UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549-1004
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
Commission file number 1-143
GENERAL MOTORS CORPORATION
(Exact name of registrant as specified in its charter)
STATE OF DELAWARE 38-0572515
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Renaissance Center, Detroit, Michigan 48265-1000
3044 West Grand Boulevard, Detroit, Michigan 48202-3091
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (313) 556-5000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X . No .
As of September 30, 1998, 654,476,779 shares of the issuer's $1-2/3 par
value common stock and 105,845,334 shares of Class H $0.10 par value common
stock were outstanding.
- 1 -
<PAGE>
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
INDEX
Page No.
Part I - Financial Information (Unaudited)
Item 1. Financial Statements
Consolidated Statements of Income for the Three and
Nine Months Ended September 30, 1998 and 1997 3
Consolidated Balance Sheets as of September 30, 1998,
December 31, 1997 and September 30, 1997 4
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Part II - Other Information (Unaudited)
Item 1. Legal Proceedings 31
Item 6. Exhibits and Reports on Form 8-K 32
Signature 32
Exhibit 99 Hughes Electronics Corporation and Subsidiaries
Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and
Results of Operations 33
Exhibit 27 Financial Data Schedule (for SEC information only)
- 2 -
<PAGE>
<TABLE>
PART I
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
------ ------ ------ ------
(Dollars in Millions Except Per Share Amounts)
<S> <C> <C> <C> <C>
Net sales and revenues
Manufactured products $29,978 $37,103 $100,115 $114,267
Financial services 3,220 3,162 9,661 9,563
Other income (Note 9) 1,225 1,625 5,119 5,447
------- ------- -------- --------
Total net sales and revenues 34,423 41,890 114,895 129,277
------ ------ ------- -------
Costs and expenses
Cost of sales and other operating charges,
exclusive of items listed below 26,484 31,484 85,464 95,602
Selling, general, and administrative
expenses 4,076 3,884 12,219 11,459
Depreciation and amortization expenses 2,874 3,030 8,712 9,196
Interest expense 1,754 1,508 5,137 4,469
Other deductions (Note 9) 499 388 1,644 956
-------- ------- -------- ---------
Total costs and expenses 35,687 40,294 113,176 121,682
------ ------ ------- -------
(Loss) income before income taxes and
minority interests (1,264) 1,596 1,719 7,595
Income tax (benefit) expense (451) 533 532 2,675
Minority interests 4 4 (3) 41
----- ------- ------- -------
Net (loss) income (809) 1,067 1,184 4,961
Premium on exchange of preference
stocks (Note 5) - 26 - 26
Dividends on preference stocks 16 16 48 56
---- ------ ------ ------
Earnings (loss) on common stocks $(825) $1,025 $1,136 $4,879
=== ===== ===== =====
Basic earnings (loss) per share attributable to
common stocks (Note 8)
Earnings per share attributable to
$1-2/3 par value $(1.28) $1.35 $1.65 $6.35
Earnings per share attributable to
Class H (prior to its
recapitalization on
December 17, 1997) $0.60 $2.54
Earnings per share attributable to
Class H (subsequent to its
recapitalization on
December 17, 1997) $0.11 $0.38
Diluted earnings (loss) per share
attributable to common stocks (Note 8)
Earnings per share attributable to
$1-2/3 par value $(1.28) $1.34 $1.60 $6.28
Earnings per share attributable
to Class H (prior to its
recapitalization on
December 17, 1997) $0.60 $2.54
Earnings per share attributable to
Class H (subsequent to its
recapitalization on
December 17, 1997) $0.11 $0.38
Reference should be made to the notes to consolidated financial statements.
</TABLE>
- 3 -
<PAGE>
<TABLE>
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
Sept. 30, Sept. 30,
1998 Dec. 31, 1997
(Unaudited) 1997 (Unaudited)
----------- -------- ----------
(Dollars in Millions)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $7,961 $11,262 $10,406
Other marketable securities 8,688 11,722 10,823
------ ------ ------
Total cash and marketable securities 16,649 22,984 21,229
Finance receivables - net 63,091 58,870 58,966
Accounts and notes receivable (less allowances) 10,419 7,493 7,223
Inventories (less allowances) (Note 2) 12,869 12,102 12,820
Deferred income taxes 22,306 22,478 19,588
Equipment on operating leases (less accumulated
depreciation) 36,179 33,302 32,964
Property - net (Note 3) 37,329 34,567 38,520
Intangible assets - net 12,309 11,469 14,979
Other assets - net 26,494 25,623 26,846
------- -------- --------
Total assets $237,645 $228,888 $233,135
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable (principally trade) $18,142 $15,782 $15,021
Notes and loans payable 102,460 93,027 90,914
Deferred income taxes 3,156 2,923 4,269
Postretirement benefits other than pensions
(Note 4) 40,806 41,168 44,427
Pensions 7,219 7,043 7,100
Accrued expenses and other liabilities 50,340 50,490 46,869
------- -------- --------
Total liabilities 222,123 210,433 208,600
------- ------- -------
Minority interests 621 727 735
General Motors - obligated mandatorily
redeemable preferred securities of
subsidiary trusts holding solely junior
subordinated debentures of General Motors
(Note 5)
Series D 79 79 79
Series G 142 143 143
Stockholders' equity
Preference stocks 1 1 1
Common stocks
$1-2/3 par value (Note 6; issued,
655,036,035; 693,456,394; and
707,772,699 shares) 1,092 1,156 1,180
Class H (issued, 102,648,686 shares) - - 10
Class H (issued, 105,959,765 and
103,885,803 shares) 11 10 -
Capital surplus (principally additional
paid-in capital) 12,769 15,369 16,211
Retained earnings 5,554 5,416 9,846
------ ------- -------
Subtotal 19,427 21,952 27,248
Minimum pension liability adjustment (4,062) (4,062) (3,490)
Accumulated foreign currency translation
adjustments (1,097) (888) (727)
Net unrealized gains on securities 412 504 547
------ ------ ------
Accumulated other comprehensive loss (4,747) (4,446) (3,670)
Total stockholders' equity 14,680 17,506 23,578
-------- -------- --------
Total liabilities and stockholders'
equity $237,645 $228,888 $233,135
======= ======= =======
</TABLE>
Reference should be made to the notes to consolidated financial statements.
- 4 -
<PAGE>
<TABLE>
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended Sept.30,
1998 1997
(Dollars in Millions)
<S> <C> <C>
Net cash provided by operating activities $7,497 $13,123
----- ------
Cash flows from investing activities
Expenditures for property (7,043) (6,958)
Investments in companies, net of cash acquired (569) (1,788)
Investments in other marketable securities
- acquisitions (23,248) (24,790)
Investments in other marketable securities
- liquidations 26,912 23,547
Finance receivables - acquisitions (112,962) (128,300)
Finance receivables - liquidations 86,659 105,401
Proceeds from sales of finance receivables 21,922 20,512
Operating leases - acquisitions (18,281) (16,206)
Operating leases - liquidations 11,961 10,138
Other (712) 721
Net cash used in investing activities (15,361) (17,723)
------ ------
Cash flows from financing activities
Net increase in loans payable 2,240 3,162
Increase in long-term debt 16,620 11,658
Decrease in long-term debt (10,795) (9,340)
Proceeds from issuing common stocks 344 471
Repurchases of common stocks (3,071) (3,353)
Cash dividends paid to stockholders (1,046) (1,252)
----- -----
Net cash provided by financing activities 4,292 1,346
----- -----
Effect of exchange rate changes on cash
and cash equivalents 271 (403)
------ ------
Net decrease in cash and cash equivalents (3,301) (3,657)
Cash and cash equivalents at beginning of the period 11,262 14,063
------ ------
Cash and cash equivalents at end of the period $7,961 $10,406
====== ======
Reference should be made to the notes to consolidated financial statements.
</TABLE>
- 5 -
<PAGE>
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Financial Statement Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. The consolidated financial statements include the
accounts of General Motors Corporation (hereinafter referred to as the
"Corporation") and domestic and foreign subsidiaries that are more than 50%
owned, principally General Motors Acceptance Corporation and Subsidiaries (GMAC)
and Hughes Electronics Corporation and Subsidiaries, prior to the December 17,
1997 restructuring of the company (hereinafter referred to as "former Hughes")
and subsequent to the December 17, 1997 restructuring of the company
(hereinafter referred to as "Hughes") (collectively referred to as "General
Motors" or "GM"). In the opinion of management, all adjustments (consisting of
only normal recurring items), which are necessary for a fair presentation have
been included. The results for interim periods are not necessarily indicative of
results which may be expected for any other interim period or for the full year.
For further information, refer to the consolidated financial statements and
notes thereto included in the GM 1997 Annual Report on Form 10-K, as amended,
filed with the Securities and Exchange Commission.
Certain amounts for 1997 were reclassified to conform with the 1998
classifications.
Note 2. Inventories
<TABLE>
<CAPTION>
Major classes of inventories were as follows (in millions):
Sept. 30, Dec. 31, Sept. 30,
1998 1997 1997
--------- -------- ---------
<S> <C> <C> <C>
Productive material, work in process,
and supplies $8,050 $7,023 $8,102
Finished product, service parts, etc. 7,090 7,347 7,066
------- ------- -------
Total inventories at FIFO 15,140 14,370 15,168
Less LIFO allowance 2,271 2,268 2,348
------- ------- -------
Total inventories (less allowances) $12,869 $12,102 $12,820
====== ====== ======
</TABLE>
Note 3. Property - Net
<TABLE>
<CAPTION>
Property - net included the following (in millions):
Sept. 30, Dec. 31, Sept. 30,
1998 1997 1997
--------- -------- ---------
<S> <C> <C> <C>
Real estate, plants, and equipment $73,073 $69,680 $70,679
Less accumulated depreciation (43,459) (41,915) (41,287)
------ ------ ------
Real estate, plants, and equipment - net 29,614 27,765 29,392
Special tools - net 7,715 6,802 9,128
------- ------- -------
Total property - net $37,329 $34,567 $38,520
====== ====== ======
</TABLE>
Note 4. Postretirement Benefits Other Than Pensions
GM has disclosed in the consolidated financial statements certain amounts
associated with estimated future postretirement benefits other than pensions and
characterized such amounts as "accumulated postretirement benefit obligations,"
"liabilities," or "obligations." Notwithstanding the recording of such amounts
and the use of these terms, GM does not admit or otherwise acknowledge that such
amounts or existing postretirement benefit plans of GM (other than pensions)
represent legally enforceable liabilities of GM.
- 6 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Note 5. Preferred Securities of Subsidiary Trusts
General Motors - Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts
In July 1997, the General Motors Capital Trust D (Series D Trust) issued
approximately $79 million of its 8.67% Trust Originated Preferred Securitiessm
(TOPrSsm) Series D, (Series D Preferred Securities), in a one-for-one exchange
for 3,055,255 of the outstanding GM Series D 7.92% Depositary Shares, each
representing one-fourth of a share of GM Series D Preference Stock, $0.10 par
value per share. In addition, the General Motors Capital Trust G (Series G
Trust) issued approximately $143 million of its 9.87% TOPrS, Series G (Series G
Preferred Securities), in a one-for-one exchange for 5,064,489 of the
outstanding GM Series G 9.12% Depositary Shares, each representing one-fourth of
a share of GM Series G Preference Stock, $0.10 par value per share.
Concurrently with the exchanges and the related purchases by GM from the
Series D and Series G Trusts (Trusts) of the common securities of such Trusts,
which represent approximately 3 percent of the total assets of such Trusts, GM
issued to the wholly-owned Trusts, as the Series D Trust's sole assets its 8.67%
Junior Subordinated Deferrable Interest Debentures, Series D, due July 1, 2012
and as the Series G Trust's sole assets, its 9.87% Junior Subordinated
Deferrable Interest Debentures, Series G, due July 1, 2012 (the "Series D
Debentures" and "Series G Debentures" or collectively the "Debentures"), having
aggregate principal amounts equal to the aggregate stated liquidation amounts of
the Series D and Series G Preferred Securities and the related common
securities, respectively ($79 million with respect to the Series D Debentures
and $131 million with respect to the Series G Debentures).
The Series D Debentures are redeemable, in whole or in part, at GM's option
on or after August 1, 1999, at a redemption price equal to 100% of the
outstanding principal amount of the Series D Debentures plus accrued and unpaid
interest, or, under certain circumstances, prior to August 1, 1999, at a
redemption price equal to 105% of the outstanding principal of the Series D
Debentures from the Series D expiration date through July 31, 1998, declining
ratably on each August 1 thereafter to 100% on August 1, 1999, plus accrued and
unpaid interest. The Series D Preferred Securities will be redeemed upon the
maturity or earlier redemption of the Series D Debentures.
The Series G Debentures are redeemable, in whole or in part, at GM's option
on or after January 1, 2001, at a redemption price equal to 100% of the
outstanding principal amount of the Series G Debentures plus accrued and unpaid
interest, or, under certain circumstances, prior to January 1, 2001, at a
redemption price equal to 114% of the outstanding principal of the Series G
Debentures from the Series G expiration date through December 31, 1997,
declining ratably on each January 1 thereafter to 100% on January 1, 2001, plus
accrued and unpaid interest. The Series G Preferred Securities will be redeemed
upon the maturity or earlier redemption of the Series G Debentures.
GM has guaranteed the payment in full to the holders of the Series D and
Series G Preferred Securities (collectively the "Preferred Securities") of all
distributions and other payments on the Preferred Securities to the extent not
paid by the Trusts only if and to the extent that the Trusts have assets
therefore, GM has made payments of interest or principal on the related
Debentures. These guarantees, when taken together with GM's obligations under
the Preferred Securities Guarantees, the Debentures, and the Indentures relating
thereto and the obligations under the Declaration of Trust of the Trusts,
including the obligations to pay certain costs and expenses of the Trusts,
constitute full and unconditional guarantees by GM of each Trust's obligations
under its Preferred Securities.
sm "Trust Originated Preferred Securities" and "TOPrS" are service trademarks of
Merrill Lynch & Co.
Note 6. Common Stock Repurchases
During the nine months ended September 30, 1998, GM used $2.6 billion to
acquire approximately 38 million shares of $1-2/3 par value common stock, which
completed the second $2.5 billion stock repurchase program announced in August
of 1997 and represented approximately 33 percent of the $4 billion stock
repurchase program announced in February 1998. Due to work stoppages at various
GM component plants, stock repurchases were suspended as part of GM's cash
conservation initiatives. GM also used approximately $485 million to repurchase
shares of $1-2/3 par value common stock for certain employee benefit plans
during the nine months ended September 30, 1998.
- 7 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
<TABLE>
<CAPTION>
Note 7. Comprehensive Income
GM's total comprehensive (loss) income was as follows (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net (loss) income $(809) $1,067 $1,184 $4,961
Other comprehensive income (loss):
Foreign currency translation
adjustments 235 (85) (209) (614)
Unrealized (losses) gains on
securities (95) 48 (92) 124
--- -- --- ---
Other comprehensive income (loss) 140 (37) (301) (490)
--- --- ---- ----
Total comprehensive (loss) income $(669) $1,030 $883 $4,471
===== ===== === =====
</TABLE>
Note 8. Earnings (loss) Per Share Attributable to Common Stocks
Basic earnings per share attributable to each class of GM common stock was
determined based on the attribution of earnings to each such class of common
stock for the period divided by the weighted-average number of common shares for
each such class outstanding during the period. Diluted earnings per share
attributable to each class of GM common stock considers the impact of potential
common shares, unless the inclusion of the potential common shares would have an
antidilutive effect.
The assumed exercise of stock options has no effect on Class H common stock
earnings per share, because to the extent that shares of Class H common stock
deemed to be outstanding would increase, such increased shares would also
increase the numerator of the fraction used to determine Available Separate
Consolidated Net Income (ASCNI).
The attribution of earnings to each class of common stock was as follows (in
millions):
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
Earnings (loss) attributable to
common stocks
Earnings attributable to
$1-2/3 par value $(836) $964 $1,096 $4,622
--- --- ----- -----
Earnings attributable to Class H
(prior to its recapitalization
on December 17, 1997) $ - $61 $ - $257
-- -- -- ---
Earnings attributable to Class H
(subsequent to its
recapitalization on
December 17, 1997) $11 $ - $40 $ -
-- -- -- --
Earnings attributable to $1-2/3 par value common stock for the period
represent the earnings attributable to all GM common stocks for the period,
reduced by the ASCNI of former Hughes and Hughes for the respective period.
Earnings attributable to Class H common stock for the three and nine months
ended September 30, 1998 represent the ASCNI of Hughes, excluding the effects of
purchase accounting adjustments arising at the time of the Corporation's
acquisition of Hughes Aircraft Company (HAC) which remains after the spin-off of
Hughes Defense, calculated for such period and multiplied by a fraction, the
numerator of which was a number equal to the weighted-average number of shares
of Class H common stock outstanding for each of the periods (106 million and 105
million for the three and nine months ended September 30, 1998, respectively)
and the denominator of which was 400 million.
Earnings attributable to Class H common stock for the three and nine months
ended September 30, 1997 represent the ASCNI of former Hughes. The ASCNI of
former Hughes was determined quarterly in amounts equal to the separate
consolidated net income of former Hughes for the respective quarter, excluding
the effects of purchase accounting adjustments arising at the time of the
Corporation's acquisition of HAC, calculated for such period and multiplied by a
fraction, the numerator of which was a number equal to the weighted-average
number of shares of Class H common stock outstanding for each of the periods
(102 million and 101 million for the three and nine months ended September 30,
1997, respectively) and the denominator of which was 400 million.
The denominator used in determining the ASCNI of former Hughes was adjusted
from time-to-time as deemed appropriate by GM's Board of Directors (GM Board) to
reflect subdivisions or combinations of the Class H common stock and to reflect
certain transfers of capital to or from former Hughes. The denominator used in
determining the ASCNI of Hughes may be adjusted from time-to-time as deemed
appropriate by the GM Board to reflect subdivisions or combinations of the Class
H common stock and to reflect certain transfers of capital to or from Hughes.
The GM Board's discretion to make such adjustments is limited by criteria set
forth in the Corporation's Restated Certificate of Incorporation.
- 8 -
<PAGE>
<TABLE>
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Note 8. Earnings Per Share Attributable to Common Stocks (concluded)
The reconciliation of the amounts used in the basic and diluted earnings per
share computations for net income was as follows (in millions except per share
amounts):
<CAPTION>
Class H Common Stock - Class H Common Stock -
Prior to its recapitalization Subsequent to its recapitalization
$1-2/3 Par Value Common Stock on December 17,1997 on Decembewr 17, 1997
----------------------------- ----------------------------- -----------------------------------
Per Share Per Share Per Share
Income Shares Amount ASCNI Shares Amount ASCNI Shares Amount
------ ------ --------- ----- ------ --------- ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Three Months Ended
September 30, 1998
Net (loss) lncome $(820) $11
Less: Dividends on
preference stocks 16 -
---- ---
Basic EPS
Net (loss) income available
to common stockholders (836) 654 $(1.28) 11 106 $0.11
---- ----
Effect of Dilutive Securities
Assumed exercise of dilutive
stock options - - - 4
--- --- --- ---
Adjusted net (loss)
income available to
common stockholders $(836) 654 $(1.28) $11 110 $0.11
===== === ==== == === ====
Three Months Ended
September 30, 1997
Net income $1,006 $61
Less:Dividends on preference
stocks 16 -
Premium on exchange of
preference stocks 26 -
----- ---
Basic EPS
Net income available to
common stockholders 964 713 $1.35 61 102 $0.60
---- ----
Effect of Dilutive Securities
Assumed exercise of
dilutive stock options (2) 7 2 3
---- ----- --- ----
Diluted EPS
Adjusted net income available
to common stockholders $962 720 $1.34 $63 105 $0.60
=== === ==== == === ====
Nine Months Ended
September 30, 1998
Net income $1,144 $40
Less:Dividends on
preference stocks 48 -
------ ---
Basic EPS
Net income available
to common stockholders 1,096 666 $1.65 40 105 $0.38
---- ----
Effect of Dilutive Securities
Assumed exercise of
dilutive stock options (2) 10 2 5
------ ---- --- ----
Diluted EPS
Adjusted net income
available to
common stockholders $1,094 676 $1.60 $42 110 $0.38
===== === ==== == === ====
Nine Months Ended
September 30, 1997
Net income $4,704 $257
Less: Dividends on
preference stocks 56 -
Premium on exchange
of preference stocks 26 -
------ ----
Basic EPS
Net income available
to common stockholders 4,622 728 $6.35 257 101 $2.54
---- ----
Effect of Dilutive Securities
Assumed exercise of dilutive
stock options (8) 6 8 3
------ ----- ----- ----
Diluted EPS
Adjusted net income
available to
common stockholders $4,614 734 $6.28 $265 104 $2.54
===== === ==== === === ====
- 9 -
</TABLE>
<PAGE>
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
<TABLE>
Note 9. Other Income and Other Deductions
Other income and other deductions consisted of the following (in millions):
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Other income
Nonfinancing interest $512 $561 $1,659 $1,510
Insurance premiums 356 252 1,094 767
Income from sales of receivables
programs 88 98 292 311
Mortgage servicing and processing fees 238 161 641 528
Insurance capital and investment gains 119 43 390 303
Mortgage investment and other income 299 256 814 563
(Loss) gain on divestiture of
businesses (1) (430) - (430) 128
Gain on PAS merger (2) - - - 490
VW Settlement (3) - - - 88
Equity in net (losses) earnings
of associates (21) (13) (54) 15
Other 64 267 713 744
----- ----- ----- ------
Total other income $1,225 $1,625 $5,119 $5,447
===== ===== ===== =====
Other deductions
Provision for financing losses $94 $139 $323 $396
Insurance losses and loss adjustment
expenses 268 156 808 448
Other 137 93 513 112
--- ---- ----- ---
Total other deductions $499 $388 $1,644 $956
=== === ===== ===
</TABLE>
(1) During the 1998 third quarter, the Delphi divestiture of Seating, Lighting
and Coil Spring Operations resulted in a pretax loss of $430 million ($271
million after tax or $0.41 per share of $1-2/3 par value common stock ).
During the 1997 second quarter, the sale of GM Europe's equity interest in
Avis Europe resulted in a pre-tax gain of $128 million ($103 million
after-tax or $0.14 per share of $1-2/3 par value common stock).
(2) During the 1997 second quarter, Hughes and PanAmSat Corporation (PAS)
completed the merger of their respective satellite service operations into a
new publicly-held company which resulted in a one-time pre-tax gain of $490
million ($318 million after-tax or $0.33 per share of $1-2/3 par value
common stock and $0.80 per share of Class H common stock).
(3) During the 1997 first quarter, an agreement with Volkswagen A.G. (VW) that
settled a civil lawsuit GM brought against VW resulted in a pre-tax gain of
$88 million ($55 million after-tax or $0.07 per share of
$1-2/3 par value common stock), after deducting certain legal expenses.
- 10 -
<PAGE>
<TABLE>
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Note 10. Segment Reporting
Selected information regarding GM's operating segments (a) - General Motors
Automotive (GMA), which is comprised of four regions: GM North America (GMNA),
GM Europe (GME), GM Asia/Pacific (GMAP), and GM Latin American/Africa/Mid-East
(GMLAAM); Delphi; GMAC; Hughes and Other follows:
<CAPTION>
Elimin-
GMNA GME GMLAAM GMAP ations GMA Delphi(b) GMAC Hughes(c) Other Total
----- ----- ------ ---- ------ ----- -------- ---- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
For the Three Months Ended: (in millions)
September 30, 1998
Net sales and revenues from
external customers $18,122 $5,925 $1,664 $615 $ - $26,326 $1,374 $ - $1,507 $639 $29,846
Intersegment net sales
and revenues 374 302 37 56 (769) - 4,641 - 6 (4,647) -
------- ------ ------ ---- --- -------- ------- ----- ------ ----- --------
Total net sales and
revenues $18,496 $6,227 $1,701 $671 $(769) $26,326 $6,015 $ - $1,513 $(4,008) $29,846
====== ===== ===== === === ====== ===== === ===== ===== ======
Net (loss) income (d) $(612) $50 $(64) $2 $(24) $(648) $(485) $313 $43 $(32) $(809)
Segment assets (e) $65,132 $18,243 $5,970 $1,384 $(505) $90,224 $22,683 $ - $12,461 $7,451 $132,819
September 30, 1997
Net sales and revenues from
external customers $23,851 $5,510 $2,245 $682 $ - $32,288 $1,172 $ - $3,040 $625 $37,125
Intersegment net sales
and revenues 196 176 28 - (400) - 4,872 - 1,077 (5,949) -
------- ------ ------ ------ --- -------- ------- ---- ----- ----- --------
Total net sales and
revenues $24,047 $5,686 $2,273 $682 $(400) $32,288 $6,044 $ - $4,117 $(5,324) $37,125
====== ===== ===== === === ====== ===== === ===== ===== ======
Net income (loss) (d) $423 $(21 $165 $(7) $1 $561 $55 $312 $240 $(101) $1,067
Segment assets (e) $67,842 $18,288 $5,936 $1,881 $(469) $93,478 $22,158 $ - $18,581 $6,787 $141,004
For the Nine Months Ended:
September 30, 1998
Net sales and revenues from
external customers $64,440 $16,967 $5,776 $2,093 $ - $89,276 $4,484 $ - $4,158 $1,817 $99,735
Intersegment net sales
and revenues 1,849 884 143 62 (2,938) - 16,195 - 15 (16,210) -
------- ------- ------ ------ ----- -------- -------- ---- ------- ------ ---------
Total net sales and
revenues $66,289 $17,851 $5,919 $2,155$(2,938) $89,276 $20,679 $ - $4,173 $(14,393) $99,735
====== ====== ===== ===== ===== ====== ====== === ===== ====== ======
Net income (loss) (d) $18 $273 $38 $(26) $3 $306 $(138) $1,027 $153 $(164) $1,184
September 30, 1997
Net sales and revenues from
external customers $74,131 $17,380 $6,387 $2,144 $- $100,042 $3,658 $ - $8,738 $1,885 $114,323
Intersegment net sales
and revenues 598 623 101 - (1,322) - 15,828 - 3,773 (19,601) -
-------- ------ ----- ----- ------ ------- ------- ---- ------ ------ -------
Total net sales and
revenues $74,729 $18,003 $6,488 $2,144$(1,322)$100,042 $19,486 $ - $12,511 $(17,716) $114,323
====== ====== ===== ===== ===== ======= ====== === ====== ====== =======
Net income (loss) (d) $1,661 $440 $475 $27 $ - $2,603 $545 $1,022 $1,017 $(226) $4,961
See notes on next page
</TABLE>
- 11 -
<PAGE>
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Note 10. Segment Reporting (concluded)
(a)Calculated with financing and insurance operations on an equity basis, which
is the basis upon which such operations are evaluated.
(b)Includes Delco Electronics Corporation's assets as of September 30, 1998 and
operating results for the periods ended September 30, 1998.
(c)Represents Hughes and former Hughes for the periods ended September 30, 1998
and 1997, respectively.
(d)The amount reported for Hughes excludes amortization of GM purchase
accounting adjustments of approximately $5 million and $31 million for the
three months ended September 30, 1998 and 1997, respectively, and $16 million
and $92 million for the nine months ended September 30, 1998 and 1997,
respectively, related to GM's acquisition of HAC. Such amortization was
allocated to GM's Other segment which is consistent with the basis upon which
the segments are evaluated.
(e)The amount reported for Hughes excludes the unamortized GM purchase
accounting adjustments of approximately $432 million and $2,632 million, for
1998 and 1997, respectively, related to GM's acquisition of HAC. These
adjustments were allocated to GM's Other segment which is consistent with the
basis upon which the segments are evaluated.
Note 11. Contingent Matters
Hughes has maintained a suit against the U.S. Government since September 1973
regarding the Government's infringement and use of a Hughes patent (the
"Williams Patent") covering "Velocity Control and Orientation of a Spin
Stabilized Body," principally satellites. On April 7, 1998, the Court of Appeals
for the Federal Circuit (CAFC) reaffirmed earlier decisions in the Williams case
and the award of $114 million in damages. The CAFC ruled that the conclusions
previously reached in the Williams case were consistent with the U.S. Supreme
Court's findings in the Warner-Jenkinson case. The U.S. Government petitioned
the CAFC for a rehearing and was denied and is presently considering a further
appeal to the U.S. Supreme Court. Hughes is unable to estimate the duration of
any further appeal effort by the U.S. Government. While no amount has been
recorded in the financial statements of Hughes to reflect the $114 million award
or the interest accumulating thereon, a resolution of this issue could result in
a gain that would be material to the earnings of GM attributable to Class H
common stock.
In connection with the 1997 spin-off of Hughes Electronics Corporation's
defense business and its subsequent merger with Raytheon Company, a process was
agreed to among GM, Hughes and Raytheon for resolving disputes that might arise
in connection with post-closing adjustments called for by the terms of the
merger agreement. Such adjustments might call for a cash payment between Hughes
and Raytheon. A dispute currently exists regarding the post-closing adjustments
which Hughes and Raytheon have proposed to one another. If the dispute is not
resolved by negotiation, the parties will proceed to an agreed upon form of
binding arbitration, under which either party may be required by arbitration to
make a payment to the other. It is possible that Hughes may be required by
arbitration to make a payment to Raytheon that would be material to Hughes.
However, the amount of payment that might be required of either party is not
determinable at this time. Hughes intends to vigorously oppose the adjustments
Raytheon seeks.
Hughes has reached an agreement with the Internal Revenue Service regarding a
claim for refund of federal income taxes for the years 1983, 1984 and 1985. The
agreement requires approval by the Joint Commission on Taxation of Congress
before the refund claim becomes final. If the agreement is approved, a favorable
adjustment to Hughes' tax provision would occur which would be material to the
earnings of GM attributable to Class H common stock.
GM is subject to potential liability under government-regulations and various
claims and legal actions which are pending or may be asserted against them. Some
of the pending actions purport to be class actions. The aggregate ultimate
liability of GM under these government regulations, and under these claims and
actions, was not determinable at September 30,1998. After discussion with
counsel, it is the opinion of management that such liability is not expected to
have a material adverse effect on the Corporation's consolidated financial
statements.
- 12 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Concluded
(Unaudited)
Note 12. Subsequent Event
On November 16, 1998, Delphi Automotive Systems Corporation announced that it
filed a registration statement with the Securities and Exchange Commission
relating to an initial public offering of its common stock. The offering is
expected to occur in the first quarter of 1999, subject to market conditions and
other factors. The number of shares to be offered will be determined at the time
of the offering and is expected to be about 15-19 percent of Delphi's
outstanding common stock.
All of the shares to be included in the initial public offering will be sold
by Delphi. GM intends to divest its ownership of Delphi later in 1999 by
distributing all of its shares of Delphi common stock to holders of GM $1-2/3
par value common stock, either in a split-off exchange transaction, a pro rata
spin-off distribution, or some combination of both. Any such divestiture would
be subject to a number of conditions and there can be no assurance as to whether
or when it will occur.
A registration statement relating to Delphi common stock has been filed with
the Securities and Exchange Commission but has not yet become effective. Delphi
common stock may not be sold nor may offers to buy be accepted prior to the time
the registration statement becomes effective.
* * * * * *
- 13 -
<PAGE>
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following management's discussion and analysis of financial condition and
results of operations (MD&A) should be read in conjunction with the MD&A
included in the General Motors (GM) 1997 Annual Report on Form 10-K, as amended,
(the "1997 Form 10-K"), the Hughes Electronics Corporation (Hughes) consolidated
financial statements and MD&A for the period ended December 31, 1997, included
as Exhibit 99 to the 1997 Form 10-K, the GMAC Annual Report on Form 10-K for the
period ended December 31, 1997, the Hughes consolidated financial statements and
MD&A for the period ended September 30, 1998, included as Exhibit 99 to this GM
1998 Quarterly Report on Form 10-Q, and the GMAC Quarterly Report on Form 10-Q
for the period ended September 30, 1998, filed with the Securities and Exchange
Commission. All earnings per share amounts included in the MD&A are reported as
basic.
There are forward looking statements contained in this Form 10-Q, including
Exhibit 99 hereto as to which General Motors Corporation has identified certain
risk factors which may make actual results materially different than the results
indicated in such forward looking statements. Those risk factors are identified
on page II-64 of the Corporation's Form 10-K for 1997.
The disaggregated financial results for General Motors Automotive (GMA)
(which is comprised of four regions: GM North America (GMNA), GM Europe (GME),
GM Asia/Pacific (GMAP), and GM Latin American/Africa/Mid-East (GMLAAM)) and
Delphi Automotive Systems (Delphi) have been prepared using a management
approach, which is consistent with the basis and manner in which GM management
internally disaggregates financial information for the purposes of assisting in
making internal operating decisions. In this regard, certain common expenses
were allocated among sectors less precisely than would be required for
standalone financial information prepared in accordance with generally accepted
accounting principles (GAAP) and certain expenses (primarily certain U.S. taxes
related to non-U.S. operations) were included in GM's "Other" sector. The
financial results represent the historical information used by management for
internal decision making purposes; therefore, other data prepared to represent
the way in which the business will operate in the future, or data prepared on a
GAAP basis, may be materially different. Net profit margins presented in the
MD&A represent net income as a percentage of net sales and revenues.
<TABLE>
- 14 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
GMA Financial Highlights
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
------ ------- ------- -------
<S> <C> <C> <C> <C>
GMNA (Dollars in Millions)
Net sales and revenues $18,496 $24,047 $66,289 $74,729
Pre-tax (loss) income (911) 608 (50) 2,418
Income tax (benefit) expense (299) 172 (48) 775
Earnings of nonconsolidated affiliates
and minority interests - (13) 20 18
------ -------- ---- -------
GMNA net (loss) income $(612) $423 $18 $1,661
=== === == =====
GME
Net sales and revenues $6,227 $5,686 $17,851 $18,003
----- ----- ------ ------
Pre-tax income 64 87 511 951
Income tax expense 18 48 238 382
Earnings of nonconsolidated affiliates
and minority interests 4 (60) - (129)
---- --- ------ ---
GME net income (loss) $50 $(21) $273 $440
== == === ===
GMLAAM
Net sales and revenues $1,701 $2,273 $5,919 $6,488
----- ----- ----- -----
Pre-tax (loss) income (136) 154 (103) 468
Income tax (benefit) expense (45) 14 (74) 76
Earnings of nonconsolidated affiliates
and minority interests 27 25 67 83
-- ---- -- -----
GMLAAM net (loss) income $(64) $165 $38 $475
== === == ===
GMAP
Net sales and revenues $671 $682 $2,155 $2,144
--- --- ----- -----
Pre-tax income (loss) 22 (73) 20 (51)
Income tax expense (benefit) 3 (15) 7 (14)
Earnings of nonconsolidated affiliates
and minority interests (17) 51 (39) 64
-- -- -- --
GMAP net income (loss) $2 $(7) $(26) $27
= = == ==
GMA
Net sales and revenues $26,326 $32,288 $89,276 $100,042
------ ------ ------ -------
Pre-tax (loss) income (1,000) 778 382 3,786
Income tax (benefit) expense (338) 220 124 1,219
Earnings of nonconsolidated affiliates
and minority interests 14 3 48 36
---- ----- ---- ------
GMA net (loss) income $(648) $561 $306 $2,603
=== === === =====
</TABLE>
- 15 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Vehicle Unit Deliveries of Cars and Trucks - GMA
Three Months Ended September 30,
1998 1997
-----------------------------------------------------
GM as GM as
a % of a % of
Industry GM Industry Industry GM Industry
(Units in Thousands)
United States
Cars 2,007 517 25.7% 2,157 727 33.7%
Trucks 1,835 411 22.4% 1,807 526 29.1%
----- --- ----- ------
Total United States 3,842 928 24.2% 3,964 1,253 31.6%
Canada, Mexico and Other 608 160 26.3% 539 158 29.3%
--- --- ----- ------
Total GMNA 4,450 1,088 24.4% 4,503 1,411 31.3%
GME 4,782 466 9.7% 4,445 456 10.3%
GMLAAM 1,005 162 16.1% 1,182 215 18.2%
GMAP 2,714 119 4.4% 3,326 149 4.5%
----- --- ----- ---
Total Worldwide 12,951 1,835 14.2% 13,456 2,231 16.6%
====== ===== ====== =====
Nine Months Ended September 30,
1998 1997
-------------------------------------------------------
GM as GM as
a % of a % of
Industry GM Industry Industry GM Industry
(Units in Thousands)
United States
Cars 6,213 1,837 29.6% 6,394 2,078 32.5%
Trucks 5,794 1,617 27.9% 5,391 1,550 28.8%
----- ----- ------ -----
Total United States 12,007 3,454 28.8% 11,785 3,628 30.8%
Canada, Mexico and Other 1,810 493 27.2% 1,571 457 29.1%
----- --- ------ ------
Total GMNA 13,817 3,947 28.6% 13,356 4,085 30.6%
GME 14,680 1,414 9.6% 13,644 1,414 10.4%
GMLAAM 3,058 522 17.1% 3,275 564 17.2%
GMAP 8,254 348 4.2% 10,237 455 4.4%
------- ------ ------ ------
Total Worldwide 39,809 6,231 15.7% 40,512 6,518 16.1%
====== ===== ====== =====
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------------- -----------------
(Units in Thousands)
Wholesale Sales
GMNA
Cars 597 729 1,901 2,318
Trucks 413 553 1,648 1,782
----- ----- ----- -----
Total GMNA 1,010 1,282 3,549 4,100
----- ----- ----- -----
GME
Cars 514 410 1,451 1,273
Trucks 20 38 89 106
---- ---- ------- ------
Total GME 534 448 1,540 1,379
--- --- ----- -----
GMLAAM
Cars 102 146 327 380
Trucks 61 83 194 218
-- ---- --- ---
Total GMLAAM 163 229 521 598
--- --- --- ---
GMAP
Cars 52 40 147 129
Trucks 62 127 181 356
---- --- --- ---
Total GMAP 114 167 328 485
---- --- --- ---
Total Worldwide 1,821 2,126 5,938 6,562
===== ===== ===== =====
- 16 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
GMA Financial Review
GMA reported a net loss of $648 million for the 1998 third quarter compared
with net income of $561 million in the prior year quarter. The decrease in net
income was primarily due to lower production volumes at GMNA associated with the
work stoppages at two component plants in Flint, Michigan, as discussed below,
and the economic downturn throughout Latin America, partially offset by material
and structural cost savings. Net income for the nine months ended September 30,
1998 totaled $306 million compared with $2,603 million for the prior year nine
month period. The decrease in net income for the first nine months of 1998 was
primarily due to the current year's work stoppages and the economic downturn
throughout Latin America.
Members of United Auto Workers Locals 659 and 651 in Flint, Michigan ceased
production at two component plants on June 5 and June 11, 1998, respectively.
Work stoppages at both facilities were resolved July 28, 1998 when tentative
agreements were reached. Both agreements were ratified by the rank and file on
July 29, 1998. Operations began to ramp-up to normal production levels July 30,
1998. GM estimated that the work stoppages in Flint had an aggregate unfavorable
after-tax impact of $1.2 billion, or $1.79 per share of GM $1-2/3 par value
common stock, during the 1998 second quarter that resulted from a loss of
227,000 units of production. The above estimated unfavorable after-tax impact
represents the combined effects for GMNA (through June 30,1998 - $890 million)
and Delphi (through June 30,1998 - $290 million). GM estimates that an
additional loss of 318,000 units of production occurred from the beginning of
the third quarter 1998 to the point in which normal production levels were
resumed. The above estimated impacts do not take into account the effect of
possible recoveries that have or may occur through production increases that GM
is likely to pursue at various facilities in future periods. The third quarter
loss of production offset by subsequent production increases has had an
estimated net unfavorable after-tax impact of approximately, $1.2 billion or
$1.89 per share of GM $1-2/3 par value common stock, representing the combined
effects for GMNA ($965 million) and Delphi ($270 million).
Net sales and revenues for GMA in the third quarter of 1998 were $26.3
billion, which represented a decrease of approximately $6.0 billion or 18.5%
compared with the prior year quarter. Net sales and revenues for the nine months
ended September 30, 1998 totaled $89.3 billion, which represented a decrease of
approximately $10.8 billion or 10.8% compared with the prior year nine month
period. These decreases in net sales and revenues resulted from lower wholesale
sales volumes primarily due to the work stoppages previously discussed at GMNA
and the economic downturn throughout Latin America.
Pre-tax income in the third quarter of 1998 decreased by $1.8 billion
compared with the prior year quarter and pre-tax income for the nine months
ended September 30, 1998 decreased by approximately $3.4 billion over the prior
year period. These decreases were primarily due to lower wholesale sales volumes
and higher retail incentives, partially offset by material, engineering and
manufacturing cost improvements.
GMA's worldwide vehicle deliveries were 1,835,000 in the 1998 third quarter,
which represented a market share of 14.2% compared with 16.6% in the prior year
quarter. The decrease in market share was primarily due to dealer inventory
shortages due to the above mentioned work stoppages at GMNA. GMNA's market share
in the 1998 third quarter was 24.4% compared with 31.3% in the prior year
quarter. GMNA's market share for the nine months ended September 30, 1998 was
28.6% compared with 30.6% in the prior year period.
GMNA reported a net loss of $612 million for the 1998 third quarter compared
with net income of $423 million in the prior year quarter. The decrease in net
income was primarily due to lower production volumes associated with the work
stoppages at two component plants in Flint, Michigan, as discussed above,
partially offset by material and structural cost savings. Net income for the
nine months ended September 30, 1998 totaled $18 million compared with $1,661
million for the prior years nine month period. The decrease in net income for
the first nine months of 1998 was primarily due to the previously discussed work
stoppages.
GME reported net income of $50 million for the 1998 third quarter compared
with a net loss of $21 million in the prior year quarter. The increase in net
income was primarily due to lower equity losses recorded for SAAB. GM is
currently not incurring a share of the operating losses, as provided for under
its agreement with the other equity owner of SAAB. This increase was partially
offset by the launch cost of the Astra. Net income for the nine months ended
September 30, 1998 totaled $273 million compared with $440 million for the prior
year nine month period. The decrease in net income for the first nine months of
1998 was primarily due to a special charge related to work schedule
modifications at Opel Belguim, launch costs associated with the Astra, and a
gain in 1997 related to the sale of GME's interest in Avis Europe.
GMLAAM reported a net loss of $64 million for the 1998 third quarter compared
with net income of $165 million in the prior year quarter. Net income for the
nine months ended September 30, 1998 totaled $38 million compared with $475
million for the prior year nine month period. The decreases in net income for
the three and nine months ended September 30, 1998 were primarily due to the
economic downturn throughout Latin America. Additionally, the increased cost of
financing in the region resulted in higher incentive cost.
- 17 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
GMA Financial Review (concluded)
GMAP reported net income of $2 million for the 1998 third quarter compared
with a net loss of $7 million in the prior year quarter. This increase in net
income was primarily due to improved sales of the new Holden Commodore, where
the costs associated with the launch of this vehicle were incurred in 1997. This
was partially offset by a decrease in equity earnings at Isuzu due to the
economic downturn in Asia. Net loss for the nine months ended September 30, 1998
totaled $26 million compared with net income of $27 million for the prior year
nine month period. This decrease was primarily attributable to decreased equity
earnings at Isuzu.
Delphi Financial Highlights
Three Months Ended Nine Months Ended
September 30, September 30,
Adjust Reported Adjusted Reported
1998(1)1997(1) 1997 1998(1) 1997(1) 1997
(Dollars in Millions)
Net sales and revenues $6,015 $7,183 $6,044 $20,679 $23,368 $19,486
----- ----- ----- ------ ------ ------
Pre-tax (loss) income (798) 136 30 (338) 1,127 735
Income tax (benefit) expense (297) 35 (6) (157) 386 236
Minority interests 5 2 2 8 8 8
Earnings of nonconsolidated
affiliates 11 20 17 35 45 38
---- ---- -- ---- ---- ----
Net (loss) income $(485) $123 $55 $(138) $794 $545
=== === == === === ===
Net (loss) profit margin (8.1%) 1.7% 0.9% (0.7%) 3.4% 2.8%
(1)Amounts have been adjusted to reflect the changes to GM's organizational
structure resulting from the Hughes Transactions which occurred in December
1997. The 1998 and adjusted 1997 amounts include the results of Delco
Electronics (Delco).
Delphi Financial Review
Delphi reported a net loss of $485 million for the 1998 third quarter
compared with $123 million of adjusted income in the prior year quarter. The
1998 third quarter net income decreased primarily due to lower production volume
at GMNA related to the current year work stoppages previously discussed.
Excluding the $270 million after-tax effect of the work stoppages in the third
quarter of 1998, Delphi's third quarter adjusted income decreased by $338
million. This decrease is primarily due to charges associated with the
divestitures of Delphi's lighting, coil-spring, and seating businesses,
discussed below, partially offset by significant progress in manufacturing
performance and a reduction in material costs. Net income for the nine months
ended September 30, 1998 decreased to a loss of $138 million compared with
adjusted income of $794 million for the prior year nine month period. The
decrease in income for the first nine months of 1998 is primarily due to the
unfavorable impact of the work stoppages and the other factors referred to
above.
Net sales and revenues for the 1998 third quarter were $6.0 billion, a
decrease of approximately $1.2 billion or 16.3% compared with adjusted sales and
revenues for the prior year quarter. This decrease was primarily due to work
stoppages, the economic downturn in Asia and Latin America and pricing pressures
from customers. After adjusting for the work stoppages, Delphi's 1998 third
quarter sales to customers outside the GMNA vehicle groups represented
approximately 37% of total sales, including all joint ventures which represents
an increase of one and one half percentage points over the same period in 1997.
Net sales and revenues for the nine months ended September 30, 1998 totaled
$20.7 billion, compared with $23.4 billion adjusted sales and revenue in the
prior year nine month period. The decrease in sales and revenues for the first
nine months of 1998 was primarily due to work stoppages, additional decreases in
GMNA's production volumes, pricing reductions to OEM's during the period and the
economic downturn in Asia and Latin America.
Pre-tax income in the third quarter of 1998 decreased by $934 million
compared with the adjusted prior year quarter. Pre-tax income for the nine
months ended September 30, 1998 decreased to a loss of $338 million from the
prior year adjusted income of $1,127 million. These decreases are primarily due
to decreases in GMNA's production volumes due to the work stoppages and model
change-over, competitive pressures that resulted in price reductions to
customers and the financial turmoil in Asia and Latin America partially offset
by strong progress in manufacturing performance and a reduction in material
costs.
- 18 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Delphi Financial Review (concluded)
In response to the increasingly competitive automotive components and systems
market, Delphi continuously reviews competitiveness of its operations, growth
opportunities, and its strategy of increasing market share through technology
leadership, quality, cost control, and responsiveness. Consistent with this
practice, during the third quarter of 1998, Delphi entered into agreements for
the divestiture of its seating, lighting, and coil springs businesses. These
businesses, with combined revenues of approximately $2 billion and global
employment of approximately 10,000 are not core to Delphi's strategic growth
objectives. In connection with consummation of these transactions Delphi
recorded an after-tax loss of $271 million.
Delphi is the principal supplier of automotive components and systems to
GMNA. Delphi's sales of automotive components and systems today is highly
dependent on GM's production of vehicles in North America, the level of
Delphi-supplied content per GMNA vehicle, the price of such automotive
components and systems, and the competitiveness of Delphi's product offerings.
Delphi's strategy is to reduce its dependence on GMNA sales by growing its
automotive components and systems sales globally and by expanding its non-GMNA
sales base in North America. In addition, the global automotive components and
systems market is highly competitive which has led Delphi to refine its strategy
to focus on profitable growth, as well as increased market share through
technology leadership, quality, cost control and responsiveness. On August 3,
1998, GM and Delphi Automotive Systems jointly announced that the GM Board of
Directors approved in principle to proceed with a series of planned transactions
that would result in Delphi becoming a fully independent, publicly traded
company. The transactions would include the incorporation of Delphi and then an
offering of 15-19 percent of its common stock in an initial public offering
during the first quarter of 1999. Later in the year, all of the Delphi shares
held by GM would be distributed to share holders of GM's $1-2/3 par value common
stock through a tax-free spin-off, split-off or some combination of both.
Further, on November 16, 1998 it was announced that Delphi has filed a
registration statement with the Securities and Exchange Commission relating to
the initial public offering of its common stock. Additional information
regarding these planned transactions is included in Note 12 to the September 30,
1998 GM consolidated financial statements.
General Motors Acceptance Corporation (GMAC) Financial Highlights
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------------- -----------------
(Dollars in Millions) Financing revenue
Retail and lease financing $982 $862 $2,834 $2,692
Operating leases 1,822 1,827 5,416 5,446
Wholesale and term loans 346 417 1,212 1,320
----- ----- ----- -----
Total automotive financing revenue 3,150 3,106 9,462 9,458
Interest and discount 1,477 1,308 4,317 3,886
Depreciation on operating leases 1,149 1,163 3,488 3,475
----- ----- ----- -----
Net automotive financing revenue 524 635 1,657 2,097
Insurance premiums earned 466 302 1,417 914
Mortgage revenue 538 418 1,456 1,091
Other income 292 281 960 843
----- ------ ----- ------
Net financing revenue and other 1,820 1,636 5,490 4,945
Expenses 1,377 1,081 4,004 3,177
----- ----- ----- -----
Pre-tax income 443 555 1,486 1,768
Income tax expense 130 243 459 746
----- --- ------ -----
Net income $313 $312 $1,027 $1,022
=== === ===== =====
Net income from automotive financing
operations $250 $223 $784 $724
Net income from insurance operations 54 50 188 171
Net income from mortgage operations 9 39 55 127
----- ---- ------ -----
Net income $313 $312 $1,027 $1,022
=== === ===== =====
Return on average equity (1) 13.3% 14.4% 14.9% 16.1%
- ------------------
(1) Return on average equity represents net income as a percentage of average
monthly stockholder's equity outstanding for each month in the period.
- 19 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
General Motors Acceptance Corporation (GMAC) Financial Review
Consolidated net income for the third quarter and nine months ended September
30, 1998 was relatively unchanged when compared to the same periods during 1997.
Earnings were 12% higher from automotive financing operations during the third
quarter of 1998, compared to the same period in 1997, primarily due to increased
retail financing and leasing assets, reduced credit losses and a lower effective
income tax rate, partially offset by lower net interest margins and lower
wholesale volume.
Earnings from insurance operations increased by 8% during the third quarter
of 1998, compared to the same period during 1997. Earnings were higher due to
the inclusion of Integon Corporation (Integon) and increased capital gains.
Net income from mortgage operations during the third quarter of 1998 was $9.4
million. The significant decline in income, when compared to the same period
last year, is the result of widening credit spreads and increasing prepayments,
which have reduced the value of its mortgage inventory and investment positions.
During the three months ended September 30, 1998, GMAC financed 37.7% of new
GM vehicles delivered in the U.S., up from 31.3% during the same period last
year. Financing of new GM vehicles for the first nine months of 1998 was 36.2%
compared with 27.2% for the comparable 1997 period. Increased incentive programs
sponsored by GM resulted in GMAC's higher retail financing penetration.
U.S. wholesale inventory financing was provided on 564,000 and 1,931,000 new
GM vehicles during the third quarter and first nine months of 1998,
respectively, compared with 756,000 and 2,428,000 new GM vehicles during the
same periods in 1997. GMAC's wholesale financing represented 63.4% of all GM
U.S. vehicle sales to dealers during the first nine months of 1998, down from
67.5% for the comparable period a year ago. Increased competitive market
conditions led to the decline in wholesale penetration levels. The reduction in
wholesale financing volume is primarily a result of the work stoppages at GM.
Automotive financing revenue totaled $3.2 billion and $9.5 billion in the
third quarter and first nine months of 1998, respectively, compared to $3.1
billion and $9.5 billion for the same periods in 1997. Higher retail financing
revenues were offset by a decline in wholesale revenues, principally as a result
of the reduction in wholesale receivable balances related to the GM work
stoppages.
GMAC's worldwide cost of borrowing, including the effects of derivatives, for
the third quarter and first nine months of 1998 averaged 6.06% and 6.07%,
respectively, a decrease of 31 and 26 basis points from the comparable periods
of a year ago. Total borrowing costs for U.S. operations averaged 5.93% and
6.00% for the third quarter and first nine months of 1998, compared to 6.48% and
6.41% for the respective periods in 1997. The lower average borrowing costs for
both comparable periods of 1998 are largely a result of lower long-term interest
rates and a greater proportion of floating rate debt compared to fixed rate
debt.
Insurance premiums earned, mortgage revenue and other income totaled $1.3
billion and $3.8 billion for the third quarter and nine months ended September
30, 1998, respectively, compared to $1.0 billion and $2.8 billion during the
comparable 1997 periods. The quarterly and year-to-year comparative increases
can be primarily attributed to higher insurance premiums and investment income
resulting from the acquisition of Integon by GMAC Insurance Holdings, Inc.
(GMACI) in October 1997, as well as an increase in mortgage investment income.
Consolidated salaries and other operating expenses totaled $922 million and
$2.6 billion for the third quarter and first nine months of 1998, respectively,
compared to $694 million and $2.1 billion for the comparable periods last year.
The increase is mainly attributable to the acquisition of Integon by GMACI and
continued growth at GMAC Mortgage Group, Inc. (GMACMG).
Annualized net retail losses were 0.74% and 0.83% of total average serviced
automotive receivables during the third quarter and first nine months of 1998,
respectively, compared to 1.12% and 1.27% for the same periods last year. The
provision for credit losses totaled $323 million and $396 million for the nine
month periods ended September 30, 1998 and 1997, respectively. The decline in
the provision is primarily attributable to lower credit losses resulting from
tightened credit standards.
The effective income tax rate for the nine months ended September 30, 1998
was 30.9%, compared to 42.2% for the same period last year. The decrease in the
effective tax rate can be attributed to lower U.S. and foreign taxes assessed on
foreign source income and a favorable change resulting from periodic assessments
of state and local income tax accruals.
- 20 -
<PAGE>
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Hughes Financial Highlights
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997(1) 1998 1997(1)
----------------- ----------------
(Dollars in Millions Except Per Share Amounts)
Revenues
Product sales $873 $703 $2,327 $2,126
Direct broadcast, leasing
and other services 640 555 1,846 1,308
----- ----- ----- -----
Total revenues 1,513 1,258 4,173 3,434
Income from continuing operations
before income
taxes and minority interests 46 87 190 611
Income taxes 17 35 72 244
Minority interests 9 (5) 19 17
Income from discontinued operations,
net of taxes - - - 1
---- ---- ----- ----
Net income $38 $47 $137 $385
== == === ===
Earnings used for computation
of Available Separate
Consolidated Net Income (2) $43 $52 $153 $401
Earnings per share attributable
to Class H common stock (3) $0.11 $0.13 $0.38 $1.00
- --------------------
(1)The 1997 amounts presented relate only to the results of the
telecommunications and space businesses of former Hughes. See Hughes
Financial Review for further discussion.
(2)Excludes amortization of GM purchase accounting adjustments of $5 million
for the third quarters of 1998 and 1997 and $16 million for the nine-month
periods ended September 30, 1998 and 1997 related to GM's acquisition of
Hughes Aircraft Company (HAC) in 1985.
(3)The 1997 amounts are presented on a pro forma basis to reflect the changes
to GM's organizational structure resulting from the Hughes Transactions which
occurred in December 1997. See Hughes Financial Review for further
discussion.
Hughes Financial Review
On December 17, 1997, GM and former Hughes completed a series of transactions
(Hughes Transactions) that were designed to address strategic challenges facing
the three principal businesses of former Hughes (consisting of the defense
electronics, automotive electronics and telecommunications and space
businesses). The Hughes Transactions included the tax-free spin-off of the
defense electronics business of former Hughes (Hughes Defense) to holders of
GM's $1-2/3 par value and Class H common stocks, the transfer of Delco from
former Hughes to Delphi, and the recapitalization of Class H common stock into a
new GM tracking stock, Class H common stock, that is linked to the remaining
telecommunications and space businesses of Hughes. The Hughes Transactions were
followed immediately by the merger of Hughes Defense with Raytheon Company. The
1997 amounts presented for Hughes relate only to the telecommunications and
space businesses of former Hughes.
For 1997, earnings per share attributable to Class H common stock is
presented on a pro forma basis. Prior to the Hughes Transactions, such amounts
were calculated based on the financial performance of former Hughes. Since the
financial highlights for 1997 relate only to the telecommunications and space
businesses of former Hughes, they do not reflect the earnings attributable to
the former Class H common stock on a historical basis. The pro forma
presentation, therefore, presents the financial results which would have been
achieved for 1997 relative to the Class H common stock based solely on the
performance of the telecommunications and space businesses of former Hughes.
In May 1998, Hughes purchased an additional 9.5% interest in PanAmSat for
$851 million in cash, increasing Hughes' ownership interest in PanAmSat to
81.0%.
Hughes Electronics reported net income of $38 million for the third quarter
of 1998 compared with last year's $47 million, and $137 million for the first
nine months of 1998 compared with $67 million in the same period of 1997. 1997
net income for the first nine months excludes the $318 million after-tax gain
($0.80 per share of Class H common stock) recognized in connection with the May
1997 PanAmSat merger. Excluding amortization of purchase accounting adjustments
related to GM's acquisition of HAC and the 1997 $318 million after-tax gain,
Hughes' earnings used for computation of available separate consolidated net
income was $43 million and $52 million for the third quarters of 1998 and 1997,
respectively, and $153 million and $82 million for the nine months ended
September 30, 1998 and 1997, respectively. Earnings per share on the same basis
decreased to $0.11 for the third quarter of 1998 versus earnings per share of
$0.13 for the same period in 1997. Earnings per share on the same basis
increased to $0.38 for the first nine months of 1998 versus pro forma earnings
per share of $0.20 in 1997. The quarterly decline resulted primarily from the
expected increase in DIRECTV sales and marketing
- 21 -
<PAGE>
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Hughes Financial Review (concluded)
expenses to support record subscriber growth, DIRECTV Japan start-up losses, and
increased other expenses, including pension expense. The reductions were
partially offset by lower interest expense and higher interest income. The
increase for the nine months was principally due to record DIRECTV subscriber
growth through September, continued strong performance in the satellite services
segment resulting from the PanAmSat merger and higher commercial satellite
sales.
Third quarter 1998 revenues increased 20.3% to $1.5 billion compared with
$1.3 billion in the third quarter of 1997. Revenues for the first nine months of
1998 increased 21.5% to $4.2 billion compared with $3.4 billion in the same
period of 1997. The 1998 increase in revenues compared to the same periods in
1997 resulted from an increase in the DIRECTV businesses due to strong
subscriber growth and average monthly revenues per subscriber, as well as low
subscriber churn rates; an increase in satellite services primarily from
increased operating lease revenues for video, data and Internet-related
services; an increase in satellite manufacturing which resulted principally from
higher commercial satellite sales; and an increase in network systems resulting
from higher DIRECTV equipment sales.
Operating profit, excluding amortization of purchase accounting adjustments
related to GM's acquisition of HAC, decreased to $68 million for the third
quarter of 1998 compared with $124 million in the third quarter of 1997 and
increased to $229 million for the first nine months of 1998 from $215 million
for the same period in 1997. Third quarter operating profit margin on the same
basis decreased to 4.5% from 9.9 % in 1997 and decreased to 5.5% in the first
nine months of 1998 compared with 6.2% in the same period of 1997. The quarterly
declines resulted primarily from the increased expenses noted above. The
increase in operating profit for the nine months resulted from the increased
revenues which more than offset the noted increases in third quarter operating
expenses and a provision for estimated losses related to the bankruptcy filing
by a network systems customer and goodwill amortization associated with
PanAmSat.
- 22 -
<PAGE>
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
To facilitate analysis, the following sections present GM's financial
statements with the financing and insurance operations (primarily GMAC)
reflected on an equity basis.
<TABLE>
Consolidated Statements of Income With Financing and Insurance Operations on an
Equity Basis (Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(Dollars in Millions)
Net sales and revenues $29,846 $37,125 $99,735 $114,323
------ ------ ------ -------
Costs and expenses
Cost of sales and other
operating charges,
exclusive of items listed below 26,457 31,484 85,399 95,586
Selling, general, and administrative
expenses 3,076 3,157 9,357 9,331
Depreciation and amortization expenses 1,672 1,830 5,082 5,627
------- ------- ------- --------
Total costs and expenses 31,205 36,471 99,838 110,544
------ ------ ------ -------
Operating (loss) income (1,359) 654 (103) 3,779
Other income less income deductions (28) 613 1,208 2,682
Interest expense 343 225 920 663
------ ------ ------ ------
(Loss) income before income taxes,
minority interests, and earnings
of nonconsolidated affiliates (1,730) 1,042 185 5,798
Income tax (benefit) expense (588) 289 63 1,928
------ ------ ------- -----
(Loss) income before minority interests
and earnings of nonconsolidated
affiliates (1,142) 753 122 3,870
Minority interests 10 13 13 50
Earnings of nonconsolidated affiliates 323 301 1,049 1,041
----- ------ ----- -----
Net (loss) income $(809) $1,067 $1,184 $4,961
=== ===== ===== =====
Net (loss) profit margin (2.7%) 2.9% 1.2% 4.3%
</TABLE>
Results of Operations With Financing and Insurance Operations on an Equity Basis
In the third quarter of 1998, GM reported a net loss of $(809) million or
$(1.28) per share of $1-2/3 par value common stock, compared to net income of
$1.1 billion or $1.35 per share of $1-2/3 par value common stock for the third
quarter of 1997. GM's third quarter 1998 net income included a $1.2 billion
after-tax unfavorable impact from the previously discussed work stoppages. GM's
net income for the nine months ended September 30, 1998 was $1.2 billion, or
$1.65 per share of $1-2/3 par value common stock, compared with $5.0 billion, or
$6.35 per share of $1-2/3 par value common stock, for the nine months ended
September 30, 1997. GM's 1998 and 1997 net income included a $2.4 billion and
$490 million after-tax unfavorable impact from work stoppages. The decreases in
net income are primarily due to the economic downturn in Asia and Latin America
and the Hughes Transactions.
Highlights of financial performance by GM's major business sectors for the
three months and nine months ended September 30 were as follows (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
GMNA $(612) $423 $18 $1,661
GME 50 (21) 273 440
GMLAAM (64) 165 38 475
GMAP 2 (7) (26) 27
Delphi (485) 55 (138) 545
GMAC 313 312 1,027 1,022
Hughes 43 240 153 1,017
Other (56) (100) (161) (226)
---- ----- ----- -----
Net (loss) income $(809) $1,067 $1,184 $4,961
===== ===== ===== =====
- 23 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Results of Operations With Financing and Insurance Operations on an Equity Basis
(concluded)
Reference should be made to the GM sectors' financial reviews that are
presented on pages 14 through 21 and incorporated by reference to supplement the
information presented herein.
Third quarter 1998 net sales and revenues were $29.8 billion, which
represented a decrease of $7.3 billion compared with the prior year quarter. Net
sales and revenues for the nine months ended September 30, 1998 were $99.7
billion compared with $114.3 billion for the nine months ended September 30,
1997. These decreases in net sales and revenues for the third quarter and the
first nine months were primarily due to the spin-off of Hughes Defense and lower
wholesale sales volumes in North America due to the launch of the GMT-800 and
the work stoppages previously discussed.
The gross margin percentage for the 1998 third quarter was 11.4% compared
with 15.2% in the prior year quarter. The gross margin percentage for the nine
months ended September 30, 1998 was 14.4%, compared with 16.4% for the first
nine months of 1997. The decreases in the gross margins primarily resulted from
the decrease in wholesale sales volumes and higher sales incentives in North
America.
Cost of sales and other operating charges decreased to $26.5 billion in the
third quarter and $85.4 billion for the first nine months of 1998 compared with
$31.5 billion and $95.6 billion, respectively. These decreases were primarily
due to the spin-off of Hughes Defense and lower wholesale sales volumes in North
America due to the work stoppages and the launch of the GMT-800. Depreciation
and amortization expenses decreased by $158 million and $545 million in the
third quarter of 1998 and for the nine months ended September 30, 1998,
respectively, primarily due to a reduction in tool amortization at GMNA as a
result of the previously reported competitiveness studies at GM.
Other income less income deductions decreased to $(28) million for the 1998
third quarter compared with $613 million in the prior year quarter primarily due
to a $430 million pre-tax loss ($271 million after-tax or $0.41 per share of
$1-2/3 par value common stock) in the third quarter related to the divestitures
of Delphi's seating, lighting and coil spring businesses. Other income less
income deductions for the nine months ended September 30, 1998 was $1.2 billion
compared with $2.7 billion for the first nine months of 1997. This decrease is
primarily due to the previously discussed third quarter 1998 loss and an $88
million pre-tax gain ($55 million after-tax or $0.07 per share of $1-2/3 par
value common stock) related to an agreement in the first quarter of 1997 with
Volkswagen A.G. (VW), a $490 million pre-tax gain ($318 million after-tax or
$0.33 per share of $1-2/3 par value common stock and $0.80 per share of Class H
common stock) related to the merger of the satellite service operations of
Hughes and PanAmSat(PAS), and a $128 million pre-tax gain ($103 million
after-tax or $0.14 per share of $1-2/3 par value common stock) related to the
sale of GME's equity interest in Avis Europe in the second quarter of 1997 .
- 24 -
<PAGE>
<TABLE>
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets With Financing and Insurance Operations on an Equity
Basis (Unaudited)
<CAPTION>
Sept. 30, Dec. 31, Sept. 30,
1998 1997 1997
--------- --------- ---------
<S> <C> <C> <C>
(Dollars in Millions)
ASSETS
Cash and cash equivalents $7,885 $10,685 $9,930
Other marketable securities 601 3,826 4,669
------ ------ ------
Total cash and marketable securities 8,486 14,511 14,599
Accounts and notes receivable
(less allowances)
Trade 6,076 5,164 5,627
Nonconsolidated affiliates 1,725 836 1,722
Inventories (less allowances) 11,751 12,102 12,820
Equipment on operating leases
(less accumulated
depreciation) 4,797 4,677 3,854
Deferred income taxes and other 6,300 6,278 4,989
------- ------- -------
Total current assets 39,135 43,568 43,611
Equity in net assets of nonconsolidated
affiliates 11,308 10,164 10,313
Deferred income taxes 20,676 20,721 20,341
Other investments and miscellaneous assets 13,646 13,564 13,926
Property - net 36,529 33,914 38,010
Intangible assets -net 11,525 10,752 14,803
-------- -------- --------
Total assets $132,819 $132,683 $141,004
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $12,760 $12,474 $11,871
Loans payable 1,854 656 1,766
Accrued expenses and customer deposits 31,707 33,459 32,440
------ ------ ------
Total current liabilities 46,321 46,589 46,077
Long-term debt 7,016 5,491 6,002
Capitalized leases 181 185 184
Postretirement benefits other than
pensions 38,002 38,388 41,820
Pensions 5,679 4,271 4,275
Other liabilities and deferred
income taxes 20,144 19,336 18,141
-------- -------- --------
Total liabilities 117,343 114,260 116,499
------- ------- -------
Minority interests 575 695 705
General Motors - obligated mandatorily
redeemable preferred securities of
subsidiary trusts holding solely
junior subordinated debentures of
General Motors
Series D 79 79 79
Series G 142 143 143
Stockholders' equity 14,680 17,506 23,578
-------- -------- --------
Total liabilities and
stockholders' equity $132,819 $132,683 $141,004
======= ======= =======
</TABLE>
Liquidity and Capital Resources With Financing and Insurance Operations on an
Equity Basis
GM's cash and marketable securities totaled $8.5 billion at September 30,
1998, compared with $14.5 billion at December 31, 1997 and $14.6 billion at
September 30, 1997. The decrease in cash and marketable securities from December
31, 1997 and September 30, 1997 to September 30, 1998 was primarily due to the
work stoppages previously mentioned and approximately $2.6 billion in cash used
in 1998 to acquire 38.4 million shares of $1-2/3 par value common stock under
the stock repurchase program announced in August 1997, a net increase of $1.5
billion in the balance of GM's VEBA trust and a $1.3 billion pension
contribution, partially offset by increases in loans payable and long-term debt.
Loans payable and long-term debt increased by approximately $2.8 billion and
$1.1 billion to $8.9 billion at September 30, 1998 from balances of $6.1 billion
at December 31, 1997 and $7.8 billion at September 30, 1997, respectively. The
increases were primarily due to issuances of commercial paper and an increase in
long-term debt to fund a VEBA. Net liquidity, calculated as cash and marketable
securities less the total of loans payable, long-term debt and capitalized
leases was $(565) million at September 30, 1998, compared with $8.2 billion at
December 31, 1997 and $6.6 billion at September 30, 1997.
Book value per share of $1-2/3 par value common stock decreased to $19.49 at
September 30, 1998, from $22.26 at December 31, 1997 and $30.17 at September 30,
1997. Book value per share of Class H common stock decreased to $11.69 at
September 30, 1998, from $13.36 at December 31, 1997 and $15.09 at September 30,
1997.
- 25 -
<PAGE>
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Liquidity and Capital Resources for GMAC
At September 30, 1998, GMAC owned assets and serviced automotive receivables
totaling $126.1 billion, $4.9 billion above year-end 1997, and $12.5 billion
above September 30, 1997. The higher balance compared to year-end 1997
predominantly reflects increases in retail earning assets partially offset by
declines in wholesale receivables and off-balance sheet wholesale and retail
serviced assets.
Earning assets totaled $113.3 billion at September 30, 1998, compared to
$104.5 billion and $102.3 billion at December 31 and September 30, 1997,
respectively.
Finance receivables serviced by GMAC, including sold receivables, totaled
$72.6 billion at September 30, 1998, $800 million below December 31, 1997 levels
and $3.5 billion above September 30, 1997 levels. On-balance sheet retail
receivables were $5.9 billion higher than year-end 1997, primarily a result of
increased retail incentive programs sponsored by GM. On-balance sheet wholesale
receivables declined $2.7 billion during the same period due to the GM work
stoppages. Also contributing to the change, sold wholesale receivables decreased
$3.7 billion, attributable to the scheduled wind down of a revolving wholesale
trust and the effects of the work stoppages. Additionally, sold retail
receivables (including the retained subordinated interest portion) declined by
$1.2 billion.
Consolidated operating lease assets, net of depreciation, totaled $28.4
billion at September 30, 1998, reflecting increases of $2.6 billion and $2.0
billion over December 31 and September 30, 1997 periods, respectively. The
increase from year-end 1997 is primarily attributable to additional GM sponsored
lease incentive programs in the U.S. during the first nine months of 1998.
Investments in securities at September 30, 1998 totaled $8.1 billion,
compared with $7.9 billion and $6.2 billion at December 31 and September 30,
1997, respectively. The increase from September 1997 to September 1998 is
principally the result of continued growth at GMACMG and the acquisition of
Integon by GMACI.
GMAC's due and deferred from receivable sales (net) totaled $186 million at
September 30, 1998, compared with $691 million and $661 million at December 31
and September 30, 1997, respectively. The significant decline in the September
30, 1998 balance was primarily due to the upgrade in GMAC's short-term debt
rating by Standard & Poor's Ratings Group ("S&P") in January 1998, which
eliminated the requirement to segregate and hold in trust the daily collections
on sold receivables.
As of September 30, 1998, GMAC's total borrowings were $91.9 billion,
compared with $86.7 billion and $82.9 billion at December 31, 1997 and September
30, 1997, respectively. The higher borrowings were used to fund increased
earning asset levels. GMAC's ratio of debt to total stockholder's equity at
September 30, 1998 was 9.7:1, compared to 9.9:1 at December 31, 1997 and 9.6:1
at September 30, 1997.
GMAC and its subsidiaries maintain substantial bank lines of credit which
totaled $42.7 billion at September 30, 1998, compared to $39.8 billion at
year-end 1997 and $39.6 billion at September 30, 1997. The unused portion of
these credit lines totaled $33.8 billion at September 30, 1998, $3.4 billion and
$2.7 billion higher than December 31 and September 30, 1997, respectively.
Included in the unused credit lines are a committed U.S. revolving credit
facility of $10.0 billion which serves primarily as back-up for GMAC's unsecured
commercial paper program and a $12.0 billion U.S. asset-backed commercial paper
liquidity and receivables credit facility for New Center Asset Trust (NCAT), a
non-consolidated limited purpose business trust established to issue
asset-backed commercial paper.
- 26 -
<PAGE>
<TABLE>
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows With Financing and Insurance
Operations on an Equity Basis (Unaudited)
<CAPTION>
Nine Months Ended
September 30,
-----------------
1998 1997
------ ------
<S> <C> <C>
(Dollars in Millions)
Net cash provided by operating activities $2,616 $11,254
----- ------
Cash flows from investing activities
Expenditures for property (6,688) (6,648)
Investments in companies, net of cash acquired (569) (1,788)
Investments in other marketable securities
- acquisitions (8,553) (11,083)
Investments in other marketable securities
- liquidations 11,777 10,056
Operating leases - acquisitions (4,382) (3,963)
Operating leases - liquidations 4,092 2,981
Other (287) -
------ -------
Net cash used in investing activities (4,610) (10,445)
----- ------
Cash flows from financing activities
Net increase in loans payable 1,178 552
Increase in long-term debt 2,695 358
Decrease in long-term debt (1,178) (568)
Proceeds from issuing common stocks 344 471
Repurchases of common stocks (3,071) (3,353)
Cash dividends paid to stockholders (1,046) (1,252)
----- -----
Net cash used in financing activities (1,078) (3,792)
----- -----
Effect of exchange rate changes on cash and
cash equivalents 272 (407)
----- -----
Net decrease in cash and cash equivalents (2,800) (3,390)
Cash and cash equivalents at beginning of the period 10,685 13,320
------ ------
Cash and cash equivalents at end of the period $7,885 $9,930
====== ======
</TABLE>
Cash Flows With Financing and Insurance Operations on an Equity Basis
Net cash provided by operating activities was approximately $2.6 billion for
the nine months ended September 30, 1998, compared with net cash provided by
operating activities of approximately $11.2 billion in the prior year period.
The decrease was primarily the result of a decrease in cash generated from lower
net income primarily due to the work stoppages previously discussed, a net
increase of $1.5 billion in the balance of GM's VEBA trust, a $1.3 billion
pension contribution and other changes in operating assets and liabilities.
Net cash used in investing activities amounted to $4.6 billion for the nine
months ended September 30, 1998 compared with $10.4 billion in the prior year
period. The decrease in net cash used in investing activities during the 1998
period was primarily due to approximately $1.5 billion of cash consideration
used in 1997 to consummate the merger of the satellite service operations of
Hughes and PAS, combined with a net liquidation of marketable securities of $3.2
billion primarily due to the work stoppages and a net decrease in cash used for
operating leases in 1998.
Net cash used in financing activities totaled $1.1 billion for the nine
months ended September 30, 1998, compared with $3.8 billion for the prior year
period. The change was primarily due to net increases in short and long-term
debt.
Dividends may be paid on common stocks only when, as and if declared by the
GM Board of Directors (GM Board) in its sole discretion. GM's policy is to
distribute dividends on its $1-2/3 par value common stock based on the outlook
and indicated capital needs of the business. On November 2,1998, the GM Board
declared quarterly dividends of $0.50 per share on $1-2/3 par value common
stock, payable December 10, 1998. The GM Board also declared quarterly dividends
on the Series B, Series D, and Series G Depositary Shares of $0.57, $0.495, and
$0.57 per share, respectively, payable February 1, 1999. With respect to Class H
common stock, which was recapitalized on December 17, 1997, the GM Board has
decided that at this time no cash dividends will be paid in order to allow the
earnings of Hughes to be retained for investment in its telecommunications and
space businesses.
- 27 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Cash Flows for GMAC
Cash provided by operating activities during the first nine months ended
September 30, 1998 totaled $6.3 billion, an increase from the $3.8 billion
provided during the comparable 1997 period. The additional operating cash flow
was primarily the result of lower net purchases of mortgage loans and increased
other mortgage liabilities.
Cash used for investing activities during the first nine months of 1998
totaled $11.9 billion, compared with $8.6 billion during the same period in
1997. Cash usage increased as a result of greater net finance receivable
acquisitions, increases in both operating lease acquisitions and receivables due
from GM, partially offset by increased proceeds from investment in securities
sales and wholesale asset securitization activity.
During the first nine months of 1998, cash provided by financing activities
totaled $5.4 billion, compared with approximately $4.5 billion of cash provided
by financing activities during the comparable 1997 period. The change is
primarily the result of an increase in notes payable to GM and lower dividends
paid to GM.
Year 2000
Many computerized systems and microprocessors that are embedded in a variety
of products either made or used by GM have the potential for operational
problems if they lack the ability to handle the transition to the Year 2000.
Because this issue has the potential to cause disruption of GM's business
operations, GM has developed a comprehensive worldwide program to identify and
remediate potential Year 2000 problems in its business information systems and
other systems embedded in its engineering and manufacturing operations. In
addition, GM has initiated communications and site assessments with its
suppliers, its dealers and other third parties in order to assess and reduce the
risk that GM's operations could be adversely affected by the failure of these
third parties to adequately address the Year 2000 issue.
One of GM's first priorities was the analysis of microprocessors used in GM
passenger cars and trucks. This review included all current and planned models
as well as the electronics in older vehicles produced during the period of
approximately the last 15 years when vehicles have contained microchips capable
of processing date information. Most of the processors reviewed have no
date-related functionality, and accordingly have no Year 2000 issues. Of the
vehicles with processors that perform date-related functions, none had any Year
2000 issues except for one vehicle model where an indicator light prematurely
indicates the need for an oil change at the end of every decade.
GM's Year 2000 program teams are responsible for remediating all of GM's
information technology and embedded systems. Information technology principally
consists of business information systems (such as mainframe and other shared
computers and associated business application software) and infrastructure (such
as personal computers, operating systems, networks and devices like switches and
routers). Embedded systems include microprocessors used in factory automation
and in systems such as elevators, security and facility management. GM's Year
2000 program includes assessment and remediation services provided by Electronic
Data Systems Corporation (EDS) pursuant to a Master Service Agreement with GM.
The Year 2000 program is being implemented in seven phases, some of which
are being conducted concurrently:
Inventory -- identification and validation of an inventory of all systems
that could be affected by the Year 2000 issue. The inventory phase commenced
in earnest in 1996 and is substantially complete. It has identified
approximately 7,600 business information systems and about 1.7 million
infrastructure items and embedded systems.
Assessment -- initial testing, code scanning, and supplier contacts to
determine whether remediation is needed and to develop a remediation plan,
if applicable. The assessment of business information systems is
substantially complete and included a determination that about one quarter
of such systems should be regarded as "critical" based on criteria such as
the potential for business disruption. The assessment of infrastructure
items and embedded systems is still underway but is expected to be
substantially complete by the end of 1998.
Remediation -- design and execution of a remediation plan, followed by
testing for adherence to the design. GM is targeting the end of 1998 for
remediation of its critical systems and will continue to address remediation
of other systems on a prioritized basis thereafter; unimportant systems have
been and will continue to be removed from GM's Year 2000 inventory and will
not be remediated. While some critical systems will not be remediated until
after the target date, GM believes that it is substantially on track to meet
its target. In the normal course of its business plans, GM's Delphi
Automotive Systems unit is incrementally implementing enterprise software
that will replace and thereby eliminate the need to remediate certain
existing systems. Implementation of this software at several Delphi sites is
scheduled for completion in the first quarter of 1999, and another Delphi
site implementation is not expected to be complete until July 1999.
- 28 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Year 2000 (continued)
System Test -- testing of remediated items to ensure that they function
normally after being replaced in their original operating environment. This
phase is closely related to the remediation phase and follows essentially
the same schedule.
Implementation -- return of items to normal operation after satisfactory
performance in system testing. This phase follows essentially the same
schedule as remediation and system testing.
Readiness Testing -- planning for and testing of integrated systems in a
Year 2000 ready environment, including ongoing auditing and follow-up.
Readiness testing is currently underway and this phase is expected to become
the major focus of the Year 2000 program commencing in the fourth quarter of
1998 and continuing throughout 1999.
Contingency Planning -- development and execution of plans that narrow the
focus on specific areas of significant concern and concentrate resources to
address them. GM currently believes that the most reasonably likely worst
case scenario is that there will be some localized disruptions of systems
that will affect individual business processes, facilities or suppliers for
a short time rather than systemic or long-term problems affecting its
business operations as a whole. GM contingency planning will continue to
identify systems or other aspects of its business or that of its suppliers
that it believes would be most likely to experience Year 2000 problems as
well as those business operations in which a localized disruption could have
the potential for causing a wider problem by interrupting the flow of
products, materials or data to other operations. Because there is
uncertainty as to which activities may be affected and the exact nature of
the problems that may arise, GM's contingency planning will focus on
minimizing the scope and duration of any disruptions by having sufficient
personnel, inventory and other resources in place to permit a flexible,
real-time response to specific problems as they may arise at individual
locations around the world. Some of the actions that GM may consider include
the deployment of emergency response teams on a regional or local basis and
the development of plans for the allocation, stockpiling or re-sourcing of
components and materials that may be critical to our continued production.
Specific contingency plans and resources for permitting the necessary
flexibility of response are expected to be identified and put into place
commencing in mid-1999.
GM's communication with its suppliers is a focused element of the assessment
and remediation phases described above. GM is a leading participant in an
industry trade association, the Automotive Industry Action Group (AIAG), which
has distributed Year 2000 compliance questionnaires as well as numerous
awareness and assistance mailings to about half of the 100,000 supplier sites
that supply GM throughout the world. Responses to these questionnaires, which
were generally sent to GM's principal suppliers, have been received from about
half of the supplier sites to which they were sent. Many of the non-responding
suppliers are communicating directly with GM on an informal basis. In addition,
GM has initiated its own review of suppliers considered to be critical to GM's
operations, including approximately 1,650 on-site assessments to date. These
assessment efforts are expected to be substantially complete for critical
supplier sites by the end of 1998. Based on its assessment activity to date, GM
believes that a substantial majority of its suppliers are making acceptable
progress toward Year 2000 readiness. GM has established a program to provide
further assistance to suppliers that desire more input or that are believed to
be at high risk of noncompliance as a result of the foregoing assessment
efforts. This supplier assistance program currently includes providing
compliance workshops and remediation consultants to work with suppliers on
developing and implementing their own remediation programs. GM's contingency
planning efforts described above are also expected to address any critical
suppliers that GM identifies as being at high risk of encountering Year 2000
problems.
GM also has a program to work with its independent dealers on their Year 2000
readiness. This program includes distributing materials that assist dealers in
designing and executing their own assessment and remediation efforts. GM has
also included Year 2000 compliance criteria as part of its established program
for certifying that third-party business information systems properly interface
with other systems provided to dealers by GM.
The cost of GM's Year 2000 program is being expensed as incurred with the
exception of capitalizable replacement hardware. Total incremental spending by
GM is not expected to be material to the Corporation's operations, liquidity or
capital resources. GM incurred approximately $40 million of Year 2000 expense
during 1997 and approximately $85 million in the first nine months of 1998. GM
currently expects its total Year 2000 expense to be approximately $560 million,
with peak spending occurring late in 1998 and early in 1999. This total spending
also includes an additional payment of $75 million that GM has agreed to pay to
EDS at the end of the first quarter of 2000 if systems remediated by EDS under
the Master Service Agreement are capable of continued operation before, on and
after January 1, 2000 without causing a significant business disruption that
results in a material financial loss to GM due to the millennium change. In
addition, the estimated value of the services EDS is required to provide to GM
under the Master Service Agreement that are part of normal fixed price services
and other on-going payments to EDS attributable to work being performed in
connection with GM's Year 2000 program is
- 29 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Year 2000 (concluded)
approximately $300 million. Despite the incremental Year 2000 spending expected
to be incurred throughout the Corporation, GM's current business plan projects
declining information technology expenses. GM's total Year 2000 costs noted
above do not include information technology projects that have been accelerated
due to Year 2000, which are estimated to be approximately $30 million.
In view of the foregoing, GM does not currently anticipate that it will
experience a significant disruption of its business as a result of the Year 2000
issue. However, there is still uncertainty about the broader scope of the Year
2000 issue as it may affect GM and third parties that are critical to GM's
operations. For example, lack of readiness by electrical and water utilities,
financial institutions, government agencies or other providers of general
infrastructure could, in some geographic areas, pose significant impediments to
GM's ability to carry on its normal operations in the area or areas so affected.
In the event that GM is unable to complete its remedial actions as described
above and is unable to implement adequate contingency plans in the event that
problems are encountered, there could be a material adverse effect on GM's
business, results of operations or financial condition.
The foregoing discussion describes the Year 2000 program being implemented by
GM and its consolidated subsidiaries other than Hughes. Information about the
Year 2000 efforts of Hughes can be found in Exhibit 99.
Statements made herein about the implementation of various phases of GM's
Year 2000 program, the costs expected to be associated with that program and the
results that GM expects to achieve constitute forward-loking information. As
noted above, there are many uncertainties involved in the Year 2000 issue,
including the extent to which GM will be able to successfully remediate systems
and adequately provide for contingencies that may arise, as well as the broader
scope of the Year 2000 issues as it may affect third parties that are not
controlled by GM. Accordingly, the costs and results of GM's Year 2000 program
and the extent of any impact on GM's operations could vary materially from
those stated herein.
Euro Conversion
On January 1, 1999, eleven of fifteen member countries of the European Union
will establish fixed conversion rates between their existing currencies and
adopt the euro as their new common currency. The euro will trade on currency
exchanges and the legacy currencies will remain legal tender in the
participating countries for a transition period between January 1, 1999 and
January 1, 2002. Beginning on January 1, 2002, euro denominated bills and coins
will be issued and legacy currencies will be withdrawn from circulation.
The Corporation has established plans to assess and address the potential
impact to the Corporation, which may result from the euro conversion. These
issues include, but are not limited to, 1) the technical challenges to
adapt information systems to accommodate euro transactions; 2) the competitive
impact of cross-border price transparency; 3) the impact on currency exchange
rate risks; 4) the impact on existing contracts and 5) tax and accounting
implications. The Corporation expects that the euro conversion will not have a
material adverse impact on its financial condition or results of operations.
Competitiveness Studies
GM periodically evaluates the carrying value of long-lived assets to be held
and used, when events and circumstances warrant such review. This evaluation and
review is generally done in conjunction with the annual business planning cycle.
The 1998 evaluation and review, anticipated to be completed prior to December
31, 1998, and other actions which may be taken, are expected to result in an
after-tax charge of $300 million to $350 million.
Employment and Payrolls
1998 1997
---- ----
Worldwide Employment at September 30, (in thousands)
GMNA 229 240
GME 81 79
GMLAAM 25 27
GMAP 10 10
Delphi 199 205
GMAC 23 18
Hughes 15 16
Other 12 11
---- ----
Total employees 594 606
=== ===
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
Worldwide payrolls - (in billions) $6.1 $6.9 $19.9 $21.0
=== === ==== ====
Employment and payroll amounts reported for 1997 have been adjusted to
reflect the changes to GM's organizational structure resulting from the Hughes
Transactions. As such, Delphi reported amounts include Delco and Hughes reported
amounts exclude Delco and Hughes Defense. The decrease in worldwide payrolls is
partially due to the work stoppages previously discussed.
- 30-
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
New Accounting Standard
In the first quarter of 1998, the AICPA's Accounting Standards Executive
Committee issued Statement of Position (SOP) 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. This SOP requires that
entities capitalize certain internal-use software cost once specific criteria
are met. Currently, GM generally expenses the costs of developing or obtaining
internal-use software as incurred. GM will adopt SOP 98-1 on January 1, 1999, as
required. GM expects that under the new SOP, approximately $300 million to $350
million in spending will be capitalized in 1999 that would have otherwise been
expensed.
* * * * * *
PART II
ITEM 1. LEGAL PROCEEDINGS
(a) Material pending legal proceedings, other than ordinary routine litigation
incidental to the business, to which the Corporation became, or was, a party
during the quarter ended September 30, 1998 or subsequent thereto, but before
the filing of this report are summarized below:
Environmental Matters
As previously reported, the Ohio Environmental Protection Agency filed an
enforcement action against the Powertrain Group Defiance Foundry alleging, among
other things, that GM failed to: 1) timely perform a stack test on certain
equipment, 2) comply with an air permit variance granted to the foundry, 3)
comply with the "Prevention of Significant Deterioration" regulations in
connection with the installation of certain equipment, and 4) comply with
certain air emission limits set forth in a number of permits. This matter has
been settled in a Consent Order, entered July 10, 1998, with GM paying a
$220,000 civil penalty, performing a supplemental environmental project valued
at $465,000, and paying $20,000 to the Ohio-Kentucky-Indiana Regional Council of
Governments to be used for the distribution of new gas caps for late model
vehicles.
Other Matters
The Louisiana Court of Appeals has reversed the certification of a nationwide
class covering owners of 1973 to 1991 C/K and R/V pickup trucks and cab chassis
with fuel tanks mounted outside the frame rails. As previously reported, the
trial court had certified the class and approved a settlement. The appeals court
decision requires the trial court to make additional findings that the proposed
class meets Louisiana class action requirements. It does not address the
objectors' appeal from the approval of the fairness of the settlement or GM's
appeal from the award of attorneys' fees and expenses. GM and plaintiffs are
seeking review by the Louisiana Supreme Court.
As previously reported, three class actions were pending alleging that front
seat air bags installed in 1993 to 1997 model vehicles are defective. The
federal court in Louisiana has granted a motion to dismiss the Louisiana and
Texas cases. A motion for change of venue in the Alabama case has been denied. A
writ of mandamus to review the denial of the change of venue motion is pending
in the Alabama Supreme Court.
In July 1998, the Corporation was served with two putative class action
complaints covering all persons or entities resident in California which then or
formerly owned or leased a 1985 through 1997 model year GM vehicle which was
painted without a primer surface layer and which subsequently exhibited peeling
or chipping of the paint. The complaints were filed in the California Superior
Courts in San Francisco (Eddie Glorioso v. General Motors Corporation) and
Alameda County (Scott Arnold v. General Motors Corporation). The complaints
assert claims for breach of express warranty, violation of California's Song
Beverly Consumer Warranty Act, and unfair competition and/or fraudulent business
practices. They request restitution of all amounts paid by class members for GM
vehicles and/or disgorgement of related profits or revenues, equitable relief,
actual damages, prejudgment interest, costs, and attorneys' fees. No
determination has been made that either case may proceed as a class action.
In August 1998, a purported class action covering all owners, except citizens
or residents of Texas and Alabama, of 1982 to 1989 GM vehicles with Type III
door latches was filed in Circuit Court of Cook County, Illinois (Haenisch, et
al. v. General Motors Corporation). Alternatively, it seeks a sub-class of
Illinois owners. GM has removed the case to the federal court in Chicago,
Illinois. As previously reported, purported class actions covering Texas
(Rangel, et al. v. General Motors Corporation) and Alabama (McLain v. General
Motors Corporation) owners were removed from state courts and are pending in
federal courts in those states. Plaintiffs allege that the door latches are
"potentially dangerous" because they are prone to open in collisions and subject
passengers to risk of injury. The complaint asserts claims under state consumer
protection statutes and for common law fraud and seeks the cost of modifying the
latches, other unspecified relief, and attorneys' fees and costs. Personal
injury claims are expressly excluded. No determination has been made that any of
the cases may proceed as class actions.
- 31 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS - Concluded
General Electric Capital Corporation ("GECC) and DIRECTV, Inc. ("DIRECTV"), a
wholly-owned subsidiary of Hughes Electronics Corporation ("Hughes"), entered
into a contract on July 31, 1995, in which GECC agreed to provide financing for
consumers' purchases of DIRECTV programming and related hardware. Under the
contract GECC also agreed to provide certain related services to DIRECTV,
including credit risk scoring, billing and collections services. DIRECTV agreed
to act as a surety for loans complying with the terms of the contract. Hughes
guaranteed DIRECTV's performance under the contract. A complaint and cross
claims have been filed by the parties in the U.S. District Court for the
District of Connecticut concerning GECC's performance and DIRECTV's obligation
to act as a surety for escalating losses. GECC claims damages in excess of $140
million. DIRECTV seeks damages in excess of $70 million. Management vigorously
disputes GECC's allegations and does not believe that the litigation will have a
material adverse impact on the company.
In connection with the 1997 spin-off of Hughes Defense and its subsequent
merger with Raytheon, the terms of the merger agreement provided a process for
resolving disputes that might arise in connection with, among other things,
post-closing financial adjustments that were also called for by the terms of the
merger agreement. Such financial adjustments might require a cash payment from
Raytheon to Hughes or visa versa. A dispute currently exists regarding the
post-closing adjustments which Hughes and Raytheon have proposed to one another.
In an attempt to resolve the dispute, Hughes gave notice to Raytheon to commence
the arbitration process. Raytheon responded by filing an action in Delaware
Chancery Court which seeks to enjoin the arbitration as premature. It is
possible that the ultimate resolution of the post-closing financial adjustment
provision of the merger agreement may result in Hughes making a payment to
Raytheon that would be material to Hughes. However, the amount of any payment
that either party might be required to make to the other is not determinable at
this time. Hughes intends to vigorously pursue resolution of the dispute through
the arbitration process, opposing the adjustments Raytheon seeks and seeking the
payment from Raytheon that it has proposed.
*****
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS (Including Those Incorporated by Reference).
Exhibit
Number Exhibit Name Page No.
- ------- -------------------------------------- --------
3(i) Corrected Restated Certificate of Incorporation
of General Motors Corporation, filed as Exhibit 3(i)
to the Current Report on Form 8-K of General Motors
Corporation dated June 8, 1998 and filed on July 30,
1998 N/A
99 Hughes Electronics Corporation and Subsidiaries
Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and
Results of Operations 33
27 Financial Data Schedule (for SEC information only)
(b) REPORTS ON FORM 8-K.
Seven reports on Form 8-K, dated June 8, 1998, July 8, 1998, July 9, 1998,
July 14, 1998 (2), August 3, 1998 and August 17, 1998 were filed during the
quarter ended September 30, 1998 reporting matters under Item 5, Other Events
and Item 7, Financial Statements, Pro Forma Financial Information and Exhibits.
* * * * * *
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
GENERAL MOTORS CORPORATION
---------------------------
(Registrant)
November 16, 1998 /s/Peter R. Bible
- ----------------- ------------------------------------
(Date) (Peter R. Bible, Chief Accounting Officer)
- 32 -
EXHIBIT 99
<TABLE>
HUGHES ELECTRONICS CORPORATION
FINANCIAL STATEMENTS AND
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
STATEMENT OF INCOME AND
AVAILABLE SEPARATE CONSOLIDATED NET INCOME
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
(Dollars in Millions Except Per
Share Amounts)
Revenues
Product sales $872.8 $703.3 $2,327.5 $2,125.9
Direct broadcast, leasing and
other services 640.5 555.0 1,845.8 1,307.8
------- ------- ------- -------
Total revenues 1,513.3 1,258.3 4,173.3 3,433.7
------- ------- ------- -------
Operating costs and expenses
Cost of products sold 659.5 550.3 1,782.4 1,711.4
Broadcast programming and
other costs 284.6 243.9 800.2 598.4
Selling, general and
administrative expenses 390.4 261.9 1,052.2 714.0
Depreciation and amortization 111.3 78.0 309.2 195.3
Amortization of GM purchase
accounting adjustments 5.3 5.3 15.9 15.9
------- ------- ------- -------
Total operating costs and expenses 1,451.1 1,139.4 3,959.9 3,235.0
------- ------- ------- -------
Operating profit 62.2 118.9 213.4 198.7
Interest income 20.5 10.4 88.6 18.1
Interest expense (3.6) (24.4) (9.5) (58.1)
Other, net (33.4) (17.8) (102.8) 452.6
------- --------- --------- --------
Income from continuing operations
before income taxes and
minority interests 45.7 87.1 189.7 611.3
Income taxes 17.4 34.8 72.1 244.5
Minority interests in net losses
(income) of subsidiaries 9.3 (5.1) 19.2 16.8
------- ------- ------- ---------
Income from continuing operations 37.6 47.2 136.8 383.6
(Loss) income from discontinued
operations, net of taxes - (0.1) - 1.2
------- ------- -------- ---------
Net income 37.6 47.1 136.8 384.8
Adjustments to exclude the effect of
GM purchase accounting adjustments 5.3 5.3 15.9 15.9
------- ------ -------- ---------
Earnings Used for Computation of
Available Separate
Consolidated Net Income $42.9 $52.4 $152.7 $400.7
==== ==== ===== =====
Available Separate Consolidated Net Income
Average number of shares of General Motors
Class H Common Stock outstanding
(in millions) (numerator) 105.7 102.0 105.0 101.2
Class H dividend base (in millions)
(denominator) 399.9 399.9 399.9 399.9
Available Separate Consolidated Net
Income $11.4 $13.4 $40.1 $101.4
==== ==== ==== =====
Earnings Attributable to General Motors
Class H Common Stock on a Per Share
Basis $0.11 $0.13 $0.38 $1.00
Reference should be made to the Notes to Financial Statements.
</TABLE>
- 33 -
<PAGE>
<TABLE>
HUGHES ELECTRONICS CORPORATION
BALANCE SHEET
<CAPTION>
September 30,
1998 December 31,
ASSETS (Unaudited) 1997
------------ ------------
<S> <C> <C>
(Dollars in Millions)
Current Assets
Cash and cash equivalents $1,509.7 $2,783.8
Accounts and notes receivable (less allowances) 1,067.2 662.8
Contracts in process, less advances and progress
payments of $2.2 and $50.2 611.8 575.6
Inventories 570.7 486.4
Prepaid expenses and other, including deferred income
taxes of $75.6 and $93.2 399.1 297.3
-------- --------
Total Current Assets 4,158.5 4,805.9
Satellites, net 2,843.1 2,643.4
Property, net 965.9 889.7
Net Investment in Sales-type Leases 181.9 337.6
Intangible Assets, net of accumulated amortization
of $388.2 and $318.3 3,587.8 2,954.8
Investments and Other Assets 1,155.9 1,132.4
--------- ---------
Total Assets $12,893.1 $12,763.8
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable $720.0 $472.8
Advances on contracts 245.6 209.8
Deferred revenues 150.3 110.6
Notes payable 60.2 -
Accrued liabilities 564.1 689.4
------- -------
Total Current Liabilities 1,740.2 1,482.6
Long-Term Debt 778.7 637.6
Deferred Gains on Sales and Leasebacks 130.1 191.9
Accrued Operating Leaseback Expense 38.8 100.2
Postretirement Benefits Other Than Pensions 156.2 154.8
Other Liabilities and Deferred Credits 702.8 706.4
Deferred Income Taxes 618.7 570.8
Commitments and Contingencies
Minority Interests 469.0 607.8
Stockholder's Equity
Capital stock and additional paid-in capital 8,142.7 8,322.8
Net income retained for use in the business 143.9 7.1
Subtotal 8,286.6 8,329.9
Minimum pension liability adjustment (34.8) (34.8)
Accumulated unrealized gains on securities 11.9 21.4
Accumulated foreign currency translation adjustments (5.1) (4.8)
-------- ---------
Accumulated other comprehensive loss (28.0) (18.2)
-------- ---------
Total Stockholder's Equity 8,258.6 8,311.7
--------- ---------
Total Liabilities and Stockholder's Equity $12,893.1 $12,763.8
======== ========
Reference should be made to the Notes to Financial Statements.
</TABLE>
- 34 -
<PAGE>
<TABLE>
HUGHES ELECTRONICS CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
------------------
1998 1997
------ ------
<S> <C> <C>
(Dollars in Millions)
Cash Flows from Operating Activities
Net cash provided by continuing operations $313.7 $315.3
Net cash used by discontinued operations - (0.3)
------ ------
Net Cash Provided by Operating Activities 313.7 315.0
------ ------
Cash Flows from Investing Activities
Investment in companies (960.5) (1,559.1)
Expenditures for property (202.7) (140.8)
Increase in satellites (526.7) (473.2)
Early buyout of satellite under sale and leaseback (155.5) -
Proceeds from disposal of property 17.6 -
Proceeds from disposal of investments 12.4 -
Proceeds from insurance claims 231.2 -
-------- ---------
Net Cash Used in Investing Activities (1,584.2) (2,173.1)
-------- --------
Cash Flows from Financing Activities
Net increase in notes and loans payable 60.0 -
Long-term debt borrowings 875.3 1,759.1
Repayment of long-term debt (734.2) -
Payment to General Motors for Delco post-closing
price adjustment (204.7) -
Contributions from Parent Company - 518.8
------- -------
Net Cash (Used In) Provided by
Financing Activities (3.6) 2,277.9
------- -------
Net (decrease) increase in cash and cash equivalents (1,274.1) 419.8
Cash and cash equivalents at beginning of the period 2,783.8 6.7
------- -----
Cash and cash equivalents at end of the period $1,509.7 $426.5
======= =====
Reference should be made to the Notes to Financial Statements.
</TABLE>
- 35 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting. In the opinion of management, all adjustments (consisting only of
normal recurring items) which are necessary for a fair presentation have been
included. The results for interim periods are not necessarily indicative of
results which may be expected for any other interim period or for the full year.
For further information, refer to the financial statements and notes thereto
included in the General Motors ("GM") 1997 Annual Report on Form 10-K, as
amended, the unaudited information relating to Hughes Electronics Corporation
("Hughes Electronics") filed as Exhibit 99 in GM's quarterly reports on Form
10-Q dated March 31, 1998 and June 30, 1998, and current reports on Form 8-K
filed subsequent to the filing date for the GM 1997 Annual Report on Form 10-K,
as amended.
GM purchase accounting adjustments relate to GM's purchase of Hughes
Electronics in 1985.
On December 17, 1997, Hughes Electronics and GM, the parent of Hughes
Electronics, completed a series of transactions (the "Hughes Transactions")
designed to address strategic challenges facing the three principal businesses
of Hughes Electronics and unlock stockholder value in GM. The Hughes
Transactions included the tax-free spin-off of the defense electronics business
("Hughes Defense") to holders of GM $1-2/3 par value and Class H common stocks,
the transfer of Delco Electronics Corporation ("Delco"), the automotive
electronics business, to GM's Delphi Automotive Systems unit, and the
recapitalization of GM Class H common stock into a new GM tracking stock, Class
H common stock, that is linked to the remaining telecommunications and space
businesses. The Hughes Transactions were followed immediately by the merger of
Hughes Defense with Raytheon Company ("Raytheon"). For the periods prior to the
consummation of the Hughes Transactions on December 17, 1997, Hughes
Electronics, consisting of its defense electronics, automotive electronics and
telecommunications and space businesses, is hereinafter referred to as former
Hughes.
In connection with the recapitalization of Hughes Electronics on December 17,
1997, the telecommunications and space businesses of former Hughes, consisting
principally of its direct-to-home broadcast, satellite services, satellite
systems and network systems businesses, were contributed to the recapitalized
Hughes Electronics. Such telecommunications and space businesses, both before
and after the recapitalization, are hereinafter referred to as Hughes. The
accompanying financial statements and footnotes pertain only to Hughes and do
not include balances of former Hughes related to Hughes Defense or Delco.
Prior to the Hughes Transactions, the Hughes businesses were effectively
operated as divisions of former Hughes. The 1997 financial statements include
allocations of corporate expenses from former Hughes, including research and
development, general management, human resources, financial, legal, tax,
quality, communications, marketing, international, employee benefits and other
miscellaneous services. These costs and expenses have been charged to Hughes
based either on usage or using allocation methodologies primarily based upon
total revenues, certain tangible assets and payroll expenses. Management
believes the allocations were made on a reasonable basis; however, they may not
necessarily reflect the financial position, results of operations or cash flows
of Hughes on a stand-alone basis in the future. Also, the interest expense for
1997 in the Statement of Income and Available Separate Consolidated Net Income
("Statement of Income") included an allocated share of total former Hughes'
interest expense.
Note 2. Inventories
Major Classes of Inventories
September 30, December 31,
(Dollars in Millions) 1998 1997
---- ----
Productive material and supplies $104.1 $57.5
Work in process 343.1 328.5
Finished goods 123.5 100.4
----- -----
Total $570.7 $486.4
===== =====
- 36 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 3. Comprehensive Income
Hughes' total comprehensive income was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
(Dollars in Millions) 1998 1997 1998 1997
-------- ------- -------- -------
Net income $37.6 $47.1 $136.8 $384.8
Other comprehensive income (loss):
Foreign currency translation
adjustments 2.2 (0.8) (0.3) (1.6)
Unrealized gains (losses)
on securities:
Unrealized holding losses (3.4) - (2.4) -
Less: reclassification
adjustment for losses
(gains) included in
net income 0.2 - (7.1) -
----- ------- ------ -------
Unrealized losses
on securities (3.2) - (9.5) -
----- ------- ------ -------
Other comprehensive loss (1.0) (0.8) (9.8) (1.6)
----- ------ ------ -------
Total comprehensive
income $36.6 $46.3 $127.0 $383.2
==== ==== ===== =====
Note 4. Earnings Per Share Attributable to GM Class H Common Stock and
Available Separate Consolidated Net Income
Earnings per share attributable to GM Class H common stock is determined
based on the relative amounts available for the payment of dividends to holders
of GM Class H common stock. Holders of GM Class H common stock have no direct
rights in the equity or assets of Hughes, but rather have rights in the equity
and assets of GM (which includes 100% of the stock of Hughes).
Amounts available for the payment of dividends on GM Class H common stock are
based on the available separate consolidated net income of Hughes. The available
separate consolidated net income of Hughes is determined quarterly and is equal
to the separate consolidated net income of Hughes, excluding the effects of GM
purchase accounting adjustments arising from GM's acquisition of Hughes
(earnings used for computation of available separate consolidated net income),
multiplied by a fraction, the numerator of which is a number equal to the
weighted-average number of shares of GM Class H common stock outstanding during
the period (105.7 million and 102.0 million during the third quarters of 1998
and 1997, respectively) and the denominator of which was 399.9 million during
the third quarters of 1998 and 1997.
For 1997, available separate consolidated net income and earnings
attributable to General Motors Class H common stock are presented on a pro forma
basis. Prior to the Hughes Transactions, such amounts were calculated based on
the financial performance of former Hughes. Since the 1997 financial statements
relate only to the telecommunications and space businesses of former Hughes,
they do not reflect the earnings attributable to the former GM Class H common
stock on a historical basis. The pro forma presentation, therefore, presents the
financial results which would have been achieved for 1997 relative to the GM
Class H common stock based solely on the performance of the telecommunications
and space businesses of former Hughes.
Earnings per share represent basic earnings per share. There is no dilutive
effect resulting from the assumed exercise of stock options, since the exercise
of stock options would not affect the GM Class H dividend base (denominator)
used in calculating earnings per share. As Hughes has no other common stock
equivalents that may impact the calculation, diluted earnings per share is not
presented.
- 37 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 5. Other Postretirement Benefits
Hughes has disclosed in the financial statements certain amounts associated
with estimated future postretirement benefits other than pensions and
characterized such amounts as "accumulated postretirement benefit obligations,"
"liabilities" or "obligations." Notwithstanding the recording of such amounts
and the use of these terms, Hughes does not admit or otherwise acknowledge that
such amounts or existing postretirement benefit plans of Hughes (other than
pensions) represent legally enforceable liabilities of Hughes.
Note 6. Acquisitions
In May 1997, Hughes and PanAmSat, a leading provider of international
satellite services, merged their respective satellite service operations into a
new publicly-held company, which retained the name PanAmSat. Hughes contributed
its Galaxy(R) satellite services business in exchange for a 71.5% interest in
the new company. PanAmSat stockholders received a 28.5% interest in the new
company and $1.5 billion in cash.
For accounting purposes, the merger was treated by Hughes as an acquisition
of 71.5% of PanAmSat and was accounted for using the purchase method.
Accordingly, the purchase price was allocated to the net assets acquired,
including intangible assets, based on estimated fair values at the date of
acquisition. The purchase price exceeded the fair value of net assets acquired
by $2.4 billion. In addition, the merger was treated as a partial sale of the
Galaxy business by Hughes and resulted in a one-time pre-tax gain of $489.7
million ($318.3 million after-tax).
In May 1998, Hughes purchased an additional 9.5% interest in PanAmSat for
$851.4 million in cash, increasing Hughes' ownership interest from 71.5% to
81.0%.
In October 1998, Hughes purchased an additional 10% interest in Galaxy Latin
America from MVS Multivision, increasing its ownership to 70%. Hughes also
agreed to acquire an additional ownership interest in Grupo Galaxy Mexicana
("GGM"), pending regulatory approval in Mexico. GGM offers Direct-To-Home
Broadcast service in Mexico.
Note 7. Hughes Transactions
In connection with the Hughes Transactions and the resulting Delco
post-closing price adjustment, Hughes made a cash payment to GM in June of 1998
for $204.7 million. The payment was treated as an adjustment to additional
paid-in capital.
Note 8. Discontinued Operations
On December 15, 1997, Hughes sold substantially all of the assets and
liabilities of the Hughes Avicom International, Inc. ("Hughes Avicom") business
to Rockwell Collins, Inc. for cash. Hughes Avicom is a supplier of products and
services to the commercial airline market. The 1997 net operating results of
Hughes Avicom have been reported, net of applicable income taxes, as "Income
from discontinued operations, net of taxes" and the net cash flows as "Net cash
used by discontinued operations."
- 38 -
<PAGE>
<TABLE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 9. Segment Reporting
The following presents selected information regarding Hughes' operating
segments:
Operating Segments:
<CAPTION>
Direct-To-
Home Satellite Satellite Network
Broadcast Services Systems Systems Other Elims. Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Millions)
For the Three Months Ended:
September 30, 1998
External Revenues $458.0 $152.0 $659.5 $240.4 $3.4 - $1,513.3
Intersegment
Revenues 1.1 34.5 29.4 27.3 - $(92.3) -
- -------------------------------------------------------------------------------
Total Revenues $459.1 $186.5 $688.9 $267.7 $3.4 $(92.3)$1,513.3
- --------------------------------------------------------------------------------
Operating (Loss)
Profit(1) $(61.8) $78.2 $63.8 $16.9 $(14.8) $(20.1) $62.2
- --------------------------------------------------------------------------------
September 30, 1997
External Revenues $343.7 $146.5 $541.1 $215.6 $11.4 - $1,258.3
Intersegment
Revenues - 23.8 63.2 0.4 0.5 $(87.9) -
- -------------------------------------------------------------------------------
Total Revenues $343.7 $170.3 $604.3 $216.0 $11.9 $(87.9)$1,258.3
- --------------------------------------------------------------------------------
Operating (Loss)
Profit(1) $(43.3) $70.8 $53.1 $22.4 $23.6 $ (7.7) $118.9
- --------------------------------------------------------------------------------
For the Nine Months Ended:
September 30, 1998
External Revenues$1,247.4 $480.7 $1,806.2 $626.5 $12.5 - $4,173.3
Intersegment
Revenues 1.1 89.9 181.8 47.6 0.9 $(321.3) -
- -------------------------------------------------------------------------------
Total Revenues $1,248.5 $570.6 $1,988.0 $674.1 $13.4 $(321.3)$4,173.3
- --------------------------------------------------------------------------------
Operating (Loss)
Profit(1) $(133.6) $236.7 $178.9 $(20.2) $(26.2) $(22.2) $213.4
- --------------------------------------------------------------------------------
September 30, 1997
External Revenues $861.0 $362.3 $1,605.7 $608.9 $(4.2) - $3,433.7
Intersegment
Revenues - 69.7 142.4 0.5 1.6 $(214.2) -
- -------------------------------------------------------------------------------
Total Revenues $861.0 $432.0 $1,748.1 $609.4 $(2.6) $(214.2)$3,433.7
- --------------------------------------------------------------------------------
Operating (Loss)
Profit(1) $(158.7) $200.4 $159.7 $6.1 $(6.4) $(2.4) $198.7
- --------------------------------------------------------------------------------
</TABLE>
(1) Includes amortization arising from purchase accounting adjustments related
to GM's acquisition of Hughes amounting to $0.9 million in each of the three
month periods and $2.5 million in each of the nine months periods for the
Satellite Services segment and $4.4 million in each of the three month
periods and $13.4 million in each of the nine month periods for Other.
A reconciliation of operating profit to income from continuing operations
before income taxes and minority interests, as shown in the Statement of Income,
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in Millions) 1998 1997 1998 1997
---- ---- ---- ----
Operating profit $62.2 $118.9 $213.4 $198.7
Interest income 20.5 10.4 88.6 18.1
Interest expense (3.6) (24.4) (9.5) (58.1)
Other, net (33.4) (17.8) (102.8) 452.6
------ ------ ------ -----
Income from continuing operations
before income taxes and
minority interests $45.7 $87.1 $189.7 $611.3
==== ==== ===== =====
- 39 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Concluded
(Unaudited)
Note 10. Contingencies
In connection with the 1997 spin-off of Hughes Defense and its subsequent
merger with Raytheon, a process was agreed to among General Motors, Hughes and
Raytheon for resolving disputes that might arise in connection with post-closing
adjustments called for by the terms of the merger agreement. Such adjustments
might call for a cash payment between Hughes and Raytheon. A dispute currently
exists regarding the post-closing adjustments which Hughes and Raytheon have
proposed to one another. If the dispute is not resolved by negotiation, the
parties will proceed to an agreed upon form of binding arbitration, under which
either party may be required by arbitration to make a payment to the other. It
is possible that Hughes may be required by arbitration to make a payment to
Raytheon that would be material to Hughes. However, the amount of payment that
might be required of either party is not determinable at this time. Hughes
intends to vigorously oppose the adjustments Raytheon seeks.
Hughes has maintained a suit against the U.S. Government since September 1973
regarding the Government's infringement and use of a Hughes patent (the
"Williams Patent") covering "Velocity Control and Orientation of a Spin
Stabilized Body," principally satellites. On April 7, 1998, the Court of Appeals
for the Federal Circuit ("CAFC") reaffirmed earlier decisions in the Williams
case and the award of $114.0 million in damages. The CAFC ruled that the
conclusions previously reached in the Williams case were consistent with the
U.S. Supreme Court's findings in the Warner-Jenkinson case. The U.S. Government
petitioned the CAFC for a rehearing and was denied and is presently considering
a further appeal to the U.S. Supreme Court. Hughes is unable to estimate the
duration of any further appeal effort by the U.S. Government. While no amount
has been recorded in the financial statements of Hughes to reflect the $114.0
million award or the interest accumulating thereon, a resolution of this issue
could result in a gain that would be material to the earnings of GM attributable
to Class H common stock.
Hughes has reached an agreement with the Internal Revenue Service regarding a
claim for refund of Federal income taxes for the years 1983, 1984 and 1985. The
agreement requires approval by the Joint Committee on Taxation before the refund
claim becomes final. If the agreement is approved, a favorable adjustment to
Hughes' tax provision would occur which would be material to the earnings of GM
attributable to Class H common stock.
- 40 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management's discussion and analysis should be read in
conjunction with the Hughes Electronics Corporation management's discussion and
analysis included in the General Motors ("GM") 1997 Annual Report to the
Securities and Exchange Commission on Form 10-K, as amended, the management's
discussion and analysis relating to Hughes Electronics Corporation included in
Exhibit 99 to GM's quarterly reports on Form 10-Q dated March 31, 1998 and June
30, 1998, and current reports on Form 8-K filed subsequent to the filing date
for GM's 1997 Form 10-K, as amended. In addition, the following discussion
excludes purchase accounting adjustments related to GM's acquisition of Hughes
Electronics Corporation (see Supplemental Data beginning on page 47).
Statements made concerning expected financial performance, ongoing financial
performance strategies, and possible future action which Hughes (as defined
below) intends to pursue to achieve strategic objectives for each of its four
principal business segments constitute forward-looking information. The
implementation of these strategies and of such future actions and the
achievement of such financial performance are each subject to numerous
conditions, uncertainties and risk factors, and, accordingly, no assurance can
be given that Hughes will be able to successfully accomplish its strategic
objectives or achieve such financial performance. The principal important risk
factors which could cause actual performance and future actions to differ
materially from forward-looking statements made herein include economic
conditions, product demand and market acceptance, government action,
competition, ability to achieve cost reductions, technological risk, ability to
deal with the Year 2000 issue, interruptions to production attributable to
causes outside of Hughes' control, the success of satellite launches, in-orbit
performance of satellites and Hughes' ability to access capital to maintain its
financial flexibility.
General
On December 17, 1997, Hughes Electronics Corporation ("Hughes Electronics")
and GM, the parent of Hughes Electronics, completed a series of transactions
(the "Hughes Transactions") designed to address strategic challenges facing the
three principal businesses of Hughes Electronics and unlock stockholder value in
GM. The Hughes Transactions included the tax-free spin-off of the defense
electronics business ("Hughes Defense") to holders of GM $1-2/3 par value and
Class H common stocks, the transfer of Delco Electronics Corporation ("Delco"),
the automotive electronics business, to GM's Delphi Automotive Systems unit, and
the recapitalization of GM Class H common stock into a new GM tracking stock, GM
Class H common stock, that is linked to the remaining telecommunications and
space businesses. The Hughes Transactions were followed immediately by the
merger of Hughes Defense with Raytheon Company ("Raytheon"). For the periods
prior to the consummation of the Hughes Transactions on December 17, 1997,
Hughes Electronics, consisting of its defense electronics, automotive
electronics, and telecommunications and space businesses, is hereinafter
referred to as former Hughes.
In connection with the recapitalization of Hughes Electronics on December 17,
1997, the telecommunications and space businesses of former Hughes, consisting
principally of its direct-to-home broadcast, satellite services, satellite
systems and network systems businesses, were contributed to the recapitalized
Hughes Electronics. Such telecommunications and space businesses, both before
and after the recapitalization, is hereinafter referred to as Hughes. The
following discussion and accompanying financial statements pertain only to
Hughes and do not pertain to balances of former Hughes related to Hughes Defense
or Delco.
During 1998, four Hughes-built satellites have experienced the failure of a
primary spacecraft control processor (SCP). With the exception of the Galaxy IV
satellite, operated by PanAmSat, control of the satellites was automatically
switched to the spare SCP and the spacecraft are operating normally. The spare
SCP on the Galaxy IV satellite had also failed, however, resulting in the loss
of the satellite.
An extensive investigation by Hughes revealed that electrical shorts
involving tin-plated relay switches are the most likely cause of the primary SCP
failures. It appears the most probable cause of the electrical shorts is that
under certain conditions, a tiny, crystalline structure, less than the width of
a human hair, can grow and bridge a relay terminal to its case. Although there
exists the possibility of failure of other currently operating SCP's, Hughes
believes the probability of a primary and spare SCP failing in one in-orbit
HS-601 satellite is very low. Hughes is confident that the phenomenon will not
be repeated on satellites currently being built and those ready for launch. The
failure of the second SCP on Galaxy IV appears to be unrelated and is being
treated as an isolated anomaly.
- 41 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
Battery anomalies have occurred on two other Hughes-built PanAmSat
satellites. In both cases, battery cells have failed resulting in the need to
shut-off a number of transponders for a brief time during twice-yearly eclipse
periods. To date, the impact on customers has been minimal. There can be no
assurance, however, that service to all full-time customers will not be
interrupted for brief periods during future eclipse periods or that additional
battery cell failures will not occur in the future. Such future service
interruptions, depending on their extent, could result in a claim by affected
customers for termination of their transponder agreements. PanAmSat is
developing solutions for its customers that may include transition of
certain services to other PanAmSat satellites or the launch of replacement
satellites.
Results of Operations
Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997
Revenues. Third quarter 1998 revenues increased 20.3% to $1,513.3 million
compared with $1,258.3 million in the third quarter of 1997. The increase
reflects continued record subscriber growth in the Direct-To-Home Broadcast
segment, increased sales of commercial satellites in the Satellite Systems
segment and increased sales of DIRECTV receiver equipment in the Network Systems
segment.
Direct-To-Home Broadcast segment third quarter 1998 revenues increased 33.6%
to $459.1 million from $343.7 million in the third quarter of 1997. The increase
resulted from continued strong subscriber growth, strong average monthly revenue
per subscriber and low subscriber churn rates. Domestic DIRECTV propelled this
growth with quarterly revenues of $408 million, a 37% increase over last year's
third quarter revenues of $298 million. With 303,000 net new subscribers in the
third quarter, total DIRECTV(R) subscribers grew to 4,058,000 in the United
States as of September 30, 1998. Hughes' Latin American DIRECTV subsidiary,
Galaxy Latin America ("GLA"), had third quarter revenues of $37 million compared
with $22 million in the third quarter of 1997. With the addition of 36,000 net
new subscribers in the third quarter, cumulative DIRECTV subscribers in Latin
America were 423,000 as of September 30, 1998. In addition, DIRECTV Japan had a
total of 181,900 subscribers by the end of the third quarter.
The Satellite Services segment third quarter 1998 revenues were up 9.5% to
$186.5 million compared with $170.3 million in the prior year. Overall revenue
from video services increased by 4% to $135.8 million, primarily due to
increased operating lease revenues from the commencement of service agreements
for full-time video distribution, as well as short-term special events.
Telecommunications services revenue increased by 16% to $40.7 million in the
third quarter, in large part due to the growth in data and Internet-related
service agreements.
For the third quarter of 1998, revenues for the Satellite Systems segment
increased 14.0% to $688.9 million from revenues of $604.3 million for the same
period in 1997. The increase in revenue was principally due to higher commercial
satellite sales to customers such as Thuraya Satellite Telecommunications
Company, ICO Global Communications and American Mobile
Radio Corporation.
Third quarter revenues for the Network Systems segment were $267.7 million
compared with $216.0 million in the same period last year, an increase of 23.9%.
The increase in revenues was primarily due to increased sales of DIRECTV
receiver equipment, which more than offset lower international sales of private
business networks.
Operating Profit. Operating profit in the quarter was $67.5 million compared
to $124.2 million in the third quarter of 1997. Third quarter operating profit
margin on the same basis decreased to 4.5% in 1998 from 9.9% in 1997. The
decrease in operating profit and operating profit margin resulted primarily from
an expected increase in operating losses in the Direct-To-Home Broadcast segment
and other increased expenses, including pension expense.
The Direct-To-Home Broadcast segment operating loss for the third quarter of
1998 was $61.8 million compared with an operating loss of $43.3 million in the
third quarter of 1997. The larger operating loss in 1998 was principally due to
expected higher sales and marketing expenditures that more than offset increased
subscriber revenues. The third quarter 1998 operating loss for the domestic
DIRECTV business was $31 million compared with $15 million for last year, and
GLA's third operating loss was $30 million compared with $26 million last year.
- 42 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
With respect to the worldwide DIRECTV businesses, particularly in the United
States, Hughes has implemented a number of strategic initiatives designed to
expand its market share and enhance its competitive position. These include new
distribution channels, expanded services, broader programming and marketing and
other promotional strategies designed to address "barriers to entry" identified
by consumers. The implementation of such strategies increased subscriber
acquisition costs and, as a result, is likely to affect the timing and amount of
revenues and the overall profitability of the DIRECTV businesses. However,
Hughes believes that early capture of market share and the establishment of
market leadership are important to the maximization of the long-term value of
the DIRECTV businesses.
The Satellite Services segment operating profit in the third quarter rose
10.3% to $79.1 million from $71.7 million in 1997, resulting from the increased
video and telecommunications services revenue noted above. Operating profit
margin in the quarter increased slightly to 42.4% from 42.1% in the same period
of last year. In August 1998, Galaxy X, a PanAmSat satellite, was destroyed as a
result of the launch failure of a Boeing Delta III rocket. Galaxy X was fully
insured.
For the third quarter 1998, operating profit for the Satellite Systems
segment increased 20.2% to $63.8 million from $53.1 million in the prior year.
The increase in operating profit was principally due to the higher commercial
satellite sales noted above. Operating profit margin in the quarter increased to
9.3% from 8.8% last year, resulting from increased commercial satellite sales in
the current period.
The Network Systems segment operating profit in the third quarter of 1998 was
$16.9 million compared with an operating profit of $22.4 million in the third
quarter of 1997. Third quarter operating profit margin declined to 6.3% compared
with 10.4% in the same period last year. The decline in operating profit and
margin in the third quarter of 1998 was primarily due to lower international
sales of private business networks.
Costs and Expenses. Selling, general and administrative expenses increased to
$390.4 million in the third quarter of 1998 from $261.9 million in the same
period of 1997. The increase resulted primarily from increased programming,
marketing and subscriber acquisition costs in the Direct-To-Home Broadcast
segment and increased general and administrative expenditures in the Network
Systems segment. The increase in depreciation and amortization expenses to
$111.3 million in the third quarter of 1998 from $78.0 million in the same
period of 1997 resulted from increased capital expenditures in the
Direct-To-Home Broadcast and Satellite Services segments since September 1997,
and amortization of goodwill for the additional 9.5% interest in PanAmSat.
Interest Income and Expense. Interest income increased to $20.5 million in
the third quarter of 1998 compared with $10.4 million in the third quarter of
1997. The increase was due to the higher level of cash and cash equivalents
resulting from the Hughes Transactions. Interest expense decreased $20.8 million
in the third quarter of 1998 from the same period in 1997 due to the repayment
of debt in conjunction with the Hughes Transactions.
Other, net. The third quarter 1998 amount primarily relates to losses from
unconsolidated subsidiaries of $28.1 million compared with $11.2 million of
losses from unconsolidated subsidiaries in the third quarter of 1997.
Income Taxes. The effective income tax rate was 34.1% in the third quarter of
1998 and 37.7% in the third quarter of 1997. The decrease in the effective tax
rate resulted from Hughes increasing its ownership in PanAmSat in the second
quarter of 1998. As a result of Hughes' increased ownership in PanAmSat, Hughes
now benefits from the inclusion of PanAmSat in the Hughes consolidated tax
return.
Discontinued Operations. On December 15, 1997, Hughes sold substantially al
of the assets and liabilities of the Hughes Avicom International, Inc.
("Hughes Avicom") business to Rockwell Collins, Inc. for cash. As a result,
Hughes Avicom is treated as a discontinued operation for 1997.
Net Earnings. 1998 third quarter earnings decreased to $42.9 million compared
with last year's $52.4 million. Earnings per share decreased to $0.11 per share
versus pro forma earnings per share of $0.13 in 1997. See Note 4 to the
financial statements for further discussion regarding pro forma presentation.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September
30, 1997
Revenues. For the first nine months of 1998, revenues increased 21.5 % to
$4,173.3 million compared with $3,433.7 million in the first nine months of
1997. This increase was primarily the result of record DIRECTV subscriber growth
in the Direct-To-Home Broadcast segment, the PanAmSat merger and increased
operating lease revenues for video, data and Internet-related services in the
Satellite Services segment, increased commercial satellite sales in the
Satellite Systems segment and higher DIRECTV equipment sales in the Network
Systems segment.
- 43 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
Direct-To-Home Broadcast segment revenues for the first nine months of 1998
increased 45.0% to $1,248.5 million from $861.0 million for the same period in
1997. The increase resulted from continued strong subscriber growth and average
monthly revenue per subscriber, as well as low subscriber churn rates.
For the first nine months of 1998, the Satellite Services segment revenues
increased 32.1% to $570.6 million from $432.0 million for the same period in
1997. The increase in revenues was primarily due to the May 1997 PanAmSat
merger, increased operating lease revenues from the commencement of service
agreements for full-time video distribution, as well as short-term special
events and increased growth in data and Internet-related service agreements.
Revenues for the first nine months of 1998 for the Satellite Systems segment
were $1,988.0 million compared to $1,748.1 million for the same period in 1997.
The 13.7% increase resulted principally from higher commercial satellite sales
to customers such as Thuraya Satellite Telecommunications Company, ICO Global
Communications and American Mobile
Radio Corporation.
Network Systems segment revenues for the first nine months of 1998 increased
10.6% to $674.1 million from $609.4 million for the first nine months of 1997.
The increase in revenues resulted from the growth in sales of DIRECTV receiver
equipment and the increased sales of private business networks and
satellite-based mobile telephony equipment offset by lower international sales.
Operating Profit. Driven by the above noted revenue growth, operating profit
for the first nine months of 1998 grew to $229.3 million versus $214.6 million
in 1997, an increase of 6.8%. The increase in operating profit for the first
nine months of 1998 resulted primarily from increased commercial satellite sales
in the Satellite Systems segment and continued strong performance in the
Satellite Services segment, primarily from the PanAmSat merger. These increases
were offset by higher sales and marketing expense in the Direct-To-Home
Broadcast segment, a provision for losses in the Network Systems segment and
higher other expenses. Operating profit margin on the same basis decreased to
5.5% compared with 6.2% in the first nine months of 1997. The decline in
operating profit margin for the first nine months of 1998 was principally due to
expected higher DIRECTV sales and marketing expenditures, a provision for
estimated losses related to the bankruptcy filing by a Network Systems segment
customer, goodwill amortization associated with the May 1997 PanAmSat merger and
a subsequent additional investment in PanAmSat by Hughes in May 1998 and other
increased expenses, including pension expense.
The Direct-To-Home Broadcast segment operating loss for the first nine months
of 1998 was $133.6 million compared with an operating loss of $158.7 million for
first nine months of 1997. The lower operating loss in 1998 was principally due
to increased subscriber revenues that more than offset higher sales and
marketing expenditures.
Resulting from the noted increased revenues, the Satellite Services segment
operating profit for the first nine months of 1998 increased 17.9% to $239.2
million from $202.9 million for the first nine months of 1997. Operating profit
margin in the period declined to 41.9% from 47.0% in the same period last year
primarily from increased goodwill amortization associated with the PanAmSat
merger, a provision for losses relating to the May 1998 failure of PanAmSat's
Galaxy IV satellite and increased depreciation expense resulting from increased
capital expenditures by PanAmSat.
For the first nine months of 1998, operating profit for the Satellite Systems
segment increased 12.0% to $178.9 million from $159.7 million. The increased
operating profit was principally due to the higher commercial satellite sales
noted above. Operating profit margin in the first nine months of 1998 declined
slightly to 9.0% from 9.1% in the prior year.
The Network Systems segment operating loss in the first nine months of 1998
was $20.2 million compared with an operating income of $6.1 million in the first
nine months of 1997. The operating loss was primarily due to a $26 million
provision for estimated losses associated with the bankruptcy filing by a
customer.
Cost and Expenses. Selling, general and administrative expenses increased to
$1,052.2 million from $714.0 million in the same period of 1997. The increase in
these expenses resulted primarily from increased programming, marketing and
subscriber acquisition costs in the Direct-To-Home Broadcast segment and
increased expenditures to support the growth in the remaining business segments.
Depreciation and amortization expenses increased to $309.2 million in the first
nine months of 1998 from $195.3 million for the same period in 1997. The
increase in depreciation and amortization expenses resulted from increased
capital expenditures in the Direct-To-Home Broadcast and Satellite Services
segments since September 1997, and amortization of goodwill related to the May
1997 PanAmSat merger as well as the purchase of an additional 9.5% interest in
PanAmSat in May 1998.
- 44 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
Interest Income and Expense. Interest income increased to $88.6 million in
the first nine months of 1998 from $18.1 million in the first nine months of
1997. The increase was due to the higher level of cash and cash equivalents
resulting from the Hughes Transactions. Interest expense decreased $ 48.6
million in the first nine months of 1998 from the same period in 1997 due to the
repayment of debt in conjunction with the Hughes Transactions.
Other, net. Other, net for the first nine months of 1998 relates primarily to
losses from unconsolidated subsidiaries of $79.0 million, attributable
principally to equity investments, and a provision for estimated losses
associated with bankruptcy filings by two customers. The amount for the first
nine months of 1997 includes the $489.7 million pre-tax gain recognized in
connection with the May 1997 PanAmSat merger offset by losses from
unconsolidated subsidiaries of $31.5 million.
Income Taxes. The effective income tax rate was 35.1% in the first nine
months of 1998 and 39.0% in the first nine months of 1997. The decrease in the
effective tax rate resulted from Hughes increasing its ownership of PanAmSat in
the second quarter of 1998. As a result of Hughes' increased ownership in
PanAmSat, Hughes now benefits from the inclusion of PanAmSat in the Hughes
consolidated tax return.
Net Earnings. Earnings for the first nine months of 1998 increased to $152.7
million compared with last year's $82.4 million, which excludes the $318.3
million after-tax gain ($0.80 per share) recognized in connection with the May
1997 PanAmSat merger. Earnings per share on the same basis increased to $0.38
per share versus pro forma earnings per share of $0.20 in 1997. Including the
gain associated with the PanAmSat merger, for the first nine months of 1997,
earnings and pro forma earnings per share were $400.7 million and $1.00,
respectively. See Note 4 to the financial statements for further discussion
regarding pro forma presentation.
Liquidity and Capital Resources
Cash and Cash Equivalents. Cash and cash equivalents were $1,509.7 million at
September 30, 1998 compared to $2,783.8 million at December 31, 1997. The
$1,274.1 million decrease was primarily due to the purchase of an additional
9.5% interest in PanAmSat, expenditures for PanAmSat satellites and cash paid to
General Motors for the Delco post-closing price adjustment, offset in part by
proceeds from insurance claims from the loss of the Galaxy IV and Galaxy X
satellites.
Cash provided by operating activities for the nine months ended September 30,
1998 was $313.7 million, compared to $315.0 million of cash provided by
operating activities for the same period in 1997.
Net cash used in investing activities was $1,584.2 million for the nine
months ended September 30, 1998 and $2,173.1 million for the same period in
1997. The 1998 investing activities reflect the purchase of an additional 9.5%
interest in PanAmSat, proceeds from insurance claims related to the loss of the
Galaxy IV and Galaxy X satellites, an increase in satellite expenditures and the
early buyout of satellite sale-leasebacks at PanAmSat. The 1997 investing
activities reflect the PanAmSat merger in May 1997.
Net cash used in financing activities was $3.6 million for the nine months
ended September 30, 1998 compared with net cash provided by financing activities
of $2,277.9 million for same period in 1997. The 1998 financing activities
reflect PanAmSat's net borrowings of $200.0 million, offset by the $204.7
million payment to GM for the Delco post-closing price adjustment. The 1997
financing activities resulted from former Hughes contributing $518.8 million to
Hughes and Hughes borrowing $1,725.0 million from GM for the PanAmSat merger.
Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of
current assets to current liabilities) at September 30, 1998 and December 31,
1997 was 2.39 and 3.24, respectively. Current assets decreased by $647.4 million
to $4,158.5 million at September 30, 1998 from $4,805.9 million at December 31,
1997, resulting primarily from the decrease in cash, noted above, offset by an
increase in accounts and notes receivable.
Dividend Policy and Use of Cash. The GM Board has decided that at this time
no cash dividends will be paid by Hughes to GM or by GM to holders of GM Class H
common stock to allow the earnings of Hughes to be retained for investment in
its business. Significant cash requirements in the next year related to capital
expenditures for property and equipment, including satellites, and equity
investments are expected to be funded from a combination of existing cash
balances, amounts available under existing credit facilities and additional
borrowings, if necessary. Also, although Hughes may be required to make a cash
payment to or receive a cash payment from Raytheon for a post-closing purchase
price adjustment in connection with the merger of Hughes Defense and Raytheon,
the amount of a cash payment to or from Raytheon, if any, is not determinable at
this time. (See further discussion in Note 10).
Debt and Credit Facilities. In January 1998, PanAmSat borrowed $125.0 million
under their five-year revolving credit facility, principally for the purpose of
exercising an early buyout option on a satellite sale-leaseback agreement. Also
in January 1998, PanAmSat completed a private placement debt offering for five,
seven, ten and thirty year notes aggregating $750.0 million, the proceeds of
which were used to repay outstanding bank borrowings of $725.0 million, which
included the $125.0 million of borrowings noted above.
- 45 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
PanAmSat maintains a $500 million five-year revolving credit facility, which
provides for short-term and long-term borrowings, and a $500 million commercial
paper program, which provides for short-term borrowings. Borrowings under the
credit facility and commercial paper program are limited to $500 million in the
aggregate. There were $60.0 million of short-term borrowings against the
commercial paper program at September 30, 1998, principally for the purpose of
exercising an early buyout option on satellite sale-leaseback agreements.
In addition, Hughes maintains two unsecured revolving credit facilities,
consisting of a $750 million multi-year facility and a $250 million 364-day
facility. There were no borrowings against the credit facilities at September
30, 1998.
Hughes believes that existing cash balances, amounts available under its
existing credit facilities and additional borrowings, if necessary, will provide
sufficient resources to meet currently identified working capital requirements,
satellite construction, debt service and other cash needs.
Year 2000
Many computer technologies made or used by Hughes throughout its business
have the potential for operational problems if they lack the ability to handle
the transition to the Year 2000. Computer technologies include both information
technology (IT) in the form of hardware and software, as well as non-information
technology (Non-IT) which include embedded technology such as microprocessors.
Because of the potential disruption that this issue could cause to Hughes and
its customers, a comprehensive, company wide, Year 2000 program was initiated in
1996 to identify and remediate potential Year 2000 problems. The Year 2000
program addresses both IT and Non-IT systems, related to internal systems and
Hughes' products and services.
Hughes' Year 2000 program is being implemented in seven phases:
1) Awareness - establish project teams made up of project leaders from
each Hughes operating company, assign responsibilities and establish
awareness of the Year 2000 issues. The awareness phase has been
completed.
2) Inventory - identify all systems within Hughes, determine if they are
critical and identify responsible personnel for compliance. The
inventory phase is substantially complete. Many of Hughes' systems are
already Year 2000 compliant, or had already been scheduled for
replacement as part of Hughes' ongoing systems plans.
3) Assessment - categorize all systems and determine activities that are
required to achieve compliance, including contacting and assessing the
Year 2000 readiness of material third party vendors and suppliers of
hardware and software. The assessment phase is substantially complete.
All critical systems have been identified in this phase and are the
primary focus of the project teams. Critical systems were identified
requiring remediation, including satellite control and communication
software, broadcast systems, and other systems utilized in customer
service/billing systems, engineering and manufacturing operations.
Hughes' in-orbit satellites do not have date dependent processing.
4) Remediation - modify, repair and replace categorized systems.
Remediation has begun on many systems and is targeted for completion by
the second quarter of 1999.
5) Testing - test remediated systems to assure normal function when placed
in their original operating environment and further test for Year 2000
compliance. Overall testing is completed at approximately the same time
as remediation due to the overlap of the remediation and testing
phases. Testing is currently underway and is expected to be a primary
focus of the project teams over the next several quarters. Hughes
expects to complete this phase shortly after the remediation phase,
with on-going review and follow-up.
6) Implementation - once a remediated system and its interfaces have been
successfully tested, the system will be put into its operating
environment. A number of remediated systems have already been put back
into operations. The majority of remediated systems will be put into
operations as testing is completed over the next several quarters.
7) Contingency Planning - development and execution of plans that narrow
the focus on specific areas of significant concern and concentrate
resources to address them. All Year 2000 critical systems are expected
to be Year 2000 compliant in a reasonably timely manner. However,
Hughes is planning to develop contingency plans to address the risk of
any system not being Year 2000 compliant and expects to complete such
plans by the end of the second quarter of 1999. Hughes currently
believes that the most reasonably likely worst case scenario is a
temporary loss of functionality in satellite control and communication
software. Contingency plans are being developed for this unlikely event
and would result in slightly higher operating costs until any remaining
Year 2000 problems are corrected.
- 46 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
Hughes is utilizing both internal and external resources for the remediation
and testing of its systems that are undergoing Year 2000 modification. Hughes'
Year 2000 program is currently on schedule. Hughes has incurred and expensed
approximately $2.0 million through 1997 and approximately $4.5 million during
the first nine months of 1998, related to the assessment of, and on-going
efforts in connection with, its Year 2000 program. Future spending for system
remediation and testing are currently estimated to be from $12 million to $19
million, with the majority of the expense expected to be incurred during the
last quarter of 1998 and early 1999. Each Hughes operating company is funding
their respective Year 2000 efforts with existing IT budgets and current and
future operating cash flows. Hughes is currently substantially on target with
respect to its Year 2000 budget.
Hughes has initiated communications and is working with its suppliers and
other third parties in order to assess and reduce the risk that Hughes'
operations could be adversely affected by the failure of these third parties to
adequately address the Year 2000 issue. A large number of Hughes' third parties'
systems are currently expected to be Year 2000 compliant. For those third party
systems which are not yet Year 2000 compliant, Hughes will continue to identify
action plans or alternatives to meet Hughes' requirements.
In view of the foregoing, Hughes does not currently anticipate that it will
experience a significant disruption of its business as a result of the Year 2000
issue. However, there is still uncertainty about the broader scope of the Year
2000 issue as it may affect Hughes and third parties that are critical to
Hughes' operations. For example, lack of readiness by electrical and water
utilities, financial institutions, governmental agencies or other providers of
general infrastructure could pose significant impediments to Hughes' ability to
carry on its normal operations. If the modifications and conversions required to
make Hughes Year 2000 ready are not made or are not completed on a timely basis
and in the event that Hughes is unable to implement adequate contingency plans
in the event that problems are encountered internally or externally by third
parties, the resulting problems could have a material adverse effect on Hughes'
results of operations and financial condition.
Supplemental Data
The financial statements reflect the application of purchase accounting
adjustments as previously discussed. However, as provided in GM's Restated
Certificate of Incorporation, the earnings attributable to GM Class H common
stock for purposes of determining the amount available for the payment of
dividends on GM Class H common stock specifically excludes such adjustments.
More specifically, amortization of the intangible assets associated with GM's
purchase of Hughes amounted to $5.3 million for the third quarters of 1998 and
1997 and $15.9 million for the nine months ended September 30, 1998 and 1997.
Such amounts are excluded from the earnings available for the payment of
dividends on GM Class H common stock and are charged against earnings available
for the payment of dividends on GM's $1-2/3 par value stock. Unamortized
purchase accounting adjustments associated with GM's purchase of Hughes were
$431.7 million at September 30, 1998 and $447.6 million at December 31, 1997.
In order to provide additional analytical data to the users of Hughes'
financial information, supplemental data in the form of unaudited summary pro
forma financial data are provided. Consistent with the basis on which earnings
of Hughes available for the payment of dividends on the GM Class H common stock
is determined, the pro forma data exclude purchase accounting adjustments
related to GM's acquisition of Hughes. Included in the supplemental data are
certain financial ratios which provide measures of financial returns excluding
the impact of purchase accounting adjustments. The pro forma data are not
presented as a measure of GM's total return on its investment in Hughes.
- 47 -
<PAGE>
<TABLE>
<CAPTION>
HUGHES ELECTRONICS CORPORATION
Unaudited Summary Pro Forma Financial Data*
Pro Forma Condensed Statement of Income
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
------ -------- ------- --------
(Dollars in Millions Except Per Share Amounts)
<S> <C> <C> <C> <C>
Total revenues $1,513.3 $1,258.3 $4,173.3 $3,433.7
Total operating costs and expenses 1,445.8 1,134.1 3,944.0 3,219.1
------- ------- ------- -------
Operating profit 67.5 124.2 229.3 214.6
Non-operating (loss) income (16.5) (31.8) (23.7) 412.6
Income taxes 17.4 34.8 72.1 244.5
Minority interests in net losses
(income)of subsidiaries 9.3 (5.1) 19.2 16.8
(Loss) income from discontinued
operations - (0.1) - 1.2
Earnings Used for Computation of
Available Separate
Consolidated Net Income $42.9 $52.4 $152.7 $400.7
==== ==== ===== =====
Earnings Attributable to
General Motors Class H
Common Stock on a Per Share Basis $0.11 $0.13 $0.38 $1.00
==== ==== ==== ====
</TABLE>
Pro Forma Condensed Balance Sheet
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1998 1997
------------- ------------
<S> <C> <C>
(Dollars in Millions)
Total Current Assets $4,158.5 $4,805.9
Satellites, net 2,843.1 2,643.4
Property, net 965.9 889.7
Net Investment in Sales-type Leases 181.9 337.6
Intangible Assets, Investments and Other Assets, net 4,312.0 3,639.6
-------- --------
Total Assets $12,461.4 $12,316.2
======== ========
Liabilities and Stockholder's Equity
Total Current Liabilities $1,740.2 $1,482.6
Long-Term Debt 778.7 637.6
Postretirement Benefits Other Than Pensions,
Other Liabilities and Deferred Credits 1,646.6 1,724.1
Minority Interests 469.0 607.8
Total Stockholder's Equity (1) 7,826.9 7,864.1
--------- ---------
Total Liabilities and Stockholder's Equity (1) $12,461.4 $12,316.2
======== ========
</TABLE>
* The summary excludes purchase accounting adjustments related to GM's
acquisition of Hughes. 1997 earnings attributable to General Motors Class H
common stock on a per share basis are presented on a pro forma basis for
comparative purposes. See Note 4 to the financial statements for further
discussion.
(1)General Motors' equity in its wholly-owned subsidiary, Hughes. Holders of GM
Class H common stock have no direct rights in the equity or assets of Hughes,
but rather have rights in the equity and assets of GM (which includes 100% of
the stock of Hughes).
- 48 -
<PAGE>
<TABLE>
HUGHES ELECTRONICS CORPORATION
Unaudited Summary Pro Forma Financial Data* - Continued
Pro Forma Selected Segment Data
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Dollars in Millions)
Direct-To-Home Broadcast
Total Revenues $459.1 $343.7 $1,248.5 $861.0
Operating Loss $(61.8) $(43.3) $(133.6) $(158.7)
Depreciation and Amortization $31.2 $21.2 $77.2 $62.5
Capital Expenditures(1) $82.0 $24.0 $130.1 $54.2
Satellite Services
Total Revenues $186.5 $170.3 $570.6 $432.0
Operating Profit $79.1 $71.7 $239.2 $202.9
Operation Profit Margin 42.4% 42.1% 41.9% 47.0%
Depreciation and Amortization $56.6 $48.0 $169.8 $91.9
Capital Expenditures (2) $190.7 $191.0 $605.0 $543.7
Satellite Systems
Total Revenues $688.9 $604.3 $1,988.0 $1,748.1
Operating Profit $63.8 $53.1 $178.9 $159.7
Operation Profit Margin 9.3% 8.8% 9.0% 9.1%
Depreciation and Amortization $12.9 $9.9 $35.1 $27.7
Capital Expenditures $18.2 $28.1 $50.5 $68.2
Network Systems
Total Revenues $267.7 $216.0 $674.1 $609.4
Operating Income (Loss) $16.9 $22.4 $(20.2) $6.1
Operating Profit Margin 6.3% 10.4% - 1.0%
Depreciation and Amortization $11.4 $5.6 $29.8 $21.7
Capital Expenditures $10.7 $15.3 $26.4 $33.0
Eliminations and Other
Total Revenues $(88.9) $(76.0) $(307.9) $(216.8)
Operating Loss $(30.5) $20.3 $(35.0) $4.6
Depreciation and Amortization $(0.8) $(6.7) $(2.7) $(8.5)
Capital Expenditures $(21.4) $74.1 $114.5 $(147.6)
</TABLE>
* The Financial Statements reflect the application of purchase accounting
adjustments related to GM's acquisition of Hughes. However, as provided
in the General Motor's Restated Certificate of Incorporation, the
earnings attributable to GM Class H common stock for purposes of determining
the amount available for the payment of dividends on GM Class H common stock
specifically excludes such adjustments. In order to provide additional
analytical data, the above unaudited pro forma selected segment data, which
exclude the purchase accounting adjustments related to GM's acquisition of
Hughes, are presented.
(1)Includes expenditures related to satellites amounting to $38.0 million in
the third quarter and nine-month periods of 1998.
(2)Includes expenditures related to satellites amounting to $182.2 million,
$180.2 million, $422.2 million and $527.3 million, respectively. Also
included in the 1998 nine-month period is $155.5 million related to the early
buy-out of satellite sale-leasebacks.
- 49 -
<PAGE>
HUGHES ELECTRONICS CORPORATION AND SUBSIDIARIES
<TABLE>
Unaudited Summary Pro Forma Financial Data* - Concluded
Pro Forma Selected Financial Data
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Dollars in Millions Except Per
Share Amounts)
Operating profit $68 $124 $229 $215
Income from continuing operations
before income taxes and
minority interests $51 $92 $206 $627
Earnings used for computation
of available separate
consolidated net income $43 $52 $153 $401
Average number of GM Class H
dividend base shares (1) 399.9 399.9 399.9 399.9
Stockholder's equity $7,827 $2,941 $7,827 $2,941
Working capital 2,418 791 2,418 791
Operating profit as a percent
of revenues 4.5% 9.9% 5.5% 6.2%
Income from continuing operations before
income taxes and minority interests
as a percent of revenues 3.4% 7.3% 4.9% 18.3%
Net income as a percent of revenues 2.8% 4.2% 3.7% 11.7%
</TABLE>
* The summary excludes purchase accounting adjustments related to GM's
acquisition of Hughes.
(1)Class H dividend base shares is used in calculating earnings attributable to
GM Class H common stock on a per share basis. This is not the same as the
average number of GM Class H shares outstanding, which was 105.7 million for
the third quarter of 1998 and 102.0 million for the third quarter of 1997.
* * * * * *
- 50 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from General
Motors Corporation September 30, 1998 Consolidatd Financial Statements and is
qualified in its entirety by reference to Third Quarter 1998 Form 10-Q.
</LEGEND>
<CIK> 0000040730
<NAME> General Motors Corporation
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Sep-30-1998
<EXCHANGE-RATE> 1
<CASH> 7,961
<SECURITIES> 8,688
<RECEIVABLES> 73,510
<ALLOWANCES> 0
<INVENTORY> 12,869
<CURRENT-ASSETS> 0
<PP&E> 80,788
<DEPRECIATION> 43,459
<TOTAL-ASSETS> 237,645
<CURRENT-LIABILITIES> 0
<BONDS> 102,460
221
1
<COMMON> 1,103
<OTHER-SE> 13,576
<TOTAL-LIABILITY-AND-EQUITY> 237,645
<SALES> 100,115
<TOTAL-REVENUES> 114,895
<CGS> 85,464
<TOTAL-COSTS> 106
<OTHER-EXPENSES> 94,070
<LOSS-PROVISION> 323
<INTEREST-EXPENSE> 5,137
<INCOME-PRETAX> 1,719
<INCOME-TAX> 532
<INCOME-CONTINUING> 1,184
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,184
<EPS-PRIMARY> 1.65
<EPS-DILUTED> 1.60
</TABLE>
