market interest rates. Exchange traded options are valued at quoted market prices. Mortgage Contracts The fair value of such contracts is estimated based upon the amount that would be received or paid to terminate the contracts based on market prices of similar financial instruments and current rates for mortgage loans. Unused Lines of Credit Because loans extended under these commitments are at market interest rates, there is no significant fair value position related to the outstanding commitments. NOTE 13. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS GM maintains hourly and salaried benefit plans that provide postretirement medical, dental, vision, and life insurance to most U.S. retirees and eligible dependents. The cost of such benefits is recognized in the consolidated financial statements during the period employees provide service to GM. Certain of the Corporation's non-U.S. subsidiaries have postretirement plans, although most participants are covered by government-sponsored or administered programs. The cost of such programs generally is not significant to GM. The components of non-pension postretirement benefit cost were as follows (in millions): Years Ended December 31, ---------------------------- 1997 1996 1995 -------- -------- -------- Benefits earned during the year $639 $668 $617 Interest accrued on benefits earned in prior years 3,128 2,980 3,120 Termination, curtailment and settlement (gains) losses (2) (3) 26 Amortization of net actuarial losses (gains) 72 43 (7) Amortization of prior service costs due to plan changes (116) (116) (116) ----- ----- ----- Total non-pension postretirement benefit cost $3,721 $3,572 $3,640 ===== ===== ===== The status of the plans at December 31 was as follows (in millions): 1997 1996 -------- -------- Accumulated postretirement benefit obligation (APBO) Current retirees $25,419 $23,498 Fully eligible active plan participants 7,104 6,427 Other active plan participants 11,771 11,462 ------ ------ APBO 44,294 41,387 Plan assets at fair value (1) 3,000 - ------ ------ APBO in excess of plan assets 41,294 41,387 Unamortized prior service costs due to plan changes 563 679 Unamortized net amount resulting from changes in plan experience and actuarial assumptions (689) 1,124 ------ ------ Net postretirement benefit obligation $41,168 $43,190 ====== ======
(1) During 1997, General Motors pre-funded a portion of its other postretirement benefits liability by contributing $3 billion to a Voluntary Employees' Beneficiary Association trust (VEBA). The assets of the VEBA trust are primarily invested in U.S. government obligations and fixed income securities. II-22 37 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 13. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONCLUDED) The principal assumptions used were as follows:
1997 1996 1995 ---- ---- ---- Weighted-average discount rate 7.2% 7.8% 7.5% Weighted-average rate of increase in future compensation levels related to pay-related life insurance 4.4% 4.4% 4.3% Base weighted-average health care cost trend rate (1) 5.5% 6.5% 6.5% Ultimate sustained weighted-average health care cost trend rate in 2004 (2) 5.0% 5.0% 5.0%
- ---------------- (1) Current year trend rate assumed at beginning of year was adjusted to actual to determine year-end obligations. (2) Rate increases to 6.0% in 1999 and then decreases on a linear basis through 2004, to the ultimate weighted-average trend rate of 5.0%. A one percentage point increase in the assumed health care trend rate would have increased the APBO by $4.8 billion at December 31, 1997 and increased the aggregate service and interest cost components of non-pension postretirement benefit expense for 1997 by $462 million. A one percentage point increase in the weighted-average discount rate would have resulted in a $4.9 billion decrease in the APBO at December 31, 1997. GM has disclosed in the consolidated financial statements certain amounts associated with estimated future postretirement benefits other than pensions and characterized such amounts as "accumulated postretirement benefit obligations," "liabilities," or "obligations." Notwithstanding the recording of such amounts and the use of these terms, GM does not admit or otherwise acknowledge that such amounts or existing postretirement benefit plans of GM (other than pensions) represent legally enforceable liabilities of GM. NOTE 14. PENSIONS GM has a number of defined benefit pension plans covering substantially all employees. Plans covering U.S. and Canadian represented employees generally provide benefits of negotiated, stated amounts for each year of service as well as significant supplemental benefits for employees who retire with 30 years of service before normal retirement age. The benefits provided by the plans covering U.S. and Canadian salaried employees and employees in certain foreign locations are generally based on years of service and salary history. GM also has certain nonqualified pension plans covering executives that are based on targeted wage replacement percentages and are unfunded. The measurement dates used for the principal U.S. plans of the Corporation and Hughes were December 31 and December 1, respectively. For non-U.S. plans, the measurement dates were December 1 for Canadian plans and October 1 for other foreign plans. Plan assets are primarily invested in U.S. Government obligations, equity and fixed income securities, commingled pension trust funds, insurance contracts, the Corporation's $1-2/3 par value common stock (valued as of the 1997 measurement date at $123 million), and EDS common stock (valued as of the 1997 measurement date at $5.3 billion). In March 1995, under the terms of an agreement between the Corporation and the Pension Benefit Guarantee Corporation (PBGC), the Corporation contributed to the GM Hourly-Rate Employees Pension Plan (Hourly Plan) 173.2 million shares of Class E common stock valued at $6.3 billion on such date. Subsequent to the split-off of EDS, the Class E stock held by the Hourly Plan was exchanged for EDS common stock. The trustees for the Hourly Plan have, from time-to-time, sold shares of former Class E common stock and EDS common stock, with the effect of reducing the number of shares of EDS common stock held by the Hourly Plan. GM's funding policy with respect to its qualified plans is to contribute annually not less than the minimum required by applicable law and regulations. GM made pension contributions to the U.S. plans of $1.5 billion in 1997, $800 million in 1996, and $10.4 billion in 1995. II-23 38 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 14. PENSIONS (CONTINUED) Pension expense included the following (in millions):
Years Ended December 31, ------------------------------------------------------------ 1997 1996 1995 ------------------------------------------------------------ U.S. Non-U.S. U.S. Non-U.S. U.S. Non-U.S. Plans Plans Plans Plans Plans Plans ----- ----- ----- ----- ----- ----- Benefits earned during the year $1,332 $191 $1,208 $185 $927 $162 Interest on projected benefit obligation (PBO) 5,261 633 4,777 653 4,851 651 Return on assets Actual gain (10,882) (758) (8,035) (929) (12,047) (626) Less deferred gain 4,252 234 1,752 442 6,584 195 Net amortization and other 1,446 141 1,505 297 1,113 193 ----- --- ----- ----- ----- --- Net pension expense $1,409 $441 $1,207 $648 $1,428 $575 ===== === ===== ===== ===== ====
The funded status of GM's plans at December 31, were as follows (in millions):
1997 1996 ------------------------ ---------------------- Assets Accum. Assets Accum. Exceed Benefits Exceed Benefits Accum. Exceed Accum. Exceed Benefits Assets Benefits Assets -------- --------- -------- -------- U.S. PLANS Actuarial present value of: Vested benefits $22,269 $40,541 $24,137 $36,723 Nonvested benefits 1,592 7,029 1,866 7,552 ------ ------ ------ ------ Accumulated benefit obligation 23,861 47,570 26,003 44,275 Effect of projected benefits 1,887 252 1,992 231 ------ ------ ------ ------ Total PBO based on service to date 25,748 47,822 27,995 44,506 Plan assets at fair value 28,295 43,985 31,123 40,172 ------ ------ ------ ------ PBO less than (in excess of) plan assets 2,547 (3,837) 3,128 (4,334) Unamortized net amount resulting from changes in plan experience and actuarial assumptions 2,764 5,868 2,989 5,138 Unamortized prior service cost 1,297 6,806 1,385 7,835 Unamortized net (asset) obligation at date of adoption (416) 311 (644) 415 Adjustment for unfunded pension liabilities - (12,733) - (13,157) ------ ------ ----- ------ Net prepaid pension asset (liability) $6,192 $(3,585) $6,858 $(4,103) ===== ====== ===== ====== NON-U.S. PLANS Actuarial present value of: Vested benefits $2,776 $5,969 $2,323 $6,112 Nonvested benefits 92 173 75 204 ----- ----- ----- ----- Accumulated benefit obligation 2,868 6,142 2,398 6,316 Effect of projected benefits 397 417 295 517 ----- ----- ----- ----- Total PBO based on service to date 3,265 6,559 2,693 6,833 Plan assets at fair value 3,381 2,694 3,065 2,850 ----- ------ ----- ----- PBO less than (in excess of) plan assets 116 (3,865) 372 (3,983) Unamortized net amount resulting from changes in plan experience and actuarial assumptions 673 1,100 548 905 Unamortized prior service cost 181 643 194 784 Unamortized net (asset) obligation at date of adoption (106) 116 (231) 226 Adjustment for unfunded pension liabilities - (1,452) - (1,410) ---- ------ --- ------ Net prepaid pension asset (liability) $864 $(3,458) $883 $(3,478) === ====== === ======
II-24 39 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 14. PENSIONS (CONCLUDED) The following assumptions were used to determine the pension expense and the actuarial value of the PBO:
1997 1996 --------------------- ------------------------- U.S. Non-U.S. U.S. Non-U.S. Plans Plans Plans Plans -------- ------------ --------- ------------- Weighted-average discount rate 7.0% 6.8% 7.5% 7.3% Rate of increase in future compensation levels (1) 5.0% 4.1% 5.0% 4.2% Expected long-term rate of return on plan assets 10.0% 9.2% 10.0% 9.8%
- --------------- (1) Benefits under the hourly plans are generally not based on wages; therefore, no benefit escalation beyond existing negotiated or anticipated increases was included. The assumptions for non-U.S. plans were developed on a basis consistent with that for U.S. plans, adjusted to reflect prevailing economic conditions and interest rate environments. NOTE 15. ACCRUED EXPENSES AND OTHER LIABILITIES Accrued expenses and other liabilities included the following (in millions):
December 31, ----------------------- 1997 1996 ------- ------- Warranties, dealer and customer allowances, claims, and discounts $14,847 $13,702 Customer deposits 7,223 6,658 Payrolls and employee benefits (excludes postemployment) 4,625 4,568 Unpaid insurance losses, loss adjustment expenses and unearned insurance premiums 3,929 3,020 Postemployment benefits 3,536 3,116 Environmental cleanup 610 646 Governmental and other contract related 360 1,060 Income taxes 1,344 11 Taxes, other than income taxes 1,258 1,334 Deferred income 1,460 1,502 Interest 2,344 2,180 Industrial Development Bonds 593 624 Other 8,361 6,723 ------ ------ Total accrued expenses and other liabilities $50,490 $45,144 ====== ======
NOTE 16. COMMITMENTS AND CONTINGENT MATTERS Commitments GM had the following minimum commitments under noncancelable operating leases having terms in excess of one year primarily for real property: 1998-$476 million; 1999-$469 million; 2000-$446 million; 2001-$341 million; 2002-$366 million; and $923 million in 2003 and thereafter. Certain of the leases contain escalation clauses and renewal or purchase options. Rental expenses under operating leases were $925 million in 1997, $853 million in 1996, and $769 million in 1995. GM sponsors a credit card program, entitled the GM Card program, that offers rebates that can be applied against the purchase or lease of GM vehicles. The amount of rebates available to qualified cardholders at December 31, 1997 and 1996 was $3.5 billion and $3.2 billion, respectively. Provisions for GM Card rebates are recorded as reductions in revenues at the time of vehicle sale. Contingent Matters Hughes has maintained a suit against the U.S. Government since September 1973 regarding the Government's infringement and use of a Hughes patent (the "Williams Patent") covering "Velocity Control and Orientation of a Spin Stabilized Body," principally satellites. On June 17, 1994, the U.S. Court of Claims awarded Hughes damages of $114 million. Because Hughes believed that the record supported a higher royalty rate, it appealed that decision. The U.S. Government, contending that the award was too high, also appealed. On June 19, 1996, the Court of Appeals for the Federal Circuit (CAFC) affirmed the decision of the Court of Claims which awarded Hughes $114 million in damages, together with interest. The U.S. Government petitioned the CAFC for a rehearing. That petition was denied in October 1996. The U.S. Government then filed a petition with the U.S. Supreme Court seeking certiorari. On April 21, 1997, II-25 40 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 16. COMMITMENTS AND CONTINGENT MATTERS (CONCLUDED) Contingent Matters (concluded) the U.S. Supreme Court, citing a recent decision it had rendered in Warner-Jenkinson v. Hilton Davis, remanded Hughes' suit over the Williams Patent back to the CAFC in order to have the CAFC determine whether the ruling in the Williams Patent matter was consistent with the U.S. Supreme Court's decision in the Warner-Jenkinson case. The previous liability decision of the Court of Claims in the Williams Patent matter, and its $114 million damage award to Hughes, currently remain in effect pending reconsideration of the case by the CAFC. Hughes is unable to estimate the duration of this reconsideration process. While no amount has been recorded in the financial statements of Hughes to reflect the $114 million award or the interest accumulating thereon, a resolution of this matter could result in a gain that would be material to the earnings of GM attributable to Class H common stock. GM is subject to potential liability under government-regulations and various claims and legal actions which are pending or may be asserted against them. Some of the pending actions purport to be class actions. The aggregate ultimate liability of GM under these government regulations and under these claims and actions, was not determinable at December 31, 1997. After discussion with counsel, it is the opinion of management that such liability is not expected to have a material adverse effect on the Corporation's consolidated financial statements. NOTE 17. PREFERRED SECURITIES OF SUBSIDIARY TRUSTS General Motors - Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts In July 1997, the General Motors Capital Trust D (Series D Trust) issued approximately $79 million of its 8.67% Trust Originated Preferred Securities(sm) (TOPrS(sm)) Series D, (Series D Preferred Securities), in a one-for-one exchange for 3,055,255 of the outstanding GM Series D 7.92% Depositary Shares, each representing one-fourth of a share of GM Series D Preference Stock, $0.10 par value per share. In addition, the General Motors Capital Trust G (Series G Trust) issued approximately $143 million of its 9.87% TOPrS, Series G (Series G Preferred Securities), in a one-for-one exchange for 5,064,489 of the outstanding GM Series G 9.12% Depositary Shares, each representing one-fourth of a share of GM Series G Preference Stock, $0.10 par value per share. Concurrently with the exchanges and the related purchases by GM from the Series D and Series G Trusts (Trusts) of the common securities of such Trusts, which represent approximately 3 percent of the total assets of such Trusts, GM issued to the wholly-owned Trusts, as the Series D Trust's sole assets its 8.67% Junior Subordinated Deferrable Interest Debentures, Series D, due July 1, 2012 and as the Series G Trust's sole assets, its 9.87% Junior Subordinated Deferrable Interest Debentures, Series G, due July 1, 2012 (the "Series D Debentures" and "Series G Debentures" or collectively the "Debentures"), having aggregate principal amounts equal to the aggregate stated liquidation amounts of the Series D and Series G Preferred Securities and the related common securities, respectively ($79 million with respect to the Series D Debentures and $131 million with respect to the Series G Debentures). The Series D Debentures are redeemable, in whole or in part, at GM's option on or after August 1, 1999, at a redemption price equal to 100% of the outstanding principal amount of the Series D Debentures plus accrued and unpaid interest, or, under certain circumstances, prior to August 1, 1999, at a redemption price equal to 105% of the outstanding principal of the Series D Debentures from the Series D expiration date through July 31, 1998, declining ratably on each August 1 thereafter to 100% on August 1, 1999, plus accrued and unpaid interest. The Series D Preferred Securities will be redeemed upon the maturity or earlier redemption of the Series D Debentures. The Series G Debentures are redeemable, in whole or in part, at GM's option on or after January 1, 2001, at a redemption price equal to 100% of the outstanding principal amount of the Series G Debentures plus accrued and unpaid interest, or, under certain circumstances, prior to January 1, 2001, at a redemption price equal to 114% of the outstanding principal of the Series G Debentures from the Series G expiration date through December 31, 1997, declining ratably on each January 1 thereafter to 100% on January 1, 2001, plus accrued and unpaid interest. The Series G Preferred Securities will be redeemed upon the maturity or earlier redemption of the Series G Debentures. GM has guaranteed the payment in full to the holders of the Series D and Series G Preferred Securities (collectively the "Preferred Securities") of all distributions and other payments on the Preferred Securities to the extent not paid by the Trusts only if and to the extent that the Trusts have assets therefore, GM has made payments of interest or principal on the related Debentures. These guarantees, when taken together with GM's obligations under the Preferred Securities Guarantees, the Debentures, and the Indentures relating thereto and the obligations under the Declaration of Trust of the Trusts, including the obligations to pay certain costs and expenses of the Trusts, constitute full and unconditional guarantees by GM of each Trust's obligations under its Preferred Securities. - ------------- (sm) "Trust Originated Preferred Securities" and "TOPrS" are service trademarks of Merrill Lynch & Co. II-26 41 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 18. STOCKHOLDERS' EQUITY The following table presents changes in capital stock for the period from January 1, 1995 to December 31, 1997 (in millions):
Common Stocks ----------------------------------------- Total Preference $1-2/3 Capital Stocks(a) par value Class H(b) Class E Class H(c) Stock ---------- --------- ---------- ------- ---------- ------- BALANCE AT JANUARY 1, 1995 $2 $1,257 $- $27 $8 $1,294 Shares reacquired (1) (16) - - - (17) Shares issued - 14 - 17 - 31 Reclassification of shares formerly subject to repurchase - - - - 2 2 -- ----- -- -- -- ----- BALANCE AT DECEMBER 31, 1995 1 1,255 - 44 10 1,310 Shares reacquired - (8) - - - (8) Shares issued - 14 - - - 14 Series C conversion - - - 5 - 5 EDS split-off - - - (49) - (49) -- ----- -- -- -- ----- BALANCE AT DECEMBER 31, 1996 1 1,261 - - 10 1,272 Shares reacquired - (122) - - - (122) Shares issued - 17 - - - 17 Recapitalization of Class H Common Stock - - 10 - (10) - -- ----- -- -- -- ----- BALANCE AT DECEMBER 31, 1997 $ 1 $1,156 $10 $- $- $1,167 == ===== == == == =====
(a) The following describes the Corporation's preference stocks (in millions except par value, stated value, and per share amounts): Preference Stock, $0.10 par value (authorized 100 shares): - Series B 9-1/8% Depositary Shares, stated value $25 per share, redeemable at Corporation option on or after January 1, 1999; issued at December 31, 1997, 20 shares equivalent to 5 shares of nonconvertible Series B 9-1/8% Preference Stock, stated value $100 per share. - Series C Depositary Shares, liquidation preference $50 per share. - Series D 7.92% Depositary Shares, stated value $25 per share, redeemable at Corporation option on or after August 1, 1999; outstanding at December 31, 1997, 3 shares equivalent to .75 shares of Series D 7.92% Preference Stock (see Note 17). - Series G 9.12% Depositary Shares, stated value $25 per share, redeemable at Corporation option on or after January 1, 2001; outstanding at December 31, 1997, 5 shares, equivalent to 1.25 shares of Series G 9.12% Preference Stock (see Note 17). (b) Subsequent to its recapitalization on December 17, 1997. (c) Prior to its recapitalization on December 17, 1997. Common Stocks In connection with the consummation of the Hughes Transactions (Note 22), each share of Class H common stock was recapitalized into a share of Class H common stock linked to the telecommunications and space businesses of Hughes. The voting and liquidation rights of the recapitalized Class H common stock were to be the greater of 0.5 or a number (rounded to the nearest one-tenth) which reflected the relative market value of the recapitalized Class H common stock compared to the market value of $1-2/3 par value common stock, determined based on the average trading prices of such stocks during a 20-trading day period that started on the eleventh trading day following the consummation of the Hughes Transactions (The Trading Period). See Stockholders' Equity - Subsequent Events for additional information. The voting and liquidation rights of $1-2/3 par value common stock continue to be one vote per share and one liquidation unit per share as it was prior to the Hughes Transactions. The liquidation rights of the $1-2/3 par value and Class H common stocks are subject to certain adjustments if outstanding common stock is subdivided, by stock split or otherwise, or if shares of one class of common stock are issued as a dividend to holders of another class of common stock. Holders of Class H common stock have no direct rights in the equity or assets of Hughes, but rather have rights in the equity and assets of GM (which includes 100% of the stock of Hughes). The outstanding shares of Class H common stock may be recapitalized as shares of $1-2/3 par value common stock at any time after December 31, 2002, at the sole discretion of the GM Board of Directors (GM Board), or automatically, if at any time the Corporation should sell, liquidate, or otherwise dispose of II-27 42 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 18. STOCKHOLDERS' EQUITY (CONTINUED) Common Stocks (concluded) 80% or more of the business of Hughes, based on fair market value of the assets, both tangible and intangible, of Hughes as of the date that such proposed transaction is approved by the GM Board. In the event of any recapitalization, all outstanding shares of Class H common stock will automatically be converted into the Corporation's $1-2/3 par value common stock at an exchange rate that would provide Class H common stockholders with that number of shares of $1-2/3 par value common stock that would have a value equal to 120% of the value of their Class H common stock, on such date. A recapitalization of the type described in the prior sentence would occur if any of the triggering events took place unless the holders of GM common stock (including the holders of $1-2/3 par value common stock and holders of the Class H common stock voting separately as individual classes) vote to approve an alternative proposal from the GM Board. Common Stock Repurchases During 1997, GM used $3.8 billion to acquire 63.5 million shares of $1-2/3 par value common stock, which completed the $2.5 billion stock repurchase program announced in January 1997 and represented 50 percent of the Corporation's second $2.5 billion stock repurchase program announced in August 1997. GM also used approximately $600 million to repurchase shares of $1-2/3 par value common stock for certain employee benefit plans. See Stockholders' Equity - Subsequent Events for additional information. Preference Stocks During 1996, approximately 45 million shares of Class E common stock were issued upon conversion of approximately 3 million shares of Series C Preference Stock (represented by depositary shares). The remaining 6,784 shares of Series C Preference Stock were redeemed on February 22, 1996. During 1995, the Corporation concluded a tender offer, under which it purchased for $1.3 billion of cash (i) 24 million depositary shares, each representing one-fourth of a share of its Series B 9-1/8% Preference Stock, at a purchase price of $27.50 per depositary share, (ii) 10 million depositary shares, each representing one-fourth of a share of its Series D 7.92% Preference Stock, at a purchase price of $26.375 per depositary share, and (iii) 13 million depositary shares, each representing one-fourth of a share of its Series G 9.12% Preference Stock, at a purchase price of $28.25 per depositary share. The purchase price in excess of the carrying amount of the preference shares amounted to $153 million. Other Comprehensive Income During 1997, GM adopted SFAS No. 130, Reporting Comprehensive Income, which established standards for reporting and displaying comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements. The changes in the components of other comprehensive income (loss) are reported net of income taxes, as follows (in millions):
Years Ended December 31, -------------------------------------------------------------------------------------- 1997 1996 1995 ---------------------------- ------------------------- ----------------------------- Pre-tax Tax Exp. Net Pre-tax Tax Exp. Net Pre-tax Tax Exp. Net Amount (Credit) Amount Amount (Credit) Amount Amount (Credit) Amount -------- -------- -------- ------- -------- ------ ------- --------- ------ Foreign currency translation adjustments $(1,274) $(499) $(775) $(614) $(278) $(336) $548 $225 $323 Unrealized gain (loss) on securities: Unrealized holding gain (loss) 272 114 158 (15) (8) (7) 474 167 307 Reclassification adjustment (118) (41) (77) (96) (33) (63) (89) (31) (58) --- -- -- -- -- ----- -- -- -- Net unrealized gain (loss) 154 73 81 (111) (41) (70) 385 136 249 --- --- -- --- -- ----- --- --- ----- Minimum pension liability adjustment (906) (334) (572) 2,013 767 1,246 (1,900) (712) (1,188) --- ---- --- ----- --- ----- ----- --- ----- Other comprehensive (loss) income $(2,026) $(760) $(1,266) $1,288 $448 $840 $(967) $(351) $(616) ===== === ===== ===== === === === === ===
Stockholders' Equity - Subsequent Events (Unaudited) Common Stock Repurchases In February 1998, the GM Board of Directors approved a $4 billion stock repurchase program. The stock repurchases are expected to be made over a 12-month period principally through open market transactions and represent about 10 percent of the outstanding shares of $1-2/3 par value common stock, based on the NYSE's closing price on Friday, February 6, 1998, of $60.56 per share. The new stock repurchase program began in mid-March, upon the completion of GM's second $2.5 billion stock repurchase program. Upon completion of the $4 billion stock repurchase program, GM's stock repurchases since January 1997 will total $9 billion. II-28 43 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 18. STOCKHOLDERS' EQUITY (CONCLUDED) Stockholders' Equity - Subsequent Events (Unaudited) (concluded) Voting and Liquidation Rights for Recapitalized Class H Common Stock The Trading Period for the recapitalized Class H common stock ended February 2, 1998 and the voting and liquidation rights were set at 0.6 votes per share and 0.6 liquidation units per share compared to 0.5 votes per share and 0.5 liquidation units per share prior to the recapitalization of the Class H common stock. NOTE 19. EARNINGS PER SHARE ATTRIBUTABLE TO COMMON STOCKS Earnings per share attributable to each class of GM common stock was determined based on the attribution of earnings to each such class of common stock for the period divided by the weighted-average number of common shares for each such class outstanding during the period. Diluted earnings per share attributable to each class of GM common stock considers the impact of potential common shares, unless the inclusion of the potential common shares would have an antidilutive effect. The assumed exercise of stock options has no effect on Class H common stock earnings per share, because to the extent that shares of Class H common stock deemed to be outstanding would increase, such increased shares would also increase the numerator of the fraction used to determine Available Separate Consolidated Net Income (ASCNI). The attribution of earnings to each class of common stock was as follows (in millions):
Years Ended December 31, ---------------------------- 1997 1996 1995 -------- -------- -------- Earnings attributable to common stocks $1-2/3 par value Continuing operations $6,276 $4,589 $5,404 Discontinued operations - (5) 105 Cumulative effect of accounting change - - (52) ----- ----- ----- Earnings attributable to $1-2/3 par value $6,276 $4,584 $5,457 ===== ===== ===== Income from discontinued operations attributable to Class E $- $15 $795 -- -- --- Earnings attributable to Class H (prior to its recapitalization on December 17, 1997) (Note 22) $322 $283 $265 --- --- --- Earnings attributable to Class H (subsequent to its recapitalization on December 17, 1997) (Note 22) $2 $- $- -- -- --
Earnings attributable to $1-2/3 par value common stock for the period represent the earnings attributable to all GM common stocks for the period, reduced by the ASCNI of EDS (Note 1), former Hughes, and Hughes for the period (Note 22). During the period that EDS was an indirect wholly-owned subsidiary of the Corporation, the earnings attributable to Class E common stock for the period represented the ASCNI of EDS for the period. The ASCNI of EDS was determined quarterly in amounts equal to the separate consolidated net income of EDS for each respective quarter, excluding the effects of purchase accounting adjustments relating to the Corporation's acquisition of EDS for each such period, multiplied by a fraction, the numerator of which represented the weighted-average number of shares of Class E common stock outstanding during the period (439 million for the fourth quarter of 1995) and the denominator of which was 484 million for the fourth quarter of 1995. The weighted-average number of shares of Class E common stock outstanding for 1996 reflects shares outstanding through June 30, 1996. Earnings attributable to Class H common stock for the period prior to the December 17, 1997 recapitalization of Class H common stock represented the ASCNI of former Hughes. The ASCNI of former Hughes was determined quarterly in amounts equal to the separate consolidated net income of former Hughes for each respective quarter, excluding the effects of purchase accounting adjustments arising at the time of the Corporation's acquisition of HAC, calculated for such period and multiplied by a fraction, the numerator of which was a number equal to the weighted-average number of shares of Class H common stock outstanding during the quarter (103 million, 99 million, and 97 million in the fourth quarter of 1997, 1996, and 1995, respectively) and the denominator of which was 400 million during the fourth quarters of 1997, 1996, and 1995. II-29 44 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 19. EARNINGS PER SHARE ATTRIBUTABLE TO COMMON STOCKS (CONTINUED) Earnings attributable to Class H common stock for the period subsequent to the recapitalization of Class H common stock represent the ASCNI of Hughes for the period December 18, 1997 through December 31, 1997, excluding the effects of purchase accounting adjustments arising at the time of the Corporation's acquisition of HAC, calculated for such period and multiplied by a fraction, the numerator of which was a number equal to the weighted-average number of shares of Class H common stock outstanding during the period (104 million) and the denominator of which was 400 million. The denominators used in determining the ASCNI of EDS and former Hughes were adjusted from time-to-time as deemed appropriate by the GM Board to reflect subdivisions or combinations of the Class E common stock and Class H common stock, respectively, and to reflect certain transfers of capital to or from EDS and former Hughes, respectively. The denominator used in determining the ASCNI of Hughes may be adjusted from time-to-time as deemed appropriate by the GM Board to reflect subdivisions or combinations of the Class H common stock and to reflect certain transfers of capital to or from Hughes. The GM Board's discretion to make such adjustments is limited by criteria set forth in the Corporation's Restated Certificate of Incorporation. II-30 45 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 19. EARNINGS PER SHARE ATTRIBUTABLE TO COMMON STOCKS (CONCLUDED) The reconciliation of the amounts used in the basic and diluted earnings per share computations for income from continuing operations was as follows (in millions except per share amounts):
Class H Common Stock - Prior to its recapitalization $1-2/3 Par Value Common Stock on December 17,1997 ----------------------------- ----------------------------- Per Share Per Share Income Shares Amount Income Shares Amount ------ ------ ---------- ------ ------ ---------- YEAR ENDED DECEMBER 31, 1997 Income from continuing operations $6,374 $322 Less:Premium on exchange of preference stocks 26 - Dividends on preference stocks 72 - ----- BASIC EPS Income from continuing operations available to common stockholders 6,276 721 $8.70 322 101 $3.17 ---- ---- EFFECT OF DILUTIVE SECURITIES Assumed exercise of dilutive stock options (11) 6 11 4 ----- --- --- --- DILUTED EPS Adjusted income from continuing operations available to common stockholders $6,265 727 $8.62 $333 105 $3.17 ===== === ---- === === ---- YEAR ENDED DECEMBER 31, 1996 Income from continuing operations $4,670 $283 Less: Dividends on preference stocks 81 - ----- --- BASIC EPS Income from continuing operations available to common stockholders 4,589 756 $6.07 283 98 $2.88 ---- ---- EFFECT OF DILUTIVE SECURITIES Assumed exercise of dilutive stock options (9) 4 9 3 ----- --- ---- -- DILUTED EPS Adjusted income from continuing operations available to common stockholders $4,580 760 $6.03 $292 101 $2.88 ===== === ---- === --- ---- YEAR ENDED DECEMBER 31, 1995 Income from continuing operations $5,768 $265 Less: Preference stocks tender offer premium 153 - Dividends on preference stocks 211 - ----- --- BASIC EPS Income from continuing operations before cumulative effect of accounting change available to common stockholders 5,404 750 $7.21 265 96 $2.77 ---- ---- EFFECT OF DILUTIVE SECURITIES Assumed exercise of dilutive stock options (9) 6 9 3 ----- --- --- -- DILUTED EPS Adjusted income from continuing operations before cumulative effect of accounting change available to common stockholders $5,395 756 $7.14 $274 99 $2.77 ===== === ---- === == Class H Common Stock - Subsequent to its recapitalization on December 17, 1997 ----------------------------------- Per Share Income Shares Amount ------- ------ --------- YEAR ENDED DECEMBER 31, 1997 Income from continuing operations $2 Less:Premium on exchange of preference stocks - Dividends on preference stocks - BASIC EPS Income from continuing operations available to common stockholders 2 104 $0.02 ---- EFFECT OF DILUTIVE SECURITIES Assumed exercise of dilutive stock options - 3 -- --- DILUTED EPS Adjusted income from continuing operations available to common stockholders $2 107 $0.02 == === ---- YEAR ENDED DECEMBER 31, 1996 Income from continuing operations Less: Dividends on preference stocks BASIC EPS Income from continuing operations available to common stockholders EFFECT OF DILUTIVE SECURITIES Assumed exercise of dilutive stock options DILUTED EPS Adjusted income from continuing operations available to common stockholders YEAR ENDED DECEMBER 31, 1995 Income from continuing operations Less: Preference stocks tender offer premium Dividends on preference stocks BASIC EPS Income from continuing operations before cumulative effect of accounting change available to common stockholders EFFECT OF DILUTIVE SECURITIES Assumed exercise of dilutive stock options DILUTED EPS Adjusted income from continuing operations before cumulative effect of accounting change available to common stockholders
II-31 46 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 20. DIVIDENDS ON COMMON STOCK In connection with the consummation of the Hughes Transactions (Note 22), the GM Board determined that the amount available for the payment of dividends on outstanding shares of $1-2/3 par value common stock would be the cumulative amount available for the payment of dividends on $1-2/3 par value common stock immediately prior to the closing of the Hughes Transactions, reduced by a pro rata portion of the net reduction in GM's total stockholders' equity resulting from the Hughes Transactions. In addition, the GM Board determined that the amount initially available for the payment of dividends on shares of Class H common stock would be the cumulative amount available for the payment of dividends on Class H common stock immediately prior to the closing of the Hughes Transactions, reduced by a pro rata portion of the net reduction in GM's total stockholders' equity resulting from the Hughes Transactions. The pro rata allocation of the net reduction in GM's total stockholders' equity resulting from the Hughes Transactions was based on the fraction used in determining the ASCNI of former Hughes immediately prior to the consummation of the Hughes Transactions. Dividends may be paid on $1-2/3 par value common stock to the extent of the amount determined to be available for the payment of dividends on $1-2/3 common stock in connection with the consummation of the Hughes Transactions, plus all of the earnings of GM after the consummation of the Hughes Transactions, other than the earnings attributed to the Class H common stock. Dividends may be paid on Class H common stock to the extent of the amount initially determined to be available for the payment of dividends on Class H common stock, plus the portion of earnings of GM after the closing of the Hughes Transactions attributed to Class H common stock. The amount available for the payment of dividends on each class of common stock will be reduced from time-to-time by dividends paid on that class and will be adjusted from time-to-time for changes to the amount of surplus attributed to the class resulting from the repurchase or issuance of shares of that class. As of December 31, 1997, the amount available for the payment of dividends on $1-2/3 par value and Class H common stock was $17.1 billion and $3.7 billion, respectively. Dividends may be paid on common stocks only when, as and if declared by the GM Board in its sole discretion. The GM Board's policy with respect to $1-2/3 par value common stock is to distribute dividends based on the outlook and the indicated capital needs of the business. The GM Board does not currently intend to pay cash dividends on the Class H common stock, which was recapitalized on December 17, 1997 as part of the Hughes Transactions. Cash dividends per share of $1-2/3 par value common stock were $2.00, $1.60, and $1.10 for 1997, 1996, and 1995, respectively. Cash dividends per share of Class E common stock were $0.30 and $0.52 in 1996 and 1995, respectively. Cash dividends per share for Class H common stock, prior to its recapitalization on December 17, 1997, were $1.00, $0.96, and $0.92 in 1997, 1996, and 1995, respectively. NOTE 21. STOCK INCENTIVE PLANS Stock-Based Compensation GM previously adopted SFAS No. 123, Accounting for Stock-Based Compensation, and as permitted by this standard, will continue to apply the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25 to its stock options and other stock-based employee compensation awards. If compensation cost for stock options and other stock-based employee compensation awards had been determined based on the fair value at the grant date, consistent with the method prescribed by SFAS No. 123, GM's pro forma net income, earnings attributable to common stocks, and basic and diluted earnings per share attributable to common stocks would have been as follows: (in millions except per share amounts):
1997 1996 1995 ------ ------ ------ Net income - as reported $6,698 $4,963 $6,881 - Pro forma $6,558 $4,904 $6,842 Earnings attributable to common stocks $1-2/3 - as reported $6,276 $4,584 $5,457 - Pro forma $6,147 $4,528 $5,418 Class H (prior to recapitalization) - as reported $322 $283 $265 - Pro forma $315 $280 $264 Class H (subsequent to recapitalization) - as reported $2 $- $- - Pro forma $(2) $- $-
II-32 47 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 21. STOCK INCENTIVE PLANS (CONTINUED) 1997 1996 1995 ---- ---- ---- Basic earnings per share attributable to common stocks $1-2/3 - as reported $8.70 $6.06 $7.28 - Pro forma $8.52 $5.98 $7.23 Class H (prior to recapitalization) - as reported $3.17 $2.88 $2.77 - Pro forma $3.10 $2.85 $2.76 Class H (subsequent to recapitalization) - as reported $0.02 $- $- - Pro forma ($0.02) $- $- Diluted earnings per share attributable to common stocks $1-2/3 - as reported $8.62 $6.02 $7.21 - Pro forma $8.44 $5.94 $7.16 Class H (prior to recapitalization) - as reported $3.17 $2.88 $2.77 - Pro forma $3.10 $2.85 $2.76 Class H (subsequent to recapitalization) - as reported $0.02 $- $- - Pro forma ($0.02) $- $-
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option- pricing model with the following weighted-average assumptions:
1997 1996 1995 --------------- --------------- ---------------- GMSIP Class H GMSIP Class H GMSIP Class H ----- ------- ----- ------- ----- ------- Interest rate 6.2% 6.8% 5.3% 6.6% 7.8% 7.0% Expected life (years) 5.0 7.0 5.8 7.0 5.8 7.0 Expected volatility 26.3% 20.7% 27.3% 20.6% 31.4% 20.0% Dividend yield 3.4% 2.1% 3.1% 1.6% 3.7% 2.3%
The effect of the Hughes Transactions adjustment on the number of options and related exercise prices, as described below, is considered, under SFAS No. 123, a modification of the terms of the outstanding options. Accordingly, the 1997 pro forma disclosure includes compensation cost for the incremental fair value, under SFAS No. 123, resulting from such modification. The pro forma amounts for compensation cost are not indicative of the effects on operating results for future periods. GM's stock incentive plans consist of the General Motors 1997 Stock Incentive Plan, formerly the General Motors Amended Stock Incentive Plan, (the "GMSIP") and the Hughes Electronics Corporation Incentive Plan (the "Hughes Plan"). The GMSIP is administered by the Executive Compensation Committee of the GM Board. The Hughes Plan is administered by the Executive Compensation Committee of the Board of Directors of Hughes. Under the GMSIP, 60 million shares of $1-2/3 par value and 2.5 million shares of Class H common stocks may be granted from June 1, 1997 through May 31, 2002 substantially all of which were available for grants at December 31, 1997. Options granted prior to 1997 under the GMSIP generally are exercisable one-half after one year and one-half after two years from the dates of grant. Stock option grants awarded during 1997 vest ratably over three years following the grant date. Option prices are 100% of fair market value on the dates of grant and the options generally expire 10 years from the dates of grant, subject to earlier termination under certain conditions. Under the Hughes Plan, Hughes may grant shares, rights, or options to acquire up to 25.8 million shares of Class H common stock through December 31, 1997, none of which were available for grant at December 31, 1997. Option prices are 100% of fair market value on the dates of grant and the options generally vest over two to four years and expire 10 years from the dates of grant, subject to earlier termination under certain conditions. II-33 48 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 21. STOCK INCENTIVE PLANS (CONCLUDED) In connection with the Hughes Transactions (Note 22), the number of options and related exercise prices for outstanding options under the GMSIP and Hughes Plan were adjusted to reflect the change in the fair market value of $1-2/3 par value and Class H common stocks that resulted from the Hughes Defense Class A common stock distribution. The number of shares under option and the exercise price were adjusted such that the aggregate intrinsic value of the options immediately before and immediately after the transaction remained unchanged. Changes in the status of outstanding options were as follows:
GMSIP Hughes Plan $1-2/3 Par Value Common Class H Common ------------------------------------------------------------------------ Shares under Weighted- Average Shares under Weighted- Option Exercise Price Option Average Exercise Price ------------------------------------------------------------------------ Options outstanding at January 1, 1995 25,274,778 $43.64 7,064,321 $27.64 Granted 6,600,115 $43.22 1,537,350 $39.94 Exercised 2,248,627 $37.12 1,929,393 $24.81 Terminated 346,140 $45.12 14,425 $34.17 -------------------------------------------------------------------------------------------------------- Options outstanding at December 31, 1995 29,280,126 $44.03 6,657,853 $31.29 -------------------------------------------------------------------------------------------------------- Granted 7,087,590 $52.27 1,501,900 $61.31 Exercised 6,207,072 $39.16 864,889 $28.58 Terminated 202,697 $51.75 128,075 $42.94 -------------------------------------------------------------------------------------------------------- Options outstanding at December 31, 1996 29,957,947 $46.94 7,166,789 $37.70 -------------------------------------------------------------------------------------------------------- Granted 8,989,460 $58.81 5,750,600 $54.90 Exercised 9,273,674 $42.95 2,158,728 $30.21 Terminated 330,727 $57.05 2,694,982 $42.56 Hughes Transactions adjustment 3,023,651 5,897,936 -------------------------------------------------------------------------------------------------------- Options outstanding at December 31, 1997 32,366,657 $51.40 13,961,615 $29.08 -------------------------------------------------------------------------------------------------------- Options exercisable at December 31, 1997 19,191,431 $44.13 3,603,063 $20.98 --------------------------------------------------------------------------------------------------------
The following table summarizes information about GMSIP and Hughes Plan stock options outstanding at December 31, 1997:
-------------------------------------------------------------------------------------------------------------- Weighted-Average Range of Options Remaining Weighted-Avg. Options Weighted-Average Exercise Prices Outstanding Contractual Life (yrs.) Exercise Price Exercisable Exercise Price -------------------------------------------------------------------------------------------------------------- GMSIP $1-2/3 Par Value Common $15.00 to $39.99 9,347,476 5.5 $36.59 9,347,476 $36.59 40.00 to 49.99 7,885,925 7.4 $47.67 4,339,013 $47.26 50.00 to 65.00 15,133,256 8.0 $54.08 5,504,942 $54.45 -------------------------------------------------------------------------------------------------------------- $15.00 to $65.00 32,366,657 7.1 $51.40 19,191,431 $44.13 Hughes Plan Class H Common $9.00 to $15.99 787,450 4.2 $13.66 787,450 $13.66 16.00 to 29.99 2,315,562 6.3 $20.35 2,315,562 $20.35 30.00 to 40.00 10,858,603 8.9 $32.06 500,051 $35.41 -------------------------------------------------------------------------------------------------------------- $9.00 to $40.00 13,961,615 8.2 $29.08 3,603,063 $20.98
II-34 49 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 22. HUGHES BUSINESS MATTERS Hughes Transactions On December 17, 1997, GM and former Hughes completed a series of related transactions (Hughes Transactions) that were designed to address strategic challenges facing the three principal businesses of former Hughes and unlock stockholder value in GM. The Hughes Transactions included the tax-free spin-off of the defense electronics business of former Hughes (Hughes Defense) to holders of $1-2/3 par value and Class H common stocks, which was then followed immediately by the merger of Hughes Defense with Raytheon Company (Raytheon). Concurrently, Delco, the automotive electronics subsidiary of former Hughes, was transferred from former Hughes to GM's Delphi Automotive Systems unit. Finally, Class H common stock was recapitalized into a GM tracking stock, Class H common stock, that is linked to the telecommunications and space businesses of Hughes. The spin-off of Hughes Defense and merger with Raytheon had a total value to GM and its stockholders of approximately $9.8 billion that consisted of approximately $4.0 billion cash retained by Hughes from debt proceeds incurred by Hughes Defense prior to its spin-off and $5.8 billion of Hughes Defense Class A common stock distributed to holders of $1-2/3 par value and Class H common stock. Substantially all of the proceeds from the debt obligation of Hughes Defense were made available to Hughes. The distribution of Hughes Defense to the $1-2/3 par value and Class H common stockholders was recorded by GM at fair value and resulted in the recognition of a $4.3 billion gain that was included in other income. In addition, GM's total stockholders' equity was reduced by approximately $1.5 billion as a result of the Hughes Transactions. GM distributed a total of 102,630,503 shares of Class A common stock of Hughes Defense, 44,308,316 shares or 43.2% to $1-2/3 par value stockholders and 58,322,187 shares or 56.8% to Class H stockholders, which represented approximately 30% of the total equity of the newly combined Hughes Defense/Raytheon Company. The distribution to Class H common stockholders, which had a total value of approximately $3.3 billion, accounted for their tracking stock interest in Hughes Defense valued at approximately $1.5 billion, plus an additional amount to compensate them for the elimination of their tracking stock interest in Delco and other factors valued at approximately $1.8 billion. The following table summarizes the 1997 operating results of Hughes for the period prior to and subsequent to the completion of the Hughes Transactions (in millions):
January 1 to December 18 to December 17(1) December 31(2) Total ----------- ----------- ----- Total revenues $17,392 $334 $17,726 Total costs and expenses 15,686 318 16,004 Income taxes 595 6 601 Minority interests 41 (3) 38 ------ - ------ Net earnings $ 1,152 $7 $1,159 ====== = ===== Earnings used for computation of ASCNI (3) $ 1,268 $8 $1,276 ------ - -----
- ---------------- (1) Amounts include the results of Hughes Defense, Delco, and the telecommunications and space businesses. (2) Amounts include the results of the telecommunications and space businesses only. (3) Excludes amortization of purchase accounting adjustments associated with GM's purchase of Hughes Aircraft Company of approximately $117 million through December 17 and $1 million from December 18 to December 31. Merger of Satellite Service Operations In May 1997, former Hughes and PAS completed the merger of their respective satellite service operations into a new publicly-held company. Former Hughes contributed its Galaxy(R) satellite services business in exchange for a 71.5% interest in the new company. Existing PAS stockholders received a 28.5% interest in the new company and $1.5 billion in cash. For accounting purposes, the merger was treated by former Hughes as an acquisition of 71.5% of PAS and was accounted for using the purchase method. Accordingly, the purchase price was allocated to the net assets acquired, including intangible assets, based on estimated fair values at date of acquisition. In addition, the merger was treated as a partial sale of the Galaxy business by former Hughes and resulted in a one-time pre-tax gain of $490 million ($318 million after-tax or $0.33 per share of $1-2/3 par value common stock and $0.80 per share of Class H common stock). II-35 50 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 23. OTHER INCOME AND OTHER DEDUCTIONS Other income and other deductions included the following (in millions):
Years Ended December 31, ----------------------------- 1997 1996 1995 -------- ------ ------ Other income Interest income $ 2,127 $ 1,679 $ 1,586 Gain on Hughes Defense spin-off (Note 22) 4,269 -- -- Gain on PAS merger (Note 22) 490 -- -- Insurance premiums 1,161 947 867 Mortgage operations investment income 796 432 323 Mortgage servicing and processing fees 729 489 375 Claims and commissions 584 670 604 Income from sales of receivables programs 571 625 744 Other 1,002 1,156 425 ------ ------ ------ Total other income $11,729 $ 5,998 $ 4,924 ====== ====== ====== Other deductions Insurance losses and loss adjustment expenses $ 747 $ 622 $ 621 Provision for financing losses 523 669 449 Other 241 792 608 ------ ------ ------ Total other deductions $ 1,511 $ 2,083 $ 1,678 ====== ====== ======
NOTE 24: SEGMENT REPORTING GM adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, during the fourth quarter of 1997. SFAS No. 131 established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. It also established standards for related disclosures about products and services, and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. GM's chief operating decision making group is the President's Council, which is comprised of the Chairman, Vice Chairman and the lead executives of each of GM's operating segments. The lead executive for each operating segment is also a member of a Strategy Board that manages the profitability and cash flow of each respective segment's various product lines and businesses. The operating segments are managed separately because each operating segment represents a strategic business unit that offers different products and serves different markets. GM's reportable operating segments include GM-NAO, Delphi, GMIO, GMAC, former Hughes, and Hughes. GM-NAO designs, manufactures, and markets vehicles primarily in North America under the following nameplates: Chevrolet, Pontiac, GMC, Oldsmobile, Buick, Cadillac, and Saturn. Delphi is a diverse supplier of automotive systems and components. Delphi offers products and services in the areas of chassis, interior, lighting, electronics, power and signal distribution, energy and engine management, steering, and thermal systems. GMIO meets 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. GMAC provides a broad range of financial services, including consumer vehicle financing, full-service leasing and fleet leasing, dealer financing, car and truck extended service contracts, residential and commercial mortgage services, and vehicle and homeowners insurance. Former Hughes and Hughes includes activities relating to designing, manufacturing, and marketing advanced technology electronic systems, products, and services for the telecommunications and space, automotive electronic, and aerospace and defense industries (see Note 22). The Other segment includes the design, manufacturing and marketing of locomotives and heavy-duty transmissions and the elimination of intersegment transactions. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies except that the disaggregated financial results for GM's automotive operating segments (GM-NAO, Delphi and GMIO) have been prepared using a management approach, which is consistent with the basis and manner in which GM management internally disaggregates financial information for the purposes of assisting in making internal operating decisions. GM evaluates performance based on stand alone operating segment net income and generally accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices. Revenues are attributed to geographic areas based on the location of the assets producing the revenues. II-36 51 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 24: SEGMENT REPORTING (CONTINUED) OPERATING SEGMENTS(A):
GM-NAO Delphi(b) GMIO GMAC Hughes(c) Other(d) Total ------ ------ ---- ---- ------ ----- ----- 1997 (in millions) Net sales and revenues from external customers $ 99,435 $ 5,021 $ 34,686 $ -- $ 12,171 $ 2,468 $ 153,781 Intersegment net sales and revenues 821 21,295 973 -- 5,013 (28,102) -- -------- -------- -------- -------- -------- -------- -------- Total net sales and revenues $ 100,256 $ 26,316 $ 35,659 $ -- $ 17,184 $ (25,634) $ 153,781 ======== ======== ======== ======== ======== ======== ======== Depreciation and amortization (e) $ 7,116 $ 1,750 $ 2,106 $ -- $ 683 $ 148 $ 11,803 Interest income $ 593 $ 261 $ 726 $ -- $ 106 $ (549) $ 1,137 Interest expense $ 690 $ 230 $ 535 $ -- $ 88 $ (572) $ 971 Income tax (credit) expense $ (357) $ (83) $ 136 $ -- $ 601 $ (142) $ 155 Earnings (losses) of nonconsolidated affiliates $ (35) $ 15 $ 13 $ 1,301 $ (60) $ 6 $ 1,240 Net (loss) income (e) $ (86) $ (60) $ 481 $ 1,301 $ 1,276 $ 3,786 $ 6,698 Investments in nonconsolidated affiliates $ 559 $ 330 $ 1,077 $ -- $ 98 $ 8,100 $ 10,164 Segment assets $ 67,253 $ 23,671 $ 24,837 $ -- $ 12,316 $ 4,606 $ 132,683 Expenditures for property (f) $ 5,387 $ 1,262 $ 2,448 $ -- $ 547 $ 157 $ 9,801 1996 Net sales and revenues from external customers $ 92,659 $ 4,793 $ 34,930 $ -- $ 10,661 $ 2,384 $ 145,427 Intersegment net sales and revenues 723 21,209 321 -- 5,083 (27,336) -- -------- -------- -------- -------- -------- -------- -------- Total net sales and revenues $ 93,382 $ 26,002 $ 35,251 $ -- $ 15,744 $ (24,952) $ 145,427 ======== ======== ======== ======== ======== ======== ======== Depreciation and amortization (e) $ 4,348 $ 567 $ 1,486 $ -- $ 560 $ 184 $ 7,145 Interest income $ 380 $ 212 $ 776 $ -- $ 66 $ (384) $ 1,050 Interest expense $ 563 $ 218 $ 566 $ -- $ 11 $ (499) $ 859 Income tax (credit) expense $ (85) $ 134 $ 307 $ -- $ 606 $ (77) $ 885 Earnings (losses) of nonconsolidated affiliates $ 37 $ 47 $ 52 $ 1,240 $ (25) $ 18 $ 1,369 Net income (loss) (e) $ 730 $ 526 $ 1,532 $ 1,240 $ 1,151 $ (216) $ 4,963 Investments in nonconsolidated affiliates $ 481 $ 254 $ 1,218 $ -- $ 124 $ 7,778 $ 9,855 Segment assets $ 63,527 $ 21,244 $ 25,476 $ -- $ 13,757 $ 11,258 $ 135,262 Expenditures for property (f) $ 5,177 $ 981 $ 2,669 $ -- $ 652 $ 127 $ 9,606 1995 Net sales and revenues from external customers $ 95,714 $ 4,509 $ 32,112 $ -- $ 9,529 $ 1,890 $ 143,754 Intersegment net sales and revenues 222 21,917 -- -- 5,186 (27,325) -- -------- -------- -------- -------- -------- -------- -------- Total net sales and revenues $ 95,936 $ 26,426 $ 32,112 $ -- $ 14,715 $ (25,435) $ 143,754 ======== ======== ======== ======== ======== ======== ======== Depreciation and amortization (e) $ 4,042 $ 622 $ 1,364 $ -- $ 488 $ 271 $ 6,787 Interest income $ 471 $ 125 $ 863 $ -- $ 94 $ (425) $ 1,128 Interest expense $ 311 $ 103 $ 444 $ -- $ 8 $ (522) $ 344 Income tax expense (credit) $ 569 $ 377 $ 162 $ -- $ 646 $ (191) $ 1,563 Earnings (losses) of nonconsolidated affiliates $ 22 $ 42 $ 205 $ 1,031 $ (9) $ 21 $ 1,312 Cumulative effect of accounting change $ (52) $ -- $ -- $ -- $ -- $ -- $ (52) Net income (e) $ 1,472 $ 916 $ 1,644 $ 1,031 $ 1,108 $ 710 $ 6,881 Investments in nonconsolidated affiliates $ 275 $ 244 $ 1,687 $ -- $ 121 $ 7,656 $ 9,983 Segment assets $ 61,465 $ 19,261 $ 22,829 $ -- $ 13,129 $ 13,960 $ 130,644 Expenditures for property (f) $ 5,128 $ 885 $ 2,086 $ -- $ 546 $ 8 $ 8,653
II-37 52 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 24: SEGMENT REPORTING (CONTINUED) - ------------------ (a) Calculated with financing and insurance operations on an equity basis which is the basis upon which such operations are evaluated. (b) Includes Delco's assets as of December 31, 1997 and operating results for the period December 18, 1997 through December 31, 1997 (see Note 22). (c) Represents Hughes as of December 31, 1997 and includes the combined operating results for former Hughes for the period of January 1, 1997 to December 17, 1997 and Hughes for the period of December 18, 1997 to December 31, 1997 (see Note 22). (d) Other includes the $4.3 billion gain resulting from the Hughes Transactions for the year ended December 31, 1997, income from discontinued operations of $10 million and $900 million for the years ended December 31, 1996 and 1995, respectively, and net assets of discontinued operations of $5.1 billion at December 31, 1995. (e) The amount reported for Hughes excludes amortization of GM purchase accounting adjustments of approximately $118 million, $122 million, and $160 million, for 1997, 1996, and 1995, respectively, 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. (f) Excludes expenditures related to telecommunications and other equipment amounting to $575 million, $188 million, and $275 million in 1997, 1996, and 1995, respectively. A reconciliation of the totals reported for the operating segments to the applicable line items in the consolidated financial statements is as follows (in millions):
1997 1996 1995 ---- ---- ---- NET SALES AND REVENUES Total revenues for reportable segments $ 153,781 $ 145,427 $ 143,754 GMAC revenues 12,577 12,644 11,664 Other financial services revenues 185 30 -- Other income 11,729 5,998 4,924 Eliminations (98) (86) (88) -------- -------- -------- Total consolidated net sales and revenues $ 178,174 $ 164,013 $ 160,254 ======== ======== ======== ASSETS Total assets for reportable segments $ 132,683 $ 135,262 $ 130,644 GMAC assets 109,319 98,578 95,648 Eliminations and other (13,114) (11,698) (12,629) -------- -------- -------- Total consolidated assets $ 228,888 $ 222,142 $ 213,663 ======== ======== ========
Segment Eliminations Consolidated OTHER SIGNIFICANT ITEMS Total GMAC and Other Total ----- ---- --------- ----- 1997 Depreciation and amortization $11,803 $ 4,746 $ 67 $16,616 Interest income $ 1,137 $ 1,127 $ (137) $ 2,127 Interest expense $ 971 $ 5,256 $ (114) $ 6,113 Income taxes $ 155 $ 913 $ 1 $ 1,069 Expenditures for property $ 9,801 $ 238 $ 281 $10,320 1996 Depreciation and amortization $ 7,145 $ 4,676 $ 19 $11,840 Interest income $ 1,050 $ 743 $ (114) $ 1,679 Interest expense $ 859 $ 4,938 $ (102) $ 5,695 Income taxes $ 885 $ 837 $ 1 $ 1,723 Expenditures for property $ 9,606 $ 121 $ 222 $ 9,949 1995 Depreciation and amortization $ 6,787 $ 4,427 $ (1) $11,213 Interest income $ 1,128 $ 643 $ (185) $ 1,586 Interest expense $ 344 $ 4,936 $ (98) $ 5,182 Income taxes $ 1,563 $ 752 $ 1 $ 2,316 Expenditures for property $ 8,653 $ 133 $ - $ 8,786
II-38 53 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONCLUDED NOTE 24: SEGMENT REPORTING (CONCLUDED) Information concerning principal geographic areas was as follows (in millions):
1997 1996 1995 -------------------- ------------------- ------------------- Net Sales Net Sales Net Sales & Net & Net & Net Revenues Property Revenues Property Revenues Property -------- -------- -------- -------- -------- -------- North America United States $127,128 $ 20,778 $113,013 $ 22,821 $113,994 $ 21,542 Canada and Mexico 12,202 3,171 9,681 3,582 8,091 3,443 ------- ------- ------- ------- ------- ------- Total North America 139,330 23,949 122,694 26,403 122,085 24,985 Europe France 1,972 424 2,680 390 2,349 351 Germany 10,725 3,083 12,365 3,821 12,376 3,919 Spain 1,760 611 1,730 805 1,638 905 United Kingdom 5,409 1,183 5,063 1,103 4,926 917 Other 8,995 1,800 8,621 1,797 8,746 1,546 ------- ------- ------- ------- ------- ------- Total Europe 28,861 7,101 30,459 7,916 30,035 7,638 Latin America Brazil 5,462 1,964 5,117 1,910 4,136 1,682 Other Latin America 2,981 466 2,239 328 2,225 104 ------- ------- ------- ------- ------- ------- Total Latin America 8,443 2,430 7,356 2,238 6,361 1,786 All Other 1,540 1,087 3,504 947 1,773 160 ------- ------- ------- ------- ------- ------- Total $178,174 $ 34,567 $164,013 $ 37,504 $160,254 $ 34,569 ======= ======= ======= ======= ======= =======
* * * * * * II-39 54 GENERAL MOTORS CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INFORMATION SELECTED QUARTERLY DATA (UNAUDITED)
1997 Quarters ----------------------------------------------------- 1st(1)(2) 2nd(3)(4)(5) 3rd 4th(6)(7) (Dollars in Millions Except Per Share Amounts) Net sales and revenues $42,241 $45,146 $41,890 $48,897 ------ ------ ------ ------ Income before income taxes and minority interests 2,766 3,233 1,596 119 Income tax expense (credit) 989 1,153 533 (1,606)(7) Minority interests 19 18 4 12 ------ ------ ------- ------- Net income 1,796 2,098 1,067 1,737 Premium on exchange of preference stocks - - 26 - Dividends on preference stocks 20 20 16 16 ------ ------ ------ ------- Earnings on common stocks $1,776 $2,078 $1,025 $1,721 ===== ===== ===== ===== Earnings attributable to common stocks Earnings attributable to $1-2/3 par value $1,717 $1,941 $964 $1,654 ----- ----- --- ----- Earnings attributable to Class H (8) $59 $137 $61 $65 -- --- -- -- Earnings attributable to Class H (9) $ - $ - $ - $2 -- -- -- - Basic earnings per share attributable to common stocks Earnings attributable to $1-2/3 par value $2.30 $2.68 $1.35 $2.36 ---- ---- ---- ---- Earnings attributable to Class H (8) $0.59 $1.35 $0.60 $0.63 ---- ---- ---- ---- Earnings attributable to Class H (9) $ - $ - $ - $0.02 -- -- -- ---- Average number of shares of common stocks outstanding - basic (in millions) $1-2/3 par value 747 724 713 702 Class H (8) 100 101 102 103 Class H (9) - - - 104 Diluted earnings per share attributable to common stocks Earnings attributable to $1-2/3 par value $2.28 $2.67 $1.34 $2.33 ---- ---- ---- ---- Earnings attributable to Class H (8) $0.59 $1.35 $0.60 $0.63 ---- ---- ---- ---- Earnings attributable to Class H (9) $ - $ - $ - $0.02 -- -- -- ---- Average number of shares of common stocks outstanding - diluted (in millions) $1-2/3 par value 752 729 720 709 Class H (8) 103 104 105 106 Class H (9) - - - 107
See notes on next page. II-40 55 GENERAL MOTORS CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INFORMATION - CONTINUED SELECTED QUARTERLY DATA (UNAUDITED) - CONTINUED
1997 Quarters ------------------------------ 1st 2nd 3rd 4th --- --- --- --- Cash dividends per share of common stocks $1-2/3 par value $0.50 $0.50 $0.50 $0.50 Class H (8) $0.25 $0.25 $0.25 $0.25 Class H (9) $-- $-- $-- $-- Price range of common stocks $1-2/3 par value (10): High $63.75 $59.88 $69.75 $72.44 Low $55.00 $55.00 $53.88 $58.31 Class H (8)(10): High $64.88 $60.25 $67.88 $68.94 Low $54.25 $49.00 $55.88 $61.00 Class H (9)(10): High $-- $-- $-- $40.00 Low $-- $-- $-- $35.75
- -------------- (1) First quarter 1997 results included a pre-tax gain of $88 million, after deducting certain legal expenses ($55 million after-tax or $0.07 basic earnings per share of $1-2/3 par value common stock) that resulted from an agreement with Volkswagen A.G. (VW) settling a civil lawsuit which GM brought against VW. (2) First quarter 1997 results included the unfavorable impact of a pre-tax plant closing charge of $80 milion ($50 million after-tax or $0.07 basic loss per share of $1-2/3 par value common stock) related to the announcement that Delphi Interior and Lighting Systems will cease production at its Trenton, New Jersey plant during the 1998 calendar year. (3) Work stoppages in the United States during the second quarter of 1997 reduced calendar year pre-tax income by approximately $530 million ($330 million after-tax or $0.45 basic loss per share of $1-2/3 par value common stock), after considering partial recovery of production losses from the work stoppages. (4) Second quarter 1997 results included a pre-tax gain of $490 million ($318 million after-tax or $0.33 basic earnings per share of $1-2/3 par value common stock and $0.80 basic earnings per share of Class H common stock) related to the merger of the satellite service operations of Hughes and PanAmSat Corporation. (5) Second quarter 1997 results included a pre-tax gain of $128 million ($103 million after-tax or $0.14 basic earnings per share of $1-2/3 par value common stock) related to the sale of GM Europe's equity interest in Avis Europe. (6) Fourth quarter 1997 results included a tax-free gain of $4.3 billion ($6.08 basic earnings per share of $1-2/3 par value common stock) related to the December 17, 1997 completion of the strategic restructuring of GM's Hughes Electronics subsidiary (Hughes Transactions). The 1997 tax credit primarily resulted from the effect of the tax-free status of the gain. (7) Fourth quarter 1997 results included pre-tax charges against income totaling $6.4 billion ($4 billion after-tax or $5.75 basic earnings per share of $1-2/3 par value common stock) resulting from GM's competitiveness studies. (8) Represents information through December 17, 1997, the date on which GM recapitalized the Class H common stock ("GM's Recapitalization Date"). (9) Represents information for the period from December 18, 1997, through December 31, 1997 , which is subsequent to GM's Recapitalization Date. (10) The principal market is the New York Stock Exchange and prices are based on the Composite Tape. $1-2/3 par value common stock is also listed on the Chicago and Philadelphia stock exchanges and on the Pacific Exchange. As of December 31, 1997, there were 563,553 holders of record of $1-2/3 par value common stock and 231,627 holders of record of Class H common stock. II-41 56 GENERAL MOTORS CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INFORMATION - CONTINUED SELECTED QUARTERLY DATA (UNAUDITED) - CONTINUED
1996 Quarters ----------------------------------------------- 1st(1)(2) 2nd 3rd(3) 4th(1)(4) --- --- --- --- (Dollars in Millions Except Per Share Amounts) Net sales and revenues $ 39,242 $ 44,780 $ 39,078 $ 40,913 ------- ------- ------- ------- Income from continuing operations before income taxes and minority interests $ 1,234 $ 3,202 $ 1,498 $ 686 Income tax expense (credit) 432 1,098 258 (65)(5) Minority interests (2) (8) 31 35 ------- ------- ------- ------- Income from continuing operations 800 2,096 1,271 786 Income (loss) from discontinued operations 219 (209) -- -- ------- ------- ------- ------- Net income 1,019 1,887 1,271 786 Dividends on preference stocks 20 20 21 20 ------- ------- ------- ------- Earnings on common stocks $ 999 $ 1,867 $ 1,250 $ 766 ======= ======= ======= ======= Earnings attributable to common stocks $1-2/3 par value from continuing operations $ 704 $ 2,001 $ 1,188 $ 696 Income (loss) from discontinued operations 10 (15) -- -- ------- ------- ------- ------- Earnings attributable to $1-2/3 par value $ 714 $ 1,986 $ 1,188 $ 696 ======= ======= ======= ======= Income (loss) from discontinued operations attributable to Class E $ 209 $ (194) $ -- $ -- ------- ------- ------- ------- Earnings attributable to Class H $ 76 $ 75 $ 62 $ 70 ------- ------- ------- ------- Basic earnings per share attributable to common stocks $1-2/3 par value from continuing operations $ 0.93 $ 2.65 $ 1.57 $ 0.92 Income (loss) from discontinued operations 0.01 (0.02) -- -- ------- ------- ------- ------- Earnings attributable to $1-2/3 par value $ 0.94 $ 2.63 $ 1.57 $ 0.92 ======= ======= ======= ======= Income (loss) from discontinued operations attributable to Class E $ 0.45 $ (0.41) $ -- $ -- ------- ------- ------- ------- Earnings attributable to Class H $ 0.78 $ 0.77 $ 0.63 $ 0.70 ------- ------- ------- ------- Average number of shares of common stocks outstanding - basic (in millions) $1-2/3 par value 755 756 756 756 Class E 463 479 -- -- Class H 97 98 99 99 Diluted earnings per share attributable to common stocks $1-2/3 par value from continuing operations $ 0.92 $ 2.63 $ 1.56 $ 0.91 Income (loss) from discontinued operations 0.01 (0.02) -- -- ------- ------- ------- ------- Earnings attributable to $1-2/3 par value $ 0.93 $ 2.61 $ 1.56 $ 0.91 ======= ======= ======= ======= Income (loss) from discontinued operations attributable to Class E $ 0.45 $ (0.41) $ -- $ -- ------- ------- ------- ------- Earnings attributable to Class H $ 0.78 $ 0.77 $ 0.63 $ 0.70 ------- ------- ------- ------- Average number of shares of common stocks outstanding - diluted (in millions) $1-2/3 par value 761 762 760 761 Class E 463 479 -- -- Class H 101 101 102 102
See notes on next page. II-42 57 GENERAL MOTORS CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INFORMATION - CONTINUED SELECTED QUARTERLY DATA (UNAUDITED) - CONCLUDED
1996 Quarters ---------------------------- 1st 2nd 3rd 4th --- --- --- --- Cash dividends per share of common stocks $1-2/3 par value $0.40 $0.40 $0.40 $0.40 Class E $0.15 $0.15 $-- $-- Class H $0.24 $0.24 $0.24 $0.24 Price range of common stocks $1-2/3 par value(6): High $54.75 $58.13 $54.50 $59.38 Low $46.88 $51.50 $45.75 $47.75 Class E(6): High $58.00 $58.63 $-- $-- Low $50.00 $52.25 $-- $-- Class H(6): High $63.38 $68.25 $61.38 $59.25 Low $45.00 $57.50 $53.13 $49.50
(1) Work stoppages in the United States and Canada, during the first and fourth quarters of 1996, reduced calendar year pre-tax income by approximately $1.9 billion ($1.2 billion after-tax or $1.56 basic loss per share of $1-2/3 par value common stock), after considering partial recovery of production losses from the work stoppages. The pre-tax impact in the 1996 fourth quarter totaled $1.1 billion ($700 million after-tax or $0.91 basic loss per share of $1-2/3 par value common stock). (2) First quarter 1996 results included a pre-tax gain of $120 million ($72 million after-tax or $0.07 basic earnings per share of $1-2/3 par value common stock and $0.18 basic earnings per share of Class H common stock) on the sale of 2.5% of DIRECTV(R) to AT&T. (3 ) Third quarter 1996 included a favorable pre-tax plant closings reserve adjustment of $409 million ($253 million after-tax or $0.34 basic earnings per share of $1-2/3 par value common stock) associated with a decision to utilize its Wilmington, Delaware facility for the assembly of the new generation Saturn vehicle. (4) Fourth quarter 1996 results also included the following special items: (a) A favorable pre-tax plant closings reserve adjustment of $318 million ($197 million after-tax or $0.26 basic earnings per share of $1-2/3 par value common stock), which primarily resulted from revised estimates of costs to be incurred in connection with plant closings, in light of changes in redeployment and other assumptions, including those resulting from the 1996 settlements with the UAW and CAW. (b) A pre-tax loss of $253 million ($157 million after-tax or $0.21 basic loss per share of $1-2/3 par value common stock) in connection with the sale of four Delphi component facilities, located in Flint and Livonia, Michigan, and Oshawa and Windsor, Canada, and GM-NAO's Oshawa die-management business. (c) A pre-tax gain of $105 million ($65 million after-tax or $0.09 basic earnings per share of $1-2/3 par value common stock) on the sale of GM's preferred stock interest in Avis, Inc. (d) Retiree benefit increases associated with the new UAW labor agreement include lump-sum payments that resulted in a pre-tax charge of approximately $270 million ($167 million after-tax or $0.22 basic loss per share of $1-2/3 par value common stock). (5) The income tax credit in the fourth quarter of 1996 was primarily due to research and experimentation credits in the United States, as well as certain international tax credits and tax credits relating to the resolution of certain tax contingencies at Hughes. (6) The principal market is the New York Stock Exchange and prices are based on the Composite Tape. $1-2/3 par value common stock is also listed on the Chicago and Philadelphia stock exchanges and on the Pacific Exchange. As of December 31, 1996, there were 592,515 holders of record of $1-2/3 par value common stock and 247,782 holders of record of Class H common stock. II-43 58 GENERAL MOTORS CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INFORMATION - CONCLUDED SELECTED FINANCIAL DATA (UNAUDITED)
Years Ended December 31, ---------------------------------------------------------- 1997(1) 1996(2) 1995 1994 1993 ---- ---- ---- ---- ---- (Dollars in Millions Except Per Share Amounts) Net sales and revenues $178,174 $164,013 $160,254 $148,467 $132,975 Income from continuing operations before cumulative effect of accounting changes $6,698 $4,953 $6,033 $4,866 $1,777 Income from discontinued operations -- 10 900 793 689 Cumulative effect of accounting changes -- -- (52)(3) (758)(4) -- ----- ------ ------ ----- ----- Net income $6,698 $4,963 $6,881 $4,901 $2,466 ===== ===== ===== ===== ===== $1-2/3 par value common stock Basic earnings per share (EPS) from continuing operations $8.70 $6.07 $7.14(3) $4.76(4) $1.72 Basic earnings (loss) per share from discontinued operations $-- $(0.01) $0.14 $0.46 $0.45 Diluted EPS from continuing operations $8.62 $6.03 $7.07 $4.69 $1.68 Diluted earnings (loss) per share from discontinued operations $-- $(0.01) $0.14 $0.46 $0.45 Cash dividends declared per share $2.00 $ 1.60 $1.10 $0.80 $0.80 Class H common stock (prior to its recapitalization on December 17, 1997) Basic EPS from continuing operations $3.17 $2.88 $2.77 $2.62(4) $2.30 Diluted EPS from continuing operations $3.17 $2.88 $2.77 $2.62 $2.30 Cash dividends declared per share $1.00 $0.96 $0.92 $0.80 $0.72 Class H common stock (subsequent to its recapitalization on December 17, 1997) Basic EPS from continuing operations $0.02 $-- $-- $-- $-- Diluted EPS from continuing operations $0.02 $-- $-- $-- $-- Cash dividends declared per share $-- $-- $-- $-- $-- Class E common stock Basic EPS from discontinued operations $-- $0.04 $1.96 $1.71 $1.51 Diluted EPS from discontinued operations $-- $0.04 $1.96 $1.71 $1.51 Cash dividends declared per share $-- $0.30 $0.52 $0.48 $0.40 Total assets $228,888 $222,142 $213,663 $191,145 $182,388 Long-term debt and capitalized leases (5) $5,676 $5,390 $4,280 $5,198 $5,861 GM-obligated mandatorily redeemable preferred securities of subsidiary trusts $222 $-- $-- $-- $--
- ---------------------- (1) The 1997 results were affected by certain items which are described on pages II-40 and II-41. (2) The 1996 results were affected by certain items which are described on pages II-42 and II-43. (3) GM adopted the provisions of the EITF consensus on Issue No. 95-1, effective January 1, 1995, which resulted in an unfavorable cumulative effect of $52 million after-tax or $0.07 basic loss per share of $1-2/3 par value common stock. (4) GM adopted SFAS No. 112, Employers' Accounting for Postemployment Benefits, effective January 1, 1994. The unfavorable cumulative effect of adopting SFAS No. 112 was $751 million after-tax or $1.05 basic loss per share of $1-2/3 par value common stock and $7 million after-tax or $0.08 basic earnings per share of Class H common stock. (5) Calculated with financing and insurance operations on an equity basis. * * * * * * II-44 59 GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following management's discussion and analysis of financial condition and results of operations (MD&A) should be read in conjunction with the Hughes Electronics Corporation consolidated financial statements and MD&A for the period ended December 31, 1997, included as Exhibit 99 to this Annual Report on Form 10-K, and the GMAC Annual Report on Form 10-K for the period ended December 31, 1997, filed separately with the Securities and Exchange Commission. Hughes Electronics Corporation, prior to the December 17, 1997 restructuring of the company, is hereinafter referred to as "former Hughes," and Hughes Electronics Corporation, subsequent to the December 17, 1997 restructuring of the company, is hereinafter referred to as "Hughes." All earnings per share amounts included in the MD&A are reported as basic. The disaggregated financial results for GM's automotive sectors (GM's North American Operations (GM-NAO), Delphi Automotive Systems (Delphi) and GM's International Operations (GMIO)) have been prepared using a management approach, which is consistent with the basis and manner in which GM management internally disaggregates financial information for the purposes of assisting in making internal operating decisions. In this regard, certain common expenses were allocated among sectors less precisely than would be required for standalone financial information prepared in accordance with generally accepted accounting principles (GAAP) and certain expenses (primarily certain U.S. taxes related to non-U.S. operations) were included in GM's "Other" sector. The financial results represent the historical information used by management for internal decision making purposes; therefore, other data prepared to represent the way in which the business will operate in the future, or data prepared on a GAAP basis, may be materially different. GM-NAO FINANCIAL HIGHLIGHTS
YEARS ENDED DECEMBER 31, --------------------------------------- 1997 1996 1995 ---- ---- ---- (Dollars in Millions) Net sales and revenues $100,256 $93,382 $95,936 ------- ------ ------ Pre-tax (loss) income (408) 608 2,071 Income tax (credit) expense (357) (85) 569 Earnings (losses) of nonconsolidated affiliates (35) 37 22 Cumulative effect of accounting change (1) -- -- (52) --- ----- ----- Net (loss) income $(86)(2) $730 $1,472 === === ===== Net (loss) profit margin (0.1)%(2) 0.8% 1.5%
- ------------------------ (1) In 1995, the provisions of Issue No. 95-1 of the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board, Revenue Recognition on Sales with a Guaranteed Minimum Resale Value, were adopted which resulted in an unfavorable after-tax impact of $52 million. (2) The 1997 results include $2.4 billion of after-tax charges related to the competitiveness studies at GM (Competitiveness Studies). Excluding the Competitiveness Studies charges, income was $2.3 billion and net profit margin was 2.3%. VEHICLE UNIT DELIVERIES OF CARS AND TRUCKS - GM-NAO
YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------------- 1997 1996 1995 ----------------------- -------------------------- ----------------------- GM AS GM AS GM AS A % OF A % OF A % OF INDUSTRY GM INDUSTRY INDUSTRY GM INDUSTRY INDUSTRY GM INDUSTRY -------- -- -------- -------- -- -------- -------- -- -------- (Units in Thousands) United States Cars 8,289 2,689 32.4% 8,528 2,786 32.7% 8,636 2,956 34.2% Trucks 7,210 2,077 28.8% 6,931 2,007 29.0% 6,484 1,939 29.9% ----- ----- ------ ----- ------ ----- Total U.S. 15,499 4,766 30.8% 15,459 4,793 31.0% 15,120 4,895 32.4% Canada 1,424 451 31.7% 1,203 381 31.6% 1,165 385 33.0% Mexico 496 143 28.9% 332 89 26.9% 232 48 20.7% ------- ------ ------- ----- ------- ------ Total North America 17,419 5,360 30.8% 16,994 5,263 31.0% 16,517 5,328 32.3% ====== ===== ====== ===== ====== ===== WHOLESALE SALES - GM-NAO Cars 3,095 2,913 3,352 Trucks 2,454 2,239 2,208 ----- ----- ----- Total 5,549 5,152 5,560 ===== ===== =====
II-45 60 GENERAL MOTORS CORPORATION AND SUBSIDIARIES GM-NAO FINANCIAL REVIEW Including $2.4 billion of after-tax charges related to the Competitiveness Studies (see Competitiveness Studies), GM-NAO reported a net loss for 1997 of $86 million. Excluding the Competitiveness Studies charges, GM-NAO's income for 1997 was $2.3 billion or 2.3% of net sales and revenues. Reported net income was $730 million or 0.8% of net sales and revenues in 1996 and $1.5 billion or 1.5% of net sales and revenues in 1995.The increase in 1997 income (excluding the Competitiveness Studies charges) was primarily due to higher wholesale sales volumes, continued improvement in the profitability of new vehicles, and lower material and engineering costs. These factors were partially offset by higher retail incentives, increased commercial spending to support the numerous vehicle launches in progress, and the unfavorable impact of $238 million after-tax related to work stoppage production losses. The decrease in 1996 net income was almost fully accounted for by lower wholesale sales caused by three major work stoppages in the U.S. and Canada, which had a net unfavorable impact of $920 million after-tax. Other factors impacting 1996 results were the record number of new vehicle launches and increased advertising and other consumer influence expenses related to the new vehicle launches. These unfavorable items were partially offset by savings associated with continued implementation of worldwide purchasing and lean manufacturing strategies, and the net favorable impact of certain special items ($397 million after-tax). The 1996 special items included favorable net plant closings reserve adjustments ($450 million after-tax) and a gain on the sale of GM's preferred stock interest in Avis, Inc. ($65 million after-tax). The effect of these favorable special items was partially offset by the unfavorable impact from retiree lump sum benefit payments ($114 million after-tax). Net sales and revenues for 1997 were $100.3 billion, which represented an increase of $6.9 billion compared with 1996. The improvement was primarily due to a 397,000 unit increase in wholesale sales volumes. Net sales and revenues for 1996 were $93.4 billion, which represented a decrease of $2.5 billion compared with 1995. The decrease was largely due to a lower number of wholesale units sold as a result of the three previously mentioned work stoppages. GM-NAO's 1997 market share decreased to 30.8% in the intensely competitive North American market, compared with 31.0% and 32.3% in 1996 and 1995, respectively. New products, such as Buick's Park Avenue, the Pontiac Grand Prix, the Oldsmobile Intrigue, and GM's new minivans are being well received in the marketplace and significantly outselling the models they replaced. In addition, GM's full-size pickups and sport utility vehicles continue to sell very well even though they are late in their model cycles. During 1997 and 1996, GM-NAO's market share increase in Mexico resulted from favorable customer reaction to new products. In the United States and Canada, 1996 market share decreased primarily due to the work stoppages and the new vehicle launches, which restricted availability of certain models. GM-NAO reported a pre-tax loss for 1997 of $408 million compared with pre-tax income of $608 million and $2.1 billion for 1996 and 1995, respectively. Excluding the $3.7 billion pre-tax impact of the Competitiveness Studies charges, GM-NAO's 1997 pre-tax income was $3.3 billion and increased primarily due to higher wholesale sales volumes, continued improvement in the profitability of new vehicles, and lower material and engineering costs. The decrease in 1996 pre-tax income was primarily due to the impact of lower wholesale sales resulting from the three work stoppages and the record number of new vehicle launches, which restricted the availability of certain models, partially offset by the favorable results of continued efforts to reduce costs and improve efficiency and the net favorable impact of special items previously mentioned. The effective income tax (credit) rate for 1997 was (87.5)%, compared with (14.0)% and 27.5% for 1996 and 1995, respectively. Excluding the previously mentioned Competitiveness Studies charges, the effective income tax rate for 1997 was 31.5%. This adjusted rate indicated a return to a more normalized level. The 1996 credit tax rate resulted from research and experimentation credits in the United States, a favorable resolution of items related to GM's 1995 tax return, and a favorable tax position in Mexico. The 1995 tax rate reflected a U.S. net operating loss - for tax purposes only that was carried back to prior years subject to higher income tax rates. II-46 61 GENERAL MOTORS CORPORATION AND SUBSIDIARIES DELPHI FINANCIAL HIGHLIGHTS
YEARS ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 ---- ---- ---- (Dollars in Millions) Net sales and revenues $26,316 $26,002 $26,426 -------- -------- -------- Pre-tax (loss) income (167) 610 1,247 Income tax (credit) expense (83) 134 377 Minority interests 9 3 4 Earnings of nonconsolidated affiliates 15 47 42 -------- -------- -------- Net (loss) income $(60)(1) $526 $916 ======== ======== ======== Net (loss) profit margin (0.2)%(1) 2.0% 3.5%
- ---------------- (1) The 1997 results include $870 million of after-tax charges related to the Competitiveness Studies and a $50 million after-tax plant closing charge. Excluding these charges, income was $860 million and net profit margin was 3.3%. DELPHI FINANCIAL REVIEW Including $870 million of after-tax charges related to the Competitiveness Studies (see Competitiveness Studies) and a $50 million after-tax plant closing charge related to the announcement that Delphi will cease production at its Trenton, New Jersey plant during 1998, Delphi reported a net loss of $60 million for 1997. Excluding these charges, Delphi's income for 1997 was $860 million or 3.3% of net sales and revenues. Reported net income was $526 million or 2.0% of net sales and revenues in 1996 and $916 million or 3.5% in 1995. The increase in 1997 income (excluding the Competitiveness Studies and plant closing charges) was primarily the result of lower material and manufacturing costs, the net impact of work stoppages that occurred in 1997 at OEM customer locations versus three 1996 work stoppages (not related to Delphi-specific issues), and the unfavorable impact of certain special items that impacted 1996 net income. These special items included charges for the sale to Peregrine, Inc. of four Delphi manufacturing facilities, located in Flint and Livonia, Michigan, and Oshawa and Windsor, Canada ($153 million after-tax), and retiree lump sum benefit payments ($49 million after-tax). Delphi's net income for 1996 decreased to $526 million compared with $916 million for 1995 primarily due to the unfavorable impact of the three work stoppages and the 1996 special items. Net sales and revenues for 1997 were $26.3 billion, which represented an increase of over $300 million compared with the prior year despite the impact of the sale of the four plants with annual revenues of approximately $1 billion and continued pricing pressures. Delphi's 1997 sales to customers outside the GM-NAO vehicle groups continued to increase and represented approximately 38% of total sales (34% with Delco Electronics on an annualized basis), including all joint ventures. This increase reflected sales growth despite significant downward pressure on revenues due to volatility in overseas economies and associated weaker currencies. Net sales and revenues for 1996 totaled $26 billion compared with $26.4 billion in 1995 with the decrease primarily due to the three work stoppages. Including pre-tax charges of $1.4 billion for the Competitiveness Studies and $80 million for the Trenton plant closing, Delphi reported a pre-tax loss of $167 million for 1997. Excluding these charges, Delphi's 1997 pre-tax income increased to $1.3 billion compared with $936 million for 1996, excluding the unfavorable $326 million pre-tax impact of the 1996 special items. This increase was the result of lower material and manufacturing costs, as well as the net impacts of the work stoppages that occurred in both years. Delphi's reported 1996 pre-tax income of $610 million represented a decrease of $637 million from 1995 pre-tax income of $1.2 billion. The decrease was primarily due to the unfavorable $326 million pre-tax impact of the 1996 special items and the impact of the three work stoppages. Earnings of nonconsolidated affiliates decreased to $15 million in 1997 compared with $47 million in 1996 and reflected the unfavorable impact of economic volatility on overseas joint ventures, particularly those based in Korea. The effective income tax (credit) rate for 1997 was (49.7)%, compared with 22.0% and 30.2% for 1996 and 1995, respectively. Excluding the Competitiveness Studies and plant closing charges, the effective income tax rate for 1997 was 35.2%, which is a more normalized rate compared with 1996 and 1995. On December 17, 1997, Delco Electronics (Delco), GM's automotive electronics business, was made part of the Delphi organization, which places Delphi in position to lead the component-industry trend toward integrated automotive systems. As the integration of Delco and Delphi proceeds and Delphi establishes the competitiveness of its combined operations, GM will be evaluating the relevant business considerations and interests of GM stockholders relating to these operations including consideration of a possible future public offering of some portion of the business operations formed by the combination of Delphi and Delco. There can be no assurances as to how long the evaluations may take, what recommendations, if any, management may make to GM's Board of Directors, or whether or when any such offering may occur. II-47 62 GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMIO FINANCIAL HIGHLIGHTS
YEARS ENDED DECEMBER 31, ----------------------------------- 1997 1996 1995 ---- ---- ---- (Dollars in Millions) Net sales and revenues $35,659 $35,251 $32,112 ------ ------ ------ Pre-tax income 561 1,786 1,578 Income tax expense 136 307 162 Minority interests 43 1 23 Earnings of nonconsolidated affiliates 13 52 205 ---- ------ ----- Net income (loss) GM Europe (GME) (17) 778 796 Other International 498 754 848 --- ----- ----- Total net income $481(1) $1,532 $1,644 === ===== ===== Net profit margin 1.3%(1) 4.3% 5.1%
- ----------------- (1) The 1997 results include $658 million of after-tax charges related to the Competitiveness Studies and a favorable $158 million after-tax impact related to other special items. Excluding the Competitiveness Studies charges and the favorable effect of the other special items, income was $981 million and net profit margin was 2.8%. VEHICLE UNIT DELIVERIES OF CARS AND TRUCKS - GMIO
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------------ 1997 1996 1995 ------------------------- -------------------------- --------------------- (Units in Thousands) GM AS GM AS GM AS A % OF A % OF A % OF INDUSTRY GM INDUSTRY INDUSTRY GM INDUSTRY INDUSTRY GM INDUSTRY -------- -- -------- -------- -- -------- -------- -- -------- INTERNATIONAL Europe Germany 3,790 565 14.9% 3,746 581 15.5% 3,575 581 16.2% United Kingdom 2,445 339 13.9% 2,282 328 14.4% 2,195 334 15.2% Other West Europe 8,937 807 9.0% 8,444 780 9.2% 7,847 751 9.6% ------ ----- ------ ------ ----- ------ ------ ---- Total West Europe 15,172 1,711 11.3% 14,472 1,689 11.7% 13,617 1,666 12.2% Central/East Europe 2,979 133 4.5% 2,405 100 4.2% 2,102 58 2.8% ------ ----- ------ ------ ----- ------ ------ ---- Total Europe 18,151 1,844 10.2% 16,877 1,789 10.6% 15,719 1,724 11.0% ------ ----- ------ ------ ----- ------ ------ ---- Latin America, Africa, and the Middle East (LAAMO) Brazil 1,942 410 21.1% 1,731 384 22.2% 1,728 348 20.2% Venezuela 173 48 27.9% 68 16 23.5% 89 28 31.6% Other Latin America 1,155 165 14.3% 1,036 143 13.8% 999 127 12.7% ------ ----- ------ ------ ----- ------ ------ ---- Total Latin America 3,270 623 19.0% 2,835 543 19.2% 2,816 503 17.9% Africa 663 101 15.2% 681 81 11.9% 633 86 13.6% Middle East 691 52 7.5% 664 66 10.0% 560 58 10.4% ------ ----- ------ ------ ----- ------ ------ ---- Total LAAMO 4,624 776 16.8% 4,180 690 16.5% 4,009 647 16.1% ------ ------ ----- ------ ------ ---- Asia and Pacific Australia 726 127 17.5% 651 131 20.2% 642 129 20.2% Other Asia and Pacific 12,624 458 3.6% 13,081 494 3.8% 12,554 490 3.9% ------ ----- ------ ------ ----- ------ ------ ---- Total Asia and Pacific 13,350 585 4.4% 13,732 625 4.6% 13,196 619 4.7% ------ ----- ------ ------ ----- ------ ------ ---- Total International 36,125 3,205 8.9% 34,789 3,104 8.9% 32,924 2,990 9.1% ====== ===== ====== ====== ===== ====== ====== ==== WHOLESALE SALES - GMIO Cars 2,379 2,331 2,233 Trucks 848 780 774 ------ ------ ------ Total 3,227 3,111 3,007 ===== ===== =====
II-48 63 GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMIO FINANCIAL REVIEW Including $658 million of after-tax charges related to the Competitiveness Studies (see Competitiveness Studies), a $103 million after-tax gain related to the sale of GME's equity interest in Avis Europe, and a $55 million after-tax gain that resulted from a settlement agreement with Volkswagen, GMIO's 1997 net income was $481 million. Excluding the Competitiveness Studies charges and the favorable effect of the other special items, GMIO's income for 1997 was $981 million or 2.8% of net sales and revenues. Reported net income was $1.5 billion or 4.3% of net sales and revenues in 1996 and $1.6 billion or 5.1% of net sales and revenues in 1995. The decrease in 1997 income (excluding the Competitiveness Studies charges and the favorable effect of the other special items) was primarily due to higher sales and marketing costs under intensely competitive market conditions, deterioration of profits in Latin America and Asia related to economic turmoil in these emerging markets, increased expenses related to ambitious capacity expansion programs in key growth regions, and the startups of the Holden Commodore in Australia and the Saab 9-5. The decrease in 1996 net income compared with 1995 was primarily due to a higher income tax rate. Net sales and revenues for 1997 totaled $35.7 billion, an increase of 1.2% from 1996, while 1996 net sales and revenues of $35.3 billion were 9.8% higher than 1995. The increase in net sales and revenues for 1997 reflected increased wholesale sales volumes in Europe and Latin America offset by an unfavorable impact of year-over-year currency exchange due to the appreciation of the U.S. dollar. GMIO's vehicle deliveries for calendar year 1997 exceeded 3.2 million units and, despite the intensely competitive market conditions, GMIO maintained an 8.9% market share consistent with the prior year. The increase in net sales and revenues for 1996 reflected increased wholesale sales volumes in Europe, Latin America, and the Asian and Pacific region. Pre-tax income for 1997 decreased to $561 million from $1.8 billion in 1996 and included $1 billion in pre-tax charges related to the Competitiveness Studies, higher sales and marketing costs, as well as spending on growth programs within Asia, Latin America, and Central Europe. During the fourth quarter of 1997, GMIO's results were impacted by the Asian economic crisis, significant economic volatility in Brazil, and the start-up of a new plant in Rosario, Argentina. These unfavorable items in 1997 were partially offset by a favorable $216 million pre-tax impact related to the previously mentioned special items. The increase in pre-tax income for 1996 reflected the favorable impact of increased net sales and revenues and favorable year-over-year currency exchange, partially offset by spending on growth programs and new product development spending. In 1997, earnings of nonconsolidated affiliates were $39 million lower than in 1996 primarily due to increased expenses at Saab related to the launch of the new 9-5 model. Earnings of nonconsolidated affiliates for 1996 were down by $153 million from 1995 primarily due to higher product development and marketing costs at Saab, the dissolution of the Australian joint venture between Holden and Toyota, and the unusually high 1995 equity income from nonrecurring asset sales at Isuzu. The effective income tax rate for GMIO in 1997 was 24.2%, compared with 17.2% and 10.3% in 1996 and 1995, respectively. Excluding the previously mentioned Competitiveness Studies charges and special items, the effective income tax rate for 1997 was 33.0%. The lower 1996 income tax rate primarily resulted from income tax credits realized in certain countries and lower withholding taxes accrued on unremitted earnings. The 1995 income tax rate was favorably impacted by nonrecurring income tax credits realized in certain countries. In 1997, GME reported a net loss of $17 million, compared with net income of $778 million and $796 million in 1996 and 1995, respectively. The decrease in 1997 earnings was primarily due to $488 million of after-tax charges related to the Competitiveness Studies, higher sales and marketing costs under intensely competitive market conditions, and lower equity earnings from Saab related to the launch of the new 9-5 model, partially offset by a favorable $158 million after-tax impact from the previously mentioned special items. The decrease in 1996 net income was primarily due to a more competitive pricing environment and reflected increased new product development costs. Net income for 1996 was also adversely affected by the startup of the Vectra, which had restricted availability early in the year. The remainder of GMIO's operations reported 1997 net income of $498 million, which represented a decrease of $256 million compared with 1996. The decline in 1997 primarily resulted from $170 million of after-tax charges related to the Competitiveness Studies and a deterioration of profits in Latin America related to economic turmoil in certain emerging markets. The remainder of GMIO's operations reported 1996 net income of $754 million, which represented a decrease of $94 million compared with 1995. The decline in 1996 resulted from a higher tax rate, lower equity earnings from nonconsolidated affiliates, and increased spending on growth programs in both Asia and Latin America. In 1997, GMIO continued its long-term commitment in the automotive industry with capital spending of over $2.4 billion, bringing total capital expenditures for the past three years to over $7 billion. II-49 64 GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMAC FINANCIAL HIGHLIGHTS
YEARS ENDED DECEMBER 31, ----------------------------- 1997 1996 1995 ---- ---- ---- (Dollars in Millions) Financing revenue Retail and lease financing $3,571 $3,822 $3,292 Operating leases 7,260 7,215 6,285 Wholesale and term loans 1,746 1,607 2,087 ------ ------ ------ Total automotive financing revenue 12,577 12,644 11,664 Interest and discount 5,256 4,938 4,936 Depreciation on operating leases 4,677 4,627 4,305 ------ ----- ------ Net automotive financing revenue 2,644 3,079 2,423 Mortgage revenue 1,499 944 661 Insurance premiums earned 1,360 1,158 1,082 Other income 1,159 1,228 1,456 ------ ----- ------ Net financing revenue and other 6,662 6,409 5,622 Expenses 4,448 4,332 3,839 ------ ----- ------ Pre-tax income 2,214 2,077 1,783 Income tax expense 913 837 752 ------ ----- ------ Net income $1,301 $1,240 $1,031 ===== ===== ===== Net income from automotive financing operations $910 $946 $809 Net income from mortgage operations 167 102 59 Net income from insurance operations 224 192 163 ----- ----- ----- Net income $1,301 $1,240 $1,031 ===== ===== ===== Return on average equity (1) 15.3% 14.8% 12.5%
- ------------------- (1) Return on average equity represents net income as a percentage of average stockholder's equity outstanding for each month in the period. II-50 65 GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMAC FINANCIAL REVIEW GMAC's 1997 consolidated net income increased 4.9% over 1996 to $1.3 billion. Net income from automotive financing operations totaled $910 million, which was 3.8% below 1996 earnings. The decrease was attributed to reduced net financing margins partially offset by lower credit losses and loss provisions and operating expenses. Net income from insurance operations totaled $224 million, which was 16.7% higher than 1996 earnings. The increase was attributed to favorable underwriting experience and higher realized capital gains. Net income from mortgage operations totaled $167 million, 63.7% higher than 1996 earnings. The increase was attributed to significant increases in origination/purchase volumes and the mortgage servicing portfolio. During 1997, GMAC financed 33.1% of new GM vehicle retail deliveries in the United States, up from 28.4% and 26.4% in 1996 and 1995, respectively. The 1997 improvement primarily resulted from higher volumes generated through special rate financing and lease incentive programs sponsored by GM. This improvement was achieved amid continued competitive pressures in the automotive financing marketplace. GMAC's automotive financing revenue totaled $12.6 billion in 1997, compared with $12.6 billion and $11.7 billion in 1996 and 1995, respectively. Increased U.S. wholesale financing and Canadian operating lease revenues were offset by a decline in U.S. and international retail and lease financing revenues, resulting in the unchanged level of financing revenues during 1997. U.S. wholesale financing revenues increased during 1997, compared with 1996, primarily from higher average wholesale receivable balances resulting from a reduction in the average amount of sold wholesale receivables during the year. Canadian operating lease revenues increased as a result of a 46% increase in 1997 volume over 1996. The decline in U.S. and international retail and lease financing revenues from 1996 to 1997 was attributable to continued competitive pressures in these markets. The increase in 1996 total automotive financing revenue, when compared to 1995, resulted from higher revenues from the portfolios of operating leases and retail finance receivables, partially offset by a decline in wholesale revenue. GMAC's worldwide cost of borrowing decreased to 6.28% in 1997, compared with 6.57% and 7.02% in 1996 and 1995, respectively. The cost of borrowings in the United States was 6.35% in 1997, compared with 6.51% and 6.86% in 1996 and 1995, respectively. The improvements in 1997 were predominantly attributable to reductions in medium- and long-term debt costs. The improvements in 1996 were predominantly attributable to a greater proportion of floating rate borrowings in the United States during a period in which the general level of interest rates declined. Net automotive financing revenue combined with mortgage revenue, insurance premiums, and other income increased in 1997 by $253 million to $6.7 billion, compared with $6.4 billion and $5.6 billion in 1996 and 1995, respectively. The 1997 increase was primarily due to results from mortgage and insurance operations, partially offset by reduced net automotive financing margins. Expenses increased by $116 million and $493 million in 1997 and 1996, respectively. The 1997 increase was due to higher costs for salaries and benefits, increased insurance losses, and other operating charges incidental to expanding mortgage and insurance business activities. The 1996 increase over 1995 reflected higher general operating costs incidental to expanded financing business activities, principally at the mortgage operations, as well as higher data processing costs, increased credit losses on operating leases, and higher collection and repossession costs. GMAC's effective income tax rate for 1997 was 41.2%, compared with 40.3% in 1996 and 42.2% in 1995. The unfavorable change in 1997 was primarily attributable to increases in accruals from prior years based on periodic assessment of the adequacy of such accruals and higher state and local income taxes. The favorable change in 1996 compared with 1995 was attributable to lower effective income tax rates for international financing operations. II-51 66 GENERAL MOTORS CORPORATION AND SUBSIDIARIES HUGHES FINANCIAL HIGHLIGHTS (INCLUDING FORMER HUGHES)
YEARS ENDED DECEMBER 31, ------------------------ 1997 1996 1995 ---- ----- ---- (Dollars in Millions Except Per Share Amounts) Net sales Outside customers $12,171 $10,661 $9,529 GM and affiliates 5,013 5,083 5,186 ----- ----- ----- Total net sales 17,184 15,744 14,715 Other income - net 542 117 48 ----- ----- ------ Total revenues 17,726 15,861 14,763 ----- ----- ----- Income before income tax expense and minority interests 1,722 1,578 1,585 Income tax expense 601 606 646 Minority interests 38 57 9 ----- ----- ----- Net income $1,159 $1,029 $948 ===== ===== === Earnings Used for Computation of Available Separate Consolidated Net Income (1) $1,276 $1,151 $1,108 ===== ===== ===== Net earnings per share attributable to Class H common stock, prior to its recapitalization $3.17 $2.88 $2.77 Net earnings per share attributable to Class H common stock, subsequent to its recapitalization $0.02 $ - $ - Cash dividends per share of Class H common stock $1.00 $0.96 $0.92
- ------------------ (1) Excludes amortization and adjustment of GM purchase accounting adjustments of approximately $118 million, $122 million, and $160 million for 1997, 1996, and 1995, respectively, related to GM's acquisition of Hughes Aircraft Company. II-52 67 GENERAL MOTORS CORPORATION AND SUBSIDIARIES HUGHES FINANCIAL REVIEW (INCLUDING FORMER HUGHES) On December 17, 1997, GM and former Hughes completed a series of related transactions (Hughes Transactions) that were designed to address strategic challenges facing the three principal businesses of former Hughes and unlock stockholder value in GM. The Hughes Transactions included the tax-free spin-off of the defense electronics business of former Hughes (Hughes Defense) to holders of $1-2/3 par value and Class H common stocks, which was then followed immediately by the merger of Hughes Defense with Raytheon Company (Raytheon). Concurrently, Delco was transferred from former Hughes to Delphi. Finally, Class H common stock was recapitalized into a GM tracking stock, Class H common stock, that is linked to the telecommunications and space businesses of Hughes. As a result of the Hughes Transactions, the 1997 operating results for Hughes Electronics Corporation include the results of Hughes Defense and Delco through December 17, 1997, and the results of the telecommunications and space businesses for the entire year. Net income was $1.16 billion in 1997, compared with $1.03 billion and $948 million in 1996 and 1995, respectively. Excluding amortization and adjustment of purchase accounting adjustments relating to GM's acquisition of Hughes Aircraft Company, earnings used for computation of available separate consolidated net income was $1.28 billion in 1997, compared with $1.15 billion in 1996, and $1.11 billion in 1995. Contributing to the 1997 increase in net income was the $318 million after-tax gain recognized in the second quarter related to the PanAmSat Corporation (PAS) merger, the $63 million after-tax gain recognized in the fourth quarter from the sale of Hughes-Avicom International, Inc. to Rockwell Collins, Inc., net income from PAS, continued DIRECTV(R) subscriber growth, and increased sales of commercial satellites. Partially offsetting these increases were lower earnings from the defense business resulting from provisions taken on certain air traffic control and training contracts and increased losses from equity investments. The 1996 increase in net income resulted from higher operating profit in the telecommunications and space businesses, reduced losses at Hughes-Avicom International, Inc., a lower effective tax rate, and the $72 million after-tax gain recognized in the first quarter from the sale of a 2.5% equity interest in DIRECTV to AT&T. Partially offsetting these increases was the impact on Delco's operating profit of lower GM production volumes due to the three major work stoppages. Total revenues increased to $17.7 billion in 1997, compared with $15.9 billion in 1996 and $14.8 billion in 1995. This revenue growth was propelled by the telecommunications and space businesses where revenues for 1997 increased to $5.6 billion, compared with $4.1 billion and $3.2 billion in 1996 and 1995, respectively. The 1997 increase in the telecommunications and space businesses resulted from strong DIRECTV subscriber growth, higher sales of commercial satellites, and completion of the PAS merger. The increase in 1996 reflected DIRECTV subscriber growth, combined with increased sales of commercial satellites and cellular communications equipment, and increased video distribution revenues from Galaxy(R) satellite transponders. Also contributing to the 1997 revenue increase were modest increases at both Delco and Hughes Defense. For 1996, Hughes Defense revenues increased primarily due to the acquisition of Hughes Defense Communications. This increase in revenues, however, was mostly offset by decreased revenues at Delco caused by the work stoppages at various GM production locations during the year and the price reductions from competitive pricing in connection with GM's global sourcing initiative. Operating profit, excluding amortization of purchase accounting adjustments related to GM's acquisition of Hughes Aircraft Company, was $1.5 billion in 1997, compared with $1.6 billion and $1.7 billion in 1996 and 1995, respectively. Operating profit margins on the same basis were 8.5%, 10.1%, and 11.3%, in 1997, 1996, and 1995, respectively. The decline in 1997 operating profit and operating profit margin was due to lower margins at Delco resulting from price reductions, provisions taken on certain defense contracts, start-up costs related to DIRECTV service in Latin America, and lower wireless telecommunications equipment sales and margins. The decline in 1996 operating profit and operating profit margin was due mainly to the unfavorable impact of lower GM production volumes at Delco as a result of the previously mentioned work stoppages. The effective income tax rate was 34.9% in 1997, compared with 38.4% and 40.8% in 1996 and 1995, respectively. The decrease in the effective income tax rate in 1997 was primarily related to research and development credits. The decrease in the effective income tax rate in 1996 was due primarily to the favorable resolution of certain tax contingencies. II-53 68 GENERAL MOTORS CORPORATION AND SUBSIDIARIES RESULTS OF OPERATIONS WITH FINANCING AND INSURANCE OPERATIONS ON AN EQUITY BASIS To facilitate analysis, the following sections present GM's financial statements with its financing and insurance operations (primarily GMAC) reflected on an equity basis. CONSOLIDATED STATEMENTS OF INCOME WITH FINANCING AND INSURANCE OPERATIONS ON AN EQUITY BASIS
Years Ended December 31, ------------------------------------ 1997 1996 1995 ---- ---- ---- (Dollars in Millions) NET SALES AND REVENUES $153,781 $145,427 $143,754 ------- ------- ------- COSTS AND EXPENSES Cost of sales and other operating charges, exclusive of items listed below 130,042 123,239 121,312 Selling, general, and administrative expenses 13,254 11,827 10,195 Depreciation and amortization expenses 11,803 7,145 6,787 ------- ------- ------- TOTAL COSTS AND EXPENSES 155,099 142,211 138,294 ------- ------- ------- OPERATING (LOSS) INCOME (1,318) 3,216 5,460 Other income less income deductions 7,836 2,056 1,150 Interest expense 971 859 344 ----- ----- ----- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES, MINORITY INTERESTS, AND EARNINGS OF NONCONSOLIDATED AFFILIATES 5,547 4,413 6,266 Income taxes 155 885 1,563 ----- ----- ----- INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTERESTS, EARNINGS OF NONCONSOLIDATED AFFILIATES, AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 5,392 3,528 4,703 Minority interests 66 56 18 Earnings of nonconsolidated affiliates 1,240 1,369 1,312 ----- ----- ----- INCOME FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 6,698 4,953 6,033 Income from discontinued operations -- 10 900 Cumulative effect of accounting change (1) -- -- (52) ----- ----- ----- NET INCOME $6,698 $4,963 $6,881 ===== ===== ===== NET PROFIT MARGIN (2) 4.4% 3.4% 4.8%
(1) Effective January 1, 1995, GM adopted EITF Issue No. 95-1. (2) Net profit margin represents net income as a percentage of net sales and revenues. II-54 69 GENERAL MOTORS CORPORATION AND SUBSIDIARIES RESULTS OF OPERATIONS WITH FINANCING AND INSURANCE OPERATIONS ON AN EQUITY BASIS (CONTINUED) In 1997, GM's income from continuing operations before cumulative effect of accounting change totaled $6.7 billion or $8.70 per share of $1-2/3 par value common stock, compared with $5 billion or $6.07 per share of $1-2/3 par value common stock and $6 billion or $7.21 per share of $1-2/3 par value common stock in 1996 and 1995, respectively. Two significant items impacted 1997 financial results: a $4.3 billion tax-free gain, or $5.91 per share of $1-2/3 par value common stock, resulting from the December 17, 1997 completion of the strategic restructuring of former Hughes (see Hughes Transactions); and charges of $4.0 billion after-tax, or $5.59 per share of $1-2/3 par value common stock, resulting from GM's Competitiveness Studies (see Competitiveness Studies). Excluding the impact of these two items and the $426 million after-tax impact of other special items that occurred during 1997, income from continuing operations was $6 billion, or $7.90 per share of $1-2/3 par value common stock. GM completed the split-off of Electronic Data Systems Corporation (EDS) on June 7, 1996 and, accordingly, the financial results related to EDS through the split-off date have been reported as discontinued operations. GM's 1996 net income, including the income from discontinued operations through the June 7, 1996 split-off, totaled $5 billion or $6.06 per share of $1-2/3 par value common stock, compared with $6.9 billion or $7.28 per share of $1-2/3 par value common stock for 1995. Additional information regarding the split-off of EDS is contained in Note 1 to the GM consolidated financial statements. Highlights of financial performance by GM's major business sectors were as follows (in millions):
1997 1996 1995 ---- ---- ---- GM-NAO $(86) $730 $1,472 Delphi (60) 526 916 GMIO 481 1,532 1,644 GMAC 1,301 1,240 1,031 Hughes(including former Hughes) 1,276 1,151 1,108 Other 3,786 (226) (190) ----- ----- ----- Income from continuing operations $6,698 $4,953 $5,981 Discontinued operations (EDS) -- 10 900 ----- ----- ----- NET INCOME $6,698 $4,963 $6,881 ===== ===== =====
Reference should be made to the GM-NAO, Delphi, GMIO, GMAC, and Hughes (Including Former Hughes) Financial Reviews that are presented on pages II-45 through II-53 and incorporated by reference to supplement the information presented herein. In 1997, net sales and revenues increased $8.4 billion to $153.8 billion, compared with $145.4 billion and $143.8 billion in 1996 and 1995, respectively. The 1997 increase primarily resulted from higher wholesale sales volumes for both GM-NAO and GMIO. The 1996 increase resulted from higher net sales and revenues for GMIO and former Hughes, partially offset by lower wholesale sales in North America. The gross margin was 15.4% for 1997, compared with 15.3% and 15.6% in 1996 and 1995, respectively. The 1997 increase in the gross margin was realized despite the unfavorable impact of the Competitiveness Studies and reflected the favorable impact of higher wholesale sales and savings associated with continued implementation of worldwide purchasing and lean manufacturing strategies, partially offset by increased retail incentives in the highly competitive North American market. The gross margin in 1996, which included the favorable impact of $789 million related to plant closing reserve adjustments, decreased compared with 1995 primarily due to lower wholesale sales, increased safety and emissions costs, and spending for new product launches and new product development. The higher costs in 1996 were partially offset by savings for GM-NAO, Delphi, and GMIO in connection with GM's strategy of utilizing common parts and processes, while implementing lean operations. Selling, general, and administrative expenses increased in both 1997 and 1996 primarily due to efforts to grow the business in all of the GM business sectors, which included increased advertising and other consumer influence spending in connection with new vehicle launch support and marketing programs in North America and Europe. Depreciation and amortization expenses increased in 1997 by approximately $4.7 billion compared with the 1996 amount primarily due to $4.1 billion of charges related to the Competitiveness Studies. The remainder of the increase in 1997, as well as the increase in 1996 compared with 1995, was related to increased expenditures for production and quality improvements worldwide. Other income less income deductions was $7.8 billion in 1997, compared with $2.1 billion in 1996 and $1.2 billion in 1995, respectively. The increase in 1997 was primarily due to the $4.3 billion gain related to the completion of the Hughes Transactions and a $490 million pre-tax gain related to the merger of the satellite service operations of former Hughes and PAS. The amount reported for 1996 included a $120 million pre-tax gain associated with the sale of a 2.5% equity interest in DIRECTV and a $105 million pre-tax gain on the sale of GM's preferred stock interest in Avis, Inc. Interest expense totaled $971 million in 1997, compared with $859 million and $344 million in 1996 and 1995, respectively. The higher interest expense in 1997 was due primarily to additional interest related to a higher long-term debt level at former Hughes. The lower 1995 interest expense resulted from the reversal of interest related to income tax issues resolved in 1995, the re-evaluation of the remaining reserve, and lower 1995 accrued interest on outstanding tax issues. II-55 70 GENERAL MOTORS CORPORATION AND SUBSIDIARIES RESULTS OF OPERATIONS WITH FINANCING AND INSURANCE OPERATIONS ON AN EQUITY BASIS (CONCLUDED) In 1997, the effective income tax rate was 2.8%, compared with 20.1% and 24.9% in 1996 and 1995, respectively. The lower 1997 tax rate primarily resulted from the effect of the tax-free status of the gain related to the completion of the Hughes Transactions. The 1996 tax rate included the favorable resolution of items related to GM's 1995 tax return, overall foreign tax rates that were lower than the U.S. statutory rate, and research and experimentation credits. The 1995 tax rate included the resolution of numerous prior year tax issues worldwide, efficient utilization of a net operating loss carryback, tax benefits associated with the mix of foreign earnings and foreign income taxes, and tax benefits relating to the sale of the net assets of National Car Rental System (NCRS). HUGHES TRANSACTIONS On December 17, 1997, GM and former Hughes completed a series of related transactions (Hughes Transactions) that were designed to address strategic challenges facing the three principal businesses of former Hughes and unlock stockholder value in GM. The Hughes Transactions included the tax-free spin-off of the defense electronics business of former Hughes (Hughes Defense) to holders of $1-2/3 par value and Class H common stocks, which was then followed immediately by the merger of Hughes Defense with Raytheon Company (Raytheon). Concurrently, Delco was transferred from former Hughes to Delphi. Finally, Class H common stock was recapitalized into a GM tracking stock, Class H common stock, that is linked to the telecommunications and space businesses of Hughes. Additional information regarding the Hughes Transactions is contained in Note 22 to the GM consolidated financial statements. COMPETITIVENESS STUDIES The global automotive industry, including the automotive components and systems market, has become increasingly competitive and is presently undergoing significant restructuring and consolidation activities. All of the major industry participants are continuing to increase their focus on efficiency and cost improvements, while announced capacity increases for the North American market and excess capacity in the European market have led to continuing price pressures. As a result, GM-NAO, Delphi, Delco, and GMIO initiated studies in 1997 concerning the long-term competitiveness of all facets of their businesses (Competitiveness Studies). These studies were performed in conjunction with GM's current business planning cycle and were substantially completed in December 1997. Additional information regarding the Competitiveness Studies is contained in Note 2 to the GM consolidated financial statements. Based on the results of these Competitiveness Studies, GM recorded pre-tax charges against income totaling $6.3 billion ($4.0 billion after-tax, or $5.59 per share of $1-2/3 par value common stock). The charges were comprised of $3.7 billion ($2.4 billion after-tax) for GM-NAO, $1.4 billion ($870 million after-tax) for Delphi and Delco, $1 billion ($658 million after-tax) for GMIO, and $205 million ($128 million after-tax) for GM's other sector. Overall, these charges had the effect of reducing net sales and revenues by $459 million and increasing cost of sales, depreciation and amortization, and other deductions by $1.7 billion, $4.1 billion, and $72 million, respectively. Going forward, GM's future cash requirements relating to these charges are expected to total approximately $2.1 billion over the next five years. The Competitiveness Studies charges included amounts for underperforming assets, including both vehicle and component manufacturing assets, pursuant to GM's policy for the valuation of long-lived assets. Future investments relating to underperforming product lines will be expensed. GM will continue to monitor the competitiveness of all aspects of its businesses and further competitiveness studies will be undertaken when and as market conditions warrant. Future charges may result from Delphi's fix/close/sell strategy and cost reduction programs in Europe. FOREIGN CURRENCY During the years ended December 31, 1997, 1996, and 1995, GM recorded the financial performance of operations in Brazil using the U.S. dollar as the functional currency due to GM's classification of the Brazilian economy as highly inflationary. Accordingly, translation gains and losses were recognized as incurred in the consolidated income statement. Statement of Financial Accounting Standards No. 52, Foreign Currency Translation, defines a highly inflationary economy as one that has cumulative inflation of approximately 100% or more over a three-year period. In mid-1997, the Brazilian three-year cumulative inflation rate fell below the 100% level. As a result, GM evaluated historical inflation rate trends and certain other factors and determined that it should no longer classify the Brazilian economy as highly inflationary. As a result, beginning January 1, 1998, GM will record the financial performance for operations in Brazil using the local currency as the functional currency with translation gains and losses recorded in the stockholders' equity section of the consolidated balance sheet. II-56 71 GENERAL MOTORS CORPORATION AND SUBSIDIARIES YEAR 2000 Certain GM information systems have potential operational problems in connection with applications that contain a date and/or use a date in a comparative manner as the date transitions into the Year 2000. GM has a comprehensive worldwide program to identify and remediate potential problems related to the Year 2000 in its information systems, infrastructure, and production and manufacturing facilities. In addition, GM has initiated formal communications with all of its significant external interfaces to determine the extent to which GM is vulnerable to third parties' failures to remediate their own potential problems related to the Year 2000. The inability of GM or significant external interfaces of GM to adequately address Year 2000 issues could cause disruption of GM's business operations. Many of GM's systems are Year 2000 compliant, or have been scheduled for replacement in GM's ongoing systems plans. GM has incurred and expensed approximately $40 million during the year ended December 31, 1997 related to the assessment of, and preliminary efforts in connection with, its Year 2000 program and remediation plan. Future spending for software modifications and testing required for Year 2000 are currently estimated to be approximately $360 million to $500 million with the majority expected to be incurred in 1998. GM's target date for completing its Year 2000 modifications is December 31, 1998 with additional testing and refinements to identified systems planned for 1999. LIQUIDITY AND CAPITAL RESOURCES WITH FINANCING AND INSURANCE OPERATIONS ON AN EQUITY BASIS Total cash and marketable securities at December 31, 1997 were $14.5 billion compared with $17 billion at December 31, 1996. During 1997, GM elected to pre-fund part of its other postretirement benefits liability, which is primarily related to postretirement health care expenses, by creating a Voluntary Employees' Beneficiary Association (VEBA) trust to which it contributed $3 billion of its cash reserves. The VEBA assets had the effect of reducing GM's postretirement benefits liability on the consolidated balance sheet. GM believes it has sufficient resources to meet anticipated future cash flow requirements. In addition to cash flows from operations, GM and its subsidiaries maintain substantial lines of credit with various financial institutions. Additional information on GM's available credit facilities is contained in Note 10 to the GM consolidated financial statements. Net liquidity, calculated as cash and marketable securities less the total of loans payable, long-term debt, and capitalized leases, was $8.2 billion at December 31, 1997, a decrease of $2.2 billion from the prior year. GM previously indicated that it had a goal of maintaining $13 billion of cash and marketable securities in order to continue funding product development programs throughout the next downturn in the business cycle. This $13 billion target includes cash to pay certain costs that were pre-funded in part by the $3 billion VEBA contribution. Separately, approximately $2 billion of cash at December 31, 1997 relates to the Hughes Transactions that will be used to fund future growth initiatives for Hughes over the next several years. Long-term debt was $5.5 billion at December 31, 1997, an increase of approximately $300 million from the prior year. The ratio of long-term debt and capitalized leases to the total of long-term debt, capitalized leases, and stockholders' equity was 24.5% and 18.7% at December 31, 1997 and 1996, respectively. The ratio of long-term debt, capitalized leases, and short-term loans payable to the total of this debt and stockholders' equity was 26.6% and 22.0% at December 31, 1997 and 1996, respectively. In February 1998, the GM Board of Directors approved a $4 billion stock repurchase program. The stock repurchases are expected to be made over a 12-month period principally through open market transactions and represent about 10 percent of the outstanding shares of $1-2/3 par value common stock, based on the NYSE's closing price on Friday, February 6, 1998, of $60.56 per share. The new stock repurchase program began in mid-March, upon the completion of GM's second $2.5 billion stock repurchase program. Upon completion of the $4 billion stock repurchase program, GM's stock repurchases since January 1997 will total $9 billion. Book value per share of $1-2/3 par value common stock decreased to $22.26 from $27.95 at December 31, 1997 and 1996, respectively. Book value per share of Class H common stock decreased to $13.36 at December 31, 1997 from $13.97 at December 31, 1996. Book value per share was determined based on the liquidation rights of the various classes of common stock. LIQUIDITY AND CAPITAL RESOURCES FOR GMAC At December 31, 1997, GMAC owned assets and serviced automotive receivables for others totaling $120.7 billion compared with $108.1 billion at year end 1996. Earning assets totaled $104.5 billion and $95.7 billion at December 31, 1997 and 1996, respectively. The increase in earning assets was primarily attributable to an increase in the investments in securities portfolio, higher wholesale and real estate mortgage outstandings and continued growth of operating leases, partially offset by a decline in the retail finance receivables portfolio. Cash and cash equivalents totaled $759 million and $742 million at December 31, 1997 and 1996, respectively. Consolidated finance receivables, net of unearned income, totaled $60.5 billion and $59.3 billion at December 31, 1997 and 1996, respectively. The higher outstanding balance was primarily attributable to a $2.2 billion increase in the U.S. and Canadian wholesale receivables portfolios, offset by a $0.9 billion decline in European finance receivables. II-57 72 GENERAL MOTORS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS WITH FINANCING AND INSURANCE OPERATIONS ON AN EQUITY BASIS
December 31, ------------ 1997 1996 ---- ---- ASSETS (Dollars in Millions) Cash and cash equivalents $10,685 $13,320 Other marketable securities 3,826 3,642 ------ ------ Total cash and marketable securities 14,511 16,962 Accounts and notes receivable (less allowances) Trade 5,164 4,909 Nonconsolidated affiliates 836 927 Inventories (less allowances) 12,102 11,898 Equipment on operating leases (less accumulated depreciation) 4,677 3,918 Deferred income taxes and other 6,278 5,327 ------ ------ Total current assets 43,568 43,941 Equity in net assets of nonconsolidated affiliates 10,164 9,855 Deferred income taxes 20,721 20,075 Other investments and miscellaneous assets 13,564 11,712 Property - net 33,914 37,156 Intangible assets - net 10,752 12,523 ------- ------- TOTAL ASSETS $132,683 $135,262 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $12,474 $11,527 Loans payable 656 1,214 Accrued expenses and customer deposits 33,459 29,822 ------ ------ Total current liabilities 46,589 42,563 Long-term debt 5,491 5,192 Capitalized leases 185 198 Postretirement benefits other than pensions 38,388 40,578 Pensions 4,271 5,966 Other liabilities and deferred income taxes 19,336 17,255 ------- ------- TOTAL LIABILITIES 114,260 111,752 ------- ------- Minority interests 695 92 General Motors - obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures of General Motors Series D 79 -- Series G 143 -- Stockholders' equity 17,506 23,418 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $132,683 $135,262 ======= =======
LIQUIDITY AND CAPITAL RESOURCES FOR GMAC (CONCLUDED) GMAC's liquidity, as well as its ability to profit from ongoing acquisition activity, is in large part dependent on its access to capital and the costs associated with raising funds in different segments of the capital markets. In this regard, GMAC regularly accesses the short-, medium-, and long-term debt markets, principally through commercial paper, term notes, and underwritten issuances. GMAC's borrowings outstanding at December 31, 1997 totaled $86.7 billion compared with $78.7 billion at December 31, 1996. GMAC's ratio of debt to total stockholder's equity at December 31, 1997 was 9.9:1, up from 9.5:1 at December 31, 1996. The higher year-to-year debt levels were principally used to fund increased asset levels. GMAC has continued to use an asset securitization program as an alternative funding source and has sold finance receivables that it continues to service for a fee. The servicing portfolio of sold finance receivables totaled $12.4 billion and $9.7 billion at December 31, 1997 and 1996, respectively. GMAC and its subsidiaries maintain substantial bank lines of credit, which totaled $39.8 billion and $40.7 billion at December 31, 1997 and 1996, respectively. The unused portion of these credit lines totaled $30.4 billion at December 31, 1997, which was $200 million lower than at December 31, 1996. II-58 73 GENERAL MOTORS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS WITH FINANCING AND INSURANCE OPERATIONS ON AN EQUITY BASIS
Years Ended December 31, --------------------------------- 1997 1996 1995 ---- ---- ---- (Dollars in Millions) CASH FLOWS FROM OPERATING ACTIVITIES Income from continuing operations before cumulative effect of accounting change $6,698 $4,953 $6,033 Adjustments to reconcile income from continuing operations before cumulative effect of accounting change to net cash provided by operating activities Depreciation and amortization expenses 11,803 7,145 6,787 Gain on Hughes Defense spin-off (4,269) -- -- Postretirement benefits other than pensions, net of payments and VEBA contribution (1,448) 1,549 1,659 Pensions expense, net of contributions 240 801 (2,932) Change in other operating assets and liabilities Accounts receivable (1,067) 1,196 (137) Prepaid expenses and other deferred charges 604 (426) 11 Inventories (716) (757) (1,214) Accounts payable 1,163 898 (288) Deferred taxes and income taxes payable (2,651) (303) 1,077 Accrued expenses and other liabilities 4,292 517 576 Other (751) 1,133 (470) ------ ------ ------ NET CASH PROVIDED BY OPERATING ACTIVITIES 13,898 16,706 11,102 ------ ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES Expenditures for property (9,801) (9,606) (8,653) Investments in other marketable securities - acquisitions (13,167) (14,340) (5,581) Investments in other marketable securities - liquidations 12,984 11,891 5,496 Operating leases - acquisitions (5,680) (4,090) (1,090) Operating leases - liquidations 3,711 3,819 506 Proceeds from borrowings of Hughes Defense prior to the Hughes Defense spin-off 4,006 -- -- Investments in companies, net of cash acquired (1,875) (166) (381) Special inter-company payment from EDS -- 500 -- Other 476 847 310 ----- ------ ----- NET CASH USED IN INVESTING ACTIVITIES (9,346) (11,145) (9,393) ----- ------ ----- CASH FLOWS FROM FINANCING ACTIVITIES Net (decrease) increase in loans payable (558) (971) 1,383 Increase in long-term debt 398 1,937 646 Decrease in long-term debt (1,143) (871) (1,597) Repurchases of common and preference stocks (4,365) (251) (1,681) Proceeds from issuing common stocks 614 480 453 Cash dividends paid to stockholders (1,620) (1,530) (1,328) ----- ----- ----- NET CASH USED IN FINANCING ACTIVITIES (6,674) (1,206) (2,124) ----- ----- ----- Effect of exchange rate changes on cash and cash equivalents (513) (185) 146 ------ ----- ---- NET CASH (USED IN) PROVIDED BY CONTINUING OPERATIONS (2,635) 4,170 (269) NET CASH PROVIDED BY DISCONTINUED OPERATIONS -- 103 193 ------ ----- --- Net (decrease) increase in cash and cash equivalents (2,635) 4,273 (76) Cash and cash equivalents at beginning of the year 13,320 9,047 9,123 ------ ------ ----- CASH AND CASH EQUIVALENTS AT END OF THE YEAR $10,685 $13,320 $9,047 ====== ====== =====
CASH FLOWS WITH FINANCING AND INSURANCE OPERATIONS ON AN EQUITY BASIS Net cash provided by operating activities was $13.9 billion, $16.7 billion, and $11.1 billion in 1997, 1996, and 1995, respectively. The decrease in net cash provided by operating activities in 1997 primarily resulted from the $3 billion VEBA contribution previously discussed, and a $3.5 billion increase in deferred tax assets, partially offset by a $500 million year-over-year increase in other operating assets and liabilities and a $1.7 billion year-over-year increase in income from continuing operations. Depreciation and amortization expenses increased by $4.7 billion in 1997 primarily due to the Competitiveness Studies charges. The increase in net cash provided by operating activities in 1996 resulted from a decrease in accounts receivable and cash contributions to the worldwide pension funds, higher depreciation II-59 74 GENERAL MOTORS CORPORATION AND SUBSIDIARIES CASH FLOWS WITH FINANCING AND INSURANCE OPERATIONS ON AN EQUITY BASIS (CONCLUDED) and amortization expenses, and a $1 billion income tax refund related to the carryback of a 1995 net operating loss - for tax purposes only, partially offset by an increase in deferred tax assets. Cash pension contributions for 1996 decreased due to the improved funding of GM's U.S. hourly pension plan and included the effects of the 1995 non-cash contribution of GM's former Class E common stock (now EDS common stock), valued for book purposes at approximately $6.3 billion in 1995. Net cash used in investing activities decreased to $9.3 billion in 1997, compared with $11.1 billion and $9.4 billion in 1996 and 1995, respectively. The decrease in 1997 was primarily due to GM's receipt of $4.0 billion in proceeds from borrowings of Hughes Defense prior to the spin-off of Hughes Defense (see Hughes Transactions), partially offset by a $1.7 billion increase in investments in companies, net of cash acquired, which primarily related to the completion of the merger of the satellite service operations of former Hughes and PAS. The increase in 1996 was primarily due to a $2.4 billion net change in investments in other marketable securities combined with a $953 million increase in property expenditures, partially offset by a $500 million special inter-company payment from EDS. Worldwide property expenditures in 1997, of which 63% were in the U.S. (60% in 1996 and 65% in 1995), 7% in Canada and Mexico (10% in 1996 and 8% in 1995) and 30% overseas (30% in 1996 and 27% in 1995), have been devoted primarily to improve efficiency and quality, to increase truck assembly capacity, and to increase GM's global presence. Capital expenditures for 1998 are estimated to be approximately $10.5 billion with outstanding commitments of $7.8 billion at December 31, 1997. In 1997, net cash used in financing activities increased to $6.7 billion, compared with $1.2 billion and $2.1 billion in 1996 and 1995, respectively. During 1997, GM used $3.8 billion to acquire 63.5 million shares of $1-2/3 par value common stock, which completed the $2.5 billion stock repurchase program announced in January 1997 and represented 50 percent of GM's second $2.5 billion stock repurchase program announced in August 1997. GM also used approximately $600 million to repurchase shares of $1-2/3 par value common stock for certain employee benefit plans during 1997. Also in 1997, net cash flows used in association with changes in long-term debt increased by approximately $1.8 billion compared with 1996 and reflected a combination of refinancing and retirement using GM's new commercial paper program and cash received in connection with the Hughes Transactions. Cash used in financing activities in 1995 included $1.3 billion to repurchase preference stocks. Dividends may be paid on common stocks only when, as and if declared by the GM Board of Directors (GM Board) in its sole discretion. GM's policy is to distribute dividends on its $1-2/3 par value common stock based on the outlook and indicated capital needs of the business. In February 1998, the GM Board declared a quarterly cash dividend of $0.50 per share on $1-2/3 par value common stock, payable March 10, 1998. The GM Board also declared quarterly dividends on the Series B, Series D, and Series G Depositary Shares of $0.57, $0.495, and $0.57 per share, respectively, payable May 1, 1998. With respect to Class H common stock, which was recapitalized on December 17, 1997, the GM Board determined that it will not pay any cash dividends at this time in order to allow the earnings of Hughes to be retained for investment in its telecommunications and space businesses. CASH FLOWS FOR GMAC In 1997, cash provided by operating and financing activities totaled $4.1 billion and $8.3 billion, respectively. Cash used in investing activities, principally for expanding the investments in securities, finance receivables and operating lease portfolios, totaled $12.3 billion. In 1996, cash provided by operating and financing activities totaled $4.2 billion and $2.6 billion, respectively. Cash used in investing activities, primarily for expanding the finance receivables and operating lease portfolios, totaled $7.5 billion. In 1995, cash provided by operating and financing activities totaled $5.9 billion and $6.7 billion, respectively. Cash used in investing activities, principally for expanding the finance receivables and operating lease portfolios, totaled $12.5 billion. II-60 75 GENERAL MOTORS CORPORATION AND SUBSIDIARIES HEALTH CARE EXPENSE AND OTHER POSTRETIREMENT BENEFITS The cost of postretirement medical, dental, vision, and life insurance benefits provided to retirees and eligible dependents are recognized in the consolidated financial statements during the period in which employees provide services to GM. Costs for medical, dental, vision, and life insurance benefits provided to employees during active service are expensed as incurred (pay-as-you-go). The components of postretirement benefits expense, the U.S. health care cost, and cash expenditures for GM's U.S. operations are set forth below (excluding cash expenditures for Hughes' and former Hughes' non-automotive employees, but including GMAC). GM is committed to reducing the burden of continuing health care cost increases. During 1997, GM elected to pre-fund part of its other postretirement benefits liability by creating a VEBA trust to which it contributed $3 billion of its cash reserves. The VEBA assets had the effect of reducing GM's postretirement benefits liability on the consolidated balance sheet.
Year Ended December 31, 1997 ---------------------------------------- Postretirement Health Pay-As-You-Go Benefits Care Cost Cost* ---------------------------------------- (Dollars in Millions) GM U.S. operations health care Postretirement medical, dental, and vision $3,083 $3,083 $ -- Retired employees pay-as-you-go -- -- 1,862 Active employees pay-as-you-go -- 1,737 1,737 ----- ----- ----- Total health care 3,083 $4,820 $3,599 ----- ===== ===== Life insurance 436 Other subsidiaries - health care and life insurance 202 ----- Total postretirement benefits expense $3,721 =====
- ---------------------- * Pay-as-you-go amounts for 1996 were $1.7 billion for retirees, $1.8 billion for active employees, and $3.5 billion in total. GM has disclosed in its consolidated financial statements certain amounts associated with estimated future postretirement benefits other than pensions and classified such amounts as "accumulated postretirement benefit obligations," "liabilities," or "obligations." Notwithstanding the recording of such amounts and the use of these terms, GM does not admit or otherwise acknowledge that such amounts or existing postretirement benefit plans of GM (other than pensions) represent legally enforceable liabilities of GM. GM CARD GM sponsors a credit card program, entitled the GM Card program, which was introduced in the U.S. in September 1992 and subsequently in Canada, Australia, Brazil, Chile and the United Kingdom. A cardholder's use of the card generates entitlements to rebates that can be used solely in connection with the cardholder's purchase or lease of a new GM vehicle. As the sponsor of the GM Card program, GM does not provide consumer credit. The program is used as a marketing tool to increase product sales. Independent banks issue the GM Card and are responsible for evaluating, extending, and funding credit to the cardholders, and are fully responsible for any credit card losses with no recourse against GM. In the U.S., GM Card rebates accumulate at a rate equal to 5% of all spending for goods or services charged on the GM Card up to a maximum rebate amount of $500 per year. The rebates, which expire in 7 years, may be applied over and above all sales allowances in the market at the time of vehicle purchase or lease. GM is solely responsible to cardholders for rebates. Provisions for GM Card rebates are recorded as reductions in revenue at the time of vehicle sale. GM has the right to prospectively modify the plan. Rebates redeemed worldwide during 1997, 1996, and 1995 were $656 million, $443 million, and $299 million, respectively. Cardholder rebates available worldwide for future redemption when the cardholder purchases or leases a new GM vehicle amounted to $3.5 billion and $3.2 billion (net of deferred program income) at December 31, 1997 and 1996, respectively. GM anticipates that profits from incremental sales resulting from the GM Card program, along with deferred program income, will more than offset future rebate costs associated with the GM Card. II-61 76 GENERAL MOTORS CORPORATION AND SUBSIDIARIES SECURITY RATINGS
CURRENT SECURITY RATINGS -------------------------------------------- MOODY'S S&P D&P FITCH ------- --- --- ----- GM/GMAC long-term debt A.3 A A- A GM preference stocks Baa1 A- BBB+ A- GM commercial paper P-2 A-1 D-1+ F-1 GMAC commercial paper P-1 A-1 D-1 F-1 GM Capital Trust D TOPrS(sm) Baa1 A- BBB+ A- GM Capital Trust G TOPrS(sm) Baa1 A- BBB+ A- Hughes long-term debt A.3 A- - - Hughes commercial paper P-2 A-2 - -
Debt ratings by the various rating agencies reflect each agency's opinion of the ability of issuers to repay debt obligations punctually. 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. Moody's Investors Services (Moody's) The long-term debt of GM, GMAC and Hughes are rated A.3 by Moody's, which is the seventh highest within the ten investment grade ratings available and signifies "upper-medium grade" quality. The rating for GM preference stocks and GM's Capital Trust D and Capital Trust G Trust Originated Preferred Securities(sm) (TOPrS(sm)) is Baa1 which is the fourth highest within the six investment grade ratings available and signifies "medium-grade" quality. For additional information regarding GM's TOPrS(sm) see Note 17 to the GM consolidated financial statements. GMAC's commercial paper is rated P-1, which is the highest of three investment grade ratings available and indicates that an issuer's ability to repay is superior relative to other issuers. GM and Hughes' commercial paper is rated P-2, which is the second highest investment grade rating available and indicates that the issuer has a strong ability for repayment relative to other issuers. Standard and Poor's Ratings Services (S&P) In January 1998, S&P, a division of McGraw-Hill Companies, Inc., raised its long-term debt ratings from A- to A and its commercial paper ratings from A-2 to A-1 for both GM and GMAC. S&P also raised its preference stock rating on GM from BBB+ to A- and indicated that the ratings outlook was revised to stable from positive based on the intensively competitive automotive industry conditions limiting further upgrade potential for this rating. The long-term debt and commercial paper ratings on various overseas GMAC affiliates were also raised by S&P. At the same time, S&P affirmed its ratings of A- and A-2 on the long-term debt and commercial paper of Hughes and indicated that the outlook remains developing. S&P's A and A- credit ratings for long-term debt are the sixth and seventh highest within the ten investment grade ratings available and indicate a strong capability to pay interest and repay principal, although somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories. The preference stock and TOPrS(sm) rating of A- is the seventh highest within the ten investment grade ratings available and indicates that the issue is backed by a sound capacity to pay the related obligations The A-1 commercial paper rating is the second highest of four categories available and indicates the degree of safety regarding timely payment is strong. The A-2 commercial paper rating is the third highest category available and indicates the degree of safety regarding timely payment is satisfactory. Duff & Phelps Credit Rating Co. (D&P) The long-term debt of GM and GMAC are rated A- by D&P, which is the seventh highest within the ten investment grade ratings available and indicates adequate likelihood of timely payment of principal and interest with average, but adequate, protection factors. Risk factors, however, are more variable and greater in periods of economic stress. GM's preference stocks and TOPrS(sm) are rated BBB+, which is the eighth highest of ten investment grade ratings available and indicates they are considered to be reasonably safe. Securities assigned this rating by D&P have below average protection factors, but are still considered sufficient for prudent investment. GM's and GMAC's commercial paper are rated D-1+ and D-1 respectively, which are the first and second highest of five investment grade ratings available and signify a very high certainty of timely payment based on excellent liquidity factors and good fundamental protection factors. II-62 77 GENERAL MOTORS CORPORATION AND SUBSIDIARIES SECURITY RATINGS (CONCLUDED) Fitch Investors Service, Inc. (Fitch) In June 1997, Fitch raised its long-term debt ratings for GM and GMAC from A- to A, and its preference stock rating on GM from BBB+ to A-. Fitch also affirmed its F-1 commercial paper ratings and revised its outlook for GM and GMAC to stable from improving. The long-term debt rating of A by Fitch is the sixth highest within the ten investment grade ratings available. Fitch's A rating is considered to be high credit quality based on the obligor's strong ability to pay interest and repay principal, but may be more vulnerable to adverse changes in economic conditions and circumstances than debt with higher ratings. GM's preference stocks and TOPrS(sm) rating of A- is the seventh highest of ten investment grade ratings available and indicates they are considered to be of good quality with both asset protection and coverage of related dividends. GM's and GMAC's commercial paper are rated F-1, which is the second highest of four investment grade ratings available and indicates these short-term issues possess very strong credit qualities from holding sufficient liquidity to meet obligations in a timely manner. - ------------------- (sm) "Trust Originated Preferred Securities" and "TOPrS" are service trademarks of Merrill Lynch & Co. DEFERRED INCOME TAXES At December 31, 1997, GM's consolidated balance sheet included a net deferred tax asset of approximately $20.3 billion related to net future deductible temporary differences (see Note 6 to the GM consolidated financial statements) in the United States of which approximately $15.5 billion related to the obligation for postretirement benefits other than pensions. Realization of the net deferred tax asset is dependent upon profitable operations in the United States and future reversals of existing taxable temporary differences. Although realization is not assured, GM believes that it is more likely than not that such benefits will be realized through the reduction of future taxable income. Management has carefully considered various factors in assessing the probability of realizing these deferred tax assets including: . The operating results of GM-NAO and Delphi over the most recent three year period and overall financial forecasts of book and taxable income for the 1998-2002 period. Further improvements are expected by continuing efforts to maintain GM's competitiveness, including actions relating to reducing material costs through global sourcing and increasing efficiency through lean manufacturing. . Operating results of GMAC which generated U.S. pre-tax income of approximately $2.2 billion, $2.1 billion, and $1.8 billion in 1997, 1996, and 1995, respectively. . The ability to utilize tax planning, such as capitalization of research and experimentation costs for tax purposes, so that GM does not have, and does not expect to generate in the near future, any significant U.S. federal tax net operating loss carryforwards. . The extended period of time over which the tax assets can be utilized. Postretirement benefits become tax deductions over periods up to 50 years. . The fact that GM has never lost deferred federal tax credits due to the expiration of a U.S. net operating loss carryforward. Dividends received from foreign operations for U.S. federal income tax purposes totaled approximately $3 billion, $1.2 billion, and $182 million in 1997, 1996, and 1995, respectively. In 1995, the reduced level of dividends resulted from tax planning strategies related to GM's U.S. net operating loss carryback position - for tax purposes only. PENSIONS At December 31, 1997, GM's total worldwide net unfunded pension position increased to $5.0 billion ($0.5 billion for the U.S. automotive sector's qualified hourly/salary plans and $4.5 billion for all other plans worldwide) from $4.8 billion a year ago ($1.9 billion for the U.S. automotive sector's qualified hourly/salary plans and $2.9 billion for all other plans worldwide). Excluding the impact related to the Hughes Transactions, GM's 1996 total worldwide net unfunded pension liability would have been $6.2 billion ($1.9 billion for the U.S. automotive sector's qualified hourly/salary plans and $4.3 billion for all other plans worldwide). Major factors contributing to the decrease in the unfunded position of the U.S. automotive sector's qualified hourly/salary plans included asset returns in excess of the assumed 10% asset earnings rate and contributions during the year, partially offset by the 50 basis point decrease in the discount rate used to measure the pension obligation at the end of 1997 compared with 1996. During 1997 and 1996 respectively, GM contributed $1.5 billion and $0.8 billion in cash to its U.S. hourly pension plans. On an economic basis, GM continues to maintain a fully-funded status for its U.S. hourly and salaried pension plans at December 31, 1997. The economic basis of measuring the U.S. hourly and salaried pension liability differs from the Statement of Financial Accounting Standards (SFAS) No. 87, Employers' Accounting for Pensions, basis required by GAAP, but GM believes it to be a better measure of GM's ongoing economic exposure for pension obligations and as such uses this as a measure to determine its funding. The economic basis discounts pension liabilities at the long-term asset earnings rate assumption (currently 10.0%) rather than at a year-end market rate as required by SFAS No. 87 (currently 7.0%). In periods of low interest rates, as in the current market environment, the SFAS No. 87 liability will generally exceed the liability calculated on an economic basis, whereas in periods of high interest rates the economic basis liability will generally exceed the SFAS No. 87 liability. II-63 78 GENERAL MOTORS CORPORATION AND SUBSIDIARIES ENVIRONMENTAL MATTERS GM is subject to various laws relating to the protection of the environment including laws regulating air emissions, water discharges, waste management, and environmental cleanup. GM is also in various stages of investigation and remediation for sites where contamination has been alleged. The liability for worldwide environmental cleanup was $610 million and $646 million at December 31, 1997 and 1996, respectively. In future periods, new laws or regulations, advances in technologies, additional information about the ultimate remedy selected at new and existing sites, and GM's share of the cost of such remedies could significantly change GM's estimates. The process of estimating environmental liabilities is complex and dependent primarily on the nature and extent of historical information and physical data relating to a contaminated site, the complexity of the site, the uncertainty as to what remedy and technology will be required, the outcome of discussions with regulatory agencies and other potentially responsible parties (PRPs) at multi-party sites, and the number and financial viability of other PRPs. In 1997, 1996, and 1995, GM expensed $88 million, $94 million, and $134 million, respectively, for environmental investigation, remediation, and waste management. In addition, worldwide capital expenditures, as discussed previously, included $115 million, $122 million, and $133 million in 1997, 1996, and 1995, respectively, for various environmental matters. EMPLOYMENT AND PAYROLLS
WORLDWIDE EMPLOYMENT AT DECEMBER 31, (in thousands) 1997 1996 1995 ---- ---- ---- GM-NAO 237 245 255 Delphi 210 179 179 GMIO 116 111 103 GMAC 21 18 17 Hughes 15 86 84 Other 9 8 11 --- --- --- Employees associated with continuing operations 608 647 649 Discontinued operations (EDS) - - 96 --- --- --- Total 608 647 745 === === === Worldwide payrolls - continuing operations (in billions) $30.4 $29.8 $29.8 U.S. hourly payrolls (in billions) (1)(2) $13.5 $13.3 $13.7 Average labor cost per active hour worked - U.S. hourly (1) $45.06 $44.19 $43.13
- --------------------- (1) Excludes EDS, Hughes' and former Hughes' non-automotive employees, Saturn, and NCRS. (2) Includes employees "at work" (excludes laid-off employees receiving benefits). FORWARD-LOOKING STATEMENTS Following are the principal important factors which may cause actual results to differ materially from those expressed in forward-looking statements made by the managements of GM and Hughes: . Changes in economic conditions, currency exchange rates, or political stability in the major markets where GM procures material, components, and supplies for the production of its principal products or where its products are produced, distributed, or sold (i.e., North America, Europe, Latin America and Asia-Pacific), including the effects of current economic problems in Asia and political problems in the Far East. . Shortages of fuel or interruptions in transportation systems, labor strikes, work stoppages, or other interruptions to or difficulties in the employment of labor in the major markets where GM purchases material, components, and supplies for the production of its products or where its products are produced, distributed or sold. . Significant changes in the competitive environment in the major markets where GM purchases material, components and supplies for the production of its products or where its products are produced, distributed, or sold. . Changes in the laws, regulations, policies or other activities of governments, agencies and similar organizations where such actions may affect the production, distribution or sale of GM products, the cost thereof or applicable tax rates. . The ability of GM to achieve reductions in cost and employment levels, to realize production efficiencies, and to implement capital expenditures, all at the levels and times planned by management. . The ability of GM to achieve the sale of assets held for disposal by Delphi within the timing and revenue levels and upon the terms contemplated by management. . With respect to GM's Hughes subsidiary, additional risk factors include: the ability to achieve subscriber growth in its Direct-To-Home businesses, ability to sustain technological competitiveness, failure of planned satellite launches, and access to capital and financial flexibility in order to take advantage of new market opportunities, respond to competitive pressures, and react quickly to other major changes in the marketplace. * * * * * * II-64 79 GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK General Motors (GM) is exposed to market risk from changes in foreign currency exchange rates, interest rates and certain commodity and equity security prices. In order to manage the risk arising from these exposures, GM enters into a variety of foreign exchange, interest rate, and commodity forward contracts and options. A discussion of GM's accounting policies for derivative instruments is included in Note 1 to the GM consolidated financial statements and further disclosure is provided in Notes 10, 11, and 12 to the GM consolidated financial statements. GM maintains risk management control systems to monitor foreign exchange, interest rate, commodity and equity price risks, and related hedge positions. Positions are monitored using a variety of analytical techniques including market value, sensitivity analysis, and value-at-risk models. The following analyses are based on sensitivity analysis tests which assume instantaneous, parallel shifts in exchange rates, interest rate yield curves, and commodity and equity prices. For options and instruments with non-linear returns, models appropriate to the instrument are utilized to determine the impact of sensitivity shifts. Foreign Currency Exchange Rate Risk GM has foreign currency exposures related to buying, selling, and financing in currencies other than the local currencies in which it operates. More specifically, GM is exposed to foreign currency risk related to uncertainty to which future earnings or assets and liability values are exposed due to operating cash flows and various financial instruments that are denominated in foreign currencies. GM's most significant foreign currency exposures relate to Canada, Mexico, Western European countries (primarily Germany, United Kingdom, Spain, Italy, Belgium and France), Australia, Japan and Brazil. As of December 31, 1997, the net fair value liability of financial instruments with exposure to foreign currency risk was approximately $1.9 billion. The potential loss in fair value for such financial instruments from a hypothetical 10% adverse change in quoted foreign currency exchange rates would be approximately $190 million. The model assumes a parallel shift in the foreign currency exchange rates. Exchange rates rarely move in the same direction. The assumption that exchange rates change in a parallel fashion may overstate the impact of changing exchange rates on assets and liabilities denominated in a foreign currency. Interest Rate Risk GM is subject to market risk from exposure to changes in interest rates based on its financing, investing, and cash management activities. GM enters into various financial instrument transactions to maintain the desired level of exposure to the risk of interest rate fluctuations and to minimize interest expense. More specifically, General Motors Acceptance Corporation (GMAC) and its affiliates have also entered into contracts to provide commercial and retail financing, retain mortgage servicing rights, and to retain various assets related to mortgage securitization. Certain exchange traded future and option contracts, interest rate caps and floors, along with various investments, have been entered into to reduce the interest rate risk related to these activities and manage potential prepayment activity associated with mortgage servicing rights. The GMAC Mortgage Group (GMACMG) manages prepayment risk associated with its capitalized mortgage servicing rights with U.S. Treasury options and futures. Since the derivative instruments do not have identical characteristics to the underlying mortgage servicing rights, GM is exposed to basis risk. GMACMG mitigates this risk through a historical review of value change in various interest rate scenarios when establishing and maintaining its hedge program. As of December 31, 1997, the net fair value liability of all financial instruments with exposure to interest rate risk was approximately $1.6 billion. The potential decrease in fair value resulting from a hypothetical 10% shift in interest rates would be approximately $257 million. The SEC disclosures on market risk requires that all financial instruments, as defined by Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures about Fair Value of Financial Instruments, should be included in the quantitative disclosure calculation. Operating leases are not required to be disclosed by SFAS No. 107, and have not been presented as part of the sensitivity analysis. This is a significant limitation to the analysis presented. While the sensitivity analysis will show a fair market value change for the debt which funds GM's operating lease portfolio, a corresponding change for GM's operating lease portfolio, which has a book value of $26 billion, was not considered by the model. As a result, the overall impact to the fair market value of financial instruments from a hypothetical change in interest rates may be overstated. There are certain shortcomings inherent to the sensitivity analyses presented. The model assumes interest rate changes are instantaneous parallel shifts in the yield curve. In reality, changes are rarely instantaneous. Although certain assets and liabilities may have similar maturities or periods to repricing, they may not react correspondingly to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate with changes in market interest rates, II-65 80 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Interest Rate Risk (concluded) while interest rates on other types of assets may lag behind changes in market rates. Finance receivables are less susceptible to prepayments when interest rates change, while prepayments on many mortgage related instruments are directly affected by a change in interest rates. As such, GM's model does not address prepayment risk for automotive related finance receivables, but does consider prepayment risk for mortgage related instruments that are highly sensitive to prepayment risk. However, in the event of a change in interest rates, actual loan prepayments may deviate significantly from assumptions used in the model. Further, certain assets, such as adjustable rate loans, have features, such as annual and lifetime caps, that restrict changing the interest rates both on a short-term basis and over the life of the asset. Finally, the ability of certain borrowers to make scheduled payments on their adjustable rate loans may decrease in the event of an interest rate increase. Commodity Price Risk GM enters into commodity forward and option contracts. Such contracts are executed to offset GM's exposure to the potential change in prices mainly for various non-ferrous metals used in the manufacturing of automotive components. The net fair value liability of such contracts, excluding the underlying exposures, as of December 31, 1997 was approximately $42 million. The potential change in the fair value of commodity forward and option contracts, assuming a 10% change in the underlying commodity price, would be approximately $111 million at December 31, 1997. This amount excludes the offsetting impact of the price risk inherent in the physical purchase of the underlying commodities. Equity Price Risk GM holds investments in various available-for-sale equity securities which are subject to price risk. The fair value of such investments, as of December 31, 1997 was approximately $899 million. The potential change in the fair value of these investments, assuming a 10% change in prices would be approximately $90 million. Forward-Looking Statements The above discussion and the estimated amounts generated from the sensitivity analyses referred to above include forward-looking statements of market risk which assume for analytical purposes that certain adverse market conditions may occur. Actual future market conditions may differ materially from such assumptions because the amounts noted previously are the result of analyses used for the purpose of assessing possible risks and the mitigation thereof. Accordingly, the forward-looking statements should not be considered projections by GM of future events or losses. * * * * * * II-66 81 PART III GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEMS 10 THROUGH 13 Certain information required by Part III (Items 10 through 13) of this form, other than the information set forth below, has been omitted because the Registrant intends to file a definitive proxy statement pursuant to Regulation 14A not later than 120 days after the end of its fiscal year. EXECUTIVE OFFICERS OF THE REGISTRANT The names and ages of all executive officers of the Registrant at February 28, 1998 and their positions and offices with the Registrant on that date are as follows:
NAME AND (AGE) POSITIONS AND OFFICES - -------------- --------------------- John F. Smith, Jr. (59) Chairman of the Board; Chief Executive Officer; President; Member, Finance Committee and Chairman, The President's Council Harry J. Pearce (55) Vice Chairman of the Board; Member, The President's Council J. Michael Losh (51) Executive Vice President; Chief Financial Officer; Member, The President's Council G. Richard Wagoner, Jr. (45) Executive Vice President; Member, The President's Council Louis R. Hughes (49) Executive Vice President; Member, The President's Council J. T. Battenberg III (54) Executive Vice President, Member, The President's Council
There are no family relationships, as defined, between any of the above executive officers, and there is no arrangement or understanding between any of the above executive officers and any other person pursuant to which he was selected as an officer. Each of the above executive officers was elected by the Board of Directors to hold office until the next annual election of officers and until his successor is elected and qualified or until his earlier resignation or removal. The Board of Directors elects the officers in conjunction with each annual meeting of the stockholders. III-1 82 GENERAL MOTORS CORPORATION AND SUBSIDIARIES EXECUTIVE OFFICERS OF THE REGISTRANT - CONCLUDED Mr. John F. Smith, Jr. has been associated with General Motors since 1961. He was elected Executive Vice President in charge of International Operations in 1988. Effective August 1990, he was elected Vice Chairman of the Board of Directors. On April 6, 1992, Mr. Smith was elected President and Chief Operating Officer. Effective November 1992, he was elected Chief Executive Officer and President. On January 1, 1996, Mr. Smith became Chairman of the Board of Directors. Mr. Pearce has been associated with General Motors since 1985. In May 1987, he was elected Vice President and General Counsel of General Motors. Effective November 1992, he was elected Executive Vice President of General Motors with responsibility for the Industry-Government Relations Staff, Environmental Activities Staff (now Environmental and Energy Staff), Worldwide Economics, Electronic Data Systems Corporation and GM Hughes Electronics Corporation (now Hughes Electronics Corporation). In July 1994, he assumed responsibility for GM's Strategic Decision Center, Corporate Communications, Allison Transmission Division, Electro-Motive Division (now GM Locomotive Group), Urban and Community Affairs, Executive Compensation and Corporate Governance, and the Corporate Services Staff. He remained General Counsel through August 1, 1994. Effective January 1, 1996, Mr. Pearce was elected a director and became Vice Chairman of the Board of Directors. Mr. Losh has been associated with General Motors since 1964. In July 1984, he was elected Vice President of General Motors and General Manager of Pontiac Division. He was named General Manager of Oldsmobile Division in June 1989. Effective May 1992, he was elected Group Executive in charge of North American Vehicle Sales, Service, and Marketing. In July 1994, he was elected Executive Vice President and Chief Financial Officer of General Motors. Mr. Wagoner has been associated with General Motors since 1977. He was elected Vice President in charge of finance for General Motors Europe in June 1989. In July 1991, he was elected President and Managing Director of General Motors do Brasil. Effective November 1992, he was elected Executive Vice President and Chief Financial Officer of General Motors. In July 1994, he was named President of North American Operations. Mr. Hughes has been associated with General Motors since 1966. In March 1989, he was elected Chairman and Managing Director of Adam Opel AG. He was elected President of General Motors Europe and Vice President and Group Executive of General Motors in April 1992. Effective November 1992, he was elected Executive Vice President, International Operations of General Motors. In September 1994, he was named President of International Operations. Mr. Battenberg has been associated with General Motors since 1961. In 1986, he was appointed product manager for the former Buick-Oldsmobile-Cadillac Group's Flint Automotive Division. He later served as vice president of the division, and then vice president and group executive for the Buick-Oldsmobile-Cadillac Group. He was named Vice President and Group Executive of the former Automotive Components Group (ACG) Worldwide in 1992. Two years later, he was elected a Senior Vice President and President of ACG Worldwide. In July 1995, he was elected Executive Vice President and President of Delphi Automotive Systems (formerly ACG Worldwide). III-2 83 PART IV GENERAL MOTORS CORPORATION AND SUBSIDIARIES
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K PAGE NUMBER ------ (a) 1. All Financial Statements See Part II 2. Financial Statement Schedule II - Allowances for the Years Ended December 31, 1997, 1996, and 1995 IV-3 3. Exhibits (Including Those Incorporated by Reference) Exhibit Number (2)(a) Agreement and Plan of Merger by and between HE Holdings, Inc. and Raytheon Company dated as of January 16, 1997, filed as Exhibit 2(a) to the Current Report on Form 8-K of General Motors Corporation dated January 16, 1997 N/A (2)(b) Implementation Agreement by and between General Motors Corporation and Raytheon Company dated as of January 16, 1997, filed as Exhibit 2(b) to the Current Report on Form 8-K of General Motors Corporation dated January 16, 1997 N/A (2)(c)* List of Omitted Schedules and Other Attachments, filed as Exhibit 2(d) to the Current Report on Form 8-K of General Motors Corporation dated January 16, 1997 N/A (2)(d) Agreement and Plan of Merger by and between General Motors Corporation and GM Mergeco Corporation, dated as of October 17, 1997, included as Appendix A to the Solicitation Statement / Prospectus dated as of November 10, 1997, which is a part of the Registration Statement on Form S-4 of General Motors Corporation (Registration No. 333-37215) N/A (3)(a) Restated Certificate of Incorporation, as amended, filed as Exhibit 3(i) to the Current Report on Form 8-K of General Motors Corporation dated December 17, 1997, and Amendment to Article Fourth of the Certificate of Incorporation Division III - Preference Stock, by reason of the Certificates of Designations filed with the Secretary of State of the State of Delaware on September 14, 1987 and the Certificate of Decrease filed with the Secretary of State of the State of Delaware on September 29, 1987 (pertaining to the six series of Preference Stock contributed to the General Motors pension trusts), incorporated by reference to Exhibit 19 to the Quarterly Report on Form 10-Q of General Motors Corporation for the quarter ended June 30, 1990 in the Form SE of General Motors Corporation dated August 6, 1990; as further amended by the Certificate of Designations filed with the Secretary of State of the State of Delaware on June 28, 1991 (pertaining to Series A Conversion Preference Stock), incorporated by reference to Exhibit 4(a) to Form S-8 Registration Statement No. 33-43744 in the Form SE of General Motors Corporation dated November 1, 1991; as further amended by the Certificate of Designations filed with the Secretary of State of the State of Delaware on December 9, 1991 (pertaining to Series B 9-1/8% Preference Stock), incorporated by reference to Exhibit 4(a) to Form S-3 Registration Statement No. 33-45216 in the Form SE of General Motors Corporation dated January 27, 1992; as further amended by the Certificate of Designations filed with the Secretary of State of the State of Delaware on February 14, 1992 (pertaining to Series C Convertible Preference Stock), incorporated by reference to Exhibit (3)(a) to the Annual Report on Form 10-K of General Motors Corporation for the year ended December 31, 1991 in the Form SE of General Motors Corporation dated March 20, 1992; as further amended by the Certificate of Designations filed with the Secretary of State of the State of Delaware on July 15, 1992 (pertaining to Series D 7.92% Preference Stock), incorporated by reference to Exhibit 3(a)(2) to the Quarterly Report on Form 10-Q of General Motors Corporation for the quarter ended June 30, 1992 in the Form SE of General Motors Corporation dated August 10, 1992; and as further amended by the Certificate of Designations filed with the Secretary of State of the State of Delaware on December 15, 1992 (pertaining to Series G 9.12% Preference Stock), incorporated by reference to Exhibit 4(a) to Form S-3 Registration Statement No. 33-49309 in the Form SE of General Motors Corporation dated January 25, 1993. N/A
IV-1 84 GENERAL MOTORS CORPORATION AND SUBSIDIARIES PART IV - CONTINUED ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K (CONTINUED)
EXHIBIT PAGE NUMBER NUMBER - ------ ------ (3)(b) By-Laws, as amended, filed as Exhibit 3(ii) to the Current Report on Form 8-K of General Motors Corporation dated March 2, 1998. N/A (4)(a) Form of Indenture relating to the $500,000,000 8-1/8% Debentures Due April 15, 2016 dated as of April 1, 1986 between General Motors Corporation and Citibank, N.A., Trustee, incorporated by reference to Exhibit 4 to Amendment No. 1 to Form S-3 Registration Statement No. 33-4452 and resolutions adopted by the Special Committee on April 15, 1986, incorporated by reference to Exhibit 4(a) to the Current Report on Form 8-K of General Motors Corporation dated April 24, 1986. N/A (4)(b) Form of Indenture relating to the $700,000,000 9-5/8% Notes Due December 1, 2000 and the $1,400,000,000 Medium-Term Note Program dated as of November 15, 1990 between General Motors Corporation and Citibank, N.A., Trustee, incorporated by reference to Exhibit 4(a) to Form S-3 Registration Statement No. 33-37737. N/A (4)(c) Form of Indenture relating to the $377,377,000 7.75% Debentures Due March 15, 2036 dated as of December 7, 1995 between General Motors Corporation and Citibank, N.A., Trustee, filed as Exhibit 4(a) to Amendment No. 1 to Form S-3 Registration Statement No. 33-64229. N/A (4)(d) Instruments defining the rights of holders of nonregistered debt of the Registrant have been omitted from this exhibit index because the amount of debt authorized under any such instrument does not exceed 10% of the total assets of the Registrant and its subsidiaries. The Registrant agrees to furnish a copy of any such instrument to the Commission upon request. N/A (4)(e)(i) Amended and Restated Declaration of Trust of General Motors Capital Trust D, incorporated by reference to Exhibit 4(c)(i) to the Current Report on Form 8-K of General Motors Corporation dated July 1, 1997. N/A (4)(e)(ii) Amended and Restated Declaration of Trust of General Motors Capital Trust G, incorporated by reference to Exhibit 4(c)(ii) to the Current Report on Form 8-K of General Motors Corporation dated July 1, 1997. N/A 4(f)(i) Indenture between General Motors Corporation and Wilmington Trust Company, incorporated by reference to Exhibit 4(d)(i) to the Current Report on Form 8-K of General Motors Corporation dated July 1, 1997. N/A 4(f)(ii) First Supplemental Indenture between General Motors Corporation and Wilmington Trust Company With Respect To The Series D Junior Subordinated Debentures, incorporated by reference to Exhibit 4(d)(ii) to the Current Report on Form 8-K of General Motors Corporation dated July 1, 1997. N/A 4(f)(iii) Second Supplemental Indenture between General Motors Corporation and Wilmington Trust Company With Respect To The Series G Junior Subordinated Debentures, incorporated by reference to Exhibit 4(d)(iii) to the Current Report on Form 8-K of General Motors Corporation dated July 1, 1997. N/A 4(g)(i) Series D Preferred Securities Guarantee Agreement, General Motors Capital Trust D, incorporated by reference to Exhibit 4(g)(i) to the Current Report on Form 8-K of General Motors Corporation dated July 1, 1997. N/A 4(g)(ii) Series G Preferred Securities Guarantee Agreement, General Motors Capital Trust G, incorporated by reference to Exhibit 4(g)(ii) to the Current Report on Form 8-K of General Motors Corporation dated July 1, 1997. N/A (10)(a)** General Motors Amended 1987 Stock Incentive Plan, incorporated by reference to Exhibit A to the Proxy Statement of General Motors Corporation dated April 13,1992 N/A (10)(b)** General Motors Performance Achievement Plan, incorporated by reference to Exhibit A to the Proxy Statement of General Motors Corporation dated April 16, 1982. N/A (10)(c)** General Motors 1987 Performance Achievement Plan, incorporated by reference to Exhibit A to the Proxy Statement of General Motors Corporation dated April 17,1987 N/A (10)(d)** General Motors 1992 Performance Achievement Plan, incorporated by reference to Exhibit A to the Proxy Statement of General Motors Corporation dated April 13,1992 N/A (12) Computation of Ratios of Earnings to Fixed Charges for the Years Ended December 31, 1997, 1996, and 1995. IV-7
IV-2 85 GENERAL MOTORS CORPORATION AND SUBSIDIARIES PART IV - CONTINUED ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K (CONCLUDED)
EXHIBIT PAGE NUMBER NUMBER - ------ ------ (21) Subsidiaries of the Registrant as of December 31, 1997 IV-8 (23) Consent of Independent Auditors IV-15 (99) Hughes Electronics Corporation and Subsidiaries Consolidated Financial Statements and Management's Discussion and Analysis IV-16 (27) Financial Data Schedule (for SEC information only) N/A
- --------------------- * The registrant hereby undertakes to furnish supplementally a copy of any omitted schedule or other attachment to the Securities and Exchange Commission upon request. ** Required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. (b) Reports on Form 8-K Five reports on Form 8-K, dated October 6, 1997, October 13, 1997, November 21, 1997, November 24, 1997, and December 17, 1997 were filed during the quarter ended December 31, 1997 reporting matters under Item 5, Other Events. IV-3 86 GENERAL MOTORS CORPORATION AND SUBSIDIARIES SCHEDULE II - ALLOWANCES
Additions Additions Balance at charged to charged to beginning costs and other Balance at of year expenses accounts Deductions end of year ------- -------- -------- ---------- ----------- Description (Dollars in Millions) FOR THE YEAR ENDED DECEMBER 31, 1997 Allowances Deducted from Assets Finance receivables (unearned income) $3,547 $- $3,124 $3,287 $3,384 Allowance for financing losses 922 523 62(a) 604(b) 903 Accounts and notes receivable (for doubtful receivables) 151 41 41(a) 52(b) 181 Inventories (principally for obsolescence of service parts) 303 - - 44(c) 259 Other investments and miscellaneous assets (receivables and other) 12 - 1 - 13 Miscellaneous allowances (mortgage) 138 106 6 48 202 ----- --- ----- ----- ----- Total Allowances Deducted from Assets $5,073 $670 $3,234 $4,035 $4,942 ===== === ===== ===== ===== FOR THE YEAR ENDED DECEMBER 31, 1996 Allowances Deducted from Assets Finance receivables (unearned income) $3,922 $- $2,949 $3,324 $3,547 Allowance for financing losses 808 669 116(a) 671(b) 922 Accounts and notes receivable (for doubtful receivables) 138 49 9(a) 45(b) 151 Inventories (principally for obsolescence of service parts) 229 74(c) - - 303 Other investments and miscellaneous assets (receivables and other) 33 1 - 22 12 Miscellaneous allowances (mortgage) 59 99 31 51 138 ----- --- ----- ----- ----- Total Allowances Deducted from Assets $5,189 $892 $3,105 $4,113 $5,073 ===== === ===== ===== ===== FOR THE YEAR ENDED DECEMBER 31, 1995 Allowances Deducted from Assets Finance receivables (unearned income) $3,310 $- $3,617 $3,005 $3,922 Allowance for financing losses 693 449 88(a) 422(b) 808 Accounts and notes receivable (for doubtful receivables) 187 25 1(a) 75(b) 138 Inventories (principally for obsolescence of service parts) 178 51(c) - - 229 Other investments and miscellaneous assets (receivables and other) 32 - 1 - 33 Miscellaneous allowances (insurance and mortgage) 36 36 - 13 59 ----- --- ----- ----- ----- Total Allowances Deducted from Assets $4,436 $561 $3,707 $3,515 $5,189 ===== === ===== ===== =====
- --------------------- Notes: (a) Primarily reflects the recovery of accounts previously written-off. (b) Accounts written off. (c) Represents net change of inventory allowances. Reference should be made to the notes to consolidated financial statements. IV-4 87 GENERAL MOTORS CORPORATION AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. GENERAL MOTORS CORPORATION (Registrant) Date: March 2, 1998 By /s/JOHN F. SMITH, JR. ----------------------------------- (John F. Smith, Jr. Chairman of the Board of Directors, Chief Executive Officer, and President) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on this 2nd day of March 1998 by the following persons on behalf of the Registrant and in the capacities indicated.
Signature Title --------- ----- /s/JOHN F. SMITH, JR. Chairman of the Board of Directors, - ---------------------- Chief Executive Officer, and President (John F. Smith, Jr.) /s/HARRY J. PEARCE Vice Chairman of the Board of - ---------------------- Directors (Harry J. Pearce) /s/J. MICHAEL LOSH Executive Vice President ) - ---------------------- and Chief Financial Officer ) (J. Michael Losh) )Principal )Financial /s/ERIC A. FELDSTEIN )Officers - ---------------------- Vice President and Treasurer ) (Eric A. Feldstein) ) /s/WALLACE W. CREEK Comptroller ) - ---------------------- )Principal (Wallace W. Creek) )Accounting )Officers /s/PETER R. BIBLE Chief Accounting Officer ) - ---------------------- ) (Peter R. Bible) )
IV-5 88 GENERAL MOTORS CORPORATION AND SUBSIDIARIES SIGNATURES - CONCLUDED
SIGNATURE TITLE --------- ----- /s/ANNE L. ARMSTRONG Director - -------------------- (Anne L. Armstrong) /s/PERCY BARNEVIK Director - -------------------- (Percy Barnevik) /s/JOHN H. BRYAN Director - -------------------- (John H. Bryan) /s/THOMAS E. EVERHART Director - -------------------- (Thomas E. Everhart) /s/CHARLES T. FISHER, III Director - -------------------- (Charles T. Fisher, III) /s/GEORGE M. C. FISHER Director - -------------------- (George M. C. Fisher) /s/KAREN KATEN Director - -------------------- (Karen Katen) /s/J. WILLARD MARRIOTT, JR. Director - -------------------- (J. Willard Marriott, Jr.) /s/ANN D. MCLAUGHLIN Director - -------------------- (Ann D. McLaughlin) /s/ECKHARD PFEIFFER Director - -------------------- (Eckhard Pfeiffer) /s/JOHN G. SMALE Director - -------------------- (John G. Smale) /s/LOUIS W. SULLIVAN Director - -------------------- (Louis W. Sullivan) /s/DENNIS WEATHERSTONE Director - -------------------- (Dennis Weatherstone) /s/THOMAS H. WYMAN Director - -------------------- (Thomas H. Wyman)
IV-6 EX-12 2 EXHIBIT 12 1 EXHIBIT 12 GENERAL MOTORS CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Years Ended December 31, -------------------------------------------- 1997 1996 1995 ------- ------- ------- (Dollars in Millions) Income from continuing operations before cumulative effect of accounting change $6,698 $4,953 $6,033 Income taxes 1,069 1,723 2,316 Equity in income of associates (34) (107) (216) Cash dividends received from associates 41 48 16 Amortization of capitalized interest 56 54 51 ------- ------- ------- Income from continuing operations before cumulative effect of accounting change, income taxes, undistributed income of associates, and amortization of capitalized interest 7,830 6,671 8,200 ------- ------- ------- Fixed charges included in income from continuing operations Interest and related charges on debt 5,946 5,673 5,557 Portion of rentals deemed to be interest 305 287 256 ------- ------- ------- Total fixed charges included in income from continuing operations 6,251 5,960 5,813 ------- ------- ------- Earnings available for fixed charges $14,081 $12,631 $14,013 ======= ======= ======= Fixed charges Fixed charges included in income from continuing operations $6,251 $5,960 $5,813 Interest capitalized in the period 126 49 50 ------- ------- ------- Total fixed charges $6,377 $6,009 $5,863 ======= ======= ======= Ratios of earnings to fixed charges 2.21 2.10 2.39 ==== ==== ====
IV-7 EX-21 3 EXHIBIT 21 1 EXHIBIT 21 GENERAL MOTORS CORPORATION AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT AS OF DECEMBER 31, 1997 Subsidiary companies of the Registrant are listed below.
STATE OR SOVEREIGN POWER NAME OF SUBSIDIARY OF INCORPORATION ------------------ ---------------- Subsidiaries included in the Registrant's consolidated financial statements Adam Opel Aktiengesellschaft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany Adam Opel Unterstuetzungskasse GmbH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany Alpha Trans Grundbesitz - und Vermogensverwaltungs GmbH . . . . . . . . . . . . . . . . . . . . . . . . . . Germany Autohaus am Nordring GmbH, Berlin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany Carus Grundstucks-Vermietungsgesellschaft mbH & Co. Object Kuno 65 KG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany Carus Grundstucks-Vermietungsgesellschaft mbH & Co. Object Leo 40 KG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany Edmund Becker und Co. AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany GM Europe GmbH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany General Motors GmbH & Co. OHG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany General Motors Poland Spolka, zo.o. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Poland Opel-Automobilwerk Eisenach-PKW GmbH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany Opel China GmbH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France Opel Hungary Automobile Production Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hungary Opel Hungary Automotive Manufacturing Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hungary Opel Performance Center GmbH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany Opel Polen GmbH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany Opel Polska Sp. z oo. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Poland Opel Turkiye Limited Sirketi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Turkey Saginaw Deutschland GmbH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany Aisin GM Allison Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Japan Arabian Battery Holding Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Arabian Financing Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Argonaut Holdings, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Auto Cable Industries (Pty) Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . South Africa Auto Lease Payment Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cayman Islands North American New Cars, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Battery Technology Services, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Brazauto Industria e Comercio Ltda. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cayman Islands Chevrolet Sociedad Anonima de Ahorro para Fines Determinados . . . . . . . . . . . . . . . . . . . . . . . . . Argentina Convesco Vehicle Sales GmbH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal Republic of Germany Controladora General Motors, S.A. de C.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mexico Centro Tecnico Herramental, S.A. de C.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mexico Componentes Para Automotores, S.A. de C.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mexico Delphi Alambrados Automotrices, S.A. de C.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mexico Delphi Cableados, S.A. de C.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mexico Delphi Componentes Mecanicos de Matamoros, S.A. de C.V. . . . . . . . . . . . . . . . . . . . . . . . Mexico Delphi Ensamble de Cables y Componentes, S.A. de C.V. . . . . . . . . . . . . . . . . . . . . . . . . Mexico Productos Delco de Chihuahua, S.A. de C.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mexico Sistemas Electricos y Conmutadores, S.A. de C.V. . . . . . . . . . . . . . . . . . . . . . . . . . . Mexico General Motors de Mexico, S.A. de C.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mexico Sistemas Para Automotores de Mexico, S.A. de C.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mexico Delphi Automotive Systems, S.A. de C.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mexico Dealership Liquidations, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Delco Electronics Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Delco Electronics Asia/Pacific Pte Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Singapore Delco Electronics International, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Delco Electronics Holding GmbH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany Delco Electronics Overseas Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Delco Electronics Singapore Pte. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Singapore Delco Electronics (Suzhou) Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . China Delnosa, S.A. de C.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mexico
IV-8 2 GENERAL MOTORS CORPORATION AND SUBSIDIARIES
STATE OR SOVEREIGN POWER NAME OF SUBSIDIARY OF INCORPORATION ------------------ ---------------- Deltronicos de Matamoros, S.A. de C.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mexico f&g Megamos Sicherheitselektronik GmbH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany Hughes Power Products, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Mecel AB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sweden Texton S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France Texton P.L.C. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom Delphi Automotive Systems do Brasil Ltda. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Brazil Delphi Automotive Systems, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Delphi Automotive Systems China, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Beijing Wy-Delphi GM Automotive Electronic Control Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . People's Republic of China Delphi Packard Electric (Guangzhou) Company, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . China Packard Electric BaiCheng Co., Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . China Packard Electric Hebi Co., Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . China Shanghai Delco International Battery Company, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . China Delphi Automotive Systems Deutschland GmbH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany Delphi Packard Deutschland GmbH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany Reinshagen GmbH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany Unterstuetzungsgesellschaft der Kabelwerke Reinshagen GmbH . . . . . . . . . . . . . . . . . . . . . . . . . . West Germany Delphi Automotive Systems France S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France Delphi Automotive Systems Luxembourg S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Luxembourg Delphi Italia Automotive Systems S.r.l. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Italy Delphi Italia Service Center S.r.l. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Italy DRB s.a./n.v. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France Diavia S.r.l. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Italy Aura Srl . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Italy Opel France S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France Delphi Automotive Systems Overseas Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Delphi Automotive Systems Poland Sp. zo.o. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Poland Delphi Automotive Systems Singapore PTE LTD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Singapore Delphi Automotive Systems Sweden AB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sweden Delphi Calsonic Compressors, S.A.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France Delphi Chassis Systems Poland S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Poland Delphi Energy and Engine Management Systems (M) Sdn Bhd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Malaysia Delphi Harrison - Calsonic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France Delphi L'EM Argentina S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Argentina Delphi Packard Austria Ges. m.b.H. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Austria Packard Electric Ceska republika s.r.o. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Czechoslovakia Packard Electric Vas kft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hungary Reinshagen Tournai S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Belgium Delphi Packard Electric Sielin Argentina S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Argentina Delphi Packard Electric Systems (M) Sdn Bhd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Malaysia Delphi Packard Romania S.r.l. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Romania Delphi Polska Automotive Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Poland Delphi Rimir, S.A. de C.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mexico Delphi Steering (Malaysia) Sdn Bhd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Malaysia Delphi Unicables, S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Spain Delphi Asientos, S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Spain Delphi Cisa S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Spain Delphi Colvegasa, S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Spain DEOC Pension Trustees Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . England Electro-Motive Maintenance Operations Pty Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Australia Exhaust Systems Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware GM Auto Receivables Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware GMC Truck Motors Development Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware GM-DI Leasing Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware GM Ovonic L.L.C. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Michigan
* Joint Venture Partnership IV-9 3 GENERAL MOTORS CORPORATION AND SUBSIDIARIES
STATE OR SOVEREIGN POWER NAME OF SUBSIDIARY OF INCORPORATION ------------------ ---------------- General Motors Acceptance Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Banque Opel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France Basic Credit Holding Company, L.L.C. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Nuvell Credit Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Nuvell Financial Services Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Capital Auto Receivables, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware General Acceptance (Thailand) Ltd.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thailand GMAC - 20th Century Finance Corporation Pvt. Ltd.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . India GMAC, a.s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Czechoslovakia GMAC Arrendamiento S.A. de C.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mexico GMAC, Australia (Finance) Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Australia GMAC Comercial Automotriz Chile S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chile GMAC Commercial Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware GMAC de Argentina S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Argentina GMAC del Ecuador S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ecuador GMAC Insurance Holdings, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Integon Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Motors Insurance Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . New York GMAC International Finance, B.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Netherlands GMAC Italia Leasing S.p.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Italy GMAC Leasing Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Patlan Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware GMAC Mortgage Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Michigan GMAC Commercial Mortgage Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . California GMAC Mortgage Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pennsylvania GMAC Mortgage Holdings, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware GMAC RF, INC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Michigan Residential Money Centers, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Risk Monitors, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pennsylvania GMAC Sverige AB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sweden General Motors Acceptance Corporation, Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Holden National Leasing Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Australia General Motors Acceptance Corporation of Canada, Limited . . . . . . . . . . . . . . . . . . . . . . . . . Canada Canadian Securitized Auto Receivables Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . Canada GMAC Leaseco Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Canada General Motors Acceptance Corporation, Colombia S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware General Motors Acceptance Corporation, Continental . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware GM Finance HB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sweden General Motors Acceptance Corporation Hungary Financial Services Limited Liability Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hungary General Motors Acceptance Corporation International . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware General Motors Acceptance Corporation Italia S.p.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . Italy General Motors Acceptance Corporation Nederland N.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . Netherlands GMAC Espana, Sociedad Anonima de Financiacion, E.F.C. . . . . . . . . . . . . . . . . . . . . . . . . Spain General Motors Acceptance Corporation, North America . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware General Motors Acceptance Corporation (N.Z.) Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . New Zealand General Motors Acceptance Corporation de Portugal - Servicos Financeiros, S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portugal General Motors Acceptance Corporation, South America . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware General Motors Acceptance Corporation del Ecuador S.A. GMAC-Management (Holding) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ecuador General Motors Acceptance Corporation de Venezuela, C.A. . . . . . . . . . . . . . . . . . . . . . . Venezuela General Motors Acceptance Corporation Suisse S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Switzerland General Motors Austria Beteiligungsgesellschaft m.b.H. . . . . . . . . . . . . . . . . . . . . . . . . . . Austria OPEL Leasinggesellschaft, m.b.H. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Austria Lease Auto Receivables, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Opel Bank GmbH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany Opel Leasing GmbH & Co. OHG* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany Opel Leasing Verwaltungs GmbH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany Opel Bank Hungary Reszrenytarsasag. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hungary Opel Bank, S.A.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Poland P.T. GMAC Lippo Finance* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Indonesia Servicios GMAC S.A. de C.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mexico Wholesale Auto Receivables Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware
* Joint Venture Partnership IV-10 4 GENERAL MOTORS CORPORATION AND SUBSIDIARIES
STATE OR SOVEREIGN POWER NAME OF SUBSIDIARY OF INCORPORATION ------------------- ---------------- General Motors de Argentina S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Argentina General Motors Asia, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware General Motors (Thailand) Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thailand General Motors Asian and Pacific Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Singapore General Motors Automobiles Philippines, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Philippines General Motors do Brasil Ltda. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Brazil Brazauto Trading (Cayman) Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cayman Islands Compass Investimentos e Participacoes Ltda. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Brazil GM Factoring Sociedade de Fomento Comercial Ltda. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Brazil General Motors of Canada Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Canada General Motors Chile S.A., Industria Automotriz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chile General Motors China (Components), Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Hubei Delphi Automotive Generator Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . China Saginaw Norinco Lingyun Drive Shaft Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . China Zhejiang Delphi Asia-Pacific Brake Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . China General Motors China, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware General Motors Colmotores, S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Colombia General Motors Commercial Corporation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware General Motors del Ecuador S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ecuador General Motors (Europe) AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Switzerland General Motors Export Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware General Motors Foreign Sales Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Virgin Islands General Motors Holding Espana, S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Spain Delphi Automotive Systems Espana, S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Spain Delphi Componentes, S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Spain Fundacion Opel Nueva Empresa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Spain Opel Espana de Automoviles, S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Spain General Motors Holdings (U.K.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . England General International (UK) Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . England General Motors Acceptance Corporation (U.K.) Public Limited Company . . . . . . . . . . . . . . . . . . . . England General Motors Acceptance Corporation (U.K.) Finance plc . . . . . . . . . . . . . . . . . . . . . England GMAC Leasing (U.K.) Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . England GMAC Leasing (U.K.) (No. 1) Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . England GMAC Leasing (U.K.) (No. 2) Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . England GMAC Leasing (U.K.) (No. 3) Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . England General Motors Locomotive Group India Private Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . India IBC Vehicles Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom Millbrook Land and Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . England Millbrook Pension Management Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . England Millbrook Proving Ground Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . England VHC Sub-Holdings (UK) Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . England Vauxhall Motors (Finance) Plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . England Vauxhall Motors Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . England General Motors Indonesia, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware General Motors Interamerica Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware General Motors International Operations, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware General Motors Investment Management Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware General Motors Japan Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Japan General Motors Kenya Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kenya General Motors Korea, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware General Motors Nederland B.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Netherlands Allison Transmission Europe B.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Netherlands General Motors Yugoslavia, d.o.o. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Yugoslavia Opel C&S spol. s.r.o. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Czechoslovakia Opel Nederland B.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Netherlands General Motors Nordiska AB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sweden General Motors Overseas Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Delphi Automotive Systems Australia Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Australia Delphi Energy and Engine Management Systems UK Overseas Corporation . . . . . . . . . . . . . . . . . . . . Delaware
IV-11 5 GENERAL MOTORS CORPORATION AND SUBSIDIARIES
STATE OR SOVEREIGN POWER NAME OF SUBSIDIARY OF INCORPORATION ------------------ ---------------- Delphi Overseas Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Delphi Chassis Systems UK Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . England/Wales Delphi Saginaw Steering Systems U.K. Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . England Societe Francaise des Amortisseurs De Carbon S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . France G.M. Holding (Portugal) SGPS, Lda. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portugal DELPHI INLAN - Industria de Componentes Mecanicos, S.A. . . . . . . . . . . . . . . . . . . . . . . . Portugal Delphi Packard Sistemas Electricos, S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portugal Opel Portugal, Lda. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portugal GMOC Administrative Services Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware GM (UK) Pension Trustees Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom GMOC Australia Pty. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Australia General Motors-Holden's Automotive Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Australia General Motors Overseas Commercial Vehicle Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware General Motors Venezolana, C.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Venezuela Holden's Motor Overseas Corporation Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Lidlington Engineering Company, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Truck and Bus Engineering U.K., Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware General Motors Overseas Distribution Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Delphi Packard Elektrik Sistemleri Ltd. Sti. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Turkey GMODC Finance N.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Netherlands Antilles General Motors Import & Distribution GmbH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany General Motors Investment Services Company N.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Belgium General Motors Peru S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Peru General Motors Receivables Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware General Motors Uruguay, S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Uruguay General Motors U.S. Trading Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nevada Holden New Zealand Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . New Zealand General Motors New Zealand Pensions Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . New Zealand Hughes Electronics Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware DIRECTV Enterprises, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware DIRECTV, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . California DIRECTV Merchandising, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware DIRECTV Operations, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . California First HNS Mauritius , Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mauritius HNS-Clairtel CP, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware HNS-India, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware HNS-India VSAT, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Hughes Escorts Communications Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . India HNS-Italia S.r.L. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Italy HNS de Mexico, S.A. de C.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mexico HNS-Shanghai, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Hughes Electronics Foreign Sales Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Barbados Hughes Electronics Realty, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Hughes Foreign Sales Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Virgin Islands Hughes International Sales Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . California Hughes International Sales Corporation No. 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . California Hughes Investment Management Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . California Hughes Network Systems France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France Hughes Network Systems International Service Company . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Hughes Network Systems Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom Hughes Software Systems Private Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . India Hughes Telecommunications & Space Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Hughes do Brasil - Electronica e Comunicacoes Ltda. . . . . . . . . . . . . . . . . . . . . . . . . . Brazil Hughes Communications, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . California Hughes International de Mexico, S.A. de C.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mexico Hughes Space and Communications Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Spectrolab, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . California
IV-12 6 GENERAL MOTORS CORPORATION AND SUBSIDIARIES
STATE OR SOVEREIGN POWER NAME OF SUBSIDIARY OF INCORPORATION ------------------ ---------------- L-T Ranches, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . California MDP, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . California Shanghai Hughes Network Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . China IBC Pension Trustees Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . England IBC Vehicles (Distribution) Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom Jennings Motors, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Luton Design Centre Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom MB Cable Confection Sdn Bhd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Malaysia Opel Austria GmbH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Austria Delphi Automotive Systems Vienna GmbH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Austria Opel Southeast Europe Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hungary Opel Belgium N.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Belgium OPEL Guangzhou Precision Machining Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . China Opel Ireland Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ireland Opel Italia S.p.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Italy Opel Norge AS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Norway Opel Oy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Finland Opel Suisse S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Switzerland GM-Saab Communication GmbH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Switzerland Packard CTA Pty. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Australia Packard Electric Ireland Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ireland Packard Hughes Interconnect Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Packard Hughes Interconnect Connection Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . California Packard Hughes Interconnect Engineering Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Packard Hughes Interconnect Wiring Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . California Packard Electric Systems Samara Cable Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Russia Provencorp S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Argentina PT General Motors Buana Indonesia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Indonesia P.T. Packard Kabelindo Murni Indonesia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Indonesia Radiadores Richard, S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Argentina Renaissance Center Management Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Michigan Riverfront Holdings, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Saab Opel Sverige AB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sweden Saturn Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Saturn County Bond Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Sodex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Morocco WRE, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Michigan Grand Pointe Holdings, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Michigan
322 directly or indirectly owned subsidiaries Companies not included in the Registrant's consolidated financial statements, for which no financial statements are submitted: 24 other directly or indirectly owned domestic and foreign subsidiaries 11 active subsidiaries 13 inactive subsidiaries 27 fifty-percent owned companies and 63 less than fifty-percent owned companies the investments in which are accounted for by the equity method. In addition, the Registrant owns 100% of the voting control of the following companies: 347 dealerships, including certain dealerships operating under dealership assistance plans, engaged in retail distribution of General Motors products 245 dealerships operating in the United States 102 dealerships operating in foreign countries The number of dealerships operating under dealership assistance plans increased by a net of 2. IV-13 7 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Companies not shown by name, if considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. During 1997, there were changes in the number of subsidiaries and companies of the Registrant, as follows: 2 directly and 44 indirectly owned domestic subsidiaries, and 6 directly and 18 indirectly owned foreign subsidiaries were organized or acquired. 2 directly and 36 indirectly owned domestic subsidiaries, and 0 direct and 22 indirectly owned foreign subsidiaries were dissolved, sold, or spun-off. A fifty-percent interest and less than fifty-percent interests were acquired in 4 companies and 5 companies, while interests in 15 fifty-percent owned and 5 less than fifty-percent owned companies were terminated. 1 indirectly owned domestic subsidiary was removed because ownership was less than twenty percent. 2 indirectly owned foreign subsidiaries went from less than fifty percent owned to greater than fifty percent owned. 2 directly owned domestic, 3 indirectly owned domestic and 6 indirectly owned foreign companies moved to inactive subsidiaries. 2 directly owned subsidiaries were removed from this list and placed on the dealership assistance plan. * * * * * * * IV-14 EX-23 4 EXHIBIT 23 1 EXHIBIT 23 GENERAL MOTORS CORPORATION AND SUBSIDIARIES CONSENT OF INDEPENDENT AUDITORS The Board of Directors General Motors Corporation: We consent to the incorporation by reference of our reports dated January 26, 1998 appearing in this Annual Report on Form 10-K of General Motors Corporation for the year ended December 31, 1997, in the following Registration Statements:
REGISTRATION FORM STATEMENT NO. DESCRIPTION - ---- ------------- ----------- S-3 33-64229 General Motors Corporation Debt Securities S-3 333-13797 General Motors Corporation Debt Securities S-3 33-47343 General Motors Corporation $1-2/3 Par Value Common Stock (Post-Effective Amendment No. 1) S-3 33-49035 General Motors Corporation $1-2/3 Par Value Common Stock (Amendment No. 1) S-3 33-56671 General Motors Corporation $1-2/3 Par Value Common Stock (Amendment No. 1) S-3 33-49309 General Motors Corporation Dividend Reinvestment Plan S-8 333-17975 The General Motors Personal Savings Plan for Hourly-Rate Employees in the United States S-8 33-54841 General Motors Amended 1987 Stock Incentive Plan S-8 333-45961 General Motors Savings-Stock Purchase Program for Salaried Employees in the United States S-8 33-32322 Hughes Aircraft Company Salaried Employees' Thrift and Savings Plan Hughes Aircraft Company Tucson Bargaining Employees' Thrift and Savings Plan Hughes Aircraft Company California Hourly Employees' Thrift and Savings Plan Hughes Thrift and Savings Plan S-8 33-54835 The GMAC Mortgage Corporation Savings Incentive Plan S-8 333-24697 Hughes Electronics Corporation Incentive Plan S-8 333-21029 Saturn Individual Savings Plan for Represented Members S-8 333-17937 Saturn Personal Choices Savings Plan for Non-Represented Members S-8 333-44957 General Motors 1998 Stock Option Plan
/s/DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Detroit, Michigan March 18, 1998 IV-15 EX-27 5 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GENERAL MOTORS CORPORATION DECEMBER 31, 1997 CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO 1997 ANNUAL REPORT ON FORM 10-K. 1,000,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 11,262 11,722 66,363 0 12,102 0 76,482 41,915 228,888 0 93,027 222 1 1,166 16,339 228,888 153,683 178,174 130,028 146,404 240 523 6,113 7,714 1,069 6,698 0 0 0 6,698 8.70 8.62
EX-99 6 EXHIBIT 99 1 EXHIBIT 99 HUGHES ELECTRONICS CORPORATION RESPONSIBILITIES FOR FINANCIAL STATEMENTS The following financial statements of Hughes Electronics Corporation and subsidiaries were prepared by management, which is responsible for their integrity and objectivity. The statements have been prepared in conformity with generally accepted accounting principles and, as such, include amounts based on judgments of management. Management is further responsible for maintaining internal control designed to provide reasonable assurance that the books and records reflect the transactions of the companies and that established policies and procedures are carefully followed. Perhaps the most important feature in internal control is that it is continually reviewed for effectiveness and is augmented by written policies and guidelines, the careful selection and training of qualified personnel and a strong program of internal audit. Deloitte & Touche LLP, an independent auditing firm, is engaged to audit the financial statements of Hughes Electronics Corporation and subsidiaries and issue reports thereon. The audit is conducted in accordance with generally accepted auditing standards that comprehend the consideration of internal control and tests of transactions to the extent necessary to form an independent opinion on the financial statements prepared by management. The Independent Auditors' Report appears on the next page. The Board of Directors, through its Audit Committee, is responsible for assuring that management fulfills its responsibilities in the preparation of the financial statements and engaging the independent auditors. The Audit Committee reviews the scope of the audits and the accounting principles being applied in financial reporting. The independent auditors, representatives of management, and the internal auditors meet regularly (separately and jointly) with the Audit Committee to review the activities of each, to ensure that each is properly discharging its responsibilities and to assess the effectiveness of internal control. It is management's conclusion that internal control at December 31, 1997 provides reasonable assurance that the books and records reflect the transactions of the companies and that established policies and procedures are complied with. To ensure complete independence, Deloitte & Touche LLP has full and free access to meet with the Audit Committee, without management representatives present, to discuss the results of the audit, the adequacy of internal control, and the quality of financial reporting. /s/MICHAEL T. SMITH /s/CHARLES H. NOSKI /s/ROXANNE S. AUSTIN Michael T. Smith Charles H. Noski Roxanne S. Austin Chairman of the Board and President Senior Vice President and Chief Executive Officer Chief Financial Officer IV-16 2 HUGHES ELECTRONICS CORPORATION INDEPENDENT AUDITORS' REPORT To the Stockholder and Board of Directors of Hughes Electronics Corporation: We have audited the Balance Sheet of Hughes Electronics Corporation (as more fully described in Note 1 to the financial statements) as of December 31, 1997 and 1996 and the related Statement of Income and Pro Forma Available Separate Consolidated Net Income, Statement of Changes in Owner's Equity and Statement of Cash Flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of Hughes Electronics Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Hughes Electronics Corporation at December 31, 1997 and 1996 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Los Angeles, California January 26, 1998 IV-17 3 HUGHES ELECTRONICS CORPORATION STATEMENT OF INCOME AND PRO FORMA AVAILABLE SEPARATE CONSOLIDATED NET INCOME
Years Ended December 31, ---------------------------- 1997 1996 1995 -------- -------- -------- (Dollars in Millions Except Per Share Amounts) REVENUES Product sales $3,143.6 $3,009.0 $2,576.1 Direct broadcast, leasing and other services 1,984.7 999.7 576.7 -------- -------- -------- TOTAL REVENUES 5,128.3 4,008.7 3,152.8 -------- -------- -------- OPERATING COSTS AND EXPENSES Cost of products sold 2,493.3 2,183.7 1,977.8 Broadcast programming and other costs 912.3 631.8 335.2 Selling, general and administrative expenses 1,119.9 788.5 488.4 Depreciation and amortization 296.4 194.6 179.9 Amortization of GM purchase accounting adjustments related to Hughes Aircraft Company 21.0 21.0 21.0 -------- -------- -------- TOTAL OPERATING COSTS AND EXPENSES 4,842.9 3,819.6 3,002.3 -------- -------- -------- OPERATING PROFIT 285.4 189.1 150.5 Interest income 33.1 6.8 5.2 Interest expense (91.0) (42.9) (61.1) Other, net 390.7 69.1 3.0 -------- -------- -------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES, MINORITY INTERESTS AND EXTRAORDINARY ITEM 618.2 222.1 97.6 Income taxes 236.7 104.8 31.4 Minority interests in net losses of subsidiaries 24.8 52.6 4.6 -------- -------- -------- Income from continuing operations before extraordinary item 406.3 169.9 70.8 Income (Loss) from discontinued operations, net of taxes 1.2 (7.4) (64.6) Gain on sale of discontinued operations, net of taxes 62.8 - - -------- -------- -------- Income before extraordinary item 470.3 162.5 6.2 Extraordinary item, net of taxes (20.6) - - -------- -------- -------- NET INCOME 449.7 162.5 6.2 Adjustments to exclude the effect of GM purchase accounting adjustments related to Hughes Aircraft Company 21.0 21.0 21.0 -------- -------- -------- EARNINGS USED FOR PRO FORMA COMPUTATION OF AVAILABLE SEPARATE CONSOLIDATED NET INCOME $470.7 $183.5 $27.2 ======== ======== ======== PRO FORMA AVAILABLE SEPARATE CONSOLIDATED NET INCOME Average number of shares of General Motors Class H Common Stock outstanding (in millions) (Numerator) 101.5 98.4 95.5 Class H dividend base (in million) (Denominator) 399.9 399.9 399.9 Pro Forma Available Separate Consolidated Net Income $119.4 $45.2 $6.5 ======== ======== ======== PRO FORMA EARNINGS ATTRIBUTABLE TO GENERAL MOTORS CLASS H COMMON STOCK ON A PER SHARE BASIS Income from continuing operations before extraordinary item $1.07 $0.48 $0.23 Discontinued operations 0.16 (0.02) (0.16) Extraordinary item (0.05) - - -------- -------- -------- Pro Forma Earnings Attributable to General Motors Class H Common Stock $1.18 $0.46 $0.07 ======== ======== ========
- -------------- Certain 1996 and 1995 amounts have been reclassified to conform with the 1997 presentation. Reference should be made to the Notes to Financial Statements. IV-18 4 HUGHES ELECTRONICS CORPORATION BALANCE SHEET
December 31, ------------------------ ASSETS 1997 1996 ----------- ----------- (Dollars in Millions) ASSETS CURRENT ASSETS Cash and cash equivalents $2,783.8 $6.7 Accounts and notes receivable (less allowances) 662.8 423.0 Contracts in process, less advances and progress payments of $50.2 and $54.2 575.6 401.4 Inventories 486.4 423.1 Net assets of discontinued operations - 35.0 Deferred subscriber acquisition costs 26.4 97.5 Prepaid expenses and other, including deferred income taxes of $93.2 and $26.7 270.9 110.4 --------- -------- TOTAL CURRENT ASSETS 4,805.9 1,497.1 SATELLITES, NET 2,643.4 1,056.6 PROPERTY, NET 889.7 690.8 NET INVESTMENT IN SALES-TYPE LEASES 337.6 320.6 INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF $318.3 AND $260.4 2,954.8 468.0 INVESTMENTS AND OTHER ASSETS 1,132.4 383.3 --------- -------- TOTAL ASSETS $12,763.8 $4,416.4 ========= ======== LIABILITIES AND OWNER'S EQUITY CURRENT LIABILITIES Accounts payable $472.8 $359.0 Advances on contracts 209.8 287.8 Deferred revenues 110.6 142.8 Accrued liabilities 689.4 430.0 --------- -------- TOTAL CURRENT LIABILITIES 1,482.6 1,219.6 --------- -------- LONG-TERM DEBT 637.6 - DEFERRED GAINS ON SALES AND LEASEBACKS 191.9 234.8 ACCRUED OPERATING LEASEBACK EXPENSE 100.2 107.8 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 154.8 - OTHER LIABILITIES AND DEFERRED CREDITS 706.4 136.9 DEFERRED INCOME TAXES 570.8 204.1 COMMITMENTS AND CONTINGENCIES MINORITY INTERESTS 607.8 21.6 OWNER'S EQUITY Parent Company's net investment - 2,497.0 Capital stock and additional paid-in capital 8,322.8 - Net income retained for use in the business 7.1 - --------- -------- Subtotal 8,329.9 2,497.0 Minimum pension liability adjustment (34.8) - Accumulated unrealized gains on securities 21.4 - Accumulated foreign currency translation adjustments (4.8) (5.4) --------- -------- Accumulated other comprehensive loss (18.2) (5.4) --------- -------- TOTAL OWNER'S EQUITY 8,311.7 2,491.6 --------- -------- TOTAL LIABILITIES AND OWNER'S EQUITY $12,763.8 $4,416.4 ========= ========
- -------------- Certain 1996 amounts have been reclassified to conform with the 1997 presentation. Reference should be made to the Notes to Financial Statements. IV-19 5 HUGHES ELECTRONICS CORPORATION STATEMENT OF CHANGES IN OWNER'S EQUITY (DOLLARS IN MILLIONS)
Capital Stock Accumulated Parent and Other Company's Additional Compre- Total Compre- Net Paid-In Retained hensive Owner's hensive Investment Capital Earnings Loss Equity Income ---------- ------------- -------- ---------- -------- ------- BALANCE AT JANUARY 1, 1995 $2,305.0 $(4.0) $2,301.0 Net contribution from Parent Company 303.9 303.9 Net income 6.2 6.2 $6.2 Foreign currency translation adjustments (2.2) (2.2) (2.2) ------- Comprehensive income $4.0 ======= BALANCE AT DECEMBER 31, 1995 2,615.1 (6.2) 2,608.9 Net distribution to Parent Company (280.6) (280.6) Net income 162.5 162.5 $162.5 Foreign currency translation adjustments 0.8 0.8 0.8 ------- Comprehensive income $163.3 ======= BALANCE AT DECEMBER 31, 1996 2,497.0 (5.4) 2,491.6 Net contribution from Parent Company 1,124.2 1,124.2 Transfer of capital from Parent Company's net investment (4,063.8) $4,063.8 - Capital contribution resulting from the Hughes Transactions 4,259.0 4,259.0 Minimum pension liability adjustment resulting from the Hughes Transactions (34.8) (34.8) Unrealized gains on securities resulting from the Hughes Transactions 21.4 21.4 Net income 442.6 $7.1 449.7 $449.7 Foreign currency translation adjustments 0.6 0.6 0.6 ------- Comprehensive income $450.3 ======= BALANCE AT DECEMBER 31, 1997 $- $8,322.8 $7.1 $(18.2) $8,311.7 ========== ======== ======== ========== ========
Reference should be made to the Notes to Financial Statements. * * * * * * * * * * * IV-20 6 HUGHES ELECTRONICS CORPORATION STATEMENT OF CASH FLOWS
Years Ended December 31, ---------------------------------- 1997 1996 1995 ----------- ----------- -------- (Dollars in Millions) CASH FLOWS FROM OPERATING ACTIVITIES Net Income $449.7 $162.5 $6.2 Adjustments to reconcile net income to net cash provided by continuing operations (Income) loss from discontinued operations (1.2) 7.4 64.6 Gain on sale of discontinued operations (62.8) - - Extraordinary item, net of taxes 20.6 - - Depreciation and amortization 296.4 194.6 179.9 Amortization of GM purchase accounting adjustments related to Hughes Aircraft Company 21.0 21.0 21.0 Net (gain) loss on sale of investments and businesses sold (489.7) (120.3) 49.0 Gross profit on sales-type leases (33.6) (51.8) (62.9) Deferred income taxes and other 285.5 91.9 (76.5) Change in other operating assets and liabilities Accounts and notes receivable (228.0) (120.1) (110.3) Contracts in process (174.2) 54.1 174.1 Inventories (60.7) (121.5) (109.3) Deferred subscriber acquisition costs 71.1 (97.5) - Collections of principal on net investment in sales-type leases 22.0 31.2 19.6 Accounts payable (184.1) 116.8 7.1 Advances on contracts (95.6) 97.6 8.6 Deferred revenues (32.2) 113.7 22.5 Accrued liabilities 217.8 22.4 86.4 Deferred gains on sales and leaseback (42.9) (41.6) (27.1) Other 31.4 7.0 (154.1) -------- -------- -------- Net Cash Provided by Continuing Operations 10.5 367.4 98.8 Net cash used by discontinued operations (15.9) (8.0) (25.2) -------- -------- -------- Net Cash (Used in) Provided by Operating Activities (5.4) 359.4 73.6 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Investment in companies, net of cash acquired (1,637.0) (32.2) (1.3) Expenditures for property (251.3) (261.5) (167.7) Increase in satellites (633.5) (191.6) (223.7) Proceeds from sale of long-term investments 242.0 - - Proceeds from sale and leaseback of satellite transponders with General Motors Acceptance Corporation - 252.0 - Proceeds from sale of minority interest in subsidiary - 137.5 - Repurchase of minority interest in subsidiary (161.8) - - Proceeds from sale of discontinued operations 155.0 - - Proceeds from sales of investments and businesses - - 17.5 Proceeds from disposal of property 55.1 15.3 1.7 -------- -------- -------- Net Cash Used in Investing Activities (2,231.5) (80.5) (373.5) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Long-term debt borrowings 2,383.3 - - Repayment of long-term debt (2,851.9) - - Premium paid to retire debt (34.4) - - Contributions from (distributions to) Parent Company 1,124.2 (279.8) 301.7 Capital infusion resulting from Hughes Transactions 4,392.8 - - -------- -------- -------- Net Cash Provided by (Used in) Financing Activities 5,014.0 (279.8) 301.7 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 2,777.1 (0.9) 1.8 Cash and cash equivalents at beginning of the year 6.7 7.6 5.8 -------- -------- -------- Cash and cash equivalents at end of the year $2,783.8 $6.7 $7.6 ======== ======== ========
- -------------- Certain 1996 and 1995 amounts have been reclassified to conform with the 1997 presentation. Reference should be made to the Notes to Financial Statements. IV-21 7 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS NOTE 1: BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS On December 17, 1997, Hughes Electronics Corporation ("Hughes Electronics") and General Motors Corporation ("GM"), the parent of Hughes Electronics completed a series of transactions (the "Hughes Transactions") designed to address strategic challenges facing the three principal businesses of Hughes Electronics and unlock stockholder value in GM. The Hughes Transactions included the tax-free spin-off of the defense electronics business ("Hughes Defense") to holders of GM $1-2/3 par value and Class H common stocks, followed immediately by the merger of Hughes Defense with Raytheon Company ("Raytheon"). Concurrently, Delco Electronics Corporation ("Delco"), the automotive electronics business, was transferred to GM's Delphi Automotive Systems unit. Finally, GM Class H common stock was recapitalized into a GM tracking stock linked to the remaining telecommunications and space business. For the periods prior to the consummation of the Hughes Transactions on December 17, 1997, Hughes Electronics, consisting of its defense electronics, automotive electronics and telecommunications and space businesses, is hereinafter referred to as former Hughes. In connection with the recapitalization of Hughes Electronics on December 17, 1997, the telecommunications and space business of former Hughes, consisting principally of its direct-to-home broadcast, satellite services, satellite manufacturing and network systems businesses, was contributed to the recapitalized Hughes Electronics. Such telecommunications and space business, both before and after the recapitalization, is hereinafter referred to as Hughes. The accompanying financial statements and footnotes pertain only to Hughes and do not include balances of former Hughes related to Hughes Defense or Delco. Prior to the Hughes Transactions, the Hughes businesses were effectively operated as divisions of former Hughes. For the period prior to December 18, 1997, these financial statements include allocations of corporate expenses from former Hughes, including research and development, general management, human resources, financial, legal, tax, quality, communications, marketing, international, employee benefits and other miscellaneous services. These costs and expenses have been charged to Hughes based either on usage or using allocation methodologies primarily based upon total revenues, certain tangible assets and payroll expenses. Management believes the allocations were made on a reasonable basis; however, they may not necessarily reflect the financial position, results of operations or cash flows of Hughes on a stand-alone basis in the future. Also, prior to December 18, 1997, interest expense in the Statement of Income and Pro Forma Available Separate Consolidated Net Income included an allocated share of total former Hughes' interest expense. The Hughes Transactions had a significant impact on the Hughes balance sheet. Prior to the consummation of the Hughes Transactions, Hughes participated in the centralized cash management system of former Hughes, wherein cash receipts were transferred to and cash disbursements were funded by former Hughes on a daily basis. Accordingly, Hughes' balance sheet included only cash and cash equivalents held directly by the telecommunications and space business. In conjunction with the completion of the Hughes Transactions, certain assets and liabilities were contributed by former Hughes to Hughes. The contributed assets and liabilities consisted principally of cash, pension assets and liabilities, liabilities for other postretirement benefits, deferred taxes, property and equipment, and other miscellaneous items. In addition, Hughes received $4.0 billion of cash proceeds from the borrowings incurred by Hughes Defense prior to its spin-off to GM. Since these asset and liability changes took place on December 17, 1997, they are not included in the December 31, 1996 balance sheet of Hughes. The accompanying financial statements include the applicable portion of intangible assets, including goodwill, and related amortization resulting from purchase accounting adjustments associated with GM's purchase of Hughes Aircraft Company in 1985. Hughes is a leading manufacturer of communications satellites and provider of satellite-based services. It owns and operates one of the world's largest private fleets of geostationary communications satellites and is the world's leading supplier of satellite-based private business networks. Hughes is also a leader in the direct broadcast satellite market with its programming distribution service known as DIRECTV(R), which was introduced in the U.S. in 1994 and was the first high-powered, all digital, Direct-To-Home ("DTH") television distribution service in North America. DIRECTV began service in Latin America in 1996 and Japan in 1997. Hughes also provides communications equipment and services in the mobile communications and packet switching markets. Its equipment and services are applied in, among other things, data, video and audio transmission, cable and network television distribution, private business networks, digital cellular communications and DTH satellite broadcast distribution of television programming. IV-22 8 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Combination and Consolidation Prior to December 18, 1997, the financial statements present the financial position, results of operations and cash flows of the telecommunications and space business owned and operated by former Hughes on a combined basis. Subsequent to the Hughes Transactions, the accompanying financial statements are presented on a consolidated basis. The financial statements include the accounts of Hughes and its domestic and foreign subsidiaries that are more than 50% owned, with investments in associated companies, in which Hughes owns at least 20% of the voting securities, accounted for under the equity method of accounting. Use of Estimates in the Preparation of the Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates. Revenue Recognition Revenues are generated from sales of satellites and telecommunications equipment, DTH broadcast subscriptions, and the sale of transponder capacity and related services through outright sales, sales-type leases and operating lease contracts. Sales under long-term contracts are recognized primarily using the percentage-of-completion (cost-to-cost) method of accounting. Under this method, sales are recorded equivalent to costs incurred plus a portion of the profit expected to be realized, determined based on the ratio of costs incurred to estimated total costs at completion. Profits expected to be realized on long-term contracts are based on estimates of total sales value and costs at completion. These estimates are reviewed and revised periodically throughout the lives of the contracts, and adjustments to profits resulting from such revisions are recorded in the accounting period in which the revisions are made. Estimated losses on contracts are recorded in the period in which they are identified. Certain contracts contain cost or performance incentives which provide for increases in profits for surpassing stated objectives and decreases in profits for failure to achieve such objectives. Amounts associated with incentives are included in estimates of total sales values when there is sufficient information to relate actual performance to the objectives. Sales which are not pursuant to long-term contracts are generally recognized as products are shipped or services are rendered. DTH subscription revenues are recognized when programming is viewed by subscribers. Programming billed in advance of viewing is recorded as deferred revenues in the Balance Sheet. Satellite transponder lease contracts qualifying for capital lease treatment (typically based on the term of the lease) are accounted for as sales-type leases, with revenues recognized equal to the net present value of the future minimum lease payments. Upon entering into a lease, the cost basis of the transponder is removed and charged to cost of products sold. The portion of each periodic lease payment deemed to be attributable to interest income is recognized as income in each respective period. Contracts for sales of transponders typically include telemetry, tracking and control (TT&C) service agreements. Revenues related to TT&C service agreements are recognized as the services are performed. Transponder and other lease contracts that do not qualify as sales-type leases are accounted for as operating leases. Operating lease revenues are recognized on a straight-line basis over the respective lease terms. Differences between operating lease payments received and revenues recognized are deferred and included in accounts receivable. Hughes has entered into agreements for the sale and leaseback of certain of its satellite transponders. The leaseback transactions have been classified as operating leases and, therefore, the capitalized cost and associated depreciation related to satellite transponders sold are not included in the accompanying financial statements. Gains resulting from such transactions are deferred and amortized over the leaseback period. Leaseback expense is recorded using the straight-line method over the term of the lease, net of amortization of the deferred gains. Differences between operating leaseback payments made and expense recognized are deferred and included in accrued operating leaseback expense. IV-23 9 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Cash Flows Cash equivalents consist of highly liquid investments purchased with original maturities of 90 days or less. Net cash from operating activities includes cash payments made by Hughes and by former Hughes on behalf of Hughes for interest of $156.8 million, $55.8 million and $75.7 million in 1997, 1996 and 1995, respectively. Cash payments made by Hughes and by former Hughes on behalf of Hughes for income taxes amounted to $24.0 million, $36.5 million and $160.5 million in 1997, 1996 and 1995, respectively. Certain non-cash transactions occurred in connection with the consummation of the Hughes Transactions on December 17, 1997, resulting in a contribution of a net liability of $133.8 million. In a separate non-cash transaction, PanAmSat converted its outstanding preferred stock, acquired as part of the PanAmSat merger (see Note 16), into debt amounting to $438.5 million. Contracts in Process Contracts in process are stated at costs incurred plus estimated profit, less amounts billed to customers and advances and progress payments applied. Engineering, tooling, manufacturing, and applicable overhead costs, including administrative, research and development, and selling expenses, are charged to costs and expenses when incurred. Contracts in process include amounts relating to contracts with long production cycles, with $137.9 million of the 1997 amount expected to be billed after one year. Amounts billed under retainage provisions of contracts are not significant, and substantially all amounts are collectible within one year. Under certain contracts with the U.S. Government, progress payments are received based on costs incurred on the respective contracts. Title to the inventories related to such contracts (included in contracts in process) vests with the U.S. Government. Inventories Inventories are stated at the lower of cost or market principally using the average cost method. Major Classes of Inventories
(Dollars in Millions) 1997 1996 ------ ------ Productive material and supplies $57.5 $82.6 Work in process 328.5 250.5 Finished goods 100.4 90.0 ------ ------ Total $486.4 $423.1 ====== ======
Deferred Subscriber Acquisition Costs During 1996, Hughes introduced certain rebate programs which reduced the net retail price of Digital Satellite System ("DSS(R)") equipment when consumers subscribed to and prepaid for DIRECTV programming services for a minimum of one year. The rebate costs have been recorded as deferred subscriber acquisition costs and are being amortized over the one-year subscription commitment period. Net deferred rebate costs totaled $26.4 million and $97.5 million at December 31, 1997 and 1996, respectively. Property, Satellites and Depreciation Property and Satellites are carried at cost. Satellite costs include construction costs, launch costs, launch insurance and capitalized interest. Capitalized satellite costs represent the costs of successful satellite launches. Satellite costs related to unsuccessful launches, net of insurance proceeds, are recognized in the period of failure. Depreciation is computed generally using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the life of the asset or term of the lease. Intangible Assets Intangible assets are amortized using the straight-line method over periods not exceeding 40 years. IV-24 10 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Software Development Costs Other assets include certain software development costs capitalized in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. Capitalized software development costs at December 31, 1997 and 1996, net of accumulated amortization of $107.7 million and $86.1 million, respectively, totaled $99.0 million and $87.0 million. The software is amortized using the greater of the units of revenue method or the straight-line method over its useful life, not in excess of five years. Software program reviews are conducted to ensure that capitalized software development costs are properly treated and costs associated with programs that are not generating revenues are appropriately written-off. Valuation of Long-Lived Assets Hughes periodically evaluates the carrying value of long-lived assets to be held and used, including goodwill and other intangible assets, when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost of disposal. Research and Development Expenditures for research and development are charged to costs and expenses as incurred and amounted to $120.4 million in 1997, $94.6 million in 1996 and $74.6 million in 1995. Foreign Currency Substantially all of Hughes' foreign operations have determined the local currency to be their functional currency. Accordingly, these foreign entities translate assets and liabilities from their local currencies to U.S. dollars using year-end exchange rates while income and expense accounts are translated at the average rates in effect during the year. The resulting translation adjustment is accumulated as a separate component of owner's equity. Net foreign currency transaction gains and losses included in the operating results were not material for all years presented. Financial Instruments and Investments Hughes maintains investments in equity securities of unaffiliated companies. Investments in equity securities are considered available-for-sale and carried at current fair value with unrealized gains or losses, net of tax, reported as a separate component of owner's equity. Fair value is determined by market quotes, when available, or by management estimate. Market values of financial instruments, other than debt and derivative instruments, are based upon management estimates. Market values of debt and derivative instruments are determined by quotes from financial institutions. The carrying value of cash and cash equivalents, accounts and notes receivable, investments and other assets, accounts payable, amounts included in accrued liabilities meeting the definition of a financial instrument and debt approximate fair value at December 31, 1997. The fair value of derivative financial instruments approximates their contract value at December 31, 1997. Hughes' derivative contracts primarily consist of foreign exchange-forward contracts. Hughes enters into these contracts to reduce its exposure to fluctuations in foreign exchange rates. Foreign exchange-forward contracts are accounted for as hedges to the extent they are designated as, and are effective as, hedges of firm foreign currency commitments. Gains and losses on foreign exchange-forward contracts designated as hedges of firm foreign currency commitments are recognized in income in the same period as gains and losses on the underlying transactions are recognized. Stock Compensation Hughes issues stock options to employees with grant prices equal to the fair value of the underlying security at the date of grant. No compensation cost has been recognized for options in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees. See Note 11 for information regarding the pro forma effect on earnings of recognizing compensation cost based on the estimated fair value of the stock options granted, as required by SFAS No. 123, Accounting for Stock-Based Compensation. IV-25 11 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED MARKET CONCENTRATIONS AND CREDIT RISK Sales under U.S. Government contracts were 15.3%, 22.5% and 30.5% of total revenues in 1997, 1996 and 1995, respectively. Hughes provides services and extends credit to a large number of customers in the commercial satellite communications market and to a large number of residential consumers. Management monitors its exposure to credit losses and maintains allowances for anticipated losses. NOTE 3: PROPERTY AND SATELLITES, NET
ESTIMATED USEFUL LIVES (Dollars in Millions) (YEARS) 1997 1996 ------------ -------- -------- Land and improvements 10 - 20 $51.2 $47.5 Buildings and unamortized leasehold improvements 3 - 45 305.8 272.4 Machinery and equipment 3 - 30 1,015.4 854.5 Furniture, fixtures and office machines 3 - 10 83.2 67.3 Construction in progress - 169.9 106.2 -------- -------- Total 1,625.5 1,347.9 Less accumulated depreciation 735.8 657.1 -------- -------- Property, net $889.7 $690.8 ======== ======== Satellites 9 - 16 $3,051.9 $1,400.1 Less accumulated depreciation - 408.5 343.5 -------- -------- Satellites, net $2,643.4 $1,056.6 ======== ========
Hughes capitalized interest of $64.5 million, $12.9 million and $14.6 million for 1997, 1996 and 1995, respectively, as part of the cost of its satellites under construction. NOTE 4: LEASING ACTIVITIES Future minimum lease payments due from customers under noncancelable satellite transponder operating leases, exclusive of amounts due from subleases reported below, are $695.9 million in 1998, $666.1 million in 1999, $612.2 million in 2000, $571.6 million in 2001, $505.2 million in 2002 and $2,721.5 million thereafter. The components of the net investment in sales-type leases are as follows:
(Dollars in Millions) 1997 1996 ------- ------- Total minimum lease payments $662.5 $678.7 Less unearned interest income (297.1) (337.5) ------- ------- Total net investment in sales-type leases 365.4 341.2 Less current portion (27.8) (20.6) ------- ------- Total $337.6 $320.6 ======= =======
Future minimum payments due from customers under sales-type leases and related service agreements as of December 31, 1997 are $78.1 million in 1998, $87.2 million in 1999, $85.8 million in 2000, $87.1 million in 2001, $87.6 million in 2002, and $305.5 million thereafter. In February 1996, Hughes entered into a sale and leaseback of certain satellite transponders on Galaxy III-R with General Motors Acceptance Corporation ("GMAC"), a subsidiary of GM. Proceeds from the sale were $252.0 million, and the sale resulted in a gain of $108.8 million, which was deferred and is being amortized over the seven-year leaseback period. In 1992 and 1991, Hughes entered into agreements for the sale and leaseback of certain transponders on SBS-6 and Galaxy VII, respectively, resulting in deferred gains of $180.0 million in 1992 and $96.1 million in 1991, which are being amortized over their respective leaseback periods. The transponder leaseback terms include early buyout options of $151.7 million in 1998 and $366.2 million in 1999. In January 1998, PanAmSat exercised an early buy-out option for $96.6 million related to transponders on SBS-6. IV-26 12 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED NOTE 4: LEASING ACTIVITIES - CONCLUDED As of December 31, 1997, the future minimum leaseback amounts payable to lessors under the operating leasebacks and the future minimum sublease amounts due from subleases under noncancelable subleases are as follows:
MINIMUM SUBLEASE LEASEBACK AMOUNTS (Dollars in Millions) PAYMENTS DUE ---------- -------- 1998 $102.5 $ 76.6 1999 133.3 74.9 2000 164.6 69.7 2001 90.9 67.0 2002 138.3 56.5 Thereafter 228.5 159.5 ------- ------- Total $858.1 $ 504.2 ======= =======
NOTE 5: ACCRUED LIABILITIES
(Dollars in Millions) 1997 1996 ------ ------ Payrolls and other compensation $200.2 $115.5 Contract-related provisions 76.0 159.5 Reserve for consumer finance and rebate programs 86.9 120.5 Other 326.3 34.5 ------ ------ Total $689.4 $430.0 ====== ======
NOTE 6: LONG-TERM DEBT
(Dollars in Millions) 1997 1996 ------ ------ Bridge loan $100.0 $- Revolving credit facility 500.0 - Other 37.6 - ------ ------ Total long-term debt $637.6 $- ====== ======
At December 31, 1997, Hughes has $1 billion of unused credit available under two unsecured revolving credit loan agreements, consisting of a $750 million multi-year facility and a $250 million 364-day facility. The multi-year facility loan agreement provides for a commitment of $750.0 million through December 5, 2002, subject to a facility fee of 0.07% per annum. Borrowings bear interest at a rate which approximates the London Interbank Offered Rate plus 0.155%. The 364-day facility provides for a commitment of $250.0 million through December 3, 1998, subject to a facility fee of 0.05% per annum. Borrowings bear interest at a rate which approximates the London Interbank Offered Rate plus 0.175%. No amounts were outstanding under either agreement at December 31, 1997. At December 31, 1997, Hughes had long-term notes outstanding of $28.5 million which are included in other long-term debt. The notes bear interest at fixed rates as follows: $10.7 million at 9.61% and $17.8 million at 11.11%. In December 1997, Hughes' subsidiary, PanAmSat, entered into a bank borrowing agreement (the "Bank Agreement") that provided for bridge loans of up to $300.0 million and loans of up to $500.0 million under a five-year revolving credit facility. Borrowings bear interest at a rate which approximates the London Interbank Offered Rate plus 0.40%. In December 1997, using $100.0 million from the bridge loans, $500.0 million from the revolving credit facility and available cash (including cash from the liquidation of certain marketable securities), PanAmSat completed a debt tender offer and restructuring program (the "Program") for its outstanding 9.75% Senior Notes, 11.375% Senior Subordinated Discount Notes and 12.75% Senior Subordinated Notes (collectively, the "Senior Notes"). In connection with the Program, PanAmSat purchased approximately 99% of the principal amount of each class of the Senior Notes then outstanding. PanAmSat retired Senior Notes having a principal value of approximately $1.1 billion. The debt refinancing Program resulted in the recognition of an extraordinary charge of $20.6 million ($34.4 million before taxes) related principally to the excess of the price paid for the debt over its carrying value, net of deferred financing costs. IV-27 13 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED NOTE 6: LONG-TERM DEBT - CONCLUDED In addition to its $600.0 million of bank borrowings, PanAmSat had $9.1 million of Senior Notes outstanding at December 31, 1997 which were not tendered as part of its debt refinancing Program. The outstanding balance of the Senior Notes is included in other long-term debt. In January 1998, PanAmSat borrowed an additional $125.0 million under the Bank Agreement, principally for the purpose of exercising an early buy-out option on a satellite sale-leaseback agreement. Also in January 1998, PanAmSat completed a private placement debt offering for five, seven, ten and thirty year notes aggregating $750.0 million (the "Notes Offering"), the proceeds of which were used to retire all of the outstanding borrowings under the Bank Agreement. As a result of the Notes Offering, the bridge loan under the Bank Agreement terminated, while the five year revolving credit facility remains in effect. As all of the bank borrowings were refinanced on a long-term basis shortly after year-end, these amounts have been classified as long-term as of December 31, 1997. The aggregate maturities of long-term debt for the five years subsequent to December 31, 1997 are $3.6 million in 2000 and $634.0 million in 2003 and beyond. NOTE 7: INCOME TAXES The provision for income taxes is based on reported income before income taxes. Deferred income tax assets and liabilities reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes, as measured by applying currently enacted tax laws. Hughes and former Hughes, and their domestic subsidiaries join with General Motors in filing a consolidated U.S. Federal income tax return. The portion of the consolidated income tax liability recorded by Hughes is generally equivalent to the liability it would have incurred on a separate return basis. Prior to December 18, 1997, certain income tax assets and liabilities were maintained by former Hughes. Income tax expense was allocated to Hughes as if Hughes filed a separate income tax return. In connection with the Hughes Transactions, certain income tax assets and liabilities were contributed to and assumed by Hughes on December 17, 1997 and are included in the accompanying balance sheet. The income tax provision consists of the following:
(Dollars in Millions) 1997 1996 1995 ------ ------ ------- U.S. federal, state and foreign taxes currently payable $24.0 $36.5 $160.5 U.S. federal, state and foreign deferred tax liabilities (assets), net 212.7 68.3 (129.1) ------ ------ ------- Total income tax provision $236.7 $104.8 $31.4 ====== ====== =======
Income from continuing operations before income taxes, minority interests and extraordinary item included the following components:
(Dollars in Millions) 1997 1996 1995 ------ ------ ----- U.S. income $659.4 $218.4 $96.0 Foreign (loss) income (41.2) 3.7 1.6 ------ ------ ----- Total $618.2 $222.1 $97.6 ====== ====== =====
The combined income tax provision was different than the amount computed using the U.S. statutory income tax rate for the reasons set forth in the following table:
(Dollars in Millions) 1997 1996 1995 ------ ------ ------ Expected tax at U.S. statutory income tax rate $216.4 $77.7 $34.2 Investment and research tax credits (39.3) - (5.0) Foreign sales corporation tax benefit (25.5) (24.0) (19.7) U.S. state and local income taxes 24.8 9.4 4.1 Purchase accounting adjustments 7.3 7.3 7.3 Losses of equity method investees 18.7 14.8 4.2 Minority interests in losses of partnership 17.5 17.7 2.0 Non-deductible goodwill amortization 9.7 - - Other 7.1 1.9 4.3 ------ ------ ------ Total income tax provision $236.7 $104.8 $31.4 ====== ====== ======
IV-28 14 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED NOTE 7: INCOME TAXES - CONCLUDED Temporary differences and carryforwards which gave rise to deferred tax assets and liabilities at December 31, 1997 and 1996 were as follows:
1997 1996 --------------------- --------------------- Deferred Deferred Deferred Deferred Tax Tax Tax Tax (Dollars in Millions) Assets Liabilities Assets Liabilities -------- ----------- -------- ----------- Profits on long-term contracts $156.0 $142.8 $124.8 $133.3 Sales and leasebacks 85.8 - 111.0 - Employee benefit programs 64.3 114.0 - - Postretirement benefits other than pensions 72.9 - - - Customer deposits and rebates 61.9 - 2.6 - State taxes 50.0 - 19.8 - Gain on PanAmSat merger - 195.0 - - Satellite launch insurance costs - 43.7 - - Depreciation - 438.6 - 255.2 Sale of equity interest in DIRECTV - 48.7 - 48.7 Other 63.9 35.4 35.8 23.9 ------ -------- ------ ------ Subtotal 554.8 1,018.2 294.0 461.1 Valuation allowance (14.2) - (10.3) - ------ -------- ------ ------ Total deferred taxes $540.6 $1,018.2 $283.7 $461.1 ====== ======== ====== ======
No provision has been made for U.S. federal income taxes related to the portion of undistributed earnings of foreign subsidiaries deemed permanently reinvested. At December 31, 1997 and 1996, undistributed earnings of foreign subsidiaries amounted to approximately $18.2 million and $5.3 million, respectively. Repatriation of all accumulated earnings would have resulted in tax liabilities of $5.4 million in 1997 and $0.5 million in 1996. At December 31, 1997, Hughes had $20.2 million of foreign operating loss carryforwards which expire in varying amounts between 1998 and 2002. The valuation allowance includes a provision of $12.3 million for foreign operating loss carryforwards. Hughes has an agreement with Raytheon which governs Hughes' rights and obligations with respect to federal and state income taxes for all periods prior to the merger of Hughes Defense with Raytheon. Hughes will be responsible for any taxes pertaining to those periods prior to the merger, including any additional taxes resulting from federal and state tax audits. Hughes will also be entitled to any tax refunds relating to those years. The federal income tax returns of former Hughes have been examined through 1990. All years prior to 1983 are closed. Issues relating to the years 1983 through 1990 are being contested through various stages of administrative appeal. The Internal Revenue Service is currently examining former Hughes' federal tax returns for years 1991 through 1994. Management believes that adequate provision has been made for any adjustment which might be assessed for open years. In addition, former Hughes has filed an affirmative claim for additional research and experimentation credits for 1986 through 1994. NOTE 8: RETIREMENT PROGRAMS Substantially all of Hughes' employees participate in Hughes' contributory and non-contributory defined benefit retirement plans. Benefits are based on years of service and compensation earned during a specified period of time before retirement. Additionally, an unfunded, nonqualified pension plan covers certain employees. Prior to December 18, 1997, the pension-related assets and liabilities were maintained by former Hughes for its non-automotive businesses and were not included in the Hughes balance sheet. A portion of former Hughes' net pension expense or income was allocated to Hughes and is included in the statement of income. In connection with the Hughes Transactions, the pension assets and liabilities related to Hughes employees were contributed to and assumed by Hughes. These assets and liabilities are included in the December 31, 1997 balance sheet. The net pension expense (credit) allocation was $12.3 million, $12.2 million and $(3.0) million for 1997, 1996 and 1995, respectively. The pension expense components including benefits earned during the year, interest accrued on benefits earned in prior years, actual return on assets and net amortization and deferral, were not determined separately for the Hughes participants. IV-29 15 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED NOTE 8: RETIREMENT PROGRAMS - CONCLUDED Costs are actuarially determined using the projected unit credit method and are funded in accordance with U.S. Government cost accounting standards to the extent such costs are tax-deductible. SFAS No. 87, Employers' Accounting for Pensions, requires the recognition of an additional pension liability to increase the amounts recorded up to the unfunded accumulated benefit obligation. The adjustment required to recognize the minimum pension liability required by SFAS No. 87 is recorded as an intangible asset to the extent of unrecognized prior service cost and the remainder, net of applicable deferred income taxes, is recorded as a reduction of owner's equity. At December 31, 1997, the additional minimum pension liability recorded was $76.5 million, of which $34.8 million was recorded as a reduction of owner's equity. Plan assets are invested primarily in listed common stocks, cash and short-term investment funds, U.S. Government securities and other investments. The following table sets forth the funded status of the Hughes plans and the amounts included in the balance sheet at December 31, 1997:
Assets Accumulated Exceed Benefits Accumulated Exceed (Dollars in Millions) Benefits Assets ----------- ----------- Actuarial present value of benefits based on service to date and present pay levels Vested $1,162.8 $82.0 Nonvested 105.2 1.8 -------- ------ Accumulated benefit obligation 1,268.0 83.8 Additional amounts related to projected pay increases 194.9 9.7 Total projected benefit obligation based on service to date 1,462.9 93.5 Plan assets at fair value 1,906.1 0.0 -------- ------ Plan assets in excess of (less than) projected benefit obligation 443.2 (93.5) Unamortized net amount resulting from changes in plan experience and actuarial assumptions (200.1) 77.8 Unamortized net asset at date of adoption (12.8) - Unamortized net amount resulting from changes in plan provisions (3.3) 8.4 Adjustment for unfunded pension liabilities - (76.5) -------- ------ Net prepaid pension cost (accrued liability) $227.0 $(83.8) ======== ======
The weighted-average discount rate used in determining the actuarial present values of the projected benefit obligation shown in the table above was 7.25% at December 31, 1997. The rate of increase in future compensation levels was 5.0% and the expected long-term rate of return on assets used in determining pension cost was 9.5%. Hughes maintains 401(k) plans for qualified employees. A portion of employee contributions are matched by Hughes and amounted to $26.3 million, $16.7 million and $14.9 million in 1997, 1996 and 1995, respectively. NOTE 9: OTHER POSTRETIREMENT BENEFITS Hughes maintains a program for eligible retirees to participate in health care and life insurance benefits generally until they reach age 65. Qualified employees who elected to participate in the Hughes contributory defined benefit pension plans may become eligible for these benefits if they retire from Hughes between the ages of 55 and 65. Prior to December 18, 1997, the postretirement benefit plans were maintained by former Hughes for its non-automotive businesses and were not included in the Hughes balance sheet. A portion of former Hughes' postretirement benefit cost was allocated to Hughes and is included in the statement of income. In connection with the Hughes Transactions, the postretirement benefit obligation related to Hughes employees was assumed by Hughes on December 17, 1997 and is included in the December 31, 1997 balance sheet. The postretirement benefit cost allocated to Hughes was $11.2 million, $10.4 million and $8.7 million for 1997, 1996 and 1995, respectively. The postretirement benefit cost components, including benefits earned during the year, interest accrued on benefits earned in prior years and net amortization, were not determined separately for the Hughes employees. IV-30 16 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED NOTE 9: OTHER POSTRETIREMENT BENEFITS - CONCLUDED The following table displays the components of Hughes' obligation recognized for postretirement benefit plans included in the Balance Sheet at December 31, 1997:
(Dollars in Millions) Accumulated postretirement benefit obligation attributable to Current retirees $54.2 Fully eligible active plan participants 18.0 Other active plan participants 63.4 ------ Accumulated postretirement benefit obligation 135.6 Unrecognized net amount resulting from changes in plan experience and actuarial assumptions 31.0 ------ Net postretirement benefit obligation 166.6 Less current portion 11.8 ------ Net long-term postretirement benefit obligation $154.8 ======
The assumed weighted-average discount rate used in determining the actuarial present value of the accumulated postretirement benefit obligation was 6.75% at December 31, 1997. The assumed weighted-average rate of increase in future compensation levels related to pay-related life insurance benefits was 5.0% at December 31, 1997. The assumed weighted-average health care cost trend rate was 10.5% in 1997, assumed to decrease linearly each successive year until it reaches 6.0% in 2006, after which it remains constant. A one percentage point increase in each year of this annual trend rate would increase the accumulated postretirement benefit obligation at December 31, 1997 by approximately $11 million, and increase the service and interest cost components of the 1997 postretirement benefit expense by approximately $1 million. Hughes has disclosed in the financial statements certain amounts associated with estimated future postretirement benefits other than pensions and characterized such amounts as "accumulated postretirement benefit obligations," "liabilities," or "obligations." Notwithstanding the recording of such amounts and the use of these terms, Hughes does not admit or otherwise acknowledge that such amounts or existing postretirement benefit plans of Hughes (other than pensions) represent legally enforceable liabilities of Hughes. NOTE 10: OWNER'S EQUITY The authorized capital stock of Hughes consists of 1,000 shares of $1.00 par value common stock. All of the outstanding capital stock of Hughes is held by GM. In connection with the Hughes Transactions, Hughes was recapitalized on December 17, 1997 at which time 1,000 shares of common stock were issued to GM. Prior to December 17, 1997, the equity of Hughes was comprised of former Hughes' (Parent Company's) net investment in its telecommunications and space business. During the fourth quarter of 1997, Hughes adopted SFAS No. 130, Reporting Comprehensive Income, which establishes standards for reporting and displaying comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements. The changes in the components of other comprehensive income (loss), net of income taxes, are as follows at December 31:
1997 1996 1995 ------------------------ ------------------------ ----------------------- Pre-tax Tax Net Pre-tax Tax Net Pre-tax Tax Net (Dollars in Millions) Amount Expense Amount Amount Expense Amount Amount Credit Amount -------- ------- ------ ------- ------- ------ ------- ------ ------ Foreign currency translation adjustments $1.0 $0.4 $0.6 $1.3 $0.5 $0.8 $(3.7) $(1.5) $(2.2) ==== ==== ==== ==== ==== ==== ====== ====== ======
IV-31 17 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED NOTE 11: INCENTIVE PLAN Under the Hughes Electronics Corporation Incentive Plan (the Plan), as approved by the GM Board of Directors in 1997, shares, rights, or options to acquire up to 25.8 million shares of GM Class H common stock were available for grant through December 31, 1997. The GM Executive Compensation Committee may grant options and other rights to acquire shares of GM Class H common stock under the provisions of the Plan. The option price is equal to 100% of the fair market value of GM Class H common stock on the date the options are granted. These nonqualified options generally vest over two to four years, expire 10 years from date of grant and are subject to earlier termination under certain conditions. As part of the Hughes Transactions, the outstanding options of former Hughes employees who continued as Hughes employees were converted into options to purchase the recapitalized GM Class H common stock. Recognition of compensation expense was not required in connection with the conversion. The following table summarizes information about the Plan stock options outstanding at December 31, 1997:
Options Outstanding Options Exercisable ----------------------------------------- ----------------------- Weighted- Average Weighted- Remaining Weighted- Average Range of Number Contractual Average Number Exercise Exercise Prices Outstanding Life (years) Exercise Price Exercisable Price - ---------------- ----------- ------------ -------------- ----------- ---------- $9.00 to $15.99 787,450 4 $13.66 787,450 $13.66 16.00 to 29.99 2,315,562 6 20.35 2,315,562 20.35 30.00 to 40.00 10,858,603 9 32.06 500,051 35.41 ------ --------- ------ $9.00 to $40.00 13,961,615 8 $29.08 3,603,063 $20.98 ====== ========= ======
At December 31, 1997, no shares were available for grant under the Plan. Effective May 6, 1997, PanAmSat, Hughes' 71.5% owned, publicly-traded subsidiary, adopted a stock option incentive plan with terms similar to the Plan. As of December 31, 1997, PanAmSat has issued 584,890 options to purchase its common stock with exercise prices ranging from $29.00 per share to $38.25 per share. The options vest ratably over three years and have a remaining life of approximately nine and one-half years. The PanAmSat options have been considered in the following pro forma analysis. The following table presents pro forma information as if Hughes recorded compensation cost using the fair value of issued options on their grant date:
(Dollars in Millions) 1997 1996 1995 ------ ------ ----- Reported net earnings used for pro forma computation of available separate consolidated net income $470.7 $183.5 $27.2 Assumed stock compensation cost, net of tax 43.5 8.8 2.6 ------ ------ ----- Adjusted earnings used for pro forma computation of available separate consolidated net income $427.2 $174.7 $24.6 ====== ====== ===== Reported pro forma earnings per share $1.18 $0.46 $0.07 Adjusted pro forma earnings per share $1.07 $0.44 $0.06 ====== ====== =====
Estimated compensation cost was based upon an allocation from former Hughes which was calculated using the Black-Scholes valuation model for estimating the fair value of its options. The following table presents the estimated weighted-average fair value of options granted and the assumptions used for the 1997 calculation (stock volatility has been estimated based upon a study of a Hughes determined peer group and may not be indicative of actual volatility for future periods): Estimated fair value per option granted $26.90 Average exercise price per option granted $31.71 Stock volatility 32.5% Risk-free interest rate 5.87% Option life in years 7
IV-32 18 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED NOTE 12: OTHER INCOME AND EXPENSES
(Dollars in Millions) 1997 1996 1995 ------ ------ ----- Gain on PanAmSat merger $489.7 $ - $ - Gain on sale of DIRECTV interest to AT&T - 120.3 - Equity losses (72.2) (42.2) (9.6) Other (26.8) (9.0) 12.6 ------ ------ ----- Total Other, net $390.7 $ 69.1 $ 3.0 ====== ====== =====
NOTE 13: RELATED-PARTY TRANSACTIONS In the ordinary course of its operations, Hughes provides telecommunications services and sells electronic components to, and purchases sub-components from, related parties. In addition, prior to December 18, 1997, Hughes received allocations of corporate expenses and interest costs from former Hughes and GM. The following table summarizes the significant related party transactions of Hughes with former Hughes and GM entities:
(Dollars in Millions) 1997 1996 1995 ----- ----- ----- Revenues $45.2 $50.8 $53.6 Costs and expenses Purchases 275.4 241.5 144.0 Allocation of corporate expenses 77.5 75.6 60.5 Allocated interest 55.6 53.2 74.7
NOTE 14: PRO FORMA EARNINGS PER SHARE ATTRIBUTABLE TO GM CLASS H COMMON STOCK AND AVAILABLE SEPARATE CONSOLIDATED NET INCOME Earnings per share attributable to GM Class H common stock is determined based on the relative amounts available for the payment of dividends to holders of GM Class H common stock. Holders of GM Class H common stock have no direct rights in the equity or assets of Hughes, but rather have rights in the equity and assets of GM (which includes 100% of the stock of Hughes). Amounts available for the payment of dividends on GM Class H common stock are based on the Available Separate Consolidated Net Income of Hughes. The Available Separate Consolidated Net Income of Hughes is determined quarterly and is equal to the separate consolidated net income of Hughes, excluding the effects of GM purchase accounting adjustments arising from GM's acquisition of Hughes Aircraft Company (Earnings Used for Computation of Available Separate Consolidated Net Income), multiplied by a fraction, the numerator of which is a number equal to the weighted-average number of shares of GM Class H common stock outstanding during the period and the denominator of which was 399.9 million during 1997, 1996 and 1995. The denominator used in determining the Available Separate Consolidated Net Income of Hughes may be adjusted from time-to-time as deemed appropriate by the GM Board of Directors to reflect subdivisions or combinations of the GM Class H common stock and to reflect certain transfers of capital to or from Hughes. The GM Board's discretion to make such adjustments is limited by criteria set forth in GM's restated Certificate of Incorporation. In the accompanying financial statements, Available Separate Consolidated Net Income and Earnings Attributable to General Motors Class H common stock are presented on a pro forma basis. Historically, such amounts were calculated based on the financial performance of former Hughes. Since these financial statements relate only to the telecommunications and space business of former Hughes prior to the consummation of the Hughes Transactions, they do not reflect the earnings attributable to the GM Class H common stock on a historical basis. The pro forma presentation is used, therefore, to present the financial results which would have been achieved relative to the GM Class H common stock had they been calculated based on the performance of the telecommunication and space business of former Hughes for all periods presented. Pro forma earnings per share represent basic earnings per share. There is no dilutive effect resulting from the assumed exercise of stock options, since the exercise of stock options would not effect the GM Class H dividend base (denominator) used in calculating earnings per share. As Hughes has no other common stock equivalents that may impact the calculation, diluted earnings per share are not presented. IV-33 19 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED NOTE 14: PRO FORMA EARNINGS PER SHARE ATTRIBUTABLE TO GM CLASS H COMMON STOCK AND AVAILABLE SEPARATE CONSOLIDATED NET INCOME - CONCLUDED Dividends may be paid on the GM Class H common stock only when, as, and if declared by GM's Board of Directors in its sole discretion. Dividends may be paid on GM Class H common stock to the extent of the amount initially determined to be available for the payment of dividends on Class H common stock, plus the portion of earnings of GM after the closing of the Hughes Transactions attributed to GM Class H common stock. The GM Board determined that the amount initially available for the payment of dividends on shares of the recapitalized GM Class H common stock was the cumulative amount available for the payment of dividends on GM Class H common stock immediately prior to the closing of the Hughes Transactions, reduced by a pro rata portion of the net reduction in GM's total stockholders' equity resulting from the Hughes Transactions. As of December 31, 1997, the amount available for the payment of dividends on GM Class H common stock was $3.7 billion. The GM Board does not currently anticipate paying any cash dividends initially on the recapitalized GM Class H common stock. NOTE 15: SPECIAL PROVISION FOR RESTRUCTURING In 1992, Hughes recorded a special restructuring charge of $155.6 million primarily attributable to redundant facilities and related employment costs. The special charge comprehended a reduction of Hughes' employment, a major facilities consolidation and a reevaluation of certain business lines that no longer met Hughes' strategic objectives. Restructuring costs of $8.8 million, $19.4 million and $44.7 million were charged against the reserve during 1997, 1996 and 1995, respectively. The remaining liability of $15.1 million relates primarily to reserves for excess facilities. It is expected that these costs will be expended predominantly over the next several years. NOTE 16: ACQUISITIONS In May 1997, Hughes and PanAmSat Corporation, a leading provider of international satellite services, merged their respective satellite service operations into a new publicly-held company, which retained the name PanAmSat. Hughes contributed its Galaxy(R) satellite services business in exchange for a 71.5% interest in the new company. PanAmSat stockholders received a 28.5% interest in the new company and $1.5 billion in cash. Such cash consideration and other funds required to consummate the merger were funded by new debt financing totaling $1,725.0 million provided by Hughes, which borrowed such funds from GM. For accounting purposes, the merger was treated by Hughes as an acquisition of 71.5% of PanAmSat and was accounted for using the purchase method. Accordingly, the purchase price was allocated to the net assets acquired, including intangible assets, based on estimated fair values at the date of acquisition. The purchase price exceeded the fair value of net assets acquired by $2.4 billion. In addition, the merger was treated as a partial sale of the Galaxy business by Hughes and resulted in a one-time pre-tax gain of $489.7 million ($318.3 million after-tax). As the Hughes 1997 financial statements include only PanAmSat's results of operations since the date of acquisition, the following selected unaudited pro forma information is being provided to present a summary of the combined results of Hughes and PanAmSat as if the acquisition had occurred as of the beginning of the respective periods, giving effect to purchase accounting adjustments. The pro forma data is presented for informational purposes only and may not necessarily reflect the results of operations of Hughes had PanAmSat operated as part of Hughes for the years ended December 31, 1997 and 1996, nor are they necessarily indicative of the results of future operations. The pro forma information excludes the effect of non-recurring charges.
(Dollars in Millions except per share amounts) 1997 1996 -------- -------- Total revenues $5,247.9 $4,189.8 Income before extraordinary item 164.1 42.1 Net income 143.5 42.1 Pro forma available separate consolidated net income 41.8 15.5 Pro forma earnings per share attributable to GM Class H common stock $0.41 $0.16
In December 1997, Hughes repurchased from AT&T, a 2.5% equity interest in DIRECTV, ending AT&T's marketing agreement to distribute the DIRECTV direct broadcast satellite television service and DSS(R) equipment. The $161.8 million repurchase resulted in goodwill of approximately $156.1 million. IV-34 20 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED NOTE 17: DERIVATIVE FINANCIAL INSTRUMENTS AND RISK MANAGEMENT In the normal course of business, Hughes enters into transactions that expose it to risks associated with foreign exchange rates. Hughes utilizes derivative instruments in an effort to mitigate these risks. Hughes' policy is not to speculate in derivative instruments to profit on foreign currency exchange fluctuations, nor to enter trades for which there are no underlying exposures. Instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged and are designated as a hedge at the inception of the contract. Accordingly, changes in market values of hedge instruments are highly correlated with changes in market values of the underlying transactions, both at the inception of the hedge and over the life of the hedge contract. Hughes primarily uses foreign exchange-forward contracts to hedge firm commitments denominated in foreign currencies. Foreign exchange-forward contracts are legal agreements between two parties to purchase and sell a foreign currency, for a price specified at the contract date, with delivery and settlement in the future. The total notional amounts of contracts afforded hedge accounting treatment at December 31, 1997 and 1996 were not significant. Hughes is exposed to credit risk in the event of non-performance of the counterparties to its foreign exchange-forward contracts, which Hughes believes is remote. Nevertheless, credit risk is managed through the periodic monitoring and approval of financially sound counterparties. In connection with PanAmSat's debt refinancing activities as discussed in Note 6, PanAmSat entered into certain U.S. Treasury rate lock contracts to reduce its exposure to fluctuations in interest rates. The aggregate notional value of these contracts was $375.0 million and these contracts were accounted for as hedges because they were applied to a specific refinancing plan that was consummated shortly after December 31, 1997. The fair value of these financial instruments at December 31, 1997 approximated their contract value. The cost to settle these instruments in 1998 will be amortized to expense over the term of the newly placed debt securities. NOTE 18: DISCONTINUED OPERATIONS On December 15, 1997, Hughes sold substantially all of the assets and liabilities of the Hughes Avicom International, Inc. ("Hughes Avicom") business to Rockwell Collins, Inc. for cash. Hughes Avicom is a supplier of products and services to the commercial airline market. Hughes recorded an after-tax gain of $62.8 million on the sale. The net operating results of Hughes Avicom have been reported, net of applicable income taxes, as "Income (loss) from discontinued operations"; the net assets as "Net assets of discontinued operations"; and the net cash flows as "Net cash used by discontinued operations". Summarized financial information for Hughes Avicom follows:
(Dollars in Millions) 1997* 1996 1995 ----- ---- ---- Revenues $102.5 $89.9 $49.6 Net income (loss) 1.2 (7.4) (64.6)
*Includes the results of Hughes Avicom through December 15, 1997.
DECEMBER 31, (Dollars in Millions) 1996 ------------ Current assets $ 73.6 Property, net 10.3 Other assets 13.9 Current liabilities (62.1) Other liabilities (0.7) ------- Net assets of discontinued operations $ 35.0 =======
IV-35 21 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED NOTE 19: SEGMENT REPORTING Hughes adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, during the fourth quarter of 1997. SFAS No. 131 establishes standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and assessing performance. The operating segments are managed separately because each operating segment represents a strategic business unit that offers different products and serves different markets. Hughes' reportable segments include Direct-To-Home Broadcast, Satellite Services, Satellite Manufacturing and Network Systems. Direct-To-Home Broadcast is engaged in acquiring, promoting, selling and/or distributing digital programming via satellite, primarily to residential customers. Satellite Services is engaged in the selling, leasing and operating of satellite transponders and provides services for cable television systems, news companies and private business networks. Satellite Manufacturing designs, manufactures and markets satellites and satellite components. Network Systems products include satellite-based business networks, cellular-based fixed wireless telephone systems and mobile cellular digital packet data systems. Other includes the corporate office and other entities. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. Hughes generally evaluates performance based on segment operating profit and accounts for intersegment revenues and transfers as if the revenues or transfers were to third parties, at current market prices.
Direct-To- Home Satellite Satellite Network (Dollars in Millions) Broadcast Services Manufacturing Systems Other Eliminations Total ---------- --------- ------------- -------- ------- ------------ -------- 1997 External Revenues $1,276.9 $537.3 $2,290.0 $998.3 $25.8 $ - $5,128.3 Intersegment Revenues - 92.6 201.9 13.0 2.7 (310.2) - -------- ------- -------- -------- ------- -------- -------- Total Revenues $1,276.9 $629.9 $2,491.9 $1,011.3 $28.5 $(310.2) $5,128.3 ======== ======= ======== ======== ======= ======== ======== Operating Profit(1) $(254.6) $292.9 $226.3 $74.1 $(47.9) $(5.4) $285.4 Depreciation and Amortization (1) 86.1 145.2 39.4 32.0 14.7 - 317.4 Intangibles, net - 2,498.5 - - 456.3 - 2,954.8 Segment Assets (2) 1,441.5 5,682.4 1,312.6 1,215.6 3,298.1 (186.4) 12,763.8 Capital Expenditures (3) 105.6 625.7 113.9 43.1 0.4 (62.1) 826.6 -------- ------- -------- -------- ------- -------- -------- 1996 External Revenues $621.0 $381.7 $1,950.4 $1,049.6 $6.0 - $4,008.7 Intersegment Revenues - 101.1 106.0 20.4 1.7 $(229.2) - -------- ------- -------- -------- ------- -------- -------- Total Revenues $621.0 $482.8 $2,056.4 $1,070.0 $7.7 $(229.2) $4,008.7 ======== ======= ======== ======== ======= ======== ======== Operating Profit(1) $(319.8) $239.1 $183.3 $107.7 $(13.5) $(7.7) $189.1 Depreciation and Amortization (1) 67.3 58.5 34.4 28.3 27.1 - 215.6 Intangibles, net 72.9 395.1 468.0 Segment Assets (2) 1,067.2 1,275.5 757.8 964.0 457.1 (105.2) 4,416.4 Capital Expenditures (3) 63.5 308.7 87.8 45.3 - (55.9) 449.4 -------- ------- -------- -------- ------- -------- -------- 1995 External Revenues $241.8 $341.3 $1,598.8 $919.0 $51.9 - $3,152.8 Intersegment Revenues - 44.8 132.7 0.3 2.4 (180.2) - -------- ------- -------- -------- ------- -------- -------- Total Revenues $241.8 $386.1 $1,731.5 $919.3 $54.3 $(180.2) $3,152.8 ======== ======= ======== ======== ======= ======== ======== Operating Profit(1) $(160.8) $163.3 $151.5 $69.0 $(28.1) $(44.4) $150.5 Depreciation and Amortization (1) 48.6 76.5 33.6 25.2 17.0 200.9 Intangibles, net 76.2 412.8 489.0 Segment Assets (2) 855.9 1,138.0 603.9 801.1 574.5 (20.8) 3,952.6 Capital Expenditures (3) 107.5 280.5 53.2 50.5 - (49.4) 442.3 -------- ------- -------- -------- ------- -------- --------
- -------------- See Notes on next page. IV-36 22 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED NOTE 19: SEGMENT REPORTING - CONCLUDED Certain amounts have been reclassified to conform with the 1997 presentation. (1) Includes amortization arising from purchase accounting adjustments related to GM's acquisition of Hughes Aircraft Company amounting to $3.3 million in each of the years for the Satellite Services segment and $17.7 million in each of the years in Other. (2) Assets of the Satellite Services segment and Other include the unamortized purchase accounting adjustments associated with the purchase of Hughes Aircraft Company. Satellite Services includes unamortized purchase accounting adjustments of $69.6 million in 1997, $72.9 million in 1996 and $76.2 million in 1995. Other includes unamortized purchase accounting adjustments of $378.0 million in 1997, $395.7 million in 1996 and $413.4 million in 1995. (3) Includes expenditures related to satellites in segments as follows: $53.1 million in 1995 for Direct-To-Home Broadcast segment and $606.1 million, $259.2 million and $234.9 million in 1997, 1996 and 1995, respectively, for Satellite Services segment. A reconciliation of operating profit shown above to Income from continuing operations before income taxes, minority interests and extraordinary item shown in the Statement of Income and Pro Forma Available Separate Consolidated Net Income follows:
(Dollars in Millions) 1997 1996 1995 ------ ------ ------ Operating profit $285.4 $189.1 $150.5 Interest income 33.1 6.8 5.2 Interest expense (91.0) (42.9) (61.1) Other, net 390.7 69.1 3.0 ------ ------ ------ Income from continuing operations before income taxes, minority interests and extraordinary item $618.2 $222.1 $97.6 ====== ====== ======
The following table presents revenues earned from customers located in different geographic areas. Property and satellites are grouped by their physical location. All satellites are reported as United States assets.
1997 1996 1995 -------------------- -------------------- -------------------- Net Net Net Property Property Property Total and Total and Total and Revenues Satellites Revenues Satellites Revenues Satellites -------- ---------- -------- ---------- -------- ---------- North America United States $2,851.1 $3,533.1 $2,613.1 $1,747.4 $2,212.9 $1,647.4 Canada and Mexico 101.3 - 27.4 - 18.8 - -------- ---------- -------- ---------- -------- ---------- Total North America 2,952.4 3,533.1 2,640.5 1,747.4 2,231.7 1,647.4 Europe 1,002.3 - 626.2 - 298.4 - Latin America 221.6 - 71.7 - 34.2 - Asia 826.7 - 640.2 - 558.9 - Middle East 77.7 - 1.2 - 15.5 - Other 47.6 - 28.9 - 14.1 - -------- ---------- -------- ---------- -------- ---------- Total $5,128.3 $3,533.1 $4,008.7 $1,747.4 $3,152.8 $1,647.4 ======== ========== ======== ========== ======== ==========
NOTE 20: COMMITMENTS AND CONTINGENCIES As a result of the Hughes Transactions, Hughes is subject to certain potential adjustments which could require amounts to be paid to or received from GM or Raytheon. In connection with the transfer of Delco to Delphi, a projected balance sheet for Delco as of December 31, 1997 was prepared. Within approximately four months following the closing of the Hughes Transactions, GM will prepare a balance sheet for Delco as of December 17, 1997, on a basis consistent with the December 31, 1997 projected balance sheet. To the extent that this closing balance sheet reflects a "net investment amount" of Delco different from the "net investment amount" presented on the projected balance sheet by an amount exceeding $50 million, a payment will be made from Hughes to GM or from GM to Hughes as appropriate to compensate for such difference in excess of $50 million. IV-37 23 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED NOTE 20: COMMITMENTS AND CONTINGENCIES - CONTINUED Similarly, within approximately four months after completion of the Hughes Transactions, Hughes will prepare and deliver to Raytheon a final audited balance sheet for the defense business of former Hughes as of December 17, 1997. To the extent that this final balance sheet reflects an adjusted net worth that deviates more than $50 million from a target amount, a payment will be made from Hughes to Raytheon or from Raytheon to Hughes as appropriate to compensate for such difference in excess of $50 million. Any amounts resulting from these adjustments will be treated as equity transactions at the time the amounts are determined. Hughes has entered into agreements to procure commercial satellite launches, a significant number of which are expected to be used in connection with satellites ordered by outside customers. The agreements provide for launches beginning in 1998 and also contain options for additional launch vehicles. The total amount of the commitments, which is dependent upon the number of options exercised, market conditions and other factors, could exceed $2.0 billion. Hughes has an agreement with a finance company under which the finance company agreed to provide an open-end revolving credit program for consumer purchases of DSS equipment, installations and ancillary items at selected retail establishments. Funding under this program was discontinued effective September 10, 1996. The aggregate outstanding balance under this agreement at December 31, 1997 was approximately $190.0 million. Hughes has certain rights regarding the administration of the program and the losses from qualifying accounts under this program accrue to Hughes, subject to certain indemnity obligations of the finance company. Hughes has established allowances to provide for expected losses under the program. The allowances are subject to periodic review as management collects additional information about the performance of the consumer loan portfolios. In December 1994, former Hughes entered into an agreement with Computer Sciences Corporation (CSC) whereby CSC provides a significant amount of data processing services required by the non-automotive businesses of former Hughes. Baseline service payments to CSC are expected to aggregate approximately $1.5 billion over the term of the eight-year agreement for former Hughes. Based on historical usage, approximately 17% of the costs incurred under the agreement are attributable to Hughes. The contract is cancelable by Hughes with early termination penalties. At December 31, 1997, minimum future commitments under noncancelable operating leases having lease terms in excess of one year, exclusive of satellite transponders leaseback payments disclosed in Note 4, are primarily for real property and aggregated $318.8 million, payable as follows: $50.4 million in 1998, $46.5 million in 1999, $43.6 million in 2000, $43.0 million in 2001, $41.4 million in 2002 and $93.9 million thereafter. Certain of these leases contain escalation clauses and renewal or purchase options. Rental expenses under operating leases were $72.2 million in 1997, $52.7 million in 1996 and $54.7 million in 1995. In conjunction with its performance on long-term contracts Hughes is contingently liable under standby letters of credit and bonds in the amount of $296.0 million and $152.5 million at December 31, 1997 and 1996, respectively. In Hughes' past experience, no material claims have been made against these financial instruments. In addition, Hughes has guaranteed up to $150.0 million of certain American Mobile Satellite Corporation ("AMSC") bank debt due June 2001. Hughes owns approximately 27.0% of the common stock of AMSC. Hughes has additional guarantees of up to $377.5 million, relating principally to a Surfin Ltd. revolving credit facility which expires July 1999. Hughes owns approximately 39% of Surfin Ltd, a company which finances the sale of subscriber equipment in Latin America. Hughes has commitments related to its programming agreements which are variable based upon the number of underlying subscribers and market penetration rates. Minimum payments over the terms of applicable contracts are anticipated to be approximately $300 million to $400 million. Hughes is subject to potential liability under government regulations and various claims and legal actions which are pending or may be asserted against it. The aggregate ultimate liability of Hughes under these claims and actions, was not determinable at December 31, 1997. In the opinion of Hughes management, such liability is not expected to have a material adverse effect on Hughes' operations or financial position. IV-38 24 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED NOTE 20: COMMITMENTS AND CONTINGENCIES - CONCLUDED Hughes has maintained a suit against the U.S. government since September 1973 regarding the Government's infringement and use of a Hughes patent (the "Williams Patent") covering "Velocity Control and Orientation of a Spin Stabilized Body," principally satellites. On June 17, 1994, the U.S. Court of Claims awarded Hughes damages of $114.0 million. Because Hughes believed that the record supported a higher royalty rate, it appealed that decision. The U.S. government, contending that the award was too high, also appealed. On June 19, 1996, the Court of Appeals for the Federal Circuit ("CAFC") affirmed the decision of the Court of Claims which awarded Hughes $114.0 million in damages, together with interest. The U.S. government petitioned the CAFC for a rehearing. That petition was denied in October 1996. The U.S. government then filed a petition with the U.S. Supreme Court seeking certiorari. On April 21, 1997, the U.S. Supreme Court, citing a recent decision it had rendered in Warner-Jenkinson v. Hilton Davis, remanded the Hughes' suit over the Williams Patent back to the CAFC in order to have the CAFC determine whether the ruling in the Williams Patent matter was consistent with the U.S. Supreme Court's decision in the Warner-Jenkinson case. The previous liability decision of the Court of Claims in the Williams Patent matter, and its $114.0 million damage award to Hughes currently remain in effect pending reconsideration of the case by the CAFC. Hughes is unable to estimate the duration of this reconsideration process. While no amount has been recorded in the financial statements of Hughes to reflect the $114.0 million award or the interest accumulating thereon, a resolution of this matter could result in a gain that would be material to the results of operations. * * * IV-39 25 HUGHES ELECTRONICS CORPORATION SUPPLEMENTAL INFORMATION
Selected Quarterly Data (Unaudited) 1st 2nd 3rd 4th - --------------------------------------------------------------------------------------------- (Dollars in Millions Except Per Share Amounts) 1997 Quarters - ------------- Revenues $1,024.0 $1,151.4 $1,258.3 $1,694.6 -------- -------- -------- -------- Income from continuing operations before income taxes, minority interests and extraordinary item $5.6 $518.6 $87.1 $6.9 Income taxes 2.2 207.5 34.8 (7.8) Minority interests 14.2 7.7 (5.1) 8.0 Income (loss) from discontinued operations 1.0 0.3 (0.1) 62.8 Extraordinary item - - - (20.6) Net income 18.6 319.1 47.1 64.9 -------- -------- -------- -------- Earnings used for pro forma computation of available separate consolidated net income $23.9 $324.4 $52.4 $70.0 ======== ======== ======== ======== Pro forma average number of shares of General Motors Class H common stock outstanding (in millions) 100.4 101.0 102.0 102.5 Class H dividend base (in millions) 399.9 399.9 399.9 399.9 Pro forma available separate consolidated net income $6.0 $82.0 $13.4 $18.0 Pro forma earnings attributable to General Motors Class H common stock on a per share basis: Pro forma income from continuing operations before extraordinary item $0.06 $0.81 $0.13 $0.07 Discontinued operations - - - 0.16 Extraordinary item - - - (0.05) Pro forma earnings attributable to General Motors Class H common stock $0.06 $0.81 $0.13 $0.18 -------- -------- -------- -------- 1996 Quarters - ------------- Revenues $826.6 $960.4 $1,000.5 $1,221.2 -------- -------- -------- -------- Income from continuing operations before income taxes and minority interests $132.4 $74.9 $(13.5) $28.3 Income taxes 53.0 36.4 (7.4) 22.8 Minority interests 3.5 11.9 14.0 23.2 Income (loss) from discontinued operations (6.5) 0.3 (0.5) (0.7) -------- -------- -------- -------- Net income 76.4 50.7 7.4 28.0 Earnings used for pro forma computation of available separate consolidated net income $81.7 $56.0 $12.7 $33.1 ======== ======== ======== ======== Pro forma average number of shares of General Motors Class H common stock outstanding (in millions) 97.4 98.2 98.8 99.3 Class H dividend base (in millions) 399.9 399.9 399.9 399.9 Pro forma available separate consolidated net income $19.9 $13.8 $3.3 $8.2 Pro forma earnings attributable to General Motors Class H common stock on a per share basis: Pro forma income from continuing operations $0.23 $0.14 $0.03 $0.08 Discontinued operations (0.02) - - - Pro forma earnings attributable to General Motors -------- -------- -------- -------- Class H common stock $0.21 $0.14 $0.03 $0.08 ======== ======== ======== ========
The stock price range for GM Class H common stock, for the period December 18, 1997 through December 31, 1997, was a high of $40.00 and a low of $35.75. The GM Class H common stock was recapitalized as part of the Hughes Transactions on December 17, 1997. IV-40 26 HUGHES ELECTRONICS CORPORATION SUPPLEMENTAL INFORMATION - CONCLUDED
Selected Financial Data (Unaudited) 1997 1996 1995 1994 1993 --------- -------- -------- ------- -------- (Dollars in Millions Except Per Share Amounts) Revenues $5,128.3 $4,008.7 $3,152.8 $2,697.0 $2,195.0 Earnings used for pro forma computation of available separate consolidated net income $470.7 $183.5 $27.2 $62.2 $173.9 Average number of shares of General Motors Class H common stock outstanding (in millions) 101.5 98.4 95.5 92.1 88.6 Class H dividend base (in millions) 399.9 399.9 399.9 399.9 399.9 Pro forma available separate consolidated net income $119.4 $45.2 $6.5 $14.3 $38.5 Pro forma earnings attributable to General Motors Class H common stock on a per share basis $1.18 $0.46 $0.07 $0.16 $0.43 Capital expenditures(1) $826.6 $449.4 $442.3 $399.0 $274.2 Cash and cash equivalents $2,783.8 $6.7 $7.6 $5.8 $10.2 Working capital $3,323.3 $277.5 $311.9 $273.5 $336.4 Total assets $12,763.8 $4,416.4 $3,952.6 $3,609.3 $3,195.5 Long-term debt $637.6 $- $- $- $1.3 Minority interests $607.8 $21.6 $40.2 $- $- Return on equity (2) 7.5% 6.7% 2.9% 4.6% 8.9% Income before interest expense and income taxes as a percent of capitalization (3) 12.8% 12.5% 6.6% 9.6% 17.1% Pre-tax return on total assets (4) 7.5% 6.6% 2.7% 4.5% 8.5% --------- -------- -------- -------- --------
(1) Includes expenditures related to telecommunications and other equipment amounting to $575.3 million, $187.9 million, $274.6 million, $255.8 million and $131.1 million in 1997, 1996, 1995, 1994 and 1993, respectively. (2) Income from continuing operations before cumulative effect of accounting change and extraordinary item divided by average owner's equity (General Motors' equity in its wholly-owned subsidiary, Hughes). Holders of GM Class H common stock have no direct rights in the equity or assets of Hughes, but rather have rights in the equity and assets of GM which includes 100% of the stock of Hughes. (3) Income from continuing operations before interest expense, income taxes, cumulative effect of accounting change and extraordinary item divided by average owner's equity plus average debt. (4) Income from continuing operations before income taxes, cumulative effect of accounting change and extraordinary item divided by average total assets. IV-41 27 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS The following discussion excludes purchase accounting adjustments related to GM's acquisition of Hughes Aircraft Company (see Supplemental Data beginning on page IV-48). Statements made concerning expected financial performance, ongoing financial performance strategies, and possible future action which Hughes (as defined below) intends to pursue to achieve strategic objectives for each of its four principal business segments constitute forward-looking information. The implementation of these strategies and of such future actions and the achievement of such financial performance are each subject to numerous conditions, uncertainties and risk factors, and, accordingly, no assurance can be given that Hughes will be able to successfully accomplish its strategic objectives or achieve such financial performance. The principal important risk factors which could cause actual performance and future actions to differ materially from the forward-looking statements made herein include economic conditions, product demand and market acceptance, government action, competition, ability to achieve cost reductions, technological risk, interruptions to production attributable to causes outside of Hughes' control, the success of satellite launches, in-orbit performance of satellites and Hughes' ability to access capital to maintain its financial flexibility. GENERAL On December 17, 1997, Hughes Electronics Corporation ("Hughes Electronics") and General Motors Corporation ("GM"), the parent of Hughes Electronics, completed a series of transactions (the "Hughes Transactions") designed to address strategic challenges facing the three principal businesses of Hughes Electronics and unlock stockholder value in GM. The Hughes Transactions included the tax-free spin-off of the defense electronics business ("Hughes Defense") to holders of GM $1-2/3 par value and Class H common stocks, followed immediately by the merger of Hughes Defense with Raytheon Company. Concurrently, Delco Electronics Corporation ("Delco"), the automotive electronics business, was transferred to GM's Delphi Automotive Systems unit. Finally, GM Class H common stock was recapitalized into a GM tracking stock linked to the remaining telecommunications and space business. For the periods prior to the consummation of the Hughes Transactions on December 17, 1997, Hughes Electronics, consisting of its defense electronics, automotive electronics, and telecommunications and space businesses, is hereinafter referred to as former Hughes. In connection with the recapitalization of Hughes Electronics on December 17, 1997, the telecommunications and space business of former Hughes, consisting principally of its direct-to-home broadcast, satellite services, satellite manufacturing and network systems businesses, was contributed to the recapitalized Hughes Electronics. Such telecommunications and space business, both before and after the recapitalization, is hereinafter referred to as Hughes. The following discussion and accompanying financial statements pertain only to Hughes and do not pertain to balances of former Hughes related to Hughes Defense or Delco. For additional information on the basis of presentation, see Note 1 to the financial statements. As a result of the May 1997 PanAmSat merger (see further discussion in Note 16 to the financial statements), Hughes' 1997 financial information includes PanAmSat's results of operations from the date of merger. RESULTS OF OPERATIONS 1997 compared to 1996 Revenues. Hughes reported that 1997 revenues increased 27.9% to $5,128.3 million compared with $4,008.7 million in 1996. The increase reflects strong subscriber growth in the Direct-To-Home Broadcast segment, increased revenues in the Satellite Services segment resulting primarily from the PanAmSat merger and increased sales on commercial satellite programs in the Satellite Manufacturing segment. Direct-To-Home Broadcast segment revenues more than doubled to $1,276.9 million from $621.0 million in 1996. The increase resulted from strong subscriber growth and continued low subscriber churn rates. Domestic DIRECTV(R) fueled this growth with revenues of $1,103.3 million, a 78.5% increase over prior year's revenues of $618.2 million. Hughes' Latin American DIRECTV subsidiary, Galaxy Latin America ("GLA"), had revenues of $70.0 million compared with $2.7 million in 1996. Total DIRECTV subscribers as of December 31, 1997 were 3,301,000 in the United States and 300,000 in Latin America. DIRECTV Japan initiated its service in December 1997. Revenues for the Satellite Services segment in 1997 increased 30.5% to $629.9 million from $482.8 million in 1996. The increased revenues were due to the PanAmSat merger and increased operating lease revenues for both video distribution and business communications services. PanAmSat's services were expanded in 1997 with the successful launch of two dedicated direct-to-home satellites and a new cable TV distribution satellite in Latin America leading to an increase of approximately 25% in total transmission capability since the May merger. IV-42 28 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED Satellite Manufacturing segment revenues increased 21.2% in 1997 to $2,491.9 million from $2,056.4 million in 1996 primarily due to higher commercial satellite sales in the HS 601HP and mid-earth orbit satellite product lines. Revenues in 1997 for the Network Systems segment were $1,011.3 million compared with $1,070.0 million in 1996. The decline was primarily due to lower domestic mobile cellular telephone equipment sales, which were partially offset by higher satellite-based mobile telephony equipment sales. Operating Profit. Operating profit for Hughes increased to $306.4 million in 1997 from $210.1 million in 1996. The 45.8% increase reflects reduced losses in the Direct-To-Home Broadcast segment, higher commercial satellite sales and the completion of the PanAmSat merger. The operating loss in the Direct-To-Home Broadcast segment in 1997 was $254.6 million compared with an operating loss of $319.8 million in 1996. The full-year 1997 operating loss for domestic DIRECTV was $137.0 million compared with $192.0 million in 1996. GLA's operating loss was $116.0 million in 1997 versus $131.0 million in 1996. The lower operating losses in 1997 were principally due to increased subscriber revenues which more than offset higher marketing and subscriber related expenditures. With respect to the worldwide DIRECTV businesses, particularly in the United States, Hughes has implemented a number of strategic initiatives designed to expand its market share and enhance its competitive position. These include new distribution channels, expanded services, broader programming and marketing and other promotional strategies designed to address "barriers to entry" identified by consumers. The implementation of such strategies is likely to increase subscriber acquisition costs and, as a result, is likely to affect the timing and amount of revenues and the overall profitability of the DIRECTV businesses. However, Hughes believes that early capture of market share and the establishment of market leadership are important to the maximization of the long-term value of the DIRECTV businesses. The Satellite Services segment operating profit was $296.2 million in 1997, an increase of 22.2% over the prior year's operating profit of $242.4 million. The increase resulted primarily from the PanAmSat merger and increased operating lease revenues for both video distribution and business communications services. Operating profit margin in 1997 declined to 46.5% from 49.5% in the prior year principally due to goodwill amortization associated with the PanAmSat merger. Operating profit for the Satellite Manufacturing segment in 1997 was $226.3 million, an increase of 23.5% over $183.3 million in 1996. The increase was primarily due to the higher commercial program sales noted above. The operating profit margin for the year was 9.1% compared with 8.9% in the prior year. The Network Systems segment operating profit in 1997 was $74.1 million versus $107.7 million in 1996 and operating profit margin declined to 7.3% from 10.1% last year. These decreases were primarily the result of lower domestic mobile cellular telephone equipment sales, increased research and development expenditures and higher marketing expenditures associated with the launch of the DirecPC/DirecDuo products. Costs and Expenses. Selling, general and administrative expenses increased to $1,119.9 in 1997 from $788.5 in 1996. The increase resulted principally from the PanAmSat merger, increased programming and subscriber acquisition costs in the Direct-To-Home Broadcast segment and increased research and development and marketing expenditures in the Network Systems segment. The increase in depreciation and amortization expense to $296.4 in 1997 from $194.6 in 1996, resulted from increased goodwill amortization related to the PanAmSat merger and additional satellite depreciation in 1997. Interest Income and Expense. Interest income increased $26.3 million in 1997 compared to 1996 due primarily to higher cash balances resulting from the PanAmSat merger as well as increased cash resulting from the Hughes Transactions. Interest expense increased $48.1 million in 1997 versus 1996 due to the increased borrowings resulting from the PanAmSat merger. Other, net. The 1997 amount included a $489.7 million pre-tax gain related to the PanAmSat merger, partially offset by losses from unconsolidated subsidiaries of $72.2 million attributable principally to equity investments in American Mobile Satellite Corporation, DIRECTV Japan and Surfin Ltd. The 1996 amount included a $120.3 million pre-tax gain recognized from the sale of 2.5% of DIRECTV to AT&T, partially offset by losses from unconsolidated subsidiaries of $42.2 million, primarily related to American Mobile Satellite Corporation. Income Taxes. The effective income tax rate was 37.0% in 1997 and 43.1% in 1996. The decrease in the effective income tax rate in 1997 was due primarily to an increase in research and development credits and favorable resolution of certain tax contingencies in 1997. Discontinued Operations and Extraordinary item. On December 15, 1997, Hughes Avicom was sold to Rockwell Collins, Inc., resulting in an after-tax gain of $62.8 million. Hughes recorded an extraordinary after-tax charge of $20.6 million in 1997 related to premiums paid for the refinancing of PanAmSat's debt (for additional information see Note 18 to the financial statements). IV-43 29 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED 1997 compared to 1996 - Concluded Net Earnings. 1997 earnings were $470.7 million, or $1.18 per share of GM Class H common stock on a pro forma basis, compared with 1996 earnings of $183.5 million, $0.46 per share of GM Class H common stock on a pro forma basis. Earnings per share are presented on a pro forma basis assuming the recapitalized GM Class H common stock was outstanding during all periods presented (See further discussion in Note 14 to the financial statements). Backlog. The 1997 year-end backlog of $10,337.6 million increased from the $6,780.5 million reported at the end of 1996, primarily due to the PanAmSat merger. 1996 compared to 1995 Revenues. Hughes revenues were $4,008.7 million in 1996, a 27.1% increase from the $3,152.8 million reported in 1995. The increase resulted from a substantial increase in subscribers in the Direct-To-Home Broadcast segment, increased transponder capacity and demand in the Satellite Services segment, increased commercial and government satellite sales in the Satellite Manufacturing segment, and increased revenues for the Network Systems segment. Direct-To-Home segment sales increased to $621.0 million in 1996 from $241.8 million in 1995. This increase was primarily due to the continued expansion of the DIRECTV subscriber base by over one million subscribers from 1995. Satellite Services segment revenues grew to $482.8 million in 1996 from $386.1 million in 1995. This growth was fueled by improved performance in cable, broadcast and direct-to-home distribution services principally as a result of additional transponder capacity due to the successful launches of Galaxy III-R and IX. Revenues from the Satellite Manufacturing segment increased to $2,056.4 million in 1996 from $1,731.5 million in 1995 due to higher commercial and government satellite sales, spread over all product lines. Revenues increased for the Network Systems segment to $1,070.0 million in 1996 from $919.3 million in 1995 resulting from higher wireless product sales coupled with the introduction and sales of digital satellite system (DSS(R)) products. Operating Profit. Operating profit for 1996 was $210.1 million, a 22.5% increase from the $171.5 million reported in 1995. The operating loss in the Direct-To-Home Broadcast segment in 1996 was $319.8 million compared to a loss of $160.8 million in 1995. The increased loss resulted from increased costs related to DIRECTV for consumer financing, marketing and operating costs and operating losses related to the start of service by the Company's DIRECTV business in Latin America. The Satellite Services segment operating profit increased to $242.4 million in 1996 from $166.6 million in 1995 due to increased utilization and capacity on existing and new satellites. Operating profit for the Satellite Manufacturing segment in 1996 was $183.3 million compared to $151.5 million in 1995 resulting from the increased sales noted above. The Network Systems segment operating profit increased to $107.7 million in 1996 from $69.0 million in 1995, reflecting the strong performance of the wireless product lines. Costs and Expenses. Selling, general and administrative expenses were $788.5 million in 1996 compared to $488.4 million in 1995. The increase was primarily related to subscriber acquisition costs related to DIRECTV businesses for both domestic and international operations. In addition, costs associated with international expansion activities for satellite services and the wireless product lines contributed to the increase. Interest Income and Expense. Interest income in 1996 of $6.8 million was relatively unchanged from the $5.2 million in 1995. Interest expense decreased to $42.9 million in 1996 from $61.1 million in 1995 resulting from a decrease in interest expense allocated from former Hughes. Other, net. The 1996 amount included a $120.3 million pre-tax gain recognized from the sale of 2.5% of DIRECTV to AT&T, partially offset by losses in unconsolidated subsidiaries of $42.2 million, primarily related to American Mobile Satellite Corporation. Income Taxes. The effective income tax rate was 43.1% in 1996 and 26.5% in 1995. The variance in the rate was primarily due to the effect of the foreign sales corporation's ("FSC") tax benefits as a percentage of the pre-tax profits for these years. The impact of the FSC benefit on the 1995 tax rate was considerably higher due to the lower operating results in 1995. Net Earnings. Hughes 1996 earnings were $183.5 million, or $0.46 per share of GM Class H common stock on a pro forma basis, compared with 1995 earnings of $27.2 million, or $0.07 per share of GM Class H common stock on a pro forma basis. Earnings per share are estimated on a pro forma basis assuming the recapitalized GM Class H Common stock was outstanding during all periods presented (See further discussion in Note 14 to the financial statements). Backlog. The 1996 year-end backlog of $6,780.5 million decreased from the $7,057.0 million reported at the end of 1995, primarily due to the completion of various government programs, offset in part by increased customer commitments for the HS 601HP satellite. IV-44 30 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED Liquidity and Capital Resources Cash and Cash Equivalents. Cash and cash equivalents were $2,783.8 million at December 31, 1997 compared to $6.7 million at December 31, 1996. The significant increase in cash resulted primarily from the Hughes Transactions pursuant to which Hughes received cash proceeds of $4,392.8 million on December 17, 1997. The $4,392.8 million of cash proceeds resulted from $4.0 billion received from borrowings incurred by Hughes Defense prior to its spin-off to GM and $392.8 million from former Hughes. The May 1997 PanAmSat merger also had a significant impact on cash and debt, as Hughes acquired existing cash and non-marketable securities of $296.9 million and $330.0 million, respectively and assumed existing debt of $613.4 million and preferred stock of $395.8 million, that was subsequently exchanged into debt on September 30, 1997. In December 1997, PanAmSat completed a $1.1 billion tender offer, which resulted in the retirement of substantially all of its existing outstanding debt. The tender offer was funded with $600 million of bank borrowings and available cash (including cash from the liquidation of marketable securities). Cash provided by continuing operations was $10.5 million in 1997, compared to $367.4 million in 1996 and $98.8 million in 1995. The change in 1997 from 1996 resulted primarily from a build-up of working capital, while the change in 1996 from 1995 resulted primarily from a decrease in working capital. Net cash used in investing activities was $2,231.5 million in 1997, $80.5 million in 1996 and $373.5 million in 1995. The substantial increase in 1997 compared to 1996 resulted from an increase in satellites, increased equity investments, the repurchase of AT&T's 2.5% equity interest in DIRECTV and the PanAmSat merger, offset by proceeds received from the sale of Hughes Avicom. The decrease in net cash used in investing activities in 1996 compared to 1995 was due to proceeds received in 1996 for the sale and leaseback of satellite transponders and sale of a 2.5% equity interest in DIRECTV to AT&T. Net cash provided by (used in) financing activities was $5,014.0 million in 1997, compared with $(279.8) million and $301.7 million in 1996 and 1995, respectively. The change in 1997 from 1996 resulted from the Hughes Transactions and PanAmSat Merger, discussed above, and increased contributions from former Hughes to Hughes to fund 1997 operations. The change in financing activities in 1996 from 1995 was the result of Hughes distributing $279.8 million to former Hughes in 1996 compared to receiving contributions from former Hughes of $301.7 million in 1995. Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of current assets to current liabilities) at December 31, 1997 and 1996 was 3.24 and 1.23, respectively. Working capital increased by $3,045.8 million to $3,323.3 million at December 31, 1997 from $277.5 million at December 31, 1996. These increases were due principally to the cash infusion resulting from the Hughes Transactions. Property and Equipment. Property, net of accumulated depreciation, increased $198.9 million to $889.7 million in 1997 from the $690.8 million reported in 1996. Satellites increased $1,586.8 million to $2,643.4 million in 1997 from the $1,056.6 million reported in 1996. The increase in property and satellites resulted primarily from the PanAmSat merger and increased capital expenditures. Capital expenditures, including expenditures related to satellites, increased to $826.6 million in 1997 from $449.5 million in 1996. The increase reflects additions to the Galaxy satellite fleet, as well as additions to property and equipment to support revenue growth at various Hughes businesses. Dividend Policy and Use of Cash. As discussed in Note 14 to the Financial Statements, GM does not initially anticipate paying cash dividends to holders of GM Class H common stock. Alternatively, Hughes anticipates using its cash to fund 1998 capital expenditures for property and equipment, as well as spacecraft, of approximately $1.2 billion, the early buy-out of satellite sale-leasebacks and to fund additional equity investments. Additionally, Hughes may be required to make cash payments for purchase price adjustments related to the Hughes Transactions. See further discussion in Note 19 to the Financial Statements. Debt and Credit Facilities. Hughes maintains two unsecured revolving credit facilities, consisting of a $750 million multi-year facility and a $250 million 364-day facility. There were no borrowings against the credit facilities at December 31, 1997. In December 1997, Hughes' subsidiary, PanAmSat, entered into a bank borrowing agreement (the "Bank Agreement") that provided for bridge loans of up to $300.0 million and loans of up to $500.0 million under a five-year revolving credit facility. Outstanding borrowings under the Bank Agreement at December 31, 1997 consisted of $100.0 million in bridge loans and $500.0 million under the revolving credit facility. As noted previously, the proceeds from such borrowings, along with cash from the liquidation of marketable securities, were used to retire substantially all of the existing PanAmSat debt then outstanding. In January 1998, PanAmSat borrowed an additional $125.0 million under the Bank Agreement, principally for the purpose of exercising an early buy-out option on a satellite sale-leaseback agreement. Also in January 1998, PanAmSat completed a private placement debt offering for five, seven, ten and thirty year notes aggregating $750.0 million (the "Notes Offering"), the proceeds of which were used to retire all of the outstanding borrowings under the Bank Agreement. As a result of the Notes Offering, the bridge loan under the Bank Agreement terminated, while the five-year revolving credit facility remains in effect. IV-45 31 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED Liquidity and Capital Resources - Concluded Hughes believes that existing cash balances and amounts available under its credit facilities, will provide sufficient resources to meet currently identified working capital requirements, debt service and other cash needs. Acquisitions. In December, 1997, Hughes repurchased from AT&T a 2.5% equity interest in DIRECTV for $161.8 million, ending AT&T's marketing agreement to distribute the DIRECTV direct broadcast satellite television service and DSS(R) equipment. In May 1997, Hughes and PanAmSat completed the merger of their respective satellite service operations into a new publicly-held company. Hughes contributed its Galaxy(R) satellite services business in exchange for a 71.5% interest in the new company. Existing PanAmSat stockholders received a 28.5% interest in the new company and $1.5 billion in cash. Such cash consideration and other funds required to consummate the merger were funded by new debt financing totaling $1,725.0 million borrowed from GM, which was subsequently repaid in December 1997. Divestitures. On December 15, 1997, Hughes sold substantially all of the assets and liabilities of the Hughes Avicom business to Rockwell Collins, Inc. for cash, which resulted in an after-tax gain of $62.8 million. Hughes Avicom is treated as a discontinued operation for all periods presented. In March 1996, Hughes Electronics sold a 2.5% equity interest in DIRECTV to AT&T for $137.5 million, with options to increase their ownership interest under certain conditions. The sale resulted in a $120.3 million pre-tax gain, which is included in other income. YEAR 2000 Certain Hughes information systems have potential operational problems in connection with applications that contain a date and/or use a date in a comparative manner as the date transitions into the Year 2000. Hughes has a comprehensive program to identify and remediate potential problems related to the Year 2000 in its information systems, infrastructure, and production and manufacturing facilities. In addition, Hughes has initiated formal communications with all of its significant external interfaces to determine the extent to which Hughes is vulnerable to third parties' failures to remediate their own potential problems related to the Year 2000. The inability of Hughes or significant external interfaces of Hughes to adequately address Year 2000 issues could cause disruption of Hughes' business operations. Many of Hughes' systems are Year 2000 compliant, or have been scheduled for replacement in Hughes' ongoing systems plans. Through December 31, 1997, Hughes has incurred and expensed approximately $2 million related to the assessment of, and preliminary efforts in connection with, its Year 2000 program and remediation plan. Future spending for software modifications and testing required for Year 2000 are currently estimated to be approximately $15 million to $25 million with the majority expected to be incurred in 1998. Hughes' target date for completing its Year 2000 modifications is December 31, 1998 with additional testing and refinements to identified systems planned for 1999. Security Ratings In December 1997, Standard and Poor's Rating Services (S&P) affirmed its long-term debt rating of Hughes at A-. The S&P A- credit rating is the seventh highest within the 10 investment grade ratings available from S&P for long-term debt, based on a strong capability to pay interest and repay principal, although somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. Additionally, S&P also affirmed its A-2 rating on Hughes' commercial paper. The A-2 commercial paper rating is the third highest category available and indicates the degree of safety regarding timely payment is satisfactory. S&P's ratings outlook for Hughes remains developing. Also in December 1997, Moody's Investors Service (Moody's), confirmed the long-term credit rating of Hughes at A-3, seventh highest within the 10 investment grade ratings available from Moody's for long-term debt. Moody's defines A-3 bonds as having "upper-medium grade" quality. 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. 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. IV-46 32 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED MARKET RISK DISCLOSURE General Hughes' cash flows and earnings are subject to fluctuations resulting from changes in foreign exchange rates, interest rates and changes in the market value of its equity investments. Hughes manages its exposure to these market risks through internally established policies and procedures and, when deemed appropriate, through the use of derivative financial instruments. Hughes' policy is not to speculate in derivative instruments, nor to enter into derivative instruments for which there are no underlying exposures. Hughes does not use financial instruments for trading purposes and is not a party to any leveraged derivatives. Foreign Currency Risk Hughes conducts business in a variety of currencies and therefore is exposed to fluctuations in foreign currency exchange rates. Hughes' objective in managing the exposure to foreign currency changes is to reduce earnings and cash flow volatility associated with foreign exchange rate fluctuations to allow management to focus its attention on its core business issues and challenges. Accordingly, Hughes primarily enters into foreign exchange-forward contracts to protect the value of its existing assets, liabilities and firm commitments. Foreign exchange-forward contracts are legal agreements between two parties to purchase and sell a foreign currency, for a price specified at the contract date, with delivery and settlement in the future. At December 31, 1997, Hughes held foreign exchange-forward contracts with an aggregate notional amount of approximately $10.9 million to buy and sell Japanese yen, Spanish pesetas and British pounds. The fair value of these contracts at December 31, 1997, as determined by market quotes, was $12.6 million. Investments Hughes maintains investments in the publicly-traded common stock of two unaffiliated companies and is therefore subject to equity price risk. Both investments are classified as available-for-sale and, consequently, reflected in the balance sheet at fair value with unrealized gains or losses, net of tax, reported as a separate component of owner's equity. At December 31, 1997, the fair value of the investments in such common stock was $21.7 million. The investments were valued at the market closing price at December 31, 1997. No actions have been taken by Hughes to hedge this market risk exposure. A 20% decline in the market price of both investments would cause the fair value of the investments in common stock to decrease by $4.3 million. Interest Rate Risk Hughes is subject to interest rate risk related to its $637.6 million of debt outstanding at December 31, 1997. Debt consisted of PanAmSat's variable rate bank borrowings of $600.0 million, PanAmSat's fixed rate borrowings of $9.1 and Hughes' fixed rate borrowings of $28.5 million. Hughes is subject to fluctuating interest rates which may adversely impact its results of operations and cash flows for its variable rate bank borrowings. Fluctuations in interest rates may also adversely effect the market value of Hughes' fixed rate borrowings. The fair market value of debt with a fixed interest rate will increase as interest rates fall, and the fair market value will decrease as interest rates rise. Bank borrowings bear interest at a rate which approximates the London Interbank Offered Rate plus 0.40%, equal to 6.09% at December 31, 1997. Other borrowings bear interest at fixed rates ranging from 9.61% to 12.75%. In connection with PanAmSat's debt refinancing activities, PanAmSat entered into certain U.S. Treasury rate lock contracts to reduce its exposure to fluctuations in interest rates. The aggregate notional value of these contracts was $375.0 million. These contracts were accounted for as hedges as they related to a specific refinancing plan that was consummated shortly after December 31, 1997. The fair value of these financial instruments at December 31, 1997 approximated their contract value. The cost to settle these instruments in 1998 will be amortized to expense over the term of the newly placed debt securities. Subsequent to the refinancing, all Hughes debt, including that of PanAmSat, will be fixed-rate debt. Hughes does not currently hedge this market risk exposure. Credit Risk Hughes is exposed to credit risk in the event of non-performance of the counterparties to its foreign currency and treasury rate lock contracts, which Hughes does not believe to be likely. Nevertheless, credit risk is managed through the periodic monitoring and approval of financially sound counterparties. IV-47 33 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - CONCLUDED Supplemental Data The Financial Statements reflect the application of purchase accounting adjustments as described in Note 1 to the Financial Statements. However, as provided in GM's 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 Aircraft Company amounted to $21.0 million in 1997, 1996 and 1995. Such amounts are excluded from the earnings available for the payment of dividends on GM Class H common stock and are charged against earnings available for the payment of dividends on GM's $1-2/3 par value stock. Unamortized purchase accounting adjustments associated with GM's purchase of Hughes Aircraft Company were $447.6 million, $468.6 million, and $489.6 million at December 31, 1997, 1996 and 1995, respectively. In order to provide additional analytical data to the users of Hughes' financial information, supplemental data in the form of unaudited summary pro forma financial data are provided. Consistent with the basis on which earnings of Hughes available for the payment of dividends on the GM Class H common stock is determined, the pro forma data exclude purchase accounting adjustments related to General Motors' acquisition of Hughes Aircraft Company. Included in the supplemental data are certain financial ratios which provide measures of financial returns excluding the impact of purchase accounting adjustments. The pro forma data are not presented as a measure of GM's total return on its investment in Hughes. IV-48 34 HUGHES ELECTRONICS CORPORATION UNAUDITED SUMMARY PRO FORMA FINANCIAL DATA* PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
Years Ended December 31, ---------------------------------------- 1997 1996 1995 -------- -------- --------- (Dollars in Millions Except per Share Amounts) Total revenues $5,128.3 $4,008.7 $3,152.8 Total costs and expenses 4,821.9 3,798.6 2,981.3 -------- -------- -------- Operating profit 306.4 210.1 171.5 Non-operating income 332.8 33.0 (52.9) Income taxes 236.7 104.8 31.4 Minority interests in net losses of subsidiaries 24.8 52.6 4.6 Income (loss) from discontinued operations 64.0 (7.4) (64.6) Extraordinary item (20.6) - - -------- -------- -------- Earnings Used for Pro Forma Computation of Available Separate Consolidated Net Income $470.7 $183.5 $27.2 ======== ======== ======== Pro Forma Earnings Attributable to General Motors Class H Common Stock on a Per Share Basis: Income from continuing operations before extraordinary item $1.07 $0.48 $0.23 Discontinued operations 0.16 (0.02) (0.16) Extraordinary item (0.05) - - -------- -------- -------- Pro Forma Earnings Attributable to General Motors Class H Common Stock $1.18 $0.46 $0.07 ======== ======== ========
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
December 31, ------------------------------ ASSETS 1997 1996 ----------- ----------- (Dollars in Millions) Total Current Assets $4,805.9 $1,497.1 Satellites, net 2,643.4 1,056.6 Property, net 889.7 690.8 Net Investment in Sales-type Leases 337.6 320.6 Intangible Assets, Investments, and Other Assets, net 3,639.6 382.7 --------- -------- Total Assets $12,316.2 $3,947.8 ========= ======== LIABILITIES AND OWNER'S EQUITY Total Current Liabilities $1,482.6 $1,219.6 Long-Term Debt 637.6 - Postretirement Benefits Other Than Pensions, Other Liabilities and Deferred Credits 1,724.1 683.6 Minority Interests 607.8 21.6 Total Owner's Equity (1) 7,864.1 2,023.0 --------- -------- Total Liabilities and Owner's Equity (1) $12,316.2 $3,947.8 ========= ========
- -------------- * The summary excludes purchase accounting adjustments related to GM's acquisition of Hughes Aircraft Company. (1) General Motors' equity in its wholly-owned subsidiary, Hughes. Holders of GM Class H common stock have no direct rights in the equity or assets of Hughes, but rather have rights in the equity and assets of GM (which includes 100% of the stock of Hughes). IV-49 35 HUGHES ELECTRONICS CORPORATION UNAUDITED SUMMARY PRO FORMA FINANCIAL DATA* - CONTINUED PRO FORMA SELECTED SEGMENT DATA
Years Ended December 31, ---------------------------- 1997 1996 1995 -------- -------- -------- (Dollars in Millions) DIRECT-TO-HOME BROADCAST Total Revenues $1,276.9 $621.0 $241.8 Operating Loss (254.6) (319.8) (160.8) Depreciation and Amortization 86.1 67.3 48.6 Segment Assets 1,441.5 1,067.2 855.9 Capital Expenditures(1) 105.6 63.5 107.5 SATELLITE SERVICES Total Revenues $629.9 $482.8 $386.1 Operating Profit 296.2 242.4 166.6 Depreciation and Amortization 141.9 55.2 73.2 Segment Assets 5,612.8 1,202.6 1,061.8 Capital Expenditures(1) 625.7 308.7 280.5 SATELLITE MANUFACTURING Total Revenues $2,491.9 $2,056.4 $1,731.5 Operating Profit 226.3 183.3 151.5 Depreciation and Amortization 39.4 34.4 33.6 Segment Assets 1,312.6 757.8 603.9 Capital Expenditures 113.9 87.8 53.2 NETWORK SYSTEMS Total Revenues $1,011.3 $1,070.0 $919.3 Operating Profit 74.1 107.7 69.0 Depreciation and Amortization 32.0 28.3 25.2 Segment Assets 1,215.6 964.0 801.1 Capital Expenditures 43.1 45.3 50.5
* The summary excludes purchase accounting adjustments related to GM's acquisition of Hughes Aircraft Company. Certain amounts for 1996 and 1995 have been reclassified to conform with 1997 classifications. (1) Includes expenditures related to satellites in the segments as follows: $53.1 million in 1995 for Direct-To-Home Broadcast segment and $606.1 million, $259.2 million and $234.9 million in 1997, 1996 and 1995, respectively, for Satellite Services segment. IV-50 36 HUGHES ELECTRONICS CORPORATION UNAUDITED SUMMARY PRO FORMA FINANCIAL DATA* - CONCLUDED PRO FORMA SELECTED FINANCIAL DATA
Years Ended December 31, ------------------------------------- 1997 1996 1995 1994 1993 ----- ----- ----- ----- ----- (Dollars in Millions Except Per Share Amounts) Operating profit $306 $210 $172 $235 $189 Income from continuing operations before income taxes, minority interests, cumulative effect of accounting change and extraordinary item $639 $243 $119 $174 $289 Earnings used for pro forma computation of available separate consolidated net income $471 $184 $27 $62 $174 Average number of GM Class H dividend base shares (1) 399.9 399.9 399.9 399.9 399.9 Owner's equity** $7,864 $2,023 $2,119 $1,790 $1,442 Working capital $3,323 $278 $312 $274 $336 Operating profit as a percent of revenues 6.0% 5.2% 5.4% 8.7% 8.6% Income from continuing operations before income taxes, minority interests, cumulative effect of accounting change and extraordinary item as a percent of revenue 12.5% 6.1% 3.8% 6.5% 13.2% Net income as a percent of revenues** 9.2% 4.6% 0.9% 2.3% 7.9% Return on equity**(2) 9.5% 8.9% 1.4% 3.8% 13.2% Income before interest expense and income taxes as a percent of capitalization (3) 14.3% 16.3% 9.4% 14.0% 25.3% Pre-tax return on total assets (4) 8.2% 8.0% 3.8% 6.0% 11.1%
* The summary excludes purchase accounting adjustments related to GM's acquisition of Hughes Aircraft Company. ** Includes unfavorable cumulative effect of accounting changes of $30.4 million in 1994. (1) Class H dividend base shares is used in calculating earnings attributable to GM Class H common stock on a per share basis. This is not the same as the average number of GM Class H shares outstanding, which was 101.5 million in 1997. (2) Earnings used for computation of available separate consolidated net income divided by average stockholder's equity (General Motors' equity in its wholly-owned subsidiary, Hughes). Holders of GM Class H common stock have no direct rights in the equity or assets of Hughes, but rather have rights in the equity and assets of GM (which includes 100% of the stock of Hughes). (3) Income from continuing operations before interest expense income taxes, cumulative effect of accounting change and extraordinary item divided by average stockholder's equity plus average total debt. (4) Income from continuing operations before income taxes, cumulative effect of accounting change and extraordinary item divided by average total assets. * * * * * * * IV-51 -----END PRIVACY-ENHANCED MESSAGE-----