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, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
Commission file number 1-143
GENERAL MOTORS CORPORATION
(Exact name of registrant as specified in its charter)
STATE OF DELAWARE 38-0572515
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Renaissance Center, Detroit, Michigan 48243-7301
3044 West Grand Boulevard, Detroit, Michigan 48202-3091
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (313) 556-5000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X . No .
As of September 30, 1999, there were outstanding 640,208,136 shares of
the issuer's $1-2/3 par value common stock and 135,137,857 shares of GM Class H
$0.10 par value common stock.
- 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, 1999 and 1998 3
Consolidated Balance Sheets as of September 30, 1999,
December 31, 1998 and September 30, 1998 5
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 1999 and 1998 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Part II - Other Information (Unaudited)
Item 1. Legal Proceedings 37
Item 6. Exhibits and Reports on Form 8-K 38
Signature 38
Exhibit 99 Hughes Electronics Corporation Financial Statements and
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Unaudited) 39
Exhibit 27 Financial Data Schedule
(for Securities and Exchange Commission information only)
- 2 -
<PAGE>
PART I
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in Millions Except Per Share Amounts)
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Manufactured products sales
and revenues $36,748 $28,464 $112,629 $95,202
Financing revenues 3,725 3,360 10,805 10,090
Other income (Note 12) 2,321 1,701 6,862 5,529
------- ------- ------- --------
Total net sales and revenues 42,794 33,525 130,296 110,821
------ ------ ------- -------
Cost of sales and other operating
expenses, exclusive of items
listed below 31,061 25,278 94,011 82,607
Selling, general and
administrative expenses 4,703 3,816 13,027 11,457
Depreciation and amortization
expense 3,088 2,674 9,039 8,029
Interest expense 1,985 1,690 5,624 4,951
Other expenses (Note 12) 439 486 1,353 1,602
------- -------- -------- --------
Total costs and expenses 41,276 33,944 123,054 108,646
Income (loss) from continuing
operations before income taxes
and minority interests 1,518 (419) 7,242 2,175
Income tax expense (benefit) 553 (144) 2,538 710
Minority interests (7) (1) (28) (11)
Losses of nonconsolidated associates (81) (33) (245) (89)
---- ---- ------ -------
Income (loss) from continuing
operations 877 (309) 4,431 1,365
(Loss) income from discontinued
operations (Note 2) - (500) 426 (181)
------ --- ------ ------
Net income (loss) 877 (809) 4,857 1,184
Dividends on preference stocks (28) (16) (51) (48)
---- ---- ------- -------
Earnings (losses) attributable to
common stocks $849 $(825) $4,806 $1,136
=== === ===== =====
Basic earnings (losses) per share
attributable to common stocks
$1-2/3 par value common stock
(Note 11)
Continuing operations $1.35 $(0.52) $6.79 $1.92
Discontinued operations - (0.76) 0.66 (0.27)
----- ---- ---- ----
Earnings per share
attributable to $1-2/3
par value $1.35 $(1.28) $7.45 $1.65
==== ==== ==== ====
Earnings per share attributable
to Class H $(0.13) $0.11 $(0.17) $0.38
==== ==== ==== ====
Diluted earnings (losses) per
share attributable to common stocks
$1-2/3 par value common stock
(Note 11)
Continuing operations $1.33 $(0.52) $6.67 $1.87
Discontinued operations - (0.76) 0.65 (0.27)
----- ---- ---- ----
Earnings per share attributable
to $1-2/3 par value $1.33 $(1.28) $7.32 $1.60
==== ==== ==== ====
Earnings per share attributable
to Class H $(0.13) $0.11 $(0.17) $0.38
==== ==== ==== ====
Reference should be made to the notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF INCOME - Concluded
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in Millions)
AUTOMOTIVE, ELECTRONICS AND OTHER OPERATIONS
Manufactured products sales
and revenues $36,748 $28,464 $112,629 $95,202
Other income 798 547 2,557 2,050
--- --- ----- -----
Total net sales and revenues 37,546 29,011 115,186 97,252
------ ------ ------- ------
Cost of sales and other operating
expenses, exclusive of items
listed below 31,061 25,278 94,011 82,607
Selling, general and
administrative expenses 3,487 2,794 9,598 8,449
Depreciation and amortization
expense 1,717 1,472 5,121 4,399
----- ----- ----- -----
Total operating costs and
expenses 36,265 29,544 108,730 95,455
------ ------ ------- ------
Interest expense 223 195 597 586
Other expenses 115 131 322 507
Net expense from transactions
with Financing and
Insurance Operations 85 48 245 117
-- -- --- ---
Income (loss) from continuing
operations before income taxes
and minority interests 858 (907) 5,292 587
Income tax expense (benefit) 291 (281) 1,799 241
Minority interests 1 5 (5) 5
Losses of nonconsolidated associates (81) (33) (245) (89)
---- ---- ------ ----
Income (loss) from continuing
operations 487 (654) 3,243 262
(Loss) income from discontinued
operations (Note 2) - (500) 426 (181)
--- ---- ----- ---
Net income (loss) - Automotive,
Electronics and
Other Operations $487 $(1,154) $3,669 $81
=== ===== ===== ==
Three Months Ended Nine Months Ended
September 30, September 30,
-------------- ---------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in Millions)
FINANCING AND INSURANCE OPERATIONS
Financing revenues $3,725 $3,360 $10,805 $10,090
Insurance, mortgage and other
income 1,523 1,154 4,305 3,479
----- ----- ------- -------
Total revenues and other income 5,248 4,514 15,110 13,569
----- ----- ------ ------
Interest expense 1,762 1,495 5,027 4,365
Depreciation and amortization
expense 1,371 1,202 3,918 3,630
Operating and other expenses 1,216 1,022 3,429 3,008
Provisions for financing losses 98 94 328 323
Insurance losses and loss
adjustment expenses 226 261 703 772
----- ----- ------ ------
Total costs and expenses 4,673 4,074 13,405 12,098
----- ----- ------ ------
Net income from transactions
with Automotive, Electronics
and Other Operations 85 48 245 117
---- --- ------ ------
Income before income taxes 660 488 1,950 1,588
Income tax expense 262 137 739 469
Minority interests (8) (6) (23) (16)
--- --- ----- -----
Net income - Financing and
Insurance Operations $390 $345 $1,188 $1,103
=== === ===== =====
The above supplemental consolidating information is explained in Note 1.
Reference should be made to the notes to consolidated financial statements.
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<PAGE>
CONSOLIDATED BALANCE SHEETS
Sept. 30, Sept. 30,
1999 Dec. 31, 1998
GENERAL MOTORS CORPORATION AND SUBSIDIARIES (Unaudited) 1998 (Unaudited)
--------- -------- ---------
ASSETS (Dollars in Millions)
Automotive, Electronics and Other Operations
Cash and cash equivalents $12,056 $9,728 $6,888
Marketable securities 1,666 402 420
------- ------- ------
Total cash and marketable securities 13,722 10,130 7,308
Accounts and notes receivable (less allowances) 5,480 4,750 5,258
Inventories (less allowances) (Note 3) 10,603 10,437 11,062
Net assets of discontinued operations (Note 2) - 77 -
Equipment on operating leases
(less accumulated depreciation) 6,244 4,954 4,797
Deferred income taxes and other current assets 7,494 10,051 5,994
------- ------ -------
Total current assets 43,543 40,399 34,419
Equity in net assets of nonconsolidated
associates 1,642 950 1,100
Property - net (Note 4) 31,761 32,222 31,652
Intangible assets - net 12,338 9,994 11,342
Deferred income taxes 17,139 14,967 18,124
Other assets 13,894 16,062 14,912
-------- -------- --------
Total Automotive, Electronics
and Other Operations assets 120,317 114,594 111,549
Financing and Insurance Operations
Cash and cash equivalents 328 146 93
Investments in securities 8,937 8,748 8,248
Finance receivables - net 76,449 70,436 62,460
Investment in leases and other receivables 35,837 32,798 33,220
Other assets 19,705 18,807 13,868
Net receivable from Automotive,
Electronics and Other Operations 369 816 186
-------- -------- --------
Total Financing and Insurance
Operations assets 141,625 131,751 118,075
-------- -------- --------
Total assets $261,942 $246,345 $229,624
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Automotive, Electronics and Other Operations
Accounts payable (principally trade) $16,323 $13,542 $12,437
Loans payable 695 1,204 1,950
Accrued expenses 32,803 30,548 29,599
Net payable to Financing and
Insurance Operations 369 816 186
-------- -------- --------
Total current liabilities 50,190 46,110 44,172
Long-term debt 7,880 7,118 6,817
Postretirement benefits other than pensions
(Note 5) 34,455 33,503 33,479
Pensions (Note 6) 3,179 4,410 3,782
Net liabilities of discontinued operations
(Note 2) - - 2
Other liabilities and deferred income taxes 18,170 17,807 17,729
-------- -------- --------
Total Automotive, Electronics and
Other Operations liabilities 113,874 108,948 105,981
Financing and Insurance Operations
Accounts payable 4,587 4,148 3,784
Debt 115,329 107,753 94,991
Deferred income taxes and other liabilities 10,723 9,661 9,399
-------- --------- ---------
Total Financing and Insurance
Operations liabilities 130,639 121,562 108,174
Minority interests 635 563 531
General Motors - obligated mandatorily
redeemable preferred securities of
subsidiary trusts holding solely junior
subordinated debentures of General Motors
(Note 7)
Series D 79 79 79
Series G 140 141 142
Stockholders' equity
Preference stocks (Note 8) - 1 1
$1-2/3 par value common stock
(issued, 642,050,210; 655,008,344
and 655,036,035 shares)(Note 9) 1,071 1,092 1,092
Class H common stock
(issued, 135,195,966; 106,159,776,
and 105,959,765 shares) 14 11 11
Capital surplus (principally additional
paid-in capital) (Note 13) 15,282 12,661 12,769
Retained earnings 5,573 6,984 5,554
------- ------- -------
Subtotal 21,940 20,749 19,427
Accumulated foreign currency
translation adjustments (1,969) (1,089) (1,060)
Net unrealized gains on securities 631 481 412
Minimum pension liability adjustment (Note 6) (4,027) (5,089) (4,062)
-------- -------- --------
Accumulated other comprehensive loss (5,365) (5,697) (4,710)
-------- -------- --------
Total stockholders' equity 16,575 15,052 14,717
-------- -------- --------
Total liabilities and stockholders' equity $261,942 $246,345 $229,624
======= ======= =======
Reference should be made to the notes to consolidated financial statements.
- 5 -
CONSOLIDATED BALANCE SHEETS - Concluded
Sept. 30, Sept. 30,
1999 Dec. 31, 1998
AUTOMOTIVE, ELECTRONICS AND OTHER OPERATIONS(Unaudited) 1998 (Unaudited)
--------- -------- ---------
(Dollars in Millions)
ASSETS
Cash and cash equivalents $12,056 $9,728 $6,888
Marketable securities 1,666 402 420
------ ------ ------
Total cash and marketable securities 13,722 10,130 7,308
Accounts and notes receivable (less allowances) 5,480 4,750 5,258
Inventories (less allowances) (Note 3) 10,603 10,437 11,062
Net assets of discontinued operations (Note 2) - 77 -
Equipment on operating leases
(less accumulated depreciation) 6,244 4,954 4,797
Deferred income taxes and other current assets 7,494 10,051 5,994
------ ------ -------
Total current assets 43,543 40,399 34,419
Equity in net assets of nonconsolidated
associates 1,642 950 1,100
Property - net (Note 4) 31,761 32,222 31,652
Intangible assets - net 12,338 9,994 11,342
Deferred income taxes 17,139 14,967 18,124
Other assets 13,894 16,062 14,912
------ ------ ------
Total Automotive, Electronics and
Other Operations assets $120,317 $114,594 $111,549
======= ======= =======
LIABILITIES AND GM INVESTMENT
Accounts payable (principally trade) $16,323 $13,542 $12,437
Loans payable 695 1,204 1,950
Accrued expenses 32,803 30,548 29,599
Net payable to Financing and Insurance
Operations 369 816 186
------ ------ ------
Total current liabilities 50,190 46,110 44,172
Long-term debt 7,880 7,118 6,817
Postretirement benefits other than pensions
(Note 5) 34,455 33,503 33,479
Pensions (Note 6) 3,179 4,410 3,782
Net liabilities of discontinued operations
(Note 2) - - 2
Other liabilities and deferred income taxes 18,170 17,807 17,729
------- ------- -------
Total Automotive, Electronics and
Other Operations liabilities 113,874 108,948 105,981
Minority interests 558 511 484
GM investment in Automotive,
Electronics and Other Operations 5,885 5,135 5,084
------- ------- -------
Total Automotive, Electronics and
Other Operations liabilities
and GM investment $120,317 $114,594 $111,549
======== ======== ========
Sept. 30, Sept. 30,
1999 Dec. 31, 1998
FINANCING AND INSURANCE OPERATIONS (Unaudited) 1998 (Unaudited)
----------- ---- -----------
(Dollars in Millions)
ASSETS
Cash and cash equivalents $328 $146 $93
Investments in securities 8,937 8,748 8,248
Finance receivables - net 76,449 70,436 62,460
Investment in leases and other receivables 35,837 32,798 33,220
Other assets 19,705 18,807 13,868
Net receivable from Automotive,
Electronics and Other Operations 369 816 186
------- ------- -------
Total Financing and Insurance
Operations assets $141,625 $131,751 $118,075
======== ======== ========
LIABILITIES AND GM INVESTMENT
Accounts payable $4,587 $4,148 $3,784
Debt 115,329 107,753 94,991
Deferred income taxes and other liabilities 10,723 9,661 9,399
-------- --------- ---------
Total Financing and Insurance
Operations liabilities 130,639 121,562 108,174
Minority interests 77 52 47
GM investment in Financing and
Insurance Operations 10,909 10,137 9,854
-------- --------- ---------
Total Financing and Insurance Operations
liabilities and GM investment $141,625 $131,751 $118,075
======== ======== ========
The above supplemental consolidating information is explained in Note 1.
Reference should be made to the notes to consolidating financial statements.
- 6 -
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
-------------------------------
1999 1998
---- ----
(Dollars in Millions)
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Net cash provided by operating activities $25,292 $6,566
Cash flows from investing activities
Expenditures for property (4,925) (5,921)
Investments in marketable securities
- acquisitions (19,570) (22,717)
Investments in marketable securities
- liquidations 17,706 26,501
Mortgage servicing rights - acquisitions (1,199) (897)
Mortgage servicing rights - liquidations 34 67
Finance receivables - acquisitions (139,165) (112,962)
Finance receivables - liquidations 100,692 86,709
Proceeds from sales of finance receivables 35,120 21,922
Operating leases - acquisitions (20,123) (18,281)
Operating leases - liquidations 11,383 11,717
Investments in companies, net of cash
acquired (Note 13) (5,005) (475)
Other (154) (431)
------- -------
Net cash used in investing activities (25,206) (14,768)
------ ------
Cash flows from financing activities
Net (decrease) increase in loans payable (8,152) 3,402
Long-term debt - borrowings 27,086 16,620
Long-term debt - repayments (15,168) (10,860)
Repurchases of common and preference stocks (2,149) (3,071)
Proceeds from issuing common and
preference stocks 1,868 343
Cash dividends paid to stockholders (1,023) (1,045)
----- -----
Net cash provided by financing activities 2,462 5,389
----- -----
Effect of exchange rate changes on cash and
cash equivalents (166) 271
------ ------
Net cash provided by (used in)
continuing operations 2,382 (2,542)
Net cash provided by (used in)
discontinued operations 128 (750)
------ ------
Net increase (decrease) in cash and
cash equivalents 2,510 (3,292)
Cash and cash equivalents at beginning
of the period 9,874 10,273
------ ------
Cash and cash equivalents at end
of the period $12,384 $6,981
====== =====
Reference should be made to the notes to consolidated financial statements.
- 7 -
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - Concluded
(Unaudited)
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
---- ----
Automotive, Financing Automotive, Financing
Electronics and Electronics and
and Other Insurance and Other Insurance
--------- --------- --------- ---------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Net cash provided by operating activities $15,409 $9,883 $2,778 $3,788
Cash flows from investing activities
Expenditures for property (4,721) (204) (5,813) (108)
Investments in marketable securities
- acquisitions (3,481) (16,089) (8,022) (14,695)
Investments in marketable securities
- liquidations 2,217 15,489 11,255 15,246
Mortgage servicing rights - acquisitions - (1,199) - (897)
Mortgage servicing rights - liquidations - 34 - 67
Finance receivables - acquisitions - (139,165) - (112,962)
Finance receivables - liquidations - 100,692 - 86,709
Proceeds from sales of finance receivables - 35,120 - 21,922
Operating leases - acquisitions (6,175) (13,948) (4,382) (13,899)
Operating leases - liquidations 4,279 7,104 4,092 7,625
Investments in companies, net of
cash acquired (Note 13) (2,885) (2,120) (417) (58)
Net investing activity with Financing and
Insurance Operations 75 - 238 -
Other (831) 677 (1,198) 767
------ ------- ----- -------
Net cash used in investing activities (11,522) (13,609) (4,247) (10,283)
------ ------ ----- ------
Cash flows from financing activities
Net (decrease) increase in loans payable (551) (7,601) 961 2,441
Long-term debt - borrowings 5,414 21,672 2,689 13,931
Long-term debt - repayments (4,632) (10,536) (1,243) (9,617)
Net financing activity with Automotive,
Electronics and Other Operations - (75) - (238)
Repurchases of common and preference stocks (2,149) - (3,071) -
Proceeds from issuing common and
preference stocks 1,868 - 343 -
Cash dividends paid to stockholders (1,023) - (1,045) -
----- ------ ----- ------
Net cash (used in) provided by
financing activities (1,073) 3,460 (1,366) 6,517
----- ----- ----- -----
Effect of exchange rate changes on cash and
cash equivalents (167) 1 272 (1)
Net transactions with Automotive/
Financing Operations (447) 447 505 (505)
----- --- ----- ---
Net cash provided by (used in)
continuing operations 2,200 182 (2,058) (484)
Net cash provided by (used in)
discontinued operations 128 - (750) -
----- --- ----- ---
Net increase (decrease) in cash and
cash equivalents 2,328 182 (2,808) (484)
Cash and cash equivalents at beginning
of the period 9,728 146 9,696 577
------ --- ----- ---
Cash and cash equivalents at end
of the period $12,056 $328 $6,888 $93
====== === ===== ==
</TABLE>
The above supplemental consolidating information is explained in Note 1.
Reference should be made to the notes to consolidated financial statements.
- 8 -
<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 (Hughes), (collectively referred to as
"General Motors" or "GM"). The financial data related to Delphi Automotive
Systems Corporation (Delphi) is presented as discontinued operations for all
periods presented. In the opinion of management, all adjustments (consisting of
only normal recurring items), which are necessary for a fair presentation have
been included. The results for interim periods are not necessarily indicative of
results which may be expected for any other interim period or for the full year.
For further information, refer to the December 31, 1998 consolidated financial
statements and notes thereto included in GM's Current Report on Form 8-K, dated
April 12, 1999, which was filed with the Securities and Exchange Commission on
April 15, 1999; Hughes financial statements and notes thereto included as
Exhibit 99 to GM's 1998 Annual Report on Form 10-K for the period ended December
31, 1998; the GMAC Annual Report on Form 10-K for the period ended December 31,
1998; the Hughes financial statements and notes thereto for the period ended
September 30, 1999, included as Exhibit 99 to this GM Quarterly Report on Form
10-Q for the period ended September 30, 1999 and related Hughes' Quarterly
Report on Form 10-Q filed with the Securities and Exchange Commission; and the
GMAC Quarterly Report on Form 10-Q for the period ended September 30, 1999,
filed with the Securities and Exchange Commission.
GM presents separate supplemental consolidating financial information for the
following businesses: (1) Automotive, Electronics and Other Operations which
consists of the design, manufacturing and marketing of cars, trucks, locomotives
and heavy duty transmissions and related parts and accessories, as well as the
operations of Hughes; and (2) Financing and Insurance Operations which consists
primarily of GMAC, which provides a broad range of financial services, including
consumer vehicle financing, full-service leasing and fleet leasing, dealer
financing, car and truck extended service contracts, residential and commercial
mortgage services, vehicle and homeowners insurance, and asset-backed lending.
Transactions between businesses have been eliminated in the Corporation's
consolidated statements of income.
Certain amounts for 1998 were reclassified to conform with the 1999
classifications.
Note 2. Discontinued Operations
Delphi is a diverse supplier of automotive systems and components. Delphi
offers products and services in the areas of electronics and mobile
communication; safety, thermal and electrical architecture; and dynamics and
propulsion. In February 1999, Delphi completed an initial public offering (IPO)
of 100 million shares of its common stock, which represented 17.7% of its
outstanding common shares. On April 12, 1999, the GM Board of Directors (GM
Board) approved the complete separation of Delphi from GM by means of a spin-off
(which was tax-free to GM and its stockholders for U.S. federal income tax
purposes). On May 28, 1999 GM distributed to holders of its $1-2/3 par value
common stock 97.8% of the shares of Delphi which GM then held, representing 80.1
percent of the outstanding shares of Delphi, which resulted in 0.69893 shares of
Delphi common stock being distributed for each share of GM $1-2/3 par value
common stock outstanding on the record date of May 25, 1999. In addition, GM
contributed the remaining 2.2% of Delphi shares it held (around 12.4 million
shares), to a Voluntary Employee Beneficiary Association (VEBA) trust
established by GM to fund benefits to its hourly retirees.
The financial data related to GM's investment in Delphi through May 28, 1999
is classified as discontinued operations for all periods presented. The
financial data of Delphi reflect the historical results of operations and cash
flows of the businesses that were considered part of the Delphi business segment
of GM during each respective period; they do not reflect many significant
changes that will occur in the operations and funding of Delphi as a result of
the separation from GM and the IPO. The Delphi financial data classified as
discontinued operations reflect the assets and liabilities transferred to Delphi
in accordance with the terms of a master separation agreement to which Delphi
and GM are parties (the "Separation Agreement"). Delphi and Delco Electronics
Corporation (Delco Electronics), the electronics and mobile communication
business that was transferred to Delphi in December 1997, were under the common
control of GM during such periods; therefore, the Delphi financial data include
amounts relating to Delco Electronics for all periods presented, although Delco
Electronics was not integrated with Delphi until December 1997.
Delphi net sales (including sales to GM) included in discontinued operations
totaled $12.5 billion and $20.7 billion for the nine months ended September 30,
1999 and 1998, respectively. Income (loss) from Delphi discontinued operations
of $426 million and $(181) million for the nine months ended September 30, 1999
and 1998 is reported net of income tax expense (benefit) of $314 million and
$(178) million, respectively.
Delphi net sales (including sales to GM) included in discontinued operations
totaled $6.0 billion for the quarter ended September 30, 1998. Losses from
Delphi discontinued operations of $(500) million for the quarter ended September
30, 1998, is reported net of income tax benefit of $307 million.
- 9 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Note 2. Discontinued Operations (concluded)
The net assets (liabilities) of Delphi were as follows (in millions):
Dec. 31, September 30,
1998 1998
---- ----
Current assets $6,405 $6,359
Property and equipment - net 4,965 4,878
Deferred income taxes and other assets 4,136 3,693
Current liabilities (4,057) (3,831)
Long-term debt (3,141) (3,294)
Other liabilities (8,299) (7,844)
Accumulated translation adjustments 68 37
-- --
Net assets (liabilities) of
discontinued operations $77 $(2)
== =
In the first quarter of 1999, GM recorded an increase to stockholders' equity
of $1.2 billion reflecting a gain, as a result of Delphi's IPO, of $1.7 billion,
less the cost of GM's investment in Delphi and the costs of the IPO and
establishing Delphi as an independent entity.
As a result of the complete separation of Delphi by means of the spin-off
(which was tax-free to GM and its stockholders for U.S. federal income tax
purposes) and VEBA trust contribution on May 28, 1999, GM recorded a decrease to
stockholders' equity of $5.2 billion in the second quarter of 1999. This amount
reflects the elimination of Delphi net assets of $3.4 billion, the allocation to
Delphi of pension plan assets and obligations and other related adjustments
totaling $1.8 billion (see Note 6).
In total, the complete separation of Delphi in the nine-month period ending
September 30, 1999 resulted in a reduction to stockholders' equity of $4.0
billion.
The Separation Agreement provided that Delphi's U.S. hourly employees would
continue to participate in the defined benefit pension plan for hourly workers
and other postretirement benefit plans administered by GM until full separation
from GM. Generally, Delphi would assume the pension and other postretirement
benefit obligations for U.S. hourly employees who retire after October 1, 1999
and GM would retain pension and postretirement benefit obligations for U.S.
hourly employees who retire on or before October 1, 1999. In connection with the
1999 United Auto Workers (UAW) labor contract (see Note 16), the October 1, 1999
date for Delphi's assumption of these retirement obligations was extended to
January 1, 2000.
The allocation of pension and other postretirement benefit obligations
between Delphi and GM assumed certain levels of employee retirements prior to
October 1, 1999, based on historical experience and conditions surrounding the
separation. Prior to the spin-off, Delphi and GM agreed to recalculate the
allocation of those liabilities based on the actual level of retirements on or
before October 1, 1999, which was subsequently extended to January 1, 2000 in
connection with the 1999 UAW labor contract. Accordingly, if and to the extent
that greater than the assumed number of employees retire on or before January 1,
2000, Delphi would be required to make a payment to GM. If and to the extent
that less than the assumed number of employees retire on or before January 1,
2000, GM would be required to make a payment to Delphi. Presently, GM expects to
receive a payment from Delphi, the amount of which will be determined in 2000.
GM does not presently anticipate that the finalization of these retirement
obligations will have a significant effect on its financial position.
Note 3. Inventories
Inventories included the following for Automotive, Electronics and Other
Operations (in millions):
Sept. 30, Dec. 31, Sept. 30,
1999 1998 1998
---- ---- ----
Productive material, work in process,
and supplies $5,858 $5,377 $6,094
Finished product, service parts, etc. 6,647 6,962 6,805
------- ------ -------
Total inventories at FIFO 12,505 12,339 12,899
Less LIFO allowance 1,902 1,902 1,837
------- ------- -------
Total inventories (less allowances) $10,603 $10,437 $11,062
====== ====== ======
- 10 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Note 4. Property - Net
Property - net included the following for Automotive, Electronics and Other
Operations (in millions):
Sept. 30, Dec. 31, Sept. 30,
1999 1998 1998
---- ---- ----
Real estate, plants, and equipment $59,527 $59,565 $58,718
Less accumulated depreciation (34,727) (34,641) (34,296)
------ ------ ------
Real estate, plants, and equipment - net 24,800 24,924 24,422
Special tools - net 6,961 7,298 7,230
------- ------- -------
Total property - net $31,761 $32,222 $31,652
====== ====== ======
Financing and Insurance Operations had net property of $431 million, $386
million, and $272 million recorded in other assets at September 30, 1999,
December 31, 1998, and September 30, 1998, respectively.
Note 5. Postretirement Benefits Other than Pensions
GM has disclosed in the consolidated financial statements certain amounts
associated with estimated future postretirement benefits other than pensions and
characterized such amounts as "accumulated postretirement benefit obligations,"
"liabilities," or "obligations." Notwithstanding the recording of such amounts
and the use of these terms, GM does not admit or otherwise acknowledge that such
amounts or existing postretirement benefit plans of GM (other than pensions)
represent legally enforceable liabilities of GM.
Note 6. Pensions
In the second quarter of 1999, as a result of the Delphi Separation, GM
recognized a charge of $2.3 billion pre-tax, related to splitting the U.S.
Hourly Pension plan, as a reduction of stockholders' equity (see Note 2). This
charge reflects the allocation to Delphi of pension plan assets and obligations
relating to Delphi employees no longer covered by the GM U.S. Hourly Pension
Plan. Furthermore, the GM U.S. Hourly Pension plan has been remeasured as of May
28, 1999. The remeasurement was based on May 28, 1999 demographics, updated
mortality assumptions, assets and liabilities adjusted for the plan split, and
an updated discount rate of 7.0% compared to the December 31, 1998 discount rate
of 6.8%. No change was made to the expected return on plan assets of 10.0%.
Note 7. Preferred Securities of Subsidiary Trusts
General Motors - Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts
In July 1997, the General Motors Capital Trust D (Series D Trust) issued
approximately $79 million of its 8.67% Trust Originated Preferred Securitiessm
(TOPrSsm) Series D, (Series D Preferred Securities), in a one-for-one exchange
for 3,055,255 of the outstanding GM Series D 7.92% Depositary Shares, each
representing one-fourth of a share of GM Series D Preference Stock, $0.10 par
value per share. In addition, the General Motors Capital Trust G (Series G
Trust) issued approximately $143 million of its 9.87% TOPrS, Series G (Series G
Preferred Securities), in a one-for-one exchange for 5,064,489 of the
outstanding GM Series G 9.12% Depositary Shares, each representing one-fourth of
a share of GM Series G Preference Stock, $0.10 par value per share.
Concurrently with the exchanges and the related purchases by GM from the
Series D and Series G Trusts (Trusts) of the common securities of such Trusts,
which represent approximately 3 percent of the total assets of such Trusts, GM
issued to the wholly-owned Trusts, as the Series D Trust's sole assets its 8.67%
Junior Subordinated Deferrable Interest Debentures, Series D, due July 1, 2012
and as the Series G Trust's sole assets, its 9.87% Junior Subordinated
Deferrable Interest Debentures, Series G, due July 1, 2012 (the "Series D
Debentures" and "Series G Debentures" or collectively the "Debentures"), having
aggregate principal amounts equal to the aggregate stated liquidation amounts of
the Series D and Series G Preferred Securities and the related common
securities, respectively ($79 million with respect to the Series D Debentures
and $131 million with respect to the Series G Debentures).
The Series D Debentures are redeemable, in whole or in part, at GM's option
on or after August 1, 1999, at a redemption price equal to 100% of the
outstanding principal amount of the Series D Debentures plus accrued and unpaid
interest. The Series D Preferred Securities will be redeemed upon the maturity
or earlier redemption of the Series D Debentures.
- 11 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Note 7. Preferred Securities of Subsidiary Trusts (concluded)
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. 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 8. America Online's Investment in GM Preference Stock
On June 24, 1999, as part of a strategic alliance with Hughes, America
Online (AOL) invested $1.5 billion in return for approximately 2.7 million
shares of GM Series H 6.25% Automatically Convertible Preference Stock, par
value $0.10 per share. This preference stock will automatically convert into GM
Class H common stock in three years, based upon a variable conversion factor
linked to the GM Class H common stock price at the time of conversion, and
accrues quarterly dividends at a rate of 6.25% per year. It may be converted
earlier in certain limited circumstances. GM immediately invested the $1.5
billion received from AOL into shares of Hughes Series A Preferred Stock
designed to correspond to the financial terms of the GM Series H 6.25%
Automatically Convertible Preference Stock. Dividends on the Hughes Series A
Preferred Stock are payable to GM quarterly at an annual rate of 6.25%. These
preferred stock dividends payable to GM will reduce Hughes' earnings used for
computation of the Available Separate Consolidated Net Income (Loss) (ASCNI) of
Hughes, which will have an effect equivalent to the payment of dividends on the
Series H preference stock as if those dividends were paid by Hughes. Upon
conversion of the GM Series H 6.25% Automatically Convertible Preference Stock
into GM Class H common stock, Hughes will redeem the Series A Preferred Stock
through a cash payment to GM equal to the fair market value of GM Class H common
stock issuable upon the conversion. Simultaneous with GM's receipt of the cash
redemption proceeds, GM will make a capital contribution to Hughes of the same
amount. In connection with this capital contribution, the denominator of the
fraction used in the computation of the ASCNI of Hughes will be increased by the
corresponding number of shares of GM Class H common stock issued. Accordingly,
upon conversion of the GM Series H 6.25% Automatically Convertible Preference
Stock into GM Class H common stock, both the numerator and denominator used in
the computation of ASCNI will increase by the amount of the GM Class H common
stock issued.
Note 9. Stock Repurchases
During the nine months ended September 30, 1999, GM used $1.0 billion to
acquire approximately 13.0 million shares of $1-2/3 par value common stock under
the Corporation's $4.0 billion stock repurchase program announced in February
1998. GM also used approximately $648 million to repurchase shares of $1-2/3 par
value common stock for certain employee benefit plans and $501 million to
repurchase and retire Series B preference stock during the nine months ended
September 30, 1999.
- 12 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Note 10. Comprehensive Income
GM's total comprehensive income (loss) was as follows (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
Net income (loss) $877 $(809) $4,857 $1,184
Other comprehensive income (loss):
Foreign currency translation
adjustments 18 189 (880)(1) (250)
Unrealized gains (losses) on
securities 70 (95) 150 (92)
Minimum pension liability adjustment - - 1,062(2) -
---- ---- ----- -----
Other comprehensive income (loss) 88 94 332 (342)
---- ---- ------ ---
Total comprehensive income (loss) $965 $(715) $5,189 $842
=== === ===== ===
(1)Includes approximately $450 million of translation adjustments associated
with the devaluation of the Brazilian Real in the first quarter of 1999.
(2)Adjustment of $614 million due to remeasurement of the U.S. Hourly Pension
Plan as of May 28, 1999 (see Note 6) and adjustments of $448 million to
reflect the allocation to Delphi of pension plan assets and obligations (see
Note 2).
Note 11. Earnings Per Share Attributable to Common Stocks
Earnings per share attributable to each class of GM common stock was
determined based on the attribution of earnings to each such class of common
stock for the period divided by the weighted-average number of common shares for
each such class outstanding during the period. Diluted earnings per share
attributable to each class of GM common stock considers the impact of potential
common shares, unless the inclusion of the potential common shares would have an
antidilutive effect.
The attribution of earnings to each class of GM common stock was as follows
(in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
Earnings (losses) attributable to common stocks
$1-2/3 par value
Continuing operations $866 $(336) $4,400 $1,277
Discontinued operations - (500) 426 (181)
------ --- ------ -----
Earnings (losses) attributable
to $1-2/3 par value $866 $(836) $4,826 $1,096
(Losses) earnings attributable
to Class H $(17) $11 $(20) $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 Hughes for the respective period and dividends on
preference stocks.
Losses attributable to GM Class H common stock for the three and nine
months ended September 30, 1999 represent the ASCNI of Hughes. Losses used for
computation of the ASCNI of Hughes are based on the separate consolidated net
income (loss) of Hughes, excluding the effects of GM purchase accounting
adjustments arising from GM's acquisition of Hughes Aircraft Company (HAC) which
remains after the spin-off of Hughes Defense, reduced by the amount of dividends
accrued on the Series A Preferred Stock of Hughes (as an equivalent measure of
the effect that GM's payment of dividends on the GM Series H 6.25% Automatically
Convertible Preference Stock would have if paid by Hughes).
- 13 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Note 11. Earnings Per Share Attributable to Common Stocks (continued)
The calculated losses used for computation of the ASCNI of Hughes is then
multiplied by a fraction, the numerator of which is equal to the
weighted-average number of shares of GM Class H common stock outstanding during
the three and nine months ended September 30, 1999 (135 million and 121 million,
respectively), and the denominator of which is a number equal to the
weighted-average number of shares of GM Class H common stock which if issued and
outstanding would represent a 100% interest in the earnings of Hughes (the
"Average Class H dividend base"). The Average Class H dividend base was 429
million and 415 million during the three and nine months ended September 30,
1999, respectively.
Earnings attributable to GM Class H common stock for the three and nine
months ended September 30, 1998 represent the ASCNI of Hughes, excluding the
effects of GM purchase accounting adjustments arising from GM's acquisition of
HAC which remains after the spin-off of Hughes Defense, calculated for such
period and multiplied by a fraction, the numerator of which is equal to the
weighted-average number of shares of GM Class H common stock outstanding for
each of the periods (110 million), and the denominator of which is a number
equal to the weighted-average number of shares of GM Class H common stock which
if issued and outstanding would represent a 100% interest in the earnings of
Hughes. The Average Class H dividend base was 400 million during both the three
and nine months ended September 30, 1998. Upon conversion of the GM Series H
6.25% Automatically Convertible Preference Stock into GM Class H common stock,
both the numerator and the denominator used in the computation of ASCNI will
increase by the number of shares of the GM Class H common stock issued (see
further discussion in Note 8). In addition, the denominator used in determining
the ASCNI of Hughes may be adjusted from time-to-time as deemed appropriate by
the GM Board to reflect subdivisions or combinations of the GM Class H common
stock, certain transfers of capital to or from Hughes, the contribution of
shares of capital stock of GM to or for the benefit of Hughes employees and the
retirement of GM Class H common stock purchased by Hughes. The GM Board's
discretion to make such adjustments is limited by criteria set forth in GM's
Restated Certificate of Incorporation.
In connection with the PRIMESTAR and USSB transactions (see further
discussion in Note 13), GM contributed to Hughes an amount of cash sufficient to
enable Hughes to purchase from GM, for fair value as determined by the GM Board,
the number of shares of GM Class H common stock delivered by Hughes. In
accordance with the GM certificate of incorporation, the GM Class H dividend
base was increased to reflect that number of shares. The number of shares issued
as part of the PRIMESTAR acquisition and the USSB merger have been included in
the calculation of both the numerator and denominator of the fraction described
above since the consummation dates of the transactions.
- 14 -
<PAGE>
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
Note 11. Earnings Per Share Attributable to Common Stocks (concluded)
Effective January 1, 1999, shares of GM Class H common stock delivered by GM
in connection with the award of such shares to and the exercise of stock options
by employees of Hughes increases the numerator and denominator of the fraction
referred to above. Prior to January 1, 1999, there was no dilutive effect
resulting from the assumed exercise of stock options, because the exercise of
stock options did not affect the GM Class H common stock dividend base
(denominator). From time to time, in anticipation of exercises of stock options,
Hughes purchases GM Class H common stock from the open market. Upon purchase,
these shares are retired and therefore decrease the numerator and denominator of
the fraction referred to above.
The reconciliation of the amounts used in the basic and diluted earnings per
share computations for income from continuing operations was as follows (in
millions except per share amounts):
<TABLE>
<CAPTION>
$1-2/3 Par Value Common Stock Class H Common Stock
----------------------------- --------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Three Months Ended September 30, 1999
<S> <C> <C> <C> <C> <C> <C>
Income (loss) from continuing
operations $886 $(9)
Less:Dividends on preference
stocks 20 8
--- --
Basic EPS
Income (loss) from continuing
operations attributable to
common stocks 866 641 $1.35 (17) 135 $(0.13)
==== ====
Effect of Dilutive Securities
Assumed exercise of dilutive
stock options - 11 - -
----- ---- --- ----
Diluted EPS
Adjusted income (loss) from
continuing operations
attributable to common stocks $866 652 $1.33 $(17) 135 $(0.13)
=== === ==== == === ====
Three Months Ended September 30, 1998
(Loss) income from continuing
operations $(320) $11
Less:Dividends on preference
stocks 16 -
--- --
Basic EPS
(Loss) income from continuing
operations attributable to
common stocks $(336) 654 $(0.52) $11 106 $0.11
===== ====
Effect of Dilutive Securities
Assumed exercise of dilutive
stock options - - - 4
----- ---- ---- ----
Diluted EPS
Adjusted (loss) income from
continuing operations
attributable to common stocks $(336) 654 $(0.52) $11 110 $0.11
=== === ===== == === ====
Nine Months Ended September 30, 1999
Income (loss) from continuing
operations $4,444 $(13)
Less:Dividends on preference
stocks 44 7
----- --
Basic EPS
Income (loss) from
continuing operations
attributable to common stocks 4,400 648 $6.79 $(20) 121 $(0.17)
==== ====
Effect of Dilutive Securities
Assumed exercise of dilutive
stock options - 12 - -
---- --- ---- -----
Diluted EPS
Adjusted income (loss) from
continuing operations
attributable to common stocks $4,400 660 $6.67 $(20) 121 $(0.17)
===== === ==== == === ====
Nine Months Ended September 30, 1998
Income from continuing
operations $1,325 $40
Less:Dividends on preference
stocks 48 -
Basic EPS
Income from continuing operations
attributable to common stocks $1,277 666 $1.92 $40 105 $0.38
==== ====
Effect of Dilutive Securities
Assumed exercise of dilutive
stock options (2) 10 2 5
----- ---- ---- ---
Diluted EPS
Adjusted income from
continuing operations
attributable to common stocks $1,275 676 $1.87 $42 110 $0.38
===== === ==== == === ====
</TABLE>
- 15 -
<PAGE>
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Note 12. Other Income and Other Expenses
Other income and other expenses consisted of the following (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------- ------- ------- ------
Other income
Interest income $545 $491 $1,693 $1,599
Insurance premiums 327 354 1,001 1,092
Rental car lease revenue 430 318 1,330 983
Mortgage operations investment
income and servicing fees 673 529 2,015 1,462
Other 346 9 823 393
------ ------- ------- -------
Total other income $2,321 $1,701 $6,862 $5,529
===== ===== ===== =====
Other expenses
Provision for financing losses $98 $94 $328 $323
Insurance losses and loss
adjustment expenses 226 261 703 772
Other 115 131 322 507
--- --- ------ ------
Total other expenses $439 $486 $1,353 $1,602
=== === ===== =====
Note 13. Acquisitions and Investments
On January 22, 1999, Hughes agreed to acquire PRIMESTAR's 2.3 million
subscriber medium-power direct-to-home satellite business and the high-power
satellite assets and direct-broadcast satellite orbital frequencies of Tempo
Satellite, a wholly-owned subsidiary of TCI Satellite Entertainment, Inc. On
April 28, 1999, the acquisition of PRIMESTAR's direct-to-home business was
completed. The purchase price consisted of $1.1 billion in cash and 4.9 million
shares of GM Class H common stock, for a total purchase price of $1.3 billion,
based on the average market price of $47.87 per share of GM Class H common stock
at the time the acquisition agreement was signed. The purchase price will be
adjusted based upon the final adjusted net working capital of PRIMESTAR at the
date of closing. The purchase price for the Tempo Satellite assets consisted of
$500 million in cash. Of this purchase price, $150 million was paid on March 10,
1999 for a satellite that has not yet been launched and the remaining $350
million was paid on June 4, 1999 for an in-orbit satellite and 11 related
satellite orbital frequencies.
In December 1998, Hughes agreed to acquire all of the outstanding capital
stock of United States Satellite Broadcasting Company, Inc. (USSB). USSB
provided direct-to-home premium satellite programming in conjunction with
DIRECTV's basic programming service. The USSB acquisition was closed on May 20,
1999. On July 6, 1999, based upon elections made by the former USSB
shareholders, Hughes paid approximately $360 million in cash and issued
approximately 22.6 million shares of GM Class H common stock, for a total
purchase price of approximately $1.6 billion.
On July 22, 1999, GMAC completed the acquisition of the asset-based lending
and factoring business unit of The Bank of New York for consideration of
approximately $1.8 billion. GMAC also completed the acquisition of the full
service leasing business of Arriva Automotive Solutions Limited (Arriva) on July
30, 1999 which was valued at (pound)484 million (approximately $775 million at
the July 30, 1999 exchange rate), which included debt refinancing.
The financial information presented as of and for the periods ended September
30, 1999 reflect the effects of the PRIMESTAR, Tempo Satellite, USSB, The Bank
of New York and Arriva Automotive Solutions Limited transactions, discussed
above, from their respective dates of acquisition. These transactions have been
accounted for using the purchase method of accounting; however, the adjustments
made in the September 30, 1999 financial statements reflect a preliminary
allocation of the purchase price for the transactions based upon information
currently available. Adjustments relating to the tangible assets (i.e.,
satellites, equipment located on customer premises, etc.), intangible assets
(i.e., licenses granted by the Federal Communications Commission, customer
lists, dealer network, etc.), and accrued liabilities for programming contracts
and leases with above-market rates are estimates pending the completion of
independent appraisals currently in process. Additionally, the adjustment to
recognize the benefit of net operating loss carry forwards of USSB represents a
preliminary estimate pending further review and analysis by the management of
Hughes. These appraisals, valuations and studies are expected to be completed by
December 31, 1999. Accordingly, the final purchase price allocations may be
different from the amounts reflected herein.
- 16 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Note 13. Acquisitions and Investments (concluded)
As the GM 1999 financial statements include only USSB's, PRIMESTAR's, The
Bank of New York's and Arriva's results of operations since their dates of
acquisition, the following selected unaudited pro forma information is provided
to present a summary of the combined results of GM, USSB, PRIMESTAR, The Bank of
New York and Arriva as if the acquisitions had occurred as of the beginning of
the respective periods, giving effect to purchase accounting adjustments. The
pro forma data is presented for informational purposes only and may not
necessarily reflect the results of operations of GM had USSB, PRIMESTAR, The
Bank of New York and Arriva operated as part of GM for the nine months ended
September 30, 1999 and September 30, 1998, nor are they necessarily indicative
of the results of future operations. The pro forma information excludes the
effect of non-recurring charges.
The pro forma information is as follows (in millions except per share amounts):
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
Total net sales and revenues $131,623 $112,699
Net income from continuing operations (1) $4,430 $1,294
Net income from discontinued operations 426 (181)
------ ------
Net income (1) $4,856 $1,113
===== =====
Basic earnings (losses) per share
attributable to common stocks
$1-2/3 par value common stock
Continuing operations $6.80 $1.84
Discontinued operations 0.66 (0.27)
---- ----
Earnings per share attributable
to $1-2/3 par value $7.46 $1.57
==== ====
Earnings per share attributable to
Class H (1) $(0.18) $0.16
==== ====
Diluted earnings (losses) per share
attributable to common stocks
$1-2/3 par value common stock
Continuing operations $6.67 $1.81
Discontinued operations 0.65 (0.27)
---- ----
Earnings per share attributable
to $1-2/3 par value $7.32 $1.54
==== ====
Earnings per share attributable to
Class H (1) $(0.18) $0.16
==== ====
(1) 1998 results exclude the cumulative effect of accounting change of $9
million, after tax, due to Hughes' adoption of SOP 98-5, Reporting
on the Costs of Start-Up Activities. GM reported the $9 million
charge in its fourth quarter 1998 results and Hughes reported the
change as a restatement of its first quarter 1998 results.
Separately, on March 2, 1999, GM invested an additional $440 million in Isuzu
Motors Limited (Isuzu), taking its common ownership interest in Isuzu to 49%. GM
has arranged for appraisals, valuations and other studies to be performed to aid
in the allocation of the $440 million investment to its interest in Isuzu. This
allocation is expected to be completed in the first quarter of 2000.
On July 28, 1999, Galaxy Latin America (GLA), acquired Galaxy Brasil, Ltda.,
the exclusive distributor of DIRECTV services in Brazil, from Tevecap S.A. for
approximately $114 million plus the assumption of debt. In connection with the
transaction, Tevecap sold its 10% equity interest in GLA to Hughes and Cisneros
Group, the remaining GLA partners. Hughes' share of the GLA purchase amounted to
approximately $101 million and increased Hughes' ownership of GLA to 77.8%.
On September 24, 1999, DIRECTV Japan, Hughes' 42.2% owned affiliate, raised
approximately $275 million through the issuance of bonds, convertible into
common stock, to five of its major shareholders, including approximately $238
million issued to Hughes. If Hughes elects to convert these bonds, Hughes would
have a controlling interest in DIRECTV Japan.
- 17 -
<PAGE>
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Note 14. Segment Reporting
GM's reportable operating segments within its Automotive, Electronics and
Other Operations business consist of GM Automotive (GMA), which is comprised of
four regions: GM North America (GMNA), GM Europe (GME), GM Asia/Pacific (GMAP),
and GM Latin America/Africa/Mid-East (GMLAAM); Hughes, and Other. GM's
reportable operating segments within its Financing and Insurance Operations
business consist of GMAC and Other. Selected information regarding GM's
reportable operating segments and regions are as follows:
<TABLE>
<CAPTION>
Elimin- Auto- Other Total
GMNA GME GMLAAM GMAP ations GMA Hughes Other motive GMAC Financing Financing
---- --- ------ ---- ------ --- ------ ----- ------ ---- --------- ---------
(in millions)
For the Three Months Ended
September 30, 1999
Manufactured products
sales & revenues:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
External customers $26,516 $5,657 $1,127 $755 $1 $34,056 $1,995 $697 $36,748 $ - $ - $ -
Intersegment 309 598 65 93 (1,065) - (5) 5 - - - -
------ ------ ------ ---- ----- ------ ----- ---- ------ ---- ---- ----
Total manufactured
products 26,825 6,255 1,192 848 (1,064) 34,056 1,990 702 36,748 - - -
Financing revenues - - - - - - - - - 3,480 245 3,725
Other income (a) 805 136 8 36 - 985 8 (195) 798 1,723 (200) 1,523
------ ------ ------ ---- ----- ------ ----- ---- ------ ----- ----- -----
Total net sales and
revenues $27,630 $6,391 $1,200 $884 $(1,064) $35,041 $1,998 $507 $37,546 $5,203 $45 $5,248
====== ===== ===== === ===== ====== ===== === ====== ===== == =====
Interest income (a) $232 $115 $11 $2 $(1) $359 $2 $(196) $165 $45 $(76) $380
Interest expense $327 $89 $29 $2 $(1) $446 $52 $(275) $223 $1,667 $95 $1,762
Net income (loss) $671 $32 $(36) $(54) $ - $613 $(30)(b) $(96) $487 $393 $(3) $390
Segment assets $77,511 $19,764 $3,908 $1,223 $(2,738) $99,668 $18,395(c) $2,254 $120,317 $141,707 $(82) $141,625
For the Three Months Ended
September 30, 1998
Manufactured products
sales & revenues:
External customers $18,122 $5,925 $1,665 $615 $(1) $26,326 $1,507 $631 $28,464 $ - $ - $ -
Intersegment 374 302 37 56 (769) - 6 (6) - - - -
------ ----- ----- ----- --- ------ ----- --- ------ ---- ---- ----
Total manufactured
products 18,496 6,227 1,702 671 (770) 26,326 1,513 625 28,464 - - -
Financing revenues - - - - - - - - - 3,150 210 3,360
Other income (a) 435 163 71 10 1 680 23 (156) 547 1,296 (142) 1,154
------ ------ ------ ---- ----- ------ ----- --- ------ ----- --- -----
Total net sales
and revenues $18,931 $6,390 $1,773 $681 $(769) $27,006 $1,536 $469 $29,011 $4,446 $68 $4,514
====== ===== ===== === === ====== ===== === ====== ===== == =====
Interest income (a) $83 $137 $30 $3 $ - $253 $21 $(169) 105 440 (54) 386
Interest expense $227 $137 $22 $1 $1 $388 $4 $(197) $195 $1,478 $17 $1,495
Net (loss) income $(595) $50 $(64) $ - $(24) $(633) $43(b) $(564) $(1,154) $313 $32 $345
Segment assets $65,499 $18,243 $5,640 $1,358 $(596) $90,144 $12,461(c) $8,944 $111,549 $118,623 $(548) $118,075
</TABLE>
(a)Interest income is included in other income.
(b)The amount reported for Hughes excludes amortization of GM purchase
accounting adjustments of approximately $5 million for both 1999 and 1998,
related to GM's acquisition of Hughes Aircraft Company. Such amortization was
allocated to GM's Other segment which is consistent with the basis upon which
the segments are evaluated.
(c)The amount reported for Hughes excludes the unamortized GM purchase
accounting adjustments of approximately $411 million and $432 million, for
1999 and 1998, respectively, related to GM's acquisition of Hughes Aircraft
Company. These adjustments were allocated to GM's Other segment which is
consistent with the basis upon which the segments are evaluated.
- 18 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Note 14. Segment Reporting (concluded)
<TABLE>
<CAPTION>
Elimin- Auto- Other Total
GMNA GME GMLAAM GMAP ations GMA Hughes Other motive GMAC Financing Financing
---- --- ------ ---- ------ --- ------ ----- ------ ---- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
For the Nine Months Ended
September 30, 1999
Manufactured products
sales & revenues:
External customers $81,530 $18,513 $3,250 $1,975 $ 1 $105,269 $5,203 $2,157 $112,629 $ - $ - $ -
Intersegment 1,286 757 170 180 (2,393) - 15 (15) - - - -
------ ------ ------ ------ ----- ------- ----- ----- ------- --- --- ---
Total manufactured
products 82,816 19,270 3,420 2,155 (2,392) 105,269 5,218 2,142 112,629 - - -
Financing revenues - - - - - - - - - 10,118 687 10,805
Other income (a) 2,368 399 28 91 1 2,887 199 (529) 2,557 4,813 (508) 4,305
------ ------ ----- ----- ----- ------- ----- ------ ------- ------ --- ------
Total net sales
and revenues $85,184 $19,669 $3,448 $2,246 $(2,391)$108,156 $5,417 $1,613 $115,186 $14,931 $179 $15,110
====== ====== ===== ===== ===== ======= ===== ===== ======= ====== === ======
Interest income (a) $734 $313 $36 $6 $ - $1,089 $21 $(525) $585 $1,278 $(170) $1,108
Interest expense $928 $242 $64 $9 $ - $1,243 $71 $(717) $597 $4,718 $309 $5,027
Net income (loss) $3,552 $393 $(99) $(195) $23 $3,674 $(44)(c) $39(b)$3,669 $1,176 $12 $1,188
For the Nine Months Ended
September 30, 1998
Manufactured products
sales & revenues:
External customers $64,440 $16,967 $5,778 $2,092 $(1) $89,276 $4,158 $1,768 $95,202 $ - $ - $ -
Intersegment 1,849 884 141 63 (2,937) - 15 (15) - - - -
------ ------ ----- ----- ----- ------ ----- ----- ------ ---- --- ---
Total manufactured
products 66,289 17,851 5,919 2,155 (2,938) 89,276 4,173 1,753 95,202 - - -
Financing revenues - - - - - - - - - 9,462 628 10,090
Other income (a) 1,630 496 197 39 1 2,363 109 (422) 2,050 3,833 (354) 3,479
------ ------ ----- ----- ----- ------ ----- ----- ----- ----- ---- ------
Total net sales
and revenues $67,919 $18,347 $6,116 $2,194 $(2,937) $91,639 $4,282 $1,331 $97,252 $13,295 $274 $13,569
====== ====== ===== ===== ===== ====== ===== ===== ====== ====== === ======
Interest income (a) $364 $409 $91 $7 $ - $871 $89 $(461) $499 $1,157 $(57) $1,100
Interest expense $634 $338 $72 $5 $ - $1,049 $10 $(473) $586 $4,317 $48 $4,365
Net income (loss) $52 $273 $37 $(30) $3 $335 $153(c) $(407)(b) $81 $1,027 $76 $1,103
</TABLE>
(a)Interest income is included in other income.
(b)The amount reported for Other net income (loss) includes income from
discontinued operations of $426 million and $(181) million for the nine
months ended September 30, 1999 and 1998, respectively.
(c)The amount reported for Hughes excludes amortization of GM purchase
accounting adjustments of approximately $16 million for both 1999 and 1998,
related to GM's acquisition of Hughes Aircraft Company. Such amortization was
allocated to GM's Other segment which is consistent with the basis upon which
the segments are evaluated. 1998 results exclude the cumulative effect of
accounting change of $9 million due to Hughes' adoption of SOP 98-5. GM had
reported the $9 million change in fourth quarter 1998 results and Hughes
reported the change as a restatement of first quarter 1998 results.
- 19 -
<PAGE>
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
Note 15. Contingent Matters
In connection with the 1997 spin-off of the defense electronics business of
Hughes' predecessor and the subsequent merger of that business with Raytheon
Company, the terms of the merger agreement provided a process for resolving
disputes that might arise in connection with post-closing financial adjustments
that were also called for by the terms of the merger agreement. Such financial
adjustments might require a cash payment from Raytheon to Hughes or vice versa.
Disputes currently exist regarding the post-closing adjustments which Hughes and
Raytheon have proposed to one another and related issues regarding the adequacy
of disclosures made by Hughes to Raytheon in the period prior to consummation of
the merger. Raytheon and Hughes are now proceeding with the dispute resolution
processes as to these matters. It is possible that ultimate resolution of the
post-closing financial adjustment and of related disclosure issues may result in
Hughes making a payment to Raytheon that would be material to Hughes. However,
the amount of any payment that either party might be required to make to the
other cannot be determined at this time. Hughes intends to vigorously pursue
resolution of the disputes through the arbitration processes, opposing the
adjustments proposed by Raytheon, and seeking the payment from Raytheon that it
has proposed.
General Electric Capital Corporation (GECC) and DIRECTV, Inc. entered into
a contract on July 31, 1995, in which GECC agreed to provide financing for
consumer purchases of DIRECTV hardware and related programming. Under the
contract, GECC also agreed to provide certain related services to DIRECTV,
including credit risk scoring, billing and collections services. DIRECTV agreed
to act as a surety for loans complying with the terms of the contract. Hughes
guaranteed DIRECTV's performance under the contract. A complaint and
counterclaim have been filed by the parties in the U.S. District Court for the
District of Connecticut concerning GECC's performance and DIRECTV's obligation
to act as a surety. GECC claims damages from DIRECTV in excess of $140 million.
DIRECTV is seeking damages from GECC in excess of $70 million. Hughes intends to
vigorously contest GECC's allegations and pursue Hughes' own contractual rights
and remedies. Pretrial discovery is not yet completed in the case and no trial
date has been set. Hughes does not believe that the litigation will have a
material adverse impact on Hughes' results of operations or financial position.
As part of a marketing agreement entered into with AOL on June 21, 1999,
Hughes committed to increase its sales and marketing expenditures over the next
three years by approximately $1.5 billion relating to DirecPC/AOL-Plus, DlRECTV,
DlRECTV/AOL TV and DirecDuo.
Hughes Space and Communications International (HSCI) has a contract with
ICO Global Communications Operations (ICO Global) to build the satellites and
related components for a global wireless communications system. Hughes owns
approximately 2.6% of the equity in the parent company, ICO Global
Communications (Holdings) (ICO). On August 27, 1999, ICO filed for bankruptcy
protection under Chapter 11 in U.S. Bankruptcy Court in Wilmington, Delaware. On
November 9, 1999, the bankruptcy court approved an iterim financing arrangement
that will allow ICO to continue its operations while it negotiates a plan of
reorganization. ICO has indicated that under its proposed plan, which is subject
to bankruptcy court approval, ICO would continue its contract with HSCI, pay
amounts owed to HSCI and have adequate financing to complete the contract. There
can be no assurance that ICO will be successful in confirming a plan of
reorganization, and if unable to do so the most likely outcome would be a
liquidation proceeding. In the event that a liquidation becomes probable, Hughes
would expect to record a pre-tax charge to earnings of up to approximately $500
million.
On June 3, 1999, the National Rural Telecommunications Cooperative (NRTC)
filed a lawsuit against DIRECTV, Inc. and Hughes Communications Galaxy, Inc.
(together, "DIRECTV") in United States District Court for the Central District
of California, alleging that DIRECTV has breached the DBS Distribution Agreement
(the "Agreement") with the NRTC. The Agreement provides the NRTC with exclusive
distribution rights, in certain specified portions of the United States, to
DIRECTV programming delivered over 27 of the 32 frequencies at the 101 degrees
west longitude orbital location. The NRTC claims that DIRECTV has wrongfully
deprived it of the exclusive right to distribute programming formerly provided
by USSB over the other 5 frequencies at 101 degrees. DIRECTV denies that the
NRTC is entitled to exclusive distribution rights to the former USSB programming
because the NRTC's exclusive distribution rights are limited to programming
distributed over 27 of the 32 frequencies at 101 degrees. The NRTC's complaint
seeks, in the alternative, the right to distribute former USSB programming on a
non-exclusive basis and the recovery of related revenues from the date USSB was
acquired by Hughes. DIRECTV maintains that the NRTC's right under the Agreement
is to market and sell the former USSB programming as its agent and is not
entitled to the claimed revenues. On August 26, 1999, the NRTC filed a second
lawsuit against DIRECTV, for damages in excess of $75 million, in which it
alleges that DIRECTV has breached the agreement it has with NRTC. In this suit,
NRTC is asking the court to require DIRECTV to pay to NRTC a proportionate share
of the financial benefits DIRECTV derives from programming providers and certain
other third parties. DIRECTV denies that it owes any sums to the NRTC on account
- 20 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
Note 15. Contingent Matters (concluded)
of the allegations in these matters and plans to vigorously defend itself
against these claims. Although the amounts of the combined claims are material
to Hughes, Hughes does not believe that the outcome of these lawsuits will
result in a material adverse impact on Hughes' results of operations or
financial position. However, there can be no assurance as to those conclusions.
In Anderson, et al v. General Motors Corporation, a jury in a Los Angeles
Superior Court returned a verdict of $4.9 billion against GM in a product
liability lawsuit involving a post-collision fuel fed fire in a 1979 Chevrolet
Malibu. In post-trial developments, the trial court has reduced the punitive
damages from $4.8 billion to $1.1 billion and GM has posted a bond for the
punitive and compensatory damages (the cost of which was not material to the
Corporation). GM continues to pursue its appellate rights, including efforts to
secure a new trial and the complete elimination of responsibility to pay any
damages in this matter consistent with GM's view that the design of the
Chevrolet Malibu was not responsible for plaintiffs' injuries.
In connection with GM's disposition of certain businesses (including Delphi),
GM has granted the UAW guarantees covering benefits to be provided to certain
former U.S. hourly employees of GM who became employees of the disposed
businesses. These guarantees have limited terms that do not extend beyond
October 2007. In connection with such guarantees relating to certain of Delphi's
U.S. hourly employees, GM and Delphi have agreed to enter into an agreement, the
provisions of which are designed to prevent or mitigate the risk that GM's
guarantee relating to Delphi's employees would ever be called upon, or, if it
is, any payments thereunder by GM would result in the obligation of Delphi to
indemnify and hold GM harmless as to such amounts. GM believes that the
likelihood it will make payments under any of these various guarantees is remote
and that if such payments are made they will not be material to GM's financial
position or results of operations.
GM is subject to potential liability under government regulations and various
claims and legal actions which are pending or may be asserted against them. Some
of the pending actions purport to be class actions. The aggregate ultimate
liability of GM under these government regulations and under these claims and
actions, was not determinable at December 31, 1998. After discussion with
counsel, it is the opinion of management that such liability is not expected to
have a material adverse effect on the Corporation's consolidated financial
condition or results of operations.
Note 16. Subsequent Events
The 1999 UAW labor contract was ratified on October 13, 1999 covering a four
year term from 1999-2003. The contract included an annual salary increase of 3%
per year and an up-front signing bonus of $1,350 per UAW employee, which will be
amortized evenly over the life of the contract. Active UAW employees were also
granted pension benefit increases. In addition, retiree benefit increases
include lump sum payments and a $1.25 monthly benefit increase per year of
service. The retiree lump sum payments will result in a charge against GM's 1999
fourth quarter earnings of approximately $444 million after-tax. The other
pension benefit increases will be paid out of plan assets.
The new contract includes job security and sourcing provisions containing an
employment floor set at 95% of 1996 employment levels in the event of net
outsourcing. It also requires a level of attrition replacement based on a 1999
benchmark minimum employment level, which is reduced by 5% over the life of the
contract.
The 1999 Canadian Auto Workers (CAW) labor agreement was ratified on October
24,1999 covering a three year term from 1999-2002. The contract included an
annual salary increase of 3% per year and an up-front signing bonus of $1,000
Canadian per CAW employee, which will be amortized evenly over the life of the
contract. In addition, hourly actives and retirees were granted pension benefit
increases to be paid out of plan assets. The 1999 labor agreement continues to
provide flexibility to cut costs and streamline operations.
In prior years, GM had established liabilities which as of September 30, 1999
totaled approximately $1.1 billion for terminations and other postemployment
benefits to be paid pursuant to UAW and CAW labor contracts in connection with
closed plants. Periodically, the Corporation reviews the adequacy and continuing
need for these liabilities. The 1999 review, which will be completed in the
fourth quarter, will take into consideration the provisions of the new UAW and
CAW contracts, including the job security and sourcing provisions, as well as
the current more favorable than expected U.S. vehicle market and higher than
expected employee attrition rates. GM expects this review will likely result in
the elimination of the need for a significant amount of the termination and
other postemployment benefits liabilities previously provided for employees at a
number of closed plants.
In October 1999, Hughes issued $500 million of floating rate notes in a
private placement with a group of institutional investors. The notes mature on
October 23, 2000.
* * * * * *
- 21 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following management's discussion and analysis of financial condition
and results of operations (MD&A) should be read in conjunction with the
consolidated financial statements and notes thereto along with the MD&A included
in GM's Current Reports on Form 8-K, dated April 12, 1999, which was filed with
the Securities and Exchange Commission on April 15, 1999 and April 21, 1999,
respectively; Hughes Electronics Corporation (Hughes) financial statements and
MD&A for the period ended December 31, 1998, included as Exhibit 99 to GM's 1998
Annual Report on Form 10-K; the General Motors Acceptance Corporation (GMAC)
Annual Report on Form 10-K for the period ended December 31, 1998; the Hughes
financial statements and MD&A for the period ended September 30, 1999, included
as Exhibit 99 to this GM Quarterly Report on Form 10-Q for the period ended
September 30, 1999 and related Hughes' Quarterly Report on Form 10-Q filed with
the Securities and Exchange Commission; and the GMAC Quarterly Report on Form
10-Q for the period ended September 30, 1999, filed with the Securities and
Exchange Commission. All earnings per share amounts included in the MD&A are
reported as diluted.
GM presents separate supplemental consolidating financial information
for the following businesses: Automotive, Electronics and Other
Operations and Financing and Insurance Operations.
GM's reportable operating segments within its Automotive, Electronics and
Other Operations business consist of:
. GM Automotive (GMA), is comprised of four regions: GM North
America (GMNA), GM Europe (GME), GM Asia/Pacific (GMAP), and GM
Latin America/Africa/Mid-East (GMLAAM). GMNA designs, manufactures,
and markets vehicles primarily in North America under the following
nameplates: Chevrolet, Pontiac, GMC, Oldsmobile, Buick, Cadillac,
and Saturn. GME, GMAP and GMLAAM meet the demands of customers
outside North America with vehicles designed, manufactured and
marketed under the following nameplates: Opel, Vauxhall, Holden,
Isuzu, Saab, Chevrolet, GMC, and Cadillac.
. Hughes includes activities relating to designing, manufacturing, and
marketing advanced technology electronic systems, products, and services
for the satellite & wireless communications industries.
. The Other segment includes the design, manufacturing and marketing of
locomotives and heavy-duty transmissions and the elimination of
intersegment transactions.
GM's reportable operating segments within its Financing and Insurance
Operations business consist of GMAC and Other. GMAC provides a broad range of
financial services, including consumer vehicle financing, full-service leasing
and fleet leasing, dealer financing, car and truck extended service contracts,
residential and commercial mortgage services, vehicle and homeowners insurance,
and asset-backed lending. The Financing and Insurance Operations' Other segment
includes financing entities operating in Canada, Germany and Brazil.
The disaggregated financial results for GMA have been prepared using a
management approach, which is consistent with the basis and manner in which GM
management internally disaggregates financial information for the purposes of
assisting in making internal operating decisions. In this regard, certain common
expenses were allocated among regions less precisely than would be required for
standalone financial information prepared in accordance with generally accepted
accounting principles (GAAP) and certain expenses (primarily certain U.S. taxes
related to non-U.S. operations) were included in the Automotive, Electronics and
Other Operations' Other segment. The financial results represent the historical
information used by management for internal decision making purposes; therefore,
other data prepared to represent the way in which the business will operate in
the future, or data prepared on a GAAP basis, may be materially different.
- 22-
<PAGE>
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
RESULTS OF OPERATIONS
In the third quarter of 1999, GM's consolidated income from continuing
operations totaled $877 million or $1.33 per share of $1-2/3 par value common
stock, which represents an increase of $1.2 billion compared with a loss of $309
million or a loss of $0.52 per share of $1-2/3 par value common stock in the
third quarter of 1998. GM's net income from continuing operations for the nine
months ended September 30, 1999 was $4.4 billion or $6.67 per share of $1-2/3
par value common stock, which represents an increase of $3.0 billion compared
with $1.4 billion or $1.87 per share of $1-2/3 par value common stock for the
nine months ended September 30, 1998.
On April 12, 1999, the GM Board of Directors (GM Board) approved the complete
separation of Delphi from GM by means of a spin-off (which was tax-free to GM
and its stockholders for U.S. federal income tax purposes) which was completed
on May 28,1999 and, accordingly, the financial results related to Delphi for all
periods presented are reported as discontinued operations. GM's net income for
the third quarter of 1999, including the income from discontinued operations
totaled $877 million or $1.33 per share of $1-2/3 par value common stock
compared with a loss of $809 million or a loss of $1.28 per share of $1-2/3 par
value common stock in the third quarter of 1998. GM's net income for the nine
months ended September 30, 1999, including the income from discontinued
operations totaled $4.9 billion or $7.32 per share of $1-2/3 par value common
stock compared with $1.2 billion or $1.60 per share of $1-2/3 par value common
stock for the nine months ended September 30, 1998. Additional information
regarding the spin-off of Delphi is contained in Note 2 to the GM consolidated
financial statements. Additionally, refer to Note 13 of the GM consolidated
financial statements for financial information regarding the effect of current
year acquisitions.
Automotive, Electronics and Other Operations
Highlights of financial performance by GM's Automotive, Electronics and Other
Operations business were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
-------- -------- ------- --------
(Dollars in Millions)
Total net sales and revenues
GMA $35,041 $27,006 $108,156 $91,639
Hughes 1,998 1,536 5,417 4,282
Other 507 469 1,613 1,331
-------- -------- --------- -------
Total net sales and revenues $37,546 $29,011 $115,186 $97,252
====== ====== ======= ======
Net income (loss)
GMA $613 $(633) $3,674 $335
Hughes (1) (30) 43 (44) 153
Other (96) (64) (387) (226)
--- ---- ------ ---
Income (loss) from continuing
operations 487 (654) 3,243 262
Discontinued operations - (500) 426 (181)
------ ----- ------ ---
Net income (loss) $487 $(1,154) $3,669 $81
=== ===== ===== ==
_______________
(1)Excludes amortization of GM purchase accounting adjustments of $5 million
for the third quarters of 1999 and 1998 and $16 million for the nine-month
periods ended September 30, 1999 and 1998, related to GM's acquisition of
Hughes Aircraft Company (HAC) in 1985.
- 23-
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
GMA Financial Highlights
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
-------- -------- ------- --------
1998
(Dollars in Millions)
GMNA
Total net sales and revenues $27,630 $18,931 $85,184 $67,919
------ ------ ------ ------
Pre-tax income (loss) 1,009 (883) 5,228 6
Income tax expense (benefit) 336 (288) 1,671 (26)
Earnings/(losses) of nonconsolidated
associates and minority interests (2) - (5) 20
----- ------ ----- --
GMNA income (loss) $671 $(595) $3,552 $52
=== === ===== ==
GME
Total net sales and revenues $6,391 $6,390 $19,669 $18,347
----- ----- ------ ------
Pre-tax income 52 64 605 511
Income tax expense 19 18 208 238
Earnings/(losses) of nonconsolidated
associates and minority interests (1) 4 (4) -
--- --- ----- ------
GME income $32 $50 $393 $273
== == === ===
GMLAAM
Total net sales and revenues $1,200 $1,773 $3,448 $6,116
----- ----- ----- -----
Pre-tax loss (79) (138) (224) (105)
Income tax benefit (37) (45) (106) (74)
Earnings/(losses) of nonconsolidated
associates and minority interests 6 29 19 68
-- -- -- --
GMLAAM (loss) income $(36) $(64) $(99) $37
== == == ==
GMAP
Total net sales and revenues $884 $681 $2,246 $2,194
--- --- ----- -----
Pre-tax income (loss) 12 19 (49) 15
Income tax expense (benefit) 11 2 (8) 6
Earnings/(losses) of nonconsolidated
associates and minority interests (55) (17) (154) (39)
-- -- --- --
GMAP (loss) income $(54) $- $(195) $(30)
== = === ==
GMA (1)
Total net sales and revenues $35,041 $27,006 $108,156 $91,639
------ ------ ------- ------
Pre-tax income (loss) 993 (975) 5,596 432
Income tax expense (benefit) 329 (328) 1,779 145
Earnings/(losses)of nonconsolidated
associates and minority interests (51) 14 (143) 48
---- ---- ------ ----
GMA income (loss) $613 $(633) $3,674 $335
=== === ===== ===
(1) GMA's results include eliminations of transactions among GMNA, GME, GMLAAM,
and GMAP.
- 24 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Vehicle Unit Deliveries of Cars and Trucks - GMA
Three Months Ended September 30,
--------------------------------
1999 1998
---- ----
GM as GM as
a % of a % of
Industry GM Industry Industry GM Industry
-------- -- -------- -------- -- --------
(Units in Thousands)
GMNA
United States
Cars 2,300 675 29.4 2,007 517 25.7
Trucks 2,195 623 28.4 1,837 411 22.4
----- ------ ----- ---
Total United States 4,495 1,298 28.9 3,844 928 24.1
Canada and Mexico 633 170 26.9 600 160 26.7
------ ------ ------ ---
Total GMNA 5,128 1,468 28.6 4,444 1,088 24.5
GME 4,906 489 10.0 4,760 463 9.7
GMLAAM 876 145 16.6 1,069 160 15.0
GMAP 2,803 128 4.6 2,705 127 4.7
------- ------ ------- -----
Total Worldwide 13,713 2,230 16.3 12,978 1,838 14.2
====== ===== ====== =====
Nine Months Ended September 30,
-------------------------------
1999 1998
---- ----
GM as GM as
a % of a % of
Industry GM Industry Industry GM Industry
-------- -- -------- -------- -- --------
(Units in Thousands)
GMNA
United States
Cars 6,730 2,030 30.2 6,213 1,837 29.6
Trucks 6,531 1,826 28.0 5,796 1,617 27.9
------- ----- ------- -----
Total United States 13,261 3,856 29.1 12,009 3,454 28.8
Canada and Mexico 1,868 516 27.6 1,806 491 27.2
------- ------ ------- ------
Total GMNA 15,129 4,372 28.9 13,815 3,945 28.6
GME 15,552 1,537 9.9 14,798 1,406 9.5
GMLAAM 2,444 399 16.3 3,193 511 16.0
GMAP 8,618 338 3.9 8,260 379 4.6
------- ------ ------- ------
Total Worldwide 41,743 6,646 15.9 40,066 6,241 15.6
====== ===== ====== =====
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------- --------- ------- -------
(Units in Thousands)
Wholesale Sales
GMNA
Cars 661 597 2,199 1,901
Trucks 680 413 2,181 1,648
----- ----- ----- -----
Total GMNA 1,341 1,010 4,380 3,549
----- ----- ----- -----
GME
Cars 413 514 1,367 1,451
Trucks 33 20 104 89
----- ----- ----- -----
Total GME 446 534 1,471 1,540
----- ----- ----- -----
GMLAAM
Cars 98 102 266 327
Trucks 43 61 133 194
----- ----- ----- -----
Total GMLAAM 141 163 399 521
----- ----- ----- -----
GMAP
Cars 45 52 121 147
Trucks 76 62 191 181
----- ----- ----- -----
Total GMAP 121 114 312 328
----- ----- ----- -----
Total Worldwide 2,049 1,821 6,562 5,938
===== ===== ===== =====
- 25 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
GMA Financial Review
GMA reported income of $613 million for the 1999 third quarter compared with
a loss of $633 million for the prior year quarter. The increase in income from
the prior year quarter was primarily due to continued improvement in the
profitability of new vehicles and lower production at GMNA in the prior year
quarter due to the work stoppages at two component plants in Flint, Michigan
that halted production of wholesale units at 26 of 29 assembly plants in North
America. These factors also contributed to the improvement in GMA's net margin
to 1.7% for the third quarter of 1999 from (2.3%) for the third quarter of 1998.
Income for the nine months ended September 30, 1999 totaled $3.7 billion
compared with $335 million for the prior year nine-month period. The increase in
income from the prior year nine-month period was primarily due to improvement in
the profitability of new vehicles, lower production at GMNA in the prior year
quarter due to the work stoppages, and lower material costs.
Total net sales and revenues for GMA in the third quarter of 1999 were $35.0
billion compared with $27.0 billion in the third quarter of 1998. GMA's total
net sales and revenues for the nine months ended September 30, 1999 totaled
$108.2 billion compared with $91.6 billion for the prior year nine-month period.
These increases were primarily due to increases in wholesale sales volumes of
228,000 units from the prior year third quarter and 624,000 units from the prior
year nine months ended September 30, 1998. These increases in wholesale sales
volumes are primarily due to GMNA's work stoppages in the prior year periods.
Pre-tax income for the third quarter of 1999 increased to $993 million
compared with the prior year quarter pre-tax loss of $975 million and pre-tax
income for the nine months ended September 30, 1999 increased to $5.6 billion
from $432 million in the prior year period. These increases in pre-tax income
were primarily due to continued improvement in the profitability of new vehicles
and lower production at GMNA in the prior year quarter due to the work
stoppages.
GMA's worldwide vehicle deliveries were 2,230,000 for the third quarter of
1999, which represented a market share of 16.3% compared with 1,838,000 for the
third quarter of 1998, which represented a market share of 14.2%. GMNA's market
share for the third quarter of 1999 was 28.6% compared with 24.5% for the third
quarter of 1998. For the nine months ended September 30, 1999, GMNA's market
share was 28.9% compared with 28.6% for the prior year nine-month period.
GMNA reported income of $671 million for the 1999 third quarter compared with
a loss of $595 million for the prior year quarter. The improvement in GMNA's
1999 third quarter income was primarily due to the prior year's work stoppages,
higher wholesale sales volumes, lower material costs and favorable net price,
partially offset by increased manufacturing, pre-production and launch costs
associated with the new LeSabre, Impala, Monte Carlo and Saturn LS models.
Income for the nine months ended September 30, 1999 totaled $3.6 billion
compared with $52 million for the prior year nine-month period. The improvement
in income for the first nine months of 1999 was primarily due to the prior
year's work stoppages, higher wholesale sales volumes, continued improvement in
the cost and profitability of new vehicles, and lower material and engineering
costs. This improvement was partially offset by increased manufacturing costs
and pre-production and launch costs associated with the new vehicles mentioned
above. Net price was slightly higher for the quarter at 0.4% year over year. Net
price comprehends the percent increase/decrease a customer pays in the current
period for the same comparably equipped vehicle produced in the previous year's
period.
The 1999 UAW labor contract was ratified on October 13, 1999 covering a four
year term from 1999-2003. The contract included an annual salary increase of 3%
per year and an up-front signing bonus of $1,350 per UAW employee, which will be
amortized evenly over the life of the contract. Active UAW employees were also
granted pension benefit increases. In addition, retiree benefit increases
include lump sum payments and a $1.25 monthly benefit increase per year of
service. The retiree lump sum payments will result in a charge against GM's 1999
fourth quarter earnings of approximately $444 million after-tax. The other
pension benefit increases will be paid out of plan assets.
The new contract includes job security and sourcing provisions containing an
employment floor set at 95% of 1996 employment levels in the event of net
outsourcing. It also requires a level of attrition replacement based on a 1999
benchmark minimum employment level, which is reduced by 5% over the life of the
contract.
The 1999 Canadian Auto Workers (CAW) labor agreement was ratified on October
24,1999 covering a three year term from 1999-2002. The contract included an
annual salary increase of 3% per year and an up-front signing bonus of $1,000
Canadian per CAW employee, which will be amortized evenly over the life of the
contract. In addition, hourly actives and retirees were granted pension benefit
increases to be paid out of plan assets. The 1999 labor agreement continues to
provide flexibility to cut costs and streamline operations.
- 26 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
GMA Financial Review (concluded)
In prior years, GM had established liabilities which as of September 30, 1999
totaled approximately $1.1 billion for terminations and other postemployment
benefits to be paid pursuant to UAW and CAW labor contracts in connection with
closed plants. Periodically, the Corporation reviews the adequacy and continuing
need for these liabilities. The 1999 review, which will be completed in the
fourth quarter, will take into consideration the provisions of the new UAW and
CAW contracts, including the job security and sourcing provisions, as well as
the current more favorable than expected U.S. vehicle market and higher than
expected employee attrition rates. GM expects this review will likely result in
the elimination of the need for a significant amount of the termination and
other postemployment benefits liabilities previously provided for employees at a
number of closed plants.
GME reported income of $32 million for the 1999 third quarter compared with
$50 million in the prior year quarter. The decrease in GME's 1999 third quarter
income was primarily due to increasing competitive pricing pressure, partially
offset by continued material cost improvements as a result of GM's global
purchasing efforts, as well as improved manufacturing performance. Income for
the nine months ended September 30, 1999 totaled $393 million compared with $273
million for the prior year nine-month period. The overall improvement in income
for the first nine months of 1999 was primarily due to continued material cost
improvements as a result of GM's global purchasing efforts.
GMLAAM reported a loss of $36 million for the 1999 third quarter compared
with a loss of $64 million for the prior year quarter. The decrease in the 1999
third quarter loss compared to the 1998 third quarter loss was primarily due to
reduced structural costs and nominal price increases throughout the region.
GMLAAM reported a loss for the nine months ended September 30, 1999 of $99
million compared with income of $37 million for the prior year nine-month
period. The decrease in the nine months ended September 30, 1999 compared to the
prior year period was primarily due to significantly lower industry volumes due
to the economic crisis throughout Latin America.
GMAP reported a loss of $54 million for the 1999 third quarter compared with
zero net income for the prior year quarter. The decrease in 1999 third quarter
earnings compared to 1998 third quarter results was primarily due to start-up
costs in the region and equity losses at Isuzu as a result of continued poor
economic conditions in Asia. These decreases were partially offset by improved
results at Shanghai GM. Losses for the nine months ended September 30, 1999
totaled $195 million compared with losses of $30 million for the prior year
nine-month period. The increase in losses for the first nine-month period in
1999 was primarily due to decreased volumes in the region, equity losses at
Isuzu due to the economic downturn in Asia, and continued spending associated
with GMAP's growth strategy.
Hughes Financial Highlights
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
------- -------- ------ -------
(Dollars in Millions Except Per Share Amounts)
Total net sales and revenues $1,998 $1,536 $5,417 $4,282
----- ----- ----- -----
Pre-tax (loss) income (51) 74 (31) 269
Income tax (benefit) expense (38) 17 (45) 72
Minority interests 9 9 22 19
Losses in nonconsolidated associates (31) (28) (96) (79)
-- -- -- ---
Net (loss) income $(35) $38 $(60) $137(2)
== == == ===
(Losses) Earnings used
for computation of
Available Separate
Consolidated Net
(Loss) Income (1) (2) $(54) $43 $(70) $153
(Losses) Earnings per
share attributable
to Class H common stock -
Basic and Diluted (2) $(0.13) $0.11 $(0.17) $0.38
- ------------
(1)Excludes amortization of GM purchase accounting adjustments of $5 million
for the third quarters of 1999 and 1998 and $16 million for the nine-month
periods ended September 30, 1999 and 1998, related to GM's acquisition of HAC
in 1985. Includes accrued preferred stock dividends of $24 million and $26
million for the three and nine months ended September 30, 1999.
(2)1998 results exclude the cumulative effect of accounting change of $9
million, after tax, due to Hughes' adoption of SOP 98-5, Reporting on the
Costs of Start-Up Activities. GM reported the $9 million charge in its fourth
quarter 1998 results and Hughes reported the change as a restatement of its
first quarter 1998 results.
- 27 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Hughes Financial Review
Third quarter total net sales and revenues increased 30.1% to $2.0 billion,
compared with $1.5 billion in the third quarter of 1998. Total net sales and
revenues for the first nine months of 1999 increased 26.5% to $5.4 billion
compared with $4.3 billion in the same periods of 1998. Revenue growth for the
third quarter and first nine months of 1999 compared to the same period in 1998
was primarily attributable to continued strong subscriber growth for the
DIRECTV(R) businesses, as well as additional revenues from the second quarter
1999 acquisitions of the PRIMESTAR medium-power direct-to-home and United States
Satellite Broadcasting Company, Inc. (USSB) businesses and increased sales of
DIRECTV(TM) receiving equipment by Hughes Network Systems (HNS). The first nine
months of 1999 also included a $155 million pre-tax gain that resulted from the
settlement of the Williams patent infringement case. These increases were offset
by a decrease in Hughes Space and Communications (HSC) revenues primarily due to
delayed revenue recognition that resulted from increased costs and schedule
delays on several new product lines, reduced activity associated with the ICO
Global Communications program in the third quarter of 1999, and a decrease in
interest income due to a decrease in cash and cash equivalents.
Hughes had a pre-tax loss of $51 million for the third quarter of 1999,
compared with pre-tax income of $74 million for the same period of 1998. Hughes
had a pre-tax loss of $31 million for the first nine months of 1999, compared
with pre-tax income of $269 million for the first nine months of 1998. The
pre-tax loss for the third quarter of 1999 and for the first nine months of 1999
resulted primarily from increased losses from the DIRECTV Latin America
businesses, reduced operating profit at HSC due to the lower revenues as
previously discussed, lower interest income as discussed above and increased
interest expense. The pre-tax loss for the first nine months of 1999 also
included a one-time first quarter pre-tax charge of $92 million that resulted
from the termination of the Asia-Pacific Mobile Telecommunications satellite
system contract due to export licenses not being issued and a second quarter
pre-tax charge of $125 million related to the increased development costs and
schedule delays at HSC. These decreases in the first nine months of 1999 were
offset by the $155 million pre-tax gain discussed above.
Income taxes for the third quarter and first nine months of 1999 reflect tax
benefits recorded for the pre-tax losses incurred in those periods and higher
expected tax benefits, compared to the third quarter and first nine months of
1998, from the expected favorable resolution of certain tax contingencies.
(Losses) earnings used for computation of available separate consolidated net
(loss) income for the third quarter of 1999 was a loss of $54 million, compared
with earnings of $43 million for the third quarter of 1998, and a loss of $70
million for the first nine months of 1999, compared with earnings of $153
million for the first nine months of 1998. The third quarter and first nine
months of 1999 included $24 million and $26 million of accrued preferred stock
dividends, respectively.
On September 24, 1999, DIRECTV Japan, Hughes' 42.2% owned affiliate, raised
approximately $275 million through the issuance of bonds, convertible into
common stock, to five of its major shareholders, including $238 million issued
to Hughes. If Hughes elects to convert these bonds, Hughes would have a
controlling interest in DIRECTV Japan.
On July 28, 1999, Galaxy Latin America (GLA), acquired Galaxy Brasil, Ltda.,
the exclusive distributor of DIRECTV services in Brazil, from Tevecap S.A. for
approximately $114 million plus the assumption of debt. In connection with the
transaction, Tevecap sold its 10% equity interest in GLA to Hughes and the
Cisneros Group, the remaining GLA partners. Hughes' share of the GLA purchase
amounted to approximately $101 million and increased Hughes' ownership of GLA to
77.8%.
- 28 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Financing and Insurance Operations
Highlights of financial performance by GM's Financing and Insurance
Operations business were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
------- -------- ------- -------
(Dollars in Millions)
Total net sales and revenues
GMAC $5,203 $4,446 $14,931 $13,295
Other 45 68 179 274
----- ------ ------- -------
Total net sales and revenues $5,248 $4,514 $15,110 $13,569
===== ===== ====== ======
Net income (loss)
GMAC $393 $313 $1,176 $1,027
Other (3) 32 12 76
--- --- ----- -----
Total $390 $345 $1,188 $1,103
=== === ===== =====
GMAC Financial Highlights
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------ ------- ------ -------
(Dollars in Millions)
Financing revenue
Retail and lease financing $1,095 $982 $3,170 $2,834
Operating leases 1,902 1,822 5,494 5,416
Wholesale, commercial and
other loans 483 346 1,454 1,212
------ ------ ------- -----
Total financing revenue 3,480 3,150 10,118 9,462
Interest and discount 1,667 1,477 4,718 4,317
Depreciation on operating leases 1,226 1,149 3,576 3,488
----- ----- ------- -----
Net financing revenue 587 524 1,824 1,657
Insurance premiums earned 450 466 1,339 1,417
Mortgage revenue 790 538 2,248 1,456
Other income 483 292 1,223 960
------ ------ ----- ------
Net financing revenue and other 2,310 1,820 6,634 5,490
Expenses 1,655 1,377 4,698 4,004
----- ----- ----- -----
Pre-tax income 655 443 1,936 1,486
Income tax expense 262 130 760 459
--- --- ------ ------
Net income $393 $313 $1,176 $1,027
=== === ===== =====
Net income from automotive
financing operations $287 $250 $791 $784
Net income from insurance operations 55 54 170 188
Net income from mortgage operations 51 9 215 55
---- ----- ------ -------
Net income $393 $313 $1,176 $1,027
=== === ===== =====
GMAC Financial Review
Consolidated net income for the third quarter and first nine months of 1999
increased by 25% and 14% compared to the same periods during 1998. Net income
from automotive financing operations increased by 15% during the third quarter
of 1999, compared to the same period in 1998. Earnings were higher due primarily
to increased financing volumes, partially offset by a significantly higher
effective tax rate. Additionally, net income in the third quarter of 1998 was
adversely impacted by the effects of the GM work stoppage.
Earnings from insurance operations were virtually unchanged from the same
period in 1998.
Net income from mortgage operations during the third quarter of 1999 was $42
million higher than the third quarter of 1998. Earnings were higher primarily
due to unusually low earnings in the third quarter of 1998, which were
negatively impacted by illiquidity in the capital markets and accelerated
prepayment experience on mortgage assets.
During the three months and nine months ended September 30, 1999, GMAC
financed 36.5% and 33.8% of new GM vehicles delivered in the U.S., respectively,
down from 37.7% and 36.2% for the same periods in 1998. The continued decline in
financing penetration was primarily the result of competitive market conditions.
- 29 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
GMAC Financial Review (concluded)
In the United States, inventory financing was provided for 852,000 and
2,580,000 new GM vehicles during the third quarter and first nine months of
1999, respectively, compared with 564,000 and 1,931,000 new GM vehicles during
the respective periods in 1998. The significant increase in new GM vehicles
financed is primarily a result of the 54-day work stoppage at two GM component
plants in June of last year that halted production of wholesale units at 26 of
29 vehicle assembly plants in North America. GMAC's wholesale financing
represented 66.9% of all GM U.S. vehicle sales to dealers during the first nine
months of 1999, up from 63.4% for the comparable period a year ago. The increase
in wholesale penetration levels was a result of competitive pricing strategies
by GMAC.
Financing revenue totaled $3.5 billion and $10.1 billion in the third quarter
and first nine months of 1999, respectively, compared to $3.2 billion and $9.5
billion for the same periods in 1998. The increases were mainly due to higher
average retail, operating lease, and other loan receivable balances which
resulted from continued retail financing incentives sponsored by GM.
Additionally, increased wholesale revenues resulting from higher average
wholesale balances contributed to the change. The increased wholesale balances
were primarily attributable to the 1998 work stoppages previously mentioned.
Insurance premiums earned totaled $450 million and $1.3 billion for the third
quarter and nine months ended September 30, 1999, respectively, compared to $466
million and $1.4 billion for the same periods during 1998. The reduction in
insurance premiums earned was due to a decline in personal line coverages,
partially offset by an increase in commercial lines and reinsurance. Mortgage
revenue and other income totaled $1.3 billion and $3.5 billion for the third
quarter and nine months ended September 30, 1999, respectively, compared to $830
million and $2.4 billion during the comparable periods a year ago. The increase
in 1999 over 1998 was primarily the result of substantial increases in mortgage
servicing and processing fees. Furthermore, GMAC Mortgage Group, Inc.'s (GMACMG)
other income increased substantially, mainly due to their expansion into
diversified businesses, specifically, Home Services, Newman and Associates,
Auritec, Capstead, Triad and American Financial Consultants LLC.
GMAC's worldwide cost of borrowing for the third quarter and first nine
months of 1999 averaged 5.62% and 5.55%, respectively, a decrease of 44 and 52
basis points from the comparable periods a year ago. Total borrowing costs for
U.S. operations averaged 5.61% and 5.50% for the third quarter and first nine
months of 1999, compared to 5.93% and 6.00% for the respective periods in 1998.
The lower average borrowing costs for the first nine months of 1999 are largely
a result of lower short-term market interest rates.
Consolidated salaries and other operating expenses totaled $1.2 billion and
$3.3 billion for the third quarter and first nine months of 1999, respectively,
compared to $930 million and $2.6 billion for the comparable periods last year.
The increase was mainly attributable to continued growth and acquisitions at
GMACMG.
Annualized net retail losses were 0.50% and 0.57% of total average serviced
automotive receivables during the third quarter and first nine months of 1999,
respectively, compared to 0.74% and 0.83% for the same periods last year. The
provision for credit losses totaled $328 million and $323 million for the nine
month periods ended September 30, 1999 and 1998, respectively. Although
comparable period loss rates declined, the higher loss provision reflects an
increase in retail receivables during the first nine months of 1999 and
favorable wholesale loss provision adjustments during the first quarter of 1998.
The effective income tax rate for the first nine months of 1999 was 39.3%,
compared to 31.6% and 30.9% for the periods ended December 31, 1998 and
September 30, 1998, respectively. The increase in the effective tax rate can be
attributed to a decrease in U.S. and foreign taxes assessed on foreign source
income for the first nine months of 1998.
Year 2000
Computers, software applications and microprocessors (embedded in a variety
of products either made or used by GM) have the potential for operational
problems if they lack the capability to handle the transition to the Year 2000.
To protect against this risk, GM implemented a comprehensive, worldwide program
to identify and remediate potential Year 2000 problems in its business
information systems and other systems embedded in its engineering and
manufacturing operations. Additionally, GM established communications and site
assessments with its suppliers, its dealers and other third parties to assess
and reduce the risk that GM's operations could be adversely affected by the
failure of these third parties to adequately address the Year 2000 issue.
One of GM's first priorities was the analysis of microprocessors in GM
passenger cars and trucks. This review included all current and planned models
as well as the electronics in older cars and trucks produced during the period
of approximately the last 15 years, back to when GM began installing
microprocessors capable of processing date information. Most of the
microprocessors reviewed have no date-related functionality and, accordingly,
have no Year 2000 issues. Of the vehicles with microprocessors that perform
date-related functions, none were found to have any Year 2000 issues.
- 30 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Year 2000 (continued)
GM assigned responsibility for remediating all of GM's information technology
and embedded systems to multiple Year 2000 program teams. 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 included assessment and remediation services provided
by Electronic Data Systems Corporation (EDS), GM's primary information
technology supplier, pursuant to a Master Service Agreement with GM. The
expenditures and other figures contained herein have been adjusted to reflect
the spin-off of Delphi Automotive Systems.
The Year 2000 program has been implemented in seven phases, some of which
were conducted concurrently:
Inventory -- This first phase consisted of the identification and validation
of an inventory of all systems that could be affected by the Year 2000
issue. The inventory phase began in earnest in 1996 and is complete. The
effort identified approximately 6,100 business information systems and about
1.4 million infrastructure items and embedded systems.
Assessment -- The assessment phase included the initial testing, code
scanning, and supplier contacts to determine whether remediation was needed
and, if so, the development of a remediation plan. The assessment of
business information systems is completed and included the determination
that about one quarter of these systems were "critical" based on criteria
such as the potential for business disruption. The assessment of
infrastructure items and embedded systems is also complete.
Remediation -- This phase involved the design and execution of a remediation
plan, followed by testing for adherence to the design. GM has completed the
remediation of its systems, with the exception of work which is continuing
into the fourth quarter involving the previously existing Year 2000 programs
of certain recent business acquisitions by GMAC to ensure conformance of
those programs to GMAC's Year 2000 program standards. The cost of such
remediation efforts is not material to GMAC and it is comprehended by the
Corporation's total cost estimates. The risk of nonremediation of these
programs is not material to GM or GMAC.
System Test -- The system test phase involved testing of remediated items to
ensure that they functioned normally after being replaced in their original
operating environment. System test was closely related to the remediation
phase and followed essentially the same schedule.
Implementation -- Implementation involved the return of items to normal
operation after satisfactory performance in system testing. This phase
followed essentially the same schedule as remediation and system testing.
Readiness Testing -- This phase included the planning for and testing of
integrated systems in a Year 2000 ready environment, including ongoing
auditing and follow-up. Three distinct types of readiness tests were
conducted: (1) individual system tests; (2) tests of groups of related
systems that comprised a major business process or manufacturing function;
and (3) running plant floor systems while production was in process.
Individual system tests of GM's critical applications, and approximately
300 integrated business process tests and 900 integrated manufacturing
system tests have been completed. More than 100 live production tests have
also been successfully completed.
In addition to GM readiness testing, a third party Independent Validation
& Verification (IV&V) process has been used to examine remediated code to
identify potential oversights or errors in select mission-critical systems.
The results have validated the success of GM's testing program.
Contingency Planning -- This final step involved the development and
execution of plans that focus on areas of significant concern and the
concentration of resources to address those issues both proactively and
reactively. GM believes that the most reasonably likely worst case scenario
is that there will be some localized disruptions of systems that will affect
individual business processes, facilities or suppliers for a short time,
rather than systemic or long-term problems affecting its business operations
as a whole.
- 31 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Year 2000 (continued)
GM's contingency planning efforts identified systems, business processes
and some suppliers that it believes are potentially vulnerable to Year 2000
problems. GM contingency planning also has addressed those business
operations in which a localized disruption could have the potential for
causing a wider problem by interrupting the flow of products, materials or
data to other operations. Because there is uncertainty as to which
activities may be affected and the exact nature of the problems that may
arise, GM's contingency planning has focused on minimizing the scope and
duration of any disruptions by developing comprehensive, detailed plans.
These reactive plans permit a flexible, real-time response to specific
problems that may arise at individual locations around the world.
A natural extension of GM's contingency planning is the deployment of a
command center structure, that began limited operations in September 1999.
The Global Command Center at the GM Technical Center has redundant
communication and power, allowing for uninterrupted operations and
connectivity with other GM command centers strategically located around the
world. Detailed plans and procedures have been developed and are being
validated. The centers will be staffed with appropriate personnel 24 hours a
day, seven days a week beginning the week of December 27, 1999. Operation
will continue for as long as conditions warrant.
GM's communication with its suppliers is a focused element of the assessment
and remediation phases described above. GM has been a leading participant in an
industry trade association, the Automotive Industry Action Group, which has
distributed Year 2000 compliance questionnaires as well as numerous awareness
and assistance mailings to about half of the 90,000 supplier sites that service
GM throughout the world. Responses to these questionnaires, which were generally
sent to GM's principal suppliers, were received from about half of the supplier
sites to which they were sent. Many of the non-responding suppliers have
communicated directly with GM on an informal basis.
However, GM has not relied on the receipt of responses to questionnaires or
written assurances from suppliers regarding their Year 2000 readiness. GM
conducted its own review and assistance program for suppliers considered to be
critical to GM's operations, including approximately 4,800 on-site assessments
to date. In addition, Year 2000 program management workshops have been conducted
for more than 2,500 supplier companies. GM's assessment efforts have been
substantially completed with respect to the critical supplier sites. Based on
its assessment activity to date, GM believes that a substantial majority of its
suppliers are adequately prepared for Year 2000.
Additionally, GM established a program to provide further remediation
assistance to suppliers considered to be "high-risk." This supplier assistance
program included providing remediation consultants to work with suppliers on
developing, implementing and accelerating their own Year 2000 readiness efforts.
With specific regard to the "off-shore" component of critical suppliers, GM's
readiness activities have been managed by a global Year 2000 supplier readiness
organization with regional offices and personnel in Mexico City, Mexico;
Russelsheim, Germany; Sao Paulo, Brazil; Melbourne, Australia; and Singapore, in
addition to the supplier readiness program headquarters in
Detroit.
Of the critical supplier sites being tracked globally in 60 countries for
specific risk management action, approximately 41% are outside of North America.
Of the high-risk suppliers who have received or are receiving direct remediation
assistance, approximately 76% are outside of North America.
For the small percentage of suppliers still judged to be "failure-likely"
after completion of the remediation assistance program, GM has taken proactive
steps to minimize the possibility of business interruption. These steps include,
among other actions, deploying further intensive supplier assistance and
follow-up, establishing buffer inventories, and working with supplier personnel
to develop internal supplier contingency plans to deal with likely failure
scenarios.
To address uncertainties in GM's risk management process and Year 2000
readiness factors outside the direct control of GM or its suppliers, GM has
developed reactive contingency plans to minimize business disruption related to
these uncertainties. These initiatives include emergency response teams,
allocation plans, strategically located command centers, and "early warning"
communication links with key suppliers during the millennium transition. GM has
accorded a high priority to contingency planning, command centers and in-depth
risk management for those countries and global regions that, as a result of
prior assessment activities, show a high concentration of failure-likely
suppliers or utility sites.
GM also has been working with its independent dealers on their Year 2000
readiness. This program included distributing materials that assist dealers in
designing and executing their own assessment and remediation efforts.
Additionally, GM developed 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.
- 32-
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Year 2000 (concluded)
GM's direct Year 2000 program cost is being expensed as incurred with the
exception of capitalizable replacement hardware and, beginning in 1999,
internal-use software. Total incremental spending by GM is not expected to be
material to the Corporation's operations, liquidity or capital resources.
In addition to the work for which GM has direct financial responsibility, EDS
has provided Year 2000-related services to GM, as required under the Master
Service Agreement. EDS provided these services as part of normal fixed price
services and other ongoing payments.
GM's current forecast is that its total direct expenditures, plus the value
of services performed by EDS attributable to GM's Year 2000 program, will be
between $566 million and $626 million. This amount includes the following:
o an estimated $360 million to $420 million in direct GM expenditures. This
estimate includes a $62 million payment from GM to EDS at the end of the
first quarter of 2000 if systems remediated by EDS under the Master Service
Agreement do not cause a significant business disruption that results in
material financial loss to GM due to the millennium change;
o and an estimated $206 million representing the value of Year 2000 services
that EDS is providing to GM as part of normal fixed price services and other
ongoing payments to EDS under the Master Service Agreement. This estimate
does not include the $62 million additional payment from GM to EDS at the end
of the first quarter of 2000 mentioned above.
GM incurred approximately $142 million of direct spending during 1997 and
1998, and approximately $142 million in 1999 through the end of the third
quarter. The estimated value of services provided to GM by EDS under the Master
Service Agreement from January 1997 through the end of the third quarter of 1999
attributable to work performed in connection with GM's Year 2000 program was
approximately $253 million. Thus, the total direct expenditures by GM, and value
of Year 2000-related services performed by EDS attributable to GM's Year 2000
program, for the period from January 1997 through September 1999, amounted to
approximately $537 million.
Despite the incremental Year 2000 spending expected to be incurred throughout
the Corporation, GM's current business plan projects declining information
technology expenses. GM's total Year 2000 costs noted above do not include the
cost of information technology projects that have been delayed due to Year 2000,
which are estimated to be approximately $27 million or information technology
projects that have been accelerated due to Year 2000 which are estimated to be
approximately $20 million.
In view of the foregoing, GM does not currently anticipate that it will
experience a significant disruption of its business as a result of the Year 2000
issue. However, there is still uncertainty about the broader scope of the Year
2000 issue as it may affect GM and third parties that are critical to GM's
operations. For example, lack of readiness by electrical and water utilities,
financial institutions, government agencies or other providers of general
infrastructure could, in some geographic areas, pose significant impediments to
GM's ability to carry on its normal operations in the area or areas so affected.
In the event that GM is unable to implement adequate contingency plans in the
event that problems are encountered, there could be a material adverse effect on
GM's business, results of operations, or financial condition.
The foregoing discussion describes the Year 2000 program being implemented by
GM and its consolidated subsidiaries other than Hughes. Information about the
Year 2000 efforts of Hughes can be found in Exhibit 99. As previously stated,
the financial and other data contained herein have been adjusted to reflect the
spin-off of Delphi Automotive Systems.
Statements made herein regarding the implementation of various phases of GM's
Year 2000 program, the costs expected to be associated with that program and the
results that GM expects to achieve constitute forward-looking information. As
noted above, there are many uncertainties involved in the Year 2000 issue,
including the extent to which GM has been able to successfully remediate systems
and adequately provide for contingencies that may arise, as well as the broader
scope of the Year 2000 issue as it may affect third parties that are not
controlled by GM. Accordingly, the costs and results of GM's Year 2000 program
and the extent of any impact on GM's operations could vary materially from those
stated herein.
- 33 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES
Automotive, Electronics and Other Operations
Cash, marketable securities, and $3.0 billion of assets of the Voluntary
Employees' Beneficiary Association (VEBA) trust invested in fixed-income
securities, at September 30, 1999 totaled $16.7 billion compared with $10.3
billion at September 30, 1998 and $13.1 billion at December 31, 1998. The
increase in cash and marketable securities from September 30, 1998 and December
31, 1998 to September 30, 1999 was primarily due to stronger operating cash
flows in the first nine months of 1999 versus 1998 due to the work stoppages
during 1998. The total VEBA assets in the VEBA trust used to pre-fund part of
GM's other postretirement benefits liability approximated $4.7 billion at
September 30, 1999, $4.6 billion at December 31, 1998, and $4.5 billion at
September 30, 1998.
Net liquidity, calculated as cash and marketable securities less the total of
loans payable and long-term debt, was $5.1 billion at September 30, 1999,
compared with $1.8 billion at December 31, 1998 and $(1.5) billion at September
30, 1998. GM previously indicated that it had a goal of maintaining $13.0
billion of cash and marketable securities in order to continue funding product
development programs throughout the next downturn in the business cycle. This
$13.0 billion target includes cash to pay certain costs that were pre-funded in
part by VEBA contributions.
Long-term debt was $7.9 billion at September 30, 1999, compared to $7.1
billion at December 31, 1998 and $6.8 billion at September 30, 1998. The ratio
of long-term debt to long-term debt and GM investment in Automotive, Electronics
and Other Operations was 57.2% at September 30, 1999, compared to 58.1% at
December 31, 1998 and 57.3% at September 30, 1998. The ratio of long-term debt
and short-term loans payable to the total of this debt and GM investment was
59.3% at September 30, 1999, compared to 61.8% at December 31, 1998 and 63.3% at
September 30, 1998.
Financing and Insurance Operations
Financing and Insurance Operations are conducted by GMAC and certain of its
subsidiaries. At September 30, 1999, GMAC owned assets and serviced automotive
receivables totaling $154.5 billion, $15.8 billion above year-end 1998, and
$28.4 billion above September 30, 1998. Earning assets totaled $133.6 billion at
September 30, 1999, compared to $125.1 billion and $112.9 billion at December 31
and September 30, 1998, respectively. The higher balances compared to third
quarter of last year were primarily attributable to increases in serviced
wholesale, retail, operating lease, commercial, and other loan receivables.
GMAC's finance receivables, including sold receivables, totaled $92.0 billion
at September 30, 1999, $12.1 billion above December 31, 1998 levels and $20.0
billion above September 30, 1998 levels. The change from December 31, 1998 was
primarily attributed to a $6.4 billion increase in commercial and other loan
receivables, a $4.8 billion increase in serviced retail receivables, and a $1.2
billion increase in serviced wholesale receivables. This year-to-year increase
was primarily a result of a $7.3 billion increase in serviced wholesale
receivables, a $7.3 billion increase in commercial and other loan receivables,
and a $5.6 billion increase in serviced retail receivables. The increase in
wholesale receivable balances over December 31 and September 30, 1998 was a
result of the 1998 work stoppages previously mentioned and higher penetration.
The change in commercial and other loan receivables was due to the acquisition
of Bank of New York Financial Corporation in July 1999 and increases in other
secured notes. The increase in retail receivable balances over December 31 and
September 30, 1998 was due to continued retail financing incentives sponsored by
GM.
GMAC's liquidity, as well as its ability to profit from ongoing acquisition
activity, is in large part dependent on its access to capital and the costs
associated with raising funds in different segments of the capital markets. In
this regard, GMAC regularly accesses the short-, medium-, and long-term debt
markets, principally through commercial paper, term notes and underwritten
issuances. As of September 30, 1999, GMAC's total borrowings were $114.4
billion, compared with $106.2 billion and $93.5 billion at December 31, 1998 and
September 30, 1998, respectively. The higher borrowings were used to fund
increased earning asset levels. GMAC's ratio of consolidated debt to total
stockholder's equity at September 30, 1999 was 10.7:1, compared to 10.8:1 at
December 31, 1998 and 9.8:1 at September 30, 1998.
GMAC and its subsidiaries maintain substantial bank lines of credit which
totaled $45.8 billion at September 30, 1999, compared to $42.9 billion at
year-end 1998 and $42.7 billion at September 30, 1998. The unused portion of
these credit lines totaled $35.8 billion at September 30, 1999, $2.6 billion and
$2.0 billion higher than December 31 and September 30, 1998, respectively.
- 34 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Book Value Per Share
Book value per share of $1-2/3 par value common stock was $20.59 at September
30, 1999, compared with $20.00 at December 31, 1998 and $19.54 at September 30,
1998. Book value per share of GM Class H common stock was $12.36 at September
30, 1999, compared with $12.00 at December 31, 1998 and $11.72 at September 30,
1998. Book value per share was determined based on the liquidation rights of the
various classes of common stock.
Return on Net Assets (RONA)
As part of its shareholder value initiatives, GM has adopted RONA as a
performance measure to heighten management's focus on balance sheet investments
and the return on those investments. GM's RONA calculation is based on
principles established by management and approved by the Board of Directors.
GM's 1999 third quarter RONA for continuing operations on an annualized basis,
excluding Hughes, was 10.1%.
CASH FLOWS
Automotive, Electronics and Other Operations
Net cash provided by operating activities was $15.4 billion during the nine
months ended September 30, 1999 compared with $2.8 billion for the prior year
period. The increase in net cash provided by operating activities was primarily
the result of increased income from continuing operations and the net changes in
operating assets and liabilites. These were primarily related to increases in
accounts payable resulting from an extension of payment terms and increases in
accrued and other liabilities.
Net cash used in investing activities amounted to $11.5 billion during the
nine months ended September 30, 1999 compared with $4.2 billion in the prior
year period. The increase in net cash used in investing activities was primarily
attributable to increased cash used for investments in companies, investments in
marketable securities, and operating leases.
Net cash used in financing activities was $1.1 billion during the nine months
ended September 30, 1999 compared with $1.4 billion in the prior year period.
The decrease in cash used for financing activities during the first nine months
of 1999 was primarily due to reduced stock repurchases and proceeds from issuing
preference stock in the second quarter of 1999, partially offset by decreases in
short-term loans payable and long-term debt.
Financing and Insurance Operations
Cash provided by operating activities totaled $9.9 billion and $3.8 billion
during the nine months ended September 30, 1999 and 1998, respectively. The
additional operating cash flow was primarily the result of an increase in
proceeds from sales of mortgage loans and mortgage-related securities held for
trading, a reduction in acquisitions of mortgage-related securities held for
trading and decreases in other miscellaneous assets and investments. These net
inflows were partially offset by the net changes in operating assets and
liabilities and increases in purchases of mortgage loans and mortgage related
securities held for trading.
Cash used for investing activities during the nine months ended September 30,
1999 totaled $13.6 billion, a $3.3 billion increase in cash used compared to the
same period last year. Cash usage increased primarily as a result of investments
in companies, net increases in acquisitions of finance receivables compared to
liquidations of such receivables, largely offset by increased proceeds from
sales of finance receivables.
Cash provided by financing activities during the nine months ended September
30, 1999 totaled $3.5 billion, compared with cash provided of $6.5 billion
during the comparable 1998 period. The change was primarily the result of a
reduction in short-term debt, partially offset by an increase in long-term debt.
Dividends
Dividends may be paid on common stocks only when, as and if declared by the
GM Board in its sole discretion. GM's policy is to distribute dividends on its
$1-2/3 par value common stock based on the outlook and indicated capital needs
of the business. On August 2, 1999, the GM Board declared a quarterly cash
dividend of $0.50 per share on $1-2/3 par value common stock, paid September 10,
1999, to holders of record as of August 2, 1999. The GM Board also declared
quarterly dividends on the Series D and Series G Depositary Shares of $0.495 and
$0.57 per share, respectively, paid November 1, 1999, to holders of record on
October 4, 1999. The Series B preference stock was redeemed on April 5,
- 35 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Dividends (concluded)
1999, and as a result, the amount paid out on that date to the Series B
shareholders of record included accrued and unpaid dividends as part of the
total redemption price. With respect to GM Class H common stock, the GM Board
determined that it will not pay any cash dividends at this time in order to
allow the earnings of Hughes to be retained for investment in its
telecommunications and space businesses. On August 2, 1999 the GM Board declared
two dividends on the GM Series H 6.25% Automatically Convertible Preference
Stock. A dividend of $0.5853 per share of GM Series H 6.25% Automatically
Convertible Preference Stock was paid on August 2, 1999, to the sole holder of
record on that date for the period between the close of the transaction and the
end of the second quarter. A quarterly dividend of $8.7793 per share for the GM
Series H 6.25% Automatically Convertible Preference Stock was paid November 1,
1999, to the holder of record on October 4, 1999.
Employment and Payrolls
Worldwide employment at September 30, 1999 1998
(in thousands) ---- ----
GMNA 219 229
GME 82 81
GMLAAM 23 25
GMAP 10 10
GMAC 27 23
Hughes 18 15
Other 12 12
---- ----
Total employees 391 395
=== ===
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
------ ------ ------ ------
1998
Worldwide payrolls - (in billions) $5.5 $5.0 $16.5 $15.3
=== === ==== ====
New Accounting Standard
In June 1999, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 - an Amendment of FASB Statement No. 133. This
statement defers, for one year, the effective date of SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, to those fiscal years
beginning after June 15, 2000. SFAS No. 133 requires all derivatives to be
recorded as either assets or liabilities and the instruments to be measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives are to be recognized immediately or deferred depending on the use of
the derivative and whether or not it qualifies as a hedge. GM will adopt SFAS
No. 133 by January 1, 2001, as required. Management is currently assessing the
impact of this statement on GM's results of operations and financial position.
- 36 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
PART II
ITEM 1. LEGAL PROCEEDINGS
(a) Material pending legal proceedings, other than ordinary routine litigation
incidental to the business, to which the Corporation became, or was, a party
during the quarter ended September 30, 1999 or subsequent thereto, but before
the filing of this report are summarized below:
Other Matters
With respect to the previously reported matter, Anderson, et al v. General
Motors Corporation, in which a jury in a Los Angeles Superior Court returned a
verdict of $4.9 billion against GM in a product liability lawsuit involving a
post-collision fuel fed fire in a 1979 Chevrolet Malibu, the following
post-trial developments have occurred. The trial court has reduced the punitive
damages from $4.8 billion to $1.1 billion and GM has posted a bond for the
punitive and compensatory damages (the cost of which was not material to the
Corporation). GM continues to pursue its appellate rights, including efforts to
secure a new trial and the complete elimination of responsibility to pay any
damages in this matter consistent with GM's view that the design of the
Chevrolet Malibu was not responsible for plaintiffs' injuries.
* * *
With respect to the previously reported matter, National Rural
Telecommunications Cooperative (NRTC) v. DIRECTV, Inc. and Hughes Communications
Galaxy, Inc. (together "DIRECTV"), the following has occurred. On August 26,
1999, the NRTC filed a second lawsuit against DIRECTV in which it alleges that
DIRECTV has breached the agreement it has with NRTC. In this suit, NRTC is
asking the court to require DIRECTV to pay to NRTC a proportionate share of the
financial benefits DIRECTV derives from programming providers and certain other
third parties. DIRECTV denies that it owes any sums to the NRTC on account of
the allegations in this matter and plans to vigorously defend itself against
these claims.
* * *
(b) Previously reported legal proceedings which have been terminated, either
during the quarter ended September 30, 1999, or subsequent thereto, but before
the filing of this report are summarized below:
As previously reported, on April 25, 1997, a purported nationwide class
action was filed against the Corporation and certain other vehicle manufacturers
in the Circuit Court of Coosa County, Alabama, Ellen Smith, et al v. General
Motors Corporation, Ford Motor Company Chrysler Motors Corporation, Sylacauga
Auto Plex, et al, claiming that the front seat air bags installed in 1993 to
1997 model vehicles are defective because, when deployed, they are likely to
injure small-statured adults and children. The complaint sought compensatory
damages, the cost of repair or replacement of the allegedly defective air bags,
plus attorneys' fees. That case has now been dismissed without prejudice.
* * * * * * *
- 37 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS (Including Those Incorporated by Reference).
Exhibit
Number Exhibit Name Page No.
99 Hughes Electronics Corporation Financial Statements and
Management's Discussion and Analysis of Financial
Condition and Results of Operations 39
27 Financial Data Schedule
(for Securities and Exchange Commission information only)
(b) REPORTS ON FORM 8-K.
Three reports on Form 8-K, dated July 9, 1999, July 19, 1999 and June 24,
1999 (filed August 24, 1999) were filed during the quarter ended September 30,
1999 reporting matters under Item 5, Other Events and reporting certain
agreements under Item 7, Financial Statements, Pro Forma Financial
Information, and Exhibits.
* * * * * *
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
GENERAL MOTORS CORPORATION
--------------------------
(Registrant)
Date November 12, 1999 /s/Peter R. Bible
- ---------------------- ------------------------------
(Peter R. Bible,
Chief Accounting Officer)
- 38 -
<PAGE>
EXHIBIT 99
HUGHES ELECTRONICS CORPORATION
<TABLE>
FINANCIAL STATEMENTS AND
MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
STATEMENTS OF INCOME (LOSS) AND
AVAILABLE SEPARATE CONSOLIDATED NET INCOME (LOSS)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in Millions Except Per Share Amounts)
Revenues
<S> <C> <C> <C> <C>
Direct broadcast, leasing and other services $1,294.4 $ 640.5 $3,095.2 $1,845.8
Product sales 696.1 872.8 2,123.1 2,327.5
-------- -------- -------- --------
Total Revenues 1,990.5 1,513.3 5,218.3 4,173.3
-------- -------- -------- --------
Operating Costs and Expenses
Cost of products sold 606.7 659.5 1,961.6 1,782.4
Broadcast programming and other costs 573.9 284.6 1,344.1 800.2
Selling, general and administrative expenses 598.3 390.4 1,551.6 1,052.2
Depreciation and amortization 216.5 111.3 499.3 309.2
Amortization of GM purchase accounting
adjustments 5.3 5.3 15.9 15.9
-------- -------- -------- --------
Total Operating Costs and Expenses 2,000.7 1,451.1 5,372.5 3,959.9
-------- -------- -------- --------
Operating Profit (Loss) (10.2) 62.2 (154.2) 213.4
Interest income 2.4 20.5 20.9 88.6
Interest expense (51.7) (3.6) (71.0) (9.5)
Other, net (22.4) (33.4) 77.8 (102.8)
-------- -------- -------- --------
Income (Loss) Before Income Taxes, Minority
Interests and Cumulative Effect of
Accounting Change (81.9) 45.7 (126.5) 189.7
Income tax provision (benefit) (38.2) 17.4 (44.9) 72.1
Minority interests in net losses of subsidiaries 8.8 9.3 22.1 19.2
-------- -------- -------- --------
Income (Loss) before cumulative effect
of accounting change (34.9) 37.6 (59.5) 136.8
Cumulative effect of accounting change, net
of taxes - - - (9.2)
-------- -------- -------- --------
Net Income (Loss) (34.9) 37.6 (59.5) 127.6
Adjustments to exclude the effect of
GM purchase accounting adjustments 5.3 5.3 15.9 15.9
-------- -------- -------- --------
Earnings (Loss) excluding the effect of
GM purchase accounting adjustments (29.6) 42.9 (43.6) 143.5
Preferred stock dividends (24.7) - (26.3) -
-------- -------- -------- --------
Earnings (Loss) Used for Computation of
Available Separate Consolidated Net
Income (Loss) $ (54.3) $ 42.9 $ (69.9) $ 143.5
======== ======== ======== ========
Available Separate Consolidated Net Income (Loss)
Average number of shares of General Motors
Class H Common Stock outstanding
(in millions) (Numerator) 135.1 105.7 120.8 105.0
Average Class H dividend base (in millions)
(Denominator) 428.9 399.9 414.7 399.9
Available Separate Consolidated Net Income (Loss) $ (17.1) $ 11.4 $ (20.4) $ 37.6
======== ======== ======== ========
Earnings (Loss) Attributable to General Motors
Class H Common Stock on a Per Share
Basis - Basic and Diluted $ (0.13) $ 0.11 $ (0.17) $ 0.36
======== ======== ======== ========
</TABLE>
- ---------
Reference should be made to the Notes to Financial Statements.
- 39 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
1999 December 31,
ASSETS (Unaudited) 1998
------------- ------------
(Dollars in Millions)
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 158.3 $ 1,342.1
Accounts and notes receivable (less allowances) 1,289.8 922.4
Contracts in process, less advances and progress
payments of $24.7 and $27.0 846.1 783.5
Inventories 639.1 471.5
Prepaid expenses and other, including deferred income
taxes of $97.5 and $33.6 705.9 326.9
--------- ---------
Total Current Assets 3,639.2 3,846.4
Satellites, net 3,690.6 3,197.5
Property, net 1,303.0 1,059.2
Net Investment in Sales-type Leases 155.9 173.4
Intangible Assets, net of accumulated amortization
of $562.0 and $413.2 7,781.5 3,552.2
Investments and Other Assets 2,236.1 1,606.3
--------- ---------
Total Assets $18,806.3 $13,435.0
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable $ 1,005.7 $ 764.1
Advances on contracts 164.5 291.8
Deferred revenues 194.9 43.8
Current portion of long-term debt 298.1 156.1
Accrued liabilities 933.1 753.7
--------- ---------
Total Current Liabilities 2,596.3 2,009.5
Long-Term Debt 1,929.2 778.7
Postretirement Benefits Other Than Pensions 155.5 150.7
Other Liabilities and Deferred Credits 1,686.1 988.6
Deferred Income Taxes 425.0 643.9
Commitments and Contingencies
Minority Interests 530.0 481.7
Stockholder's Equity
Capital stock and additional paid-in capital 9,710.7 8,146.1
Preferred stock 1,486.3 -
Net income retained for use in the business 172.0 257.8
--------- ---------
Subtotal Stockholder's Equity 11,369.0 8,403.9
--------- ---------
Accumulated Other Comprehensive Income (Loss)
Minimum pension liability adjustment (37.1) (37.1)
Accumulated unrealized gains on securities 140.1 16.1
Accumulated foreign currency translation adjustments 12.2 (1.0)
--------- ---------
Accumulated other comprehensive income (loss) 115.2 (22.0)
--------- ---------
Total Stockholder's Equity 11,484.2 8,381.9
--------- ---------
Total Liabilities and Stockholder's Equity $18,806.3 $13,435.0
========= =========
</TABLE>
- ------
Reference should be made to the Notes to Financial Statements.
- 40 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
1999 1998
---- ----
(Dollars in Millions)
Cash Flows from Operating Activities
<S> <C> <C>
Net Cash (Used in) Provided by Operating Activities $ (187.6) $ 313.7
--------- ---------
Cash Flows from Investing Activities
Investment in companies, net of cash acquired (2,324.5) (960.5)
Investment in convertible bonds (238.1) -
Expenditures for property (310.2) (202.7)
Increase in satellites (551.9) (526.7)
Early buy-out of satellite under sale and leaseback (245.4) (155.5)
Proceeds from disposals of property 5.1 17.6
Proceeds from disposal of investments - 12.4
Proceeds from insurance claims 10.7 231.2
--------- ---------
Net Cash Used in Investing Activities (3,654.3) (1,584.2)
--------- ---------
Cash Flows from Financing Activities
Net increase in notes and loans payable 85.7 60.0
Long-term debt borrowings 5,221.6 875.3
Repayment of long-term debt (4,171.0) (734.2)
Net proceeds from issuance of preferred stock 1,485.0 -
Stock options exercised 47.3 -
Purchase and retirement of GM Class H common stock (8.9) -
Preferred stock dividends paid to General Motors (1.6) -
Payment to General Motors for Delco post-closing
price adjustment - (204.7)
--------- ---------
Net Cash Provided by (Used in) Financing Activities 2,658.1 (3.6)
--------- ---------
Net decrease in cash and cash equivalents (1,183.8) (1,274.1)
Cash and cash equivalents at beginning of the period 1,342.1 2,783.8
--------- ---------
Cash and cash equivalents at end of the period $ 158.3 $ 1,509.7
========= =========
</TABLE>
- -----
Reference should be made to the Notes to Financial Statements.
- 41 -
<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 that may be expected for any other interim period or for the full year.
For further information, refer to the financial statements and notes thereto
included in the General Motors ("GM") 1998 Annual Report on Form 10-K filed with
the Securities and Exchange Commission ("SEC"); the unaudited information
relating to Hughes filed as Exhibit 99 in GM's Quarterly Reports on Form 10-Q
dated March 31, 1999 and June 30, 1999 and related Hughes' Quarterly Report on
Form 10-Q for the period ended June 30, 1999, filed with the SEC; and Current
Reports on Form 8-K filed with the SEC subsequent to the filing date for the GM
1998 Annual Report on Form 10-K.
Certain prior period amounts have been reclassified to conform to the
September 1999 presentation.
The financial statements include the applicable portion of intangible assets,
including goodwill, and related amortization resulting from purchase accounting
adjustments associated with GM's purchase of Hughes in 1985.
In 1998, Hughes adopted American Institute of Certified Public Accountants
Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-Up
Activities. SOP 98-5 requires that all start-up costs previously capitalized be
written off and recognized as a cumulative effect of accounting change, net of
taxes, as of the beginning of the year of adoption. On a prospective basis,
these types of costs are required to be expensed as incurred. The unfavorable
cumulative effect of this accounting change was $9.2 million after-tax, or $0.02
per share of GM Class H common stock in the first quarter of 1998.
Note 2. Inventories
Major Classes of Inventories
September 30, December 31,
(Dollars in Millions) 1999 1998
---- ----
Productive material and supplies $ 75.8 $ 73.4
Work in process 457.9 285.1
Finished goods 105.4 113.0
------ ------
Total $639.1 $471.5
====== ======
Note 3. Comprehensive Income
Hughes' total comprehensive income was as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
(Dollars in Millions) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $(34.9) $ 37.6 $(59.5) $127.6
Other comprehensive income (loss):
Foreign currency translation
adjustments 17.8 2.2 13.2 (0.3)
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) 148.1 (3.4) 124.0 (2.4)
Less: reclassification
adjustment for unrealized
gains (losses) included in net
income - 0.2 - (7.1)
------ ------ ------ ------
Unrealized gains (losses) on securities 148.1 (3.2) 124.0 (9.5)
------ ------ ------ ------
Other comprehensive income (loss) 165.9 (1.0) 137.2 (9.8)
------ ------ ------ ------
Total comprehensive income $131.0 $ 36.6 $ 77.7 $117.8
====== ====== ====== ======
</TABLE>
- 42 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 4. Earnings (Loss) Per Share Attributable to GM Class H Common Stock and
Available Separate Consolidated Net Income (Loss)
Earnings (Loss) attributable to GM Class H common stock on a per share basis
is determined based on the relative amounts available for the payment of
dividends to holders of GM Class H common stock. Holders of GM Class H common
stock have no direct rights in the equity or assets of Hughes, but rather have
rights in the equity and assets of GM (which includes 100% of the stock of
Hughes).
Amounts available for the payment of dividends on GM Class H common stock are
based on the Available Separate Consolidated Net Income (Loss) ("ASCNI") of
Hughes. The ASCNI of Hughes is determined quarterly and is equal to the
separate consolidated net income (loss) of Hughes, excluding the effects of GM
purchase accounting adjustments arising from GM's acquisition of Hughes and
including the effects of preferred dividends paid and/or payable to GM (earnings
(loss) used for computation of ASCNI), multiplied by a fraction, the numerator
of which is equal to the weighted-average number of shares of GM Class H common
stock outstanding during the period (135.1 million and 105.7 million during the
third quarters of 1999 and 1998, respectively) and the denominator of which is a
number equal to the weighted-average number of shares of GM Class H common
stock which, if issued and outstanding, would represent 100% of the tracking
stock interest in the earnings of Hughes (Average Class H dividend base). The
Average Class H dividend base was 428.9 million and 399.9 million during the
third quarters of 1999 and 1998, respectively. Upon conversion of the General
Motors Series H preference stock into General Motors Class H common stock, both
the numerator and the denominator used in the computation of ASCNI will increase
by the number of shares of the General Motors Class H common stock issued (see
further discussion in Note 5). In addition, the denominator used in determining
the ASCNI of Hughes may be adjusted from time to time as deemed appropriate by
the GM Board of Directors ("GM Board") to reflect subdivisions or combinations
of the GM Class H common stock, certain transfers of capital to or from Hughes,
the contribution of shares of capital stock of GM to or for the benefit of
Hughes employees and the retirement of GM Class H common stock purchased by
Hughes. The GM Board's discretion to make such adjustments is limited by
criteria set forth in GM's Restated Certificate of Incorporation.
In connection with the PRIMESTAR and USSB transactions (see further discussion
in Note 7), GM contributed to Hughes an amount of cash sufficient to enable
Hughes to purchase from GM, for fair value as determined by the GM Board, the
number of shares of GM Class H common stock delivered by Hughes. In accordance
with the GM certificate of incorporation, the Class H dividend base was
increased to reflect that number of shares. The number of shares issued as part
of the PRIMESTAR acquisition and the USSB merger have been included in the
calculation of both the numerator and denominator of the fraction described
above since the consummation dates of the transactions.
Effective January 1, 1999, shares of Class H common stock delivered by GM in
connection with the award of such shares to and the exercise of stock options by
employees of Hughes increases the numerator and denominator of the fraction
referred to above. Prior to January 1, 1999, there was no dilutive effect
resulting from the assumed exercise of stock options, because the exercise of
stock options did not affect the GM Class H dividend base (denominator). From
time to time, in anticipation of exercises of stock options, Hughes purchases
Class H common stock from the open market. Upon purchase, these shares are
retired and therefore decrease the numerator and denominator of the fraction
referred to above.
For the three and nine months ended September 30, 1999, diluted loss per share
has not been presented as the assumed exercise of stock options and the assumed
conversion of the preferred shares in the computation of diluted loss per share
would have been anti-dilutive.
- 43 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 5. Hughes Series A Preferred Stock
On June 24, 1999, as part of a strategic alliance with Hughes, America
Online ("AOL") invested $1.5 billion in shares of General Motors Series H 6.25%
Automatically Convertible Preference Stock. The General Motors Series H
preference stock will automatically convert into Class H common stock in three
years based upon a variable conversion factor linked to the Class H common stock
price at the time of conversion, and accrues quarterly dividends at a rate of
6.25% per year. It may be converted earlier in certain limited circumstances.
General Motors immediately invested the $1.5 billion received from AOL in shares
of Hughes Series A Preferred Stock designed to correspond to the financial terms
of the General Motors Series H preference stock. Dividends on the Hughes Series
A Preferred Stock are payable to General Motors quarterly at an annual rate of
6.25%. These preferred stock dividends payable to General Motors will reduce
Hughes' earnings used for computation of the ASCNI of Hughes, which will have an
effect equivalent to the payment of dividends on the Series H preference stock
as if those dividends were paid by Hughes. Upon conversion of the General Motors
Series H preference stock into General Motors Class H common stock, Hughes will
redeem the Series A Preferred Stock through a cash payment to General Motors
equal to the fair market value of the Class H common stock issuable upon the
conversion. Simultaneous with General Motors' receipt of the cash redemption
proceeds, General Motors will make a capital contribution to Hughes of the same
amount. In connection with this capital contribution, the denominator of the
fraction used in the computation of the ASCNI of Hughes will be increased by the
corresponding number of shares of General Motors Class H common stock issued.
Accordingly, upon conversion of the General Motors Series H preference stock
into General Motors Class H common stock, both the numerator and denominator
used in the computation of ASCNI will increase by the amount of the General
Motors Class H common stock issued.
Note 6. Other Postretirement Benefits
Hughes has disclosed in the financial statements certain amounts associated
with estimated future postretirement benefits other than pensions and
characterized such amounts as "accumulated postretirement benefit obligations,"
"liabilities" or "obligations." Notwithstanding the recording of such amounts
and the use of these terms, Hughes does not admit or otherwise acknowledge that
such amounts or existing postretirement benefit plans of Hughes (other than
pensions) represent legally enforceable liabilities of Hughes.
Note 7. Investments and Acquisitions
On September 24, 1999, DIRECTV Japan, Hughes' 42.2% owned affiliate, raised
approximately $275 million through the issuance of bonds, convertible into
common stock, to five of its major shareholders, including $238.1 million issued
to Hughes. If Hughes elects to convert these bonds, Hughes would have a
controlling interest in DIRECTV Japan.
On July 28, 1999, Galaxy Latin America ("GLA") acquired Galaxy Brasil,
Ltda., the exclusive distributor of DIRECTV services in Brazil, from Tevecap
S.A. for approximately $114.0 million plus the assumption of debt. In connection
with the transaction, Tevecap sold its 10% equity interest in GLA to Hughes and
the Cisneros Group, the remaining GLA partners. Hughes' share of the GLA
purchase amounted to approximately $101.1 million and increased Hughes'
ownership of GLA to 77.8%.
- 44 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 7. Investments and Acquisitions - concluded
On January 22, 1999, Hughes agreed to acquire PRIMESTAR's 2.3 million
subscriber medium-power direct-to-home satellite business and the high-power
satellite assets and direct-broadcast satellite orbital frequencies of Tempo
Satellite, a wholly-owned subsidiary of TCI Satellite Entertainment, Inc. On
April 28, 1999, the acquisition of PRIMESTAR's direct-to-home business was
completed. The purchase price consisted of $1.1 billion in cash and 4.9 million
shares of GM Class H common stock, for a total purchase price of $1.3 billion,
based on the average market price of $47.87 per share of Class H common stock at
the time the acquisition agreement was signed. The purchase price will be
adjusted based upon the final adjusted net working capital of PRIMESTAR at the
date of closing. The purchase price for the Tempo Satellite assets consisted of
$500 million in cash. Of this purchase price, $150 million was paid on March 10,
1999 for a satellite that has not yet been launched and the remaining $350
million was paid on June 4, 1999 for an in-orbit satellite and 11 related
satellite orbital frequencies.
In December 1998, Hughes agreed to acquire all of the outstanding capital
stock of United States Satellite Broadcasting Company, Inc. ("USSB"). USSB
provided direct-to-home premium satellite programming in conjunction with
DIRECTV's basic programming service. The USSB acquisition was closed on May 20,
1999. On July 6, 1999, based upon elections made by the former USSB
shareholders, Hughes paid approximately $0.4 billion in cash and issued
approximately 22.6 million shares of Class H common stock, for a total purchase
price of approximately $1.6 billion.
The financial information presented as of and for the periods ended
September 30, 1999 reflect the effects of the PRIMESTAR, Tempo Satellite and
USSB transactions, discussed above, from their respective dates of acquisition.
These transactions have been accounted for using the purchase method of
accounting; however, the adjustments made in the September 30, 1999 financial
statements reflect a preliminary allocation of the purchase price for the
transactions based upon information currently available. Adjustments relating to
the tangible assets (i.e., satellites, equipment located on customer premises,
etc.), intangible assets (i.e., licenses granted by the Federal Communications
Commission, customer lists, dealer network, etc.), and accrued liabilities for
programming contracts and leases with above-market rates are estimates pending
the completion of independent appraisals currently in process. Additionally, the
adjustment to recognize the benefit of net operating loss carryforwards of USSB
represents a preliminary estimate pending further review and analysis by the
management of Hughes. These appraisals, valuations and studies are expected to
be completed by December 31, 1999. Accordingly, the final purchase price
allocations may be different from the amounts reflected herein.
As the Hughes 1999 financial statements include only USSB's and PRIMESTAR's
results of operations since their dates of acquisition, the following selected
unaudited pro forma information is provided to present a summary of the combined
results of Hughes, USSB and PRIMESTAR as if the acquisitions had occurred as of
the beginning of the respective periods, giving effect to purchase accounting
adjustments. The pro forma data is presented for informational purposes only and
may not necessarily reflect the results of operations of Hughes had USSB and
PRIMESTAR operated as part of Hughes for the nine months ended September 30,
1999 and September 30, 1998, nor are they necessarily indicative of the results
of future operations. The pro forma information excludes the effect of non-
recurring charges.
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
(Dollars in Millions Except Per Share Amounts) September 30, 1999 September 30, 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total revenues $6,008.1 $5,484.4
Income (Loss) before cumulative effect of accounting
change (41.7) 79.3
Net income (loss) (41.7) 70.1
Pro forma available separate consolidated net income (loss) (1) (30.1) 4.9
Pro forma earnings (loss) per share attributable to GM Class H
common stock on a per share basis (1) $ (0.22) $ 0.04
</TABLE>
(1) Both periods include the pro forma effect of dividends amounting to $70.3
million related to the Hughes Series A Preferred Stock as if the preferred stock
had been outstanding as of the beginning of the respective periods.
- 45 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 8. Segment Reporting
Hughes' segments, which are differentiated by their products and services,
include Direct-To-Home Broadcast, Satellite Services, Satellite Systems and
Network Systems. Direct-To-Home Broadcast is engaged in acquiring, promoting,
selling and/or distributing digital programming via satellite to residential and
commercial customers. Satellite Services is engaged in the selling, leasing and
operating of satellite transponders and providing services for cable television
systems, news companies, Internet service providers and private business
networks. Satellite Systems designs, manufactures and markets satellites and
satellite components. Network Systems products include satellite-based business
networks and Internet access service, cellular-based fixed wireless telephony
systems, mobile cellular digital packet data systems and DIRECTVtm receiver
equipment. Other includes the corporate office and other entities.
Selected information for Hughes' operating segments for the three and nine
months ended September 30, 1999 and 1998, are reported as follows:
<TABLE>
Operating Segments:
<CAPTION>
Direct-To-
Home Satellite Satellite Network
(Dollars in Millions) Broadcast Services Systems Systems Other Eliminations Total
- --------------------------------------------------------------------------------------------------------------------
For the Three Months Ended:
September 30, 1999
<S> <C> <C> <C> <C> <C> <C> <C>
External Revenues $1,143.8 $176.3 $ 364.6 $305.8 - - $1,990.5
Intersegment
Revenues 0.8 34.4 146.2 120.4 $ 0.1 $(301.9) -
- --------------------------------------------------------------------------------------------------------------------
Total Revenues $1,144.6 $210.7 $ 510.8 $426.2 $ 0.1 $(301.9) $1,990.5
- --------------------------------------------------------------------------------------------------------------------
Operating Profit
(Loss)(1) $ (67.6) $ 98.2 $ 41.3 $ 32.2 $(27.1) $ (87.2) $ (10.2)
- --------------------------------------------------------------------------------------------------------------------
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 Profit
(Loss)(1) $ (61.8) $ 78.2 $ 63.8 $ 16.9 $(14.8) $ (20.1) $ 62.2
- --------------------------------------------------------------------------------------------------------------------
For the Nine Months Ended:
September 30, 1999
External Revenues $2,569.1 $503.3 $1,362.6 $783.3 - - $5,218.3
Intersegment
Revenues 2.3 101.3 332.3 214.9 $ 0.4 $(651.2) -
- --------------------------------------------------------------------------------------------------------------------
Total Revenues $2,571.4 $604.6 $1,694.9 $998.2 $ 0.4 $(651.2) $5,218.3
- --------------------------------------------------------------------------------------------------------------------
Operating Profit
(Loss)(1) $ (159.4) $258.9 $ (106.1) $ 25.7 $(67.0) $(106.3) $ (154.2)
- --------------------------------------------------------------------------------------------------------------------
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 Profit
(Loss)(1) $ (133.6) $236.7 $ 178.9 $(20.2) $(26.2) $ (22.2) $ 213.4
- --------------------------------------------------------------------------------------------------------------------
</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-month 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.
- 46 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 9. Commitments and Contingencies
In connection with the 1997 spin-off of the defense electronics business of
Hughes' predecessor and the subsequent merger of that business with Raytheon
Company, the terms of the merger agreement provided processes for resolving
disputes that might arise in connection with post-closing financial adjustments
that were also called for by the terms of the merger agreement. Such financial
adjustments might require a cash payment from Raytheon to Hughes or vice versa.
Disputes currently exist regarding the post-closing adjustments which Hughes
and Raytheon have proposed to one another and related issues regarding the
adequacy of disclosures made by Hughes to Raytheon in the period prior to
consummation of the merger. Hughes and Raytheon are proceeding with the dispute
resolution process. It is possible that the ultimate resolution of the post-
closing financial adjustment and of related disclosure issues may result in
Hughes making a payment to Raytheon that would be material to Hughes. However,
the amount of any payment that either party might be required to make to the
other cannot be determined at this time. Hughes intends to vigorously pursue
resolution of the disputes through the arbitration processes, opposing the
adjustments proposed by Raytheon, and seeking the payment from Raytheon that it
has proposed.
General Electric Capital Corporation ("GECC") and DIRECTV, Inc. entered
into a contract on July 31, 1995, in wich GECC agreed to provide financing for
consumer purchases of DIRECTV hardware and related programming. Under the
contract, GECC also agreed to provide certain related services to DIRECTV,
including credit risk scoring, billing and collections services. DIRECTV agreed
to act as a surety for loans complying with the terms of the contract. Hughes
guaranteed DIRECTV's performance under the contract. A complaint and
counterclaim have been filed by the parties in the U.S. District Court for the
District of Connecticut concerning GECC's performance and DIRECTV's obligation
to act as a surety. GECC claims damages from DIRECTV in excess of $140 million.
DIRECTV is seeking damages from GECC in excess of $70 million. Hughes intends to
vigorously contest GECC's allegations and pursue Hughes' own contractual rights
and remedies. Hughes does not believe that the litigation will have a material
adverse impact on Hughes' results of operations or financial position. Pretrial
discovery is not yet completed in the case and no trial date has been set.
Hughes Space and Communications International ("HSCI") has a contract with
ICO Global Communications Operations ("ICO Global") to build the satellites and
related components for a global wireless communications system. Hughes owns
approximately 2.6% of the equity in the parent company, ICO Global
Communications (Holdings) ("ICO"). On August 27, 1999, ICO filed for bankruptcy
protection under Chapter 11 in U.S. Bankruptcy Court in Wilmington, Delaware. On
November 9, 1999, the bankruptcy court approved an interim financing arrangement
that will allow ICO to continue its operations while it negotiates a plan of
reorganization. ICO has indicated that under its proposed plan, which is subject
to bankruptcy court approval, ICO would continue its contract with HSCI, pay
amounts owed to HSCI and have adequate financing to complete the contract. There
can be no assurance that ICO will be successful in confirming a plan of
reorganization, and if unable to do so the most likely outcome would be a
liquidation proceeding. In the event that a liquidation becomes probable, Hughes
would expect to record a pre-tax charge to earnings of up to approximately $500
million.
- 47 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 9. Commitments and Contingencies - concluded
On June 3, 1999, the National Rural Telecommunications Cooperative ("NRTC")
filed a lawsuit against DIRECTV, Inc. and Hughes Communications Galaxy, Inc.
(together, "DIRECTV") in United States District Court for the Central District
of California, alleging that DIRECTV has breached the DBS Distribution Agreement
(the "Agreement") with the NRTC. The Agreement provides the NRTC with exclusive
distribution rights, in certain specified portions of the United States, to
DIRECTV programming delivered over 27 of the 32 frequencies at the 101 degrees
west longitude orbital location. The NRTC claims that DIRECTV has wrongfully
deprived it of the exclusive right to distribute programming formerly provided
by USSB over the other 5 frequencies at 101 degrees. DIRECTV denies that the
NRTC is entitled to exclusive distribution rights to the former USSB programming
because the NRTC's exclusive distribution rights are limited to programming
distributed over 27 of the 32 frequencies at 101 degrees. The NRTC's complaint
seeks, in the alternative, the right to distribute former USSB programming on a
non-exclusive basis and the recovery of related revenues from the date USSB was
acquired by Hughes. DIRECTV maintains that the NRTC's right under the Agreement
is to market and sell the former USSB programming as its agent and is not
entitled to the claimed revenues. On August 26, 1999, the NRTC filed a second
lawsuit against DIRECTV, for damages in excess of $75 million, in which it
alleges that DIRECTV has breached the agreement it has with NRTC. In this suit,
NRTC is asking the court to require DIRECTV to pay to NRTC a proportionate share
of the financial benefits DIRECTV derives from programming providers and certain
other third parties. DIRECTV denies that it owes any sums to the NRTC on account
of the allegations in these matters and plans to vigorously defend itself
against these claims. Although the amounts of the combined claims are material
to Hughes, Hughes does not believe that the outcome of these lawsuits will
result in a material adverse impact on Hughes' results of operations or
financial position. However, there can be no assurance as to those conclusions.
Note 10. Subsequent Event
In October 1999, Hughes issued $500.0 million of floating rate notes in a
private placement with a group of institutional investors. The notes mature on
October 23, 2000.
- 48 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following management's discussion and analysis should be read in
conjunction with the Hughes management's discussion and analysis included in the
General Motors ("GM") 1998 Annual Report to the Securities and Exchange
Commission ("SEC") on Form 10-K; the management's discussion and analysis
relating to Hughes included in Exhibit 99 to GM's Quarterly Reports on Form 10-Q
dated March 31, 1999 and June 30, 1999 and related Hughes' Quarterly Report on
Form 10-Q filed with the SEC; and Current Reports on Form 8-K filed with the SEC
subsequent to the filing date for GM's 1998 Form 10-K. In addition, the
following discussion excludes purchase accounting adjustments related to GM's
acquisition of Hughes (see Supplemental Data beginning on page 60).
This Quarterly Report may contain certain statements that Hughes believes
are, or may be considered to be, "forward-looking statements", within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements generally can
be identified by use of statements that include phrases such as we "believe,"
"expect," "anticipate," "intend," "plan," "foresee" or other similar words or
phrases. Similarly, statements that describe our objectives, plans or goals also
are forward-looking statements. All of these forward-looking statements are
subject to certain risks and uncertainties that could cause our actual results
to differ materially from those contemplated by the relevant forward-looking
statement. The principal important risk factors which could cause actual
performance and future actions to differ materially from forward-looking
statements made herein include economic conditions, product demand and market
acceptance, government action, local political or economic developments in or
affecting countries where Hughes has operations, ability to obtain export
licenses, competition, ability to achieve cost reductions, technological risk,
ability to address the year 2000 issue, interruptions to production attributable
to causes outside of Hughes' control, limitations on access to distribution
channels, the success and timeliness of satellite launches, in-orbit performance
of satellites, ability of customers to obtain financing and Hughes' ability to
access capital to maintain its financial flexibility. Additionally, Hughes and
its 81.0% owned subsidiary, PanAmSat Corporation ("PanAmSat"), have experienced
satellite anomalies in the past and may experience satellite anomalies in the
future that could lead to the loss or reduced capacity of such satellites that
could materially affect Hughes' operations. Readers are urged to consider these
factors carefully in evaluating the forward-looking statements. The forward-
looking statements included in this Quarterly Report are made only as of the
date of this Quarterly Report and we undertake no obligation to publicly update
these forward-looking statements to reflect subsequent events or circumstances.
The financial information presented as of and for the period ended
September 30, 1999 reflect the effects of the PRIMESTAR, Tempo Satellite and
United States Satellite Broadcasting Company, Inc. ("USSB") transactions,
discussed below, from their respective dates of acquisition. These transactions
have been accounted for using the purchase method of accounting; however, the
adjustments made in the September 30, 1999 financial statements reflect a
preliminary allocation of the purchase price for the transactions based upon
information currently available. Adjustments relating to the tangible assets
(i.e., satellites, equipment located on customer premises, etc.), intangible
assets (i.e., licenses granted by the Federal Communications Commission,
customer lists, dealer network, etc.), and accrued liabilities for programming
contracts and leases with above-market rates are estimates pending the
completion of independent appraisals currently in process. Additionally, the
adjustment to recognize the benefit of net operating loss carryforwards of USSB
represents a preliminary estimate pending further review and analysis by the
management of Hughes. These appraisals, valuations and studies are expected to
be completed by December 31, 1999. Accordingly, the final purchase price
allocations may be different from the amounts reflected herein.
- 49 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
General
On February 24, 1999, the Department of Commerce notified Hughes that it
intended to deny a U.S. government export license Hughes was required to obtain
in connection with a contract with Asia-Pacific Mobile Telecommunications
Satellite Pte. Ltd. ("APMT") for the provision of a satellite-based mobile
telecommunications system. As a result, APMT and Hughes terminated the contract
on April 9, 1999, resulting in a pre-tax charge to Hughes' earnings of $92
million in the first quarter of 1999. This charge represents the write-off of
receivables and inventory, with no alternative use, related to the contract.
Hughes had maintained a lawsuit against the U.S. government since September
1973 regarding the U.S. government's infringement and use of a Hughes patent
covering "Velocity Control and Orientation of a Spin Stabilized Body,"
principally satellites (the "Williams Patent"). On April 7, 1998, the U.S. Court
of Appeals for the Federal Circuit reaffirmed earlier decisions in the Williams
Patent case, including an award of $114.0 million in damages, plus interest. In
March 1999, Hughes received and recognized as income a $154.6 million payment
from the U.S. government as a final settlement of the suit.
In April 1999, Hughes acquired the direct-broadcast satellite medium-power
business of PRIMESTAR and the related high-power satellite assets of Tempo
Satellite, a wholly-owned subsidiary of TCI Satellite Entertainment, in related
transactions. PRIMESTAR operated a 160-channel medium-power direct broadcast
service using leased satellite capacity at 85 (degrees) west longitude. As of
March 31, 1999, PRIMESTAR had 2.3 million subscribers in the United States.
DIRECTV intends to operate the medium-power PRIMESTAR business, PRIMESTAR By
DIRECTV, for a period of approximately two years, during which time PRIMESTAR
subscribers will be offered the opportunity to transition to the high-power
DIRECTV service. During this period, the PRIMESTAR distribution network will
continue servicing PRIMESTAR By DIRECTV subscribers and begin offering the high-
power DIRECTV service to new subscribers. The PRIMESTAR acquisition provided
DIRECTV with an immediate increase in revenues from the existing PRIMESTAR
subscribers, and ongoing revenues from those subscribers that transition to the
DIRECTV service. The Tempo Satellite in-orbit satellite and related frequencies
acquisition provides DIRECTV with 11 high-power DBS frequencies at 119(degrees)
west longitude, from which it can begin delivering programming to the contiguous
United States at any time.
In May 1999, Hughes acquired by merger all of the outstanding capital stock
of U.S. Satellite Broadcasting Company ("USSB"). USSB provided subscription
television programming to households throughout the continental United States
via the digital satellite broadcasting system that it shared with DIRECTV. The
USSB acquisition has provided DIRECTV with 25 channels of video programming,
including premium networks such as HBO(R), Showtime(R), Cinemax(R) and The Movie
Channel(R) which it is now offering to its subscribers resulting in an increase
in average revenue per subscriber.
In May 1999, it was announced that Hughes will collaborate with America
Online ("AOL") on a new service that will combine digital satellite television
programming from DIRECTV with AOL's new interactive television Internet service.
Hughes Network Systems ("HNS") will design and build the initial dual purpose
DIRECTV/AOL receiver equipment. The new service will be suited for both frequent
Internet users and the mass market consumer who wants to connect to the
Internet. In June 1999, Hughes announced a more extensive strategic alliance
with AOL to develop and market digital entertainment and Internet services
nationwide. The new alliance is expected to accelerate subscriber growth and
revenue-per-subscriber for the DIRECTV and DirecPC services, as well as expand
the subscriber base for AOL's developing AOL TV and AOL-Plus broadband services.
As part of the alliance, Hughes and AOL plan to jointly develop new content and
interactive services for U.S. and international markets. Additionally, an
extensive cross-marketing initiative will be instituted to market each company's
products through their respective retail outlets and to their respective
subscribers. As part of its marketing initiative with AOL, Hughes committed to
increase its sales and marketing expenditures over the next three years by
approximately $1.5 billion relating to its DirecPC/AOL-Plus, DlRECTV,
DlRECTV/AOL TV and DirecDuo products and services.
As part of the alliance, AOL invested $1.5 billion in shares of General
Motors Series H 6.25% Automatically Convertible Preference Stock. General Motors
immediately invested the $1.5 billion received from AOL in shares of Hughes
Series A Preferred Stock designed to correspond to the financial terms of the
General Motors Series H preference stock. Dividends on the Hughes Series A
Preferred Stock are payable to General Motors quarterly at an annual rate of
6.25%. See further discussion in Notes 4 and 5 to the financial statements.
Hughes Space and Communications International ("HSCI") has a contract with
ICO Global Communications Operations ("ICO Global") to build the satellites and
related components for a global wireless communications system. Hughes owns
approximately 2.6% of the equity in the parent company, ICO Global
Communications (Holdings) ("ICO"). On August 27, 1999, ICO filed for bankruptcy
protection under Chapter 11 in U.S. Bankruptcy Court in Wilmington, Delaware. On
November 9, 1999, the bankruptcy court approved an interim financing arrangement
that will allow ICO to continue its operations while it negotiates a plan of
reorganization. ICO has indicated that under its proposed plan, which is subject
to bankruptcy court approval, ICO would continue its contract with HSCI, pay
amounts owed to HSCI and have adequate financing to complete the contract. There
can be no assurance that ICO will be successful in confirming a plan of
reorganization, and if unable to do so the most likely outcome would be a
liquidation proceeding. In the event that a liquidation becomes probable, Hughes
would expect to record a pre-tax charge to earnings of up to approximately $500
million.
On October 9, 1999, DIRECTV successfully launched the DIRECTV 1-R satellite
which will be used in the 101 degree West Longitude ("WL") orbital slot. With
the addition of DIRECTV 1-R and technology upgrades at its two broadcast
centers, DIRECTV will have the additional capacity needed to deliver local
broadcast network channels to DIRECTV's top 20 markets using their existing 18-
inch satellite dish and receiving equipment. This announcement updates earlier
plans to deliver local channels from 101 degrees WL only to its customers in New
York and Los Angeles. In total, DIRECTV's initial plans call for the delivery of
local channels by satellite to approximately 50 million homes, or about half of
the nation's television households. DIRECTV remains, however, prohibited from
providing local television channels into local markets, until currently pending
legislation authorizes such delivery.
There is a pending grand jury investigation into whether Hughes should be
accused of criminal violations of the export control laws arising out of the
participation of two of its employees on a committee formed to review the
findings of Chinese engineers regarding the failure of a Long March rocket in
China in 1996. Hughes is also subject to the authority of the State Department
to impose sanctions for non-criminal violations of the Arms Export Control Act.
The possible criminal and/or civil sanctions could include fines as well as
debarment from various export privileges and participation in government
contracts. Hughes does not expect the grand jury investigation or State
Department review to result in a material adverse effect upon its business.
However, there can be no assurance as to those conclusions. In addition, a
congressional committee chaired by Representative Cox released a report in May
1999 containing negative commentary about the compliance of U.S. satellite
manufacturers, including Hughes, with export control laws. Many of Hughes'
satellite launches, including those of PanAmSat, are scheduled for non-U.S.
launch providers. There can be no assurance that future satellite launches by
non-U.S. launch providers will not be adversely affected by this investigation
and report, including the possibility of significant launch delays.
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HUGHES ELECTRONICS CORPORATION
Results of Operations
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Revenues. Third quarter 1999 revenues increased 31.5% to $1,990.5 million
compared with $1,513.3 million for the third quarter of 1998. The increase
reflects revenue growth at the Direct-To-Home, Satellite Services and Network
Systems segments offset in part by a decline in revenues at the Satellite
Systems segment.
The Direct-To-Home Broadcast segment's third quarter 1999 revenues more
than doubled to $1,144.6 million from $459.1 million in the third quarter of
1998. The increase was primarily attributable to continued strong subscriber
growth for the DIRECTV(R) businesses, as well as additional revenues from the
PRIMESTAR By DIRECTV and USSB businesses acquired in the second quarter of 1999.
Domestic DIRECTV contributed significantly to this growth with quarterly
revenues of $1,052 million compared to last year's third quarter revenues of
$408 million. Domestic DIRECTV added 423,000 net new subscribers to its
high-power DIRECTV service in the third quarter of 1999 compared to 303,000 net
new subscribers for the third quarter of 1998, a 40% increase. In addition,
204,000 customers were transitioned from the PRIMESTAR By DIRECTV medium-power
service to the DIRECTV high-power service in the third quarter of 1999. As of
September 30, 1999, total domestic DIRECTV subscribers grew to more than 7.7
million, which includes approximately 1.8 million customers subscribing to
PRIMESTAR By DIRECTV. Hughes' DIRECTV Latin American businesses, which includes
Hughes' subsidiary, Galaxy Latin America ("GLA"), more than doubled revenues to
$76 million for the third quarter of 1999 from $37 million for the third quarter
of 1998. This increase in revenues was due to continued subscriber growth and
additional revenues resulting from the consolidation of SurFin Ltd. ("SurFin"),
beginning in November 1998, Grupo Galaxy Mexicana, S.A. de C.V. ("GGM"),
beginning in February 1999 and Galaxy Brazil, Ltda. ("GLB"), beginning in August
1999. GLA added 67,000 net new subscribers for the third quarter, compared to
36,000 net new subscribers acquired for the same period last year, bringing the
total cumulative DIRECTV Latin America subscribers to 668,000 as of September
30, 1999.
The Satellite Services segment's third quarter 1999 revenues increased to
$210.7 million compared with $186.5 million for the prior year. The 13.0%
increase in revenues resulted primarily from the commencement of new service
agreements on additional satellites placed into service and a one-time customer
payment associated with the termination of a direct-to-home video services
agreement in India.
For the third quarter of 1999, revenues for the Satellite Systems segment
decreased to $510.8 million from revenues of $688.9 million for the same period
in 1998. This decrease in revenues was principally due to reduced activity
associated with the ICO program.
Third quarter 1999 revenues for the Network Systems segment were $426.2
million compared with $267.7 million for the same period last year, an increase
of 59.2%. This increase in revenues was primarily due to higher sales of
DIRECTV receiving equipment, satellite-based mobile telephone systems and U.S.
private business network systems.
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HUGHES ELECTRONICS CORPORATION
Costs and Expenses. Selling, general and administrative expenses increased to
$598.3 million in the third quarter of 1999 from $390.4 million for the same
period of 1998. The increase resulted primarily from increased subscriber
acquisition costs due to the record DIRECTV subscriber growth, added costs from
the PRIMESTAR By DIRECTV and USSB businesses, and the consolidation of GGM,
SurFin and GLB. The increase in depreciation and amortization expense to $216.5
million in the third quarter of 1999 from $111.3 million in the same period of
1998 resulted primarily from higher depreciation due to increased capital
expenditures for property and equipment, additions to PanAmSat's satellite fleet
in late 1998 and early 1999, added depreciation expense related to leased
medium-power receiving equipment for the PRIMESTAR By DIRECTV business and
additional goodwill amortization of $45.1 million that resulted from the
PRIMESTAR, USSB, GGM and GLB transactions.
Operating Profit (Loss). Hughes incurred an operating loss of $4.9 million
for the third quarter of 1999 compared with operating profit, on the same basis,
of $67.5 million for the third quarter of 1998. The operating loss for the
third quarter of 1999 compared to the operating profit in the same quarter of
1998 principally resulted from increased losses from the DIRECTV Latin American
businesses and reduced operating profit in the Satellite Systems segment from
the lower revenues discussed above.
The operating loss in the Direct-To-Home Broadcast segment for the third
quarter of 1999 was $67.6 million compared with an operating loss of $61.8
million for the third quarter of 1998. The increased operating loss for the
third quarter of 1999 resulted primarily from increased losses at the DIRECTV
international businesses consisting primarily of DIRECTV Latin America. DIRECTV
Latin America's operating loss for the third quarter of 1999 was $53 million
compared with an operating loss of $30 million for the same period of 1998. The
increased loss at DIRECTV Latin America was primarily due to the consolidation
of GLB and GGM and higher marketing expenses. Domestic DIRECTV reported an
operating loss for the third quarter of $6 million compared with an operating
loss of $31 million for the third quarter of 1998. The decreased operating loss
at domestic DIRECTV for the quarter was due to the increased subscriber revenues
discussed above which were partially offset by increased subscriber acquisition
costs due to record subscriber growth, added goodwill and intangible
amortization that resulted from the PRIMESTAR and USSB acquisitions and added
depreciation expense related to leased medium-power receiving equipment for the
PRIMESTAR By DIRECTV business.
Domestic DIRECTV's cost of acquiring new subscribers has increased due to,
among other things, incentives granted by USSB to manufacturers of DIRECTV
receiving equipment which were assumed by DIRECTV as part of the USSB
acquisition in May 1999 and increased incentives paid to DIRECTV dealers. In
connection with the AOL alliance, DIRECTV's subscriber acquisition costs will
increase with respect to the new DIRECTV/AOL TV service. In the future,
subscriber acquisition costs will continue to be largely determined by the
competitive environment.
The Satellite Services segment's operating profit for the third quarter of
1999 increased 25.3% to $99.1 million from $79.1 million for the same period of
1998. The increase in operating profit was primarily due to the increase in
revenues discussed above, partially offset by increased depreciation from the
additions to the satellite fleet noted above.
The Satellite Systems segment reported operating profit and operating profit
margin of $41.3 million and 8.1%, respectively, for the third quarter of 1999
compared with operating profit and operating profit margin of $63.8 million and
9.3%, respectively, for the third quarter of 1998. The decrease in operating
profit and operating profit margin for the third quarter of 1999 resulted
primarily from the decrease in revenues discussed above.
The Network Systems segment's operating profit and operating profit margin for
the third quarter of 1999 was $32.2 million and 7.6%, respectively, compared
with operating profit and operating profit margin of $16.9 million and 6.3%,
respectively, for the third quarter of 1998. The increase in operating income
and operating profit margin for the third quarter of 1999 was primarily due to
higher sales of DIRECTV receiving equipment, satellite-based mobile telephone
systems and U.S. private business network systems.
Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA").
EBITDA is defined as operating profit (loss), plus depreciation and
amortization. EBITDA is not presented as an alternative measure of operating
results or cash flow from operations, as determined in accordance with generally
accepted accounting principles. However, Hughes believes EBITDA is a meaningful
measure of the company's performance and that of its business units. EBITDA is
a performance measurement commonly used by other communications, entertainment
and media service providers and therefore can be used to analyze and compare
Hughes' financial performance to that of its competitors. EBITDA is also a
measurement used for certain of Hughes' debt covenants and is used by rating
agencies in determining credit ratings. EBITDA does not give effect to cash
used for debt service requirements and thus does not reflect funds available for
investment in the business of Hughes, dividends or other discretionary uses.
EBITDA margin is calculated by dividing EBITDA by total revenues.
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HUGHES ELECTRONICS CORPORATION
For the third quarter of 1999, EBITDA grew to $211.6 million from $178.8
million for the same period in 1998 primarily as a result of the EBITDA growth
in the Direct-To-Home Broadcast Segment. EBITDA margin on the same basis was
10.6% for the third quarter of 1999 compared to 11.8% for the third quarter of
1998.
The Direct-To-Home Broadcast segment had EBITDA of $47.7 million for the third
quarter of 1999 compared with negative EBITDA of $30.6 million for the third
quarter of 1998. Domestic DIRECTV's EBITDA was $86 million for the third
quarter of 1999 compared to a negative EBITDA of $5 million for the third
quarter of 1998. The increase in domestic DIRECTV's EBITDA was due to EBITDA
contributions from the PRIMESTAR By DIRECTV and USSB businesses, as well as
increased revenues resulting from the larger high-power subscriber base which
more than offset increased subscriber acquisition costs. DIRECTV Latin America
reported negative EBITDA for the third quarter of 1999 of $30 million compared
to negative EBITDA of $24 million for the same period of 1998. This change was
primarily due to the acquisition of GLB during the 1999 third quarter and higher
marketing expenses.
For the Satellite Services segment, EBITDA for the third quarter of 1999 was
$169.0 million compared with $135.7 million for the same period of last year.
EBITDA margin increased to 80.2% versus 72.8% for last year's third quarter.
The increases in EBITDA and EBITDA margin were principally due to the higher
revenues discussed above and lower satellite leaseback expenses resulting from
the early buy-out of certain satellites under sale-leaseback agreements during
the first and third quarters of 1999.
The Satellite Systems segment had EBITDA and EBITDA margin of $56.3 million
and 11.0% for the third quarter of 1999 compared with EBITDA and EBITDA margin
of $76.7 million and 11.1% for the third quarter of 1998. The decrease in
EBITDA for the third quarter of 1999 was due to reduced activity associated with
the ICO program.
Network Systems segment EBITDA grew to $44.3 million for the third quarter of
1999 compared to EBITDA of $28.3 million for the third quarter of 1998 primarily
due to the increased revenues discussed above. EBITDA margin for the third
quarter of 1999 was 10.4% compared to 10.6% for the third quarter of 1998.
Interest Income and Expense. Interest income decreased to $2.4 million for
the third quarter of 1999 compared with $20.5 million for the third quarter of
1998 due to lower cash balances in the third quarter of 1999 compared to 1998.
Interest expense increased $48.1 million for the third quarter of 1999 from the
same period in 1998 due to the increased borrowings and interest expense
associated with certain liabilities that arose from the PRIMESTAR and USSB
acquisitions.
Other, net. Other, net for the third quarter of 1999 reflects losses from
unconsolidated subsidiaries of $31.6 million that are primarily attributable to
equity investment in DIRECTV Japan. The third quarter 1998 amount reflects
losses from unconsolidated subsidiaries of $28.1 million, primarily related to
DIRECTV Japan and AMSC.
Income taxes for the third quarter of 1999 reflect the recognition of tax
benefits for the pre-tax losses incurred in the period and higher expected tax
benefits, compared to the third quarter of 1998, from the expected favorable
resolution of certain tax contingencies.
Accounting Change. In 1998, Hughes adopted American Institute of Certified
Public Accountants Statement of Position ("SOP") 98-5, Reporting on the Costs of
Start-Up Activities. SOP 98-5 requires that all start-up costs previously
capitalized be written off and recognized as a cumulative effect of accounting
change, net of taxes, as of the beginning of the year of adoption. On a
prospective basis, these types of costs are required to be expensed as incurred.
The unfavorable cumulative effect of this accounting change was $9.2 million
after-tax, or $0.02 per share of GM Class H common stock in the first quarter of
1998.
Earnings (Loss). Third quarter 1999 loss and loss per share, including the
effect of preferred stock dividends, were $29.6 million and $0.13, respectively,
compared to third quarter 1998 earnings and earnings per share of $42.9 million
and $0.11, respectively.
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HUGHES ELECTRONICS CORPORATION
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Revenues. For the first nine months of 1999, revenues increased 25.0% to
$5,218.3 million compared to $4,173.3 million for the first nine months of 1998.
The increase reflects revenue growth at the Direct-To-Home, Satellite Services
and Network Systems segments offset in part by a decline in revenues at the
Satellite Systems segment.
Direct-To-Home Broadcast segment revenues for the first nine months of 1999
increased 106.0% to $2,571.4 million from $1,248.5 million for the same period
of 1998. The increase resulted from continued record subscriber growth, as well
as additional revenues from the PRIMESTAR By DIRECTV and USSB businesses.
For the first nine months of 1999, the Satellite Services segment's revenues
increased to $604.6 million compared with $570.6 million for the prior year, a
6.0% increase. The increase in revenues resulted primarily from the
commencement of new service agreements on additional satellites placed into
service and a one-time customer payment associated with the termination of a
direct-to-home video services agreement in India.
Revenues for the first nine months of 1999 for the Satellite Systems segment
decreased to $1,694.9 million from revenues of $1,988.0 million for the same
period in 1998. This decrease in revenues was principally due to contract
revenue adjustments and delayed revenue recognition that resulted from increased
development costs and schedule delays on several new product lines and decreased
activity associated with the ICO program.
Network Systems segment revenues for the first nine months of 1999 were $998.2
million compared with $674.1 million for the same period last year, an increase
of 48.1%. This increase in revenues was primarily due to higher sales of
DIRECTV receiving equipment, satellite-based mobile telephone systems and U.S.
private business network systems.
Costs and Expenses. Selling, general and administrative expenses increased to
$1,551.6 million for the first nine months of 1999 from $1,052.2 million for the
same period of 1998. The increase resulted primarily from increased subscriber
acquisition costs, added costs for the PRIMESTAR By DIRECTV and USSB businesses,
and the consolidation of GGM, SurFin and GLB. The increase in depreciation and
amortization expense to $499.3 million for the first nine months of 1999 from
$309.2 million for the same period of 1998 resulted primarily from higher
depreciation due to increased capital expenditures for property and equipment,
additions to PanAmSat's satellite fleet, added depreciation expense related to
leased medium-power receiving equipment for the PRIMESTAR By DIRECTV business,
increased goodwill amortization related to the May 1998 purchase of an
additional 9.5% interest in PanAmSat and added depreciation expense and goodwill
and intangible amortization that resulted from the PRIMESTAR, USSB, GGM and GLB
acquisitions.
Operating Profit (Loss). Hughes incurred an operating loss of $138.3 million
for the first nine months of 1999 compared with operating profit, on the same
basis, of $229.3 million for the first nine months of 1998. The operating loss
for the first nine months of 1999 was principally a result of the $125.0 million
pre-tax charge at the Satellite Systems segment resulting from increased
development costs and schedule delays, $190.1 million of higher depreciation and
amortization expense discussed above and a one-time pre-tax charge of $92.0
million resulting from the termination of the Asia-Pacific Mobile
Telecommunications Satellite Pte. Ltd. ("APMT") contract due to export licenses
not being issued.
The operating loss in the Direct-To-Home Broadcast segment for the first nine
months of 1999 was $159.4 million compared with an operating loss of $133.6
million for the first nine months of 1998. The increase in operating loss for
the first nine months of 1999 was due primarily to increased losses at the
DIRECTV Latin America businesses that resulted from the consolidation of GLB and
GGM and higher marketing expenses. These losses were partially offset by a
decrease in operating losses at the domestic DIRECTV businesses.
The Satellite Services segment operating profit for the first nine months of
1999 was $261.4 million compared to $239.2 million for the same period of 1998.
The increase in operating profit was primarily due to the increase in revenues
discussed above offset by higher depreciation expense due to additions to the
satellite fleet. Also affecting the comparison was a second quarter 1998
provision for losses related to the May 1998 failure of PanAmSat's Galaxy IV
satellite.
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HUGHES ELECTRONICS CORPORATION
The Satellite Systems segment reported an operating loss for the first nine
months of 1999 of $106.1 million compared to operating profit of $178.9 million
for the first nine months of 1998. The operating loss for the first nine months
of 1999 resulted from a pre-tax charge, before intercompany eliminations, of
$178.0 million that resulted from increased development costs and schedule
delays on several new product lines, a one-time pre-tax charge of $81.0 million
resulting from the termination of the APMT contract and decreased activity
associated with the ICO program.
The Network Systems segment's operating profit for the first nine months of
1999 was $25.7 million compared with an operating loss of $20.2 million for the
first nine months of 1998. The increase for the first nine months of 1999
compared to 1998 was primarily due to the higher sales noted above partially
offset by a one-time pre-tax charge of $11.0 million in the first quarter of
1999 resulting from the termination of the APMT contract. Also affecting the
comparison was a 1998 provision of $26.0 million associated with the bankruptcy
filing by a customer.
EBITDA. For the first nine months of 1999, EBITDA was $361.0 million versus
$538.5 million for the same period in 1998. EBITDA margin on the same basis was
6.9% for the first nine months of 1999 compared to 12.9% for the first nine
months of 1998. The decrease in EBITDA and EBITDA margin were primarily due to
decreased EBITDA at the Satellite Systems segment offset in part by increased
EBITDA at the Direct-To-Home Segment.
The Direct-To-Home Broadcast segment had EBITDA for the first nine months of
1999 of $44.8 million compared with negative EBITDA of $56.4 million for the
first nine months of 1998. This improvement in EBITDA for the first nine months
of 1999 was primarily due to continued strong subscriber growth in the domestic
DIRECTV business, the contributions from PRIMESTAR By DIRECTV and USSB
businesses from their dates of acquisition and the consolidation of SurFin.
The Satellite Services segment's EBITDA for the first nine months of 1999 was
$465.9 million compared with $409.0 million for the same period of last year.
EBITDA margin increased to 77.1% versus 71.7% for last year's first nine months.
The increases in EBITDA and EBITDA margin were principally due to the higher
revenues discussed above, and lower satellite leaseback expenses resulting from
the 1999 early buy-out of certain satellites under sale-leaseback agreements.
Also affecting the comparison was a second quarter 1998 provision for losses
related to the May 1998 failure of PanAmSat's Galaxy IV satellite.
The Satellite Systems segment had a negative EBITDA of $64.7 million for the
first nine months of 1999, compared with EBITDA of $214.0 million for the first
nine months of 1998. The decrease in EBITDA for the first nine months of 1999
was due to the first quarter 1999 pre-tax charge of $81.0 million that resulted
from the termination of the APMT contract, the second quarter 1999 $178.0
million pre-tax charge, before intercompany eliminations, discussed above and
decreased activity associated with the ICO program.
Network Systems segment EBITDA increased to $63.4 million for the first nine
months of 1999, compared to EBITDA of $9.6 million for the first nine months of
1998. EBITDA margin for the first nine months of 1999 was 6.4% compared to
EBITDA margin of 1.4% for the first nine months of 1998. The increase in EBITDA
and EBITDA margin for the first nine months of 1999 was primarily due to the
higher sales discussed above, partially offset by the first quarter 1999 pre-tax
charge of $11.0 million related to the termination of the APMT contract. Also,
the second quarter of 1998 included a $26.0 million provision associated with
the bankruptcy filing by a customer.
Interest Income and Expense. Interest income decreased to $20.9 million for
the first nine months of 1999 compared with $88.6 million for the first nine
months of 1998 due to lower cash balances for the first nine months of 1999
compared to 1998. Interest expense increased $61.5 million for the first nine
months of 1999 from the same period in 1998 due to increased borrowings and
interest expense associated with certain liabilities that arose from the
PRIMESTAR and USSB acquisitions.
Other, net. Other, net for the first nine months of 1999 reflects a $154.6
million pre-tax gain that resulted from the settlement of the Williams Patent
infringement case offset by losses from unconsolidated subsidiaries of $96.3
million attributable principally to equity investments in DIRECTV Japan and
AMSC. The first nine months of 1998 includes losses from unconsolidated
subsidiaries of $79.0 million, primarily related to DIRECTV Japan and AMSC and
$17.5 million of losses associated with bankruptcy filings by two unaffiliated
customers.
Income Taxes. For the first nine months of 1999, Hughes recorded an income
tax benefit at an effective income tax rate of 40.6%, while Hughes recorded an
income tax provision at an effective income tax rate of 35.1% for the first nine
months of 1998. Income taxes for the first nine months of 1999 reflect the
recognition of tax benefits for the pre-tax losses incurred in the period and
higher expected tax benefits, compared to the first nine months of 1998, from
the expected favorable resolution of certain tax contingencies.
Earnings (Loss). Loss and loss per share, including the effect of preferred
stock dividends in 1999 of $26.3 million, for the nine months ended September
30, 1999 were $43.6 million and $0.17, respectively, compared to earnings and
earnings per share of $143.5 million and $0.36, respectively, for the comparable
period in 1998.
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HUGHES ELECTRONICS CORPORATION
Liquidity and Capital Resources
Cash and Cash Equivalents. Cash and cash equivalents were $158.3 million at
September 30, 1999 compared to $1,342.1 million at December 31, 1998. The
$1,183.8 million decrease was due to increased investments in companies, which
included the acquisitions of PRIMESTAR, USSB, Tempo Satellite assets and GLB
(see "Acquisitions"), additional equity investments in DIRECTV Japan, the early
buy-out of satellite sale-leasebacks by PanAmSat, additional capital
expenditures for satellites and property and equipment and general working
capital requirements. These uses of cash were partially funded by GM's $1.5
billion investment in Hughes as part of the alliance with AOL and the $154.6
million received in connection with the settlement of the Williams Patent
infringement case.
Cash used in operating activities for the first nine months of 1999 was $187.6
million, compared to cash provided by operating activities of $313.7 million in
the same period of 1998. The decrease was due primarily to the decrease in net
income for the first nine months of 1999 and an increase in prepaid dealer
commissions and prepaid marketing expenses at the DIRECTV businesses.
Net cash used in investing activities was $3,654.3 million for the nine months
ended September 30, 1999 and $1,584.2 million for the same period in 1998. The
substantial increase in 1999 compared to 1998 resulted from increased
investments in companies, which included the acquisitions of PRIMESTAR, USSB,
Tempo Satellite assets, GLB (See "Acquisitions") and additional investments in
DIRECTV Japan, and an increase in capital expenditures for satellite and
property and equipment, partially offset by a decrease in proceeds from
insurance claims related to the loss of satellites in the prior year.
Net cash provided by financing activities for the first nine months of 1999
was $2,658.1 million, compared to cash used in financing activities of $3.6
million for the same period in 1998. The substantial increase was primarily due
to an increase in net borrowings compared to 1998 and proceeds received in 1999
from the issuance of preferred stock to GM related to the AOL transaction.
Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of
current assets to current liabilities) at September 30, 1999 and December 31,
1998 was 1.40 and 1.91, respectively. Working capital decreased by $794.0
million to $1,042.9 million at September 30, 1999 from $1,836.9 million at
December 31, 1998.
Common Stock Dividend Policy and Use of Cash. Since the completion of the
recapitalization of Hughes in late 1997, the GM Board has not paid, and does not
currently intend to pay in the foreseeable future, cash dividends on its GM
Class H common stock. Similarly, since such time, Hughes has not paid dividends
on its common stock to GM and does not currently intend to do so in the
foreseeable future. Future Hughes earnings, if any, are expected to be retained
for the development of the businesses of Hughes. Hughes expects to have
significant cash requirements in 2000 primarily due to capital expenditures of
approximately $1.5 to $2.0 billion for property and equipment as well as
expenditures for new satellites. In addition, Hughes expects to increase its
investment in affiliated companies, primarily related to its international
DIRECTV businesses. Also, although Hughes may be required to make a cash
payment to or receive a cash payment from Raytheon, the amount of a cash payment
to or from Raytheon, if any, is not determinable at this time. These cash
requirements are expected to be funded from a combination of cash provided from
operations, amounts available under credit facilities and debt and equity
offerings, as needed.
Debt and Credit Facilities. At September 30, 1999, Hughes' 75% owned
subsidiary, SurFin, had a total of $197.6 million outstanding under a $400.0
million unsecured revolving credit facility expiring in June 2002.
At September 30, 1999, GLA's 100% owned subsidiary, GLB, had a total of $26.7
million outstanding under a variable rate note.
In January 1998, PanAmSat issued five, seven, ten and thirty-year notes
totaling $750.0 million. The proceeds received were used by PanAmSat to repay
$600.0 million of outstanding borrowings.
PanAmSat maintains a $500.0 million multi-year revolving credit facility and a
$500.0 million commercial paper program. The multi-year revolving credit
facility provides for a commitment through December 24, 2002. Borrowings under
the credit facility and commercial paper program are limited to $500.0 million
in the aggregate and are expected to be used to fund PanAmSat's satellite
expansion program. No amounts were outstanding under the credit facility at
September 30, 1999. $185.0 million was outstanding under the commercial paper
program at September 30, 1999.
In July 1999, in connection with the early buy-out of satellite sale-
leasebacks, PanAmSat assumed variable rate notes. The notes bear interest at
London Interbank Offered Rate plus 0.25%, and mature on various dates through
January 2, 2002. At September 30, 1999, $124.1 million was outstanding.
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HUGHES ELECTRONICS CORPORATION
Hughes has two unsecured revolving credit facilities totaling $1.0 billion,
consisting of a $750.0 million multi-year facility and a $250.0 million 364-day
facility. The multi-year credit facility provides for a commitment of $750.0
million through December 5, 2002 and the 364-day credit facility provides for a
commitment of $250.0 million through December 1, 1999. $665.0 million was
outstanding under the multi-year facility at September 30, 1999. No amount was
outstanding under the 364-day credit facility at September 30, 1999. These
facilities provide backup capacity for Hughes' $1.0 billion commercial paper
program. $196.6 million was outstanding under the commercial paper program at
September 30, 1999.
At September 30, 1999, other short-term and long-term debt of $82.3 million
was outstanding.
Hughes has filed a shelf registration statement with the Securities and
Exchange Commission with respect to an issuance of up to $2.0 billion of debt
securities from time to time. Currently, no amounts have been issued at
September 30, 1999.
In October 1999, Hughes issued $500.0 million of floating rate notes in a
private placement with a group of institutional investors. The notes mature on
October 23, 2000.
Acquisitions and Investments. On September 24, 1999, DIRECTV Japan, Hughes'
42.2% owned affiliate, raised approximately $275 million through the issuance of
bonds, convertible into common stock, to five of its major shareholders,
including $238.1 million issued to Hughes. If Hughes elects to convert these
bonds, Hughes would have a controlling interest in DIRECTV Japan.
On July 28, 1999, Galaxy Latin America ("GLA") acquired Galaxy Brasil, Ltda.,
the exclusive distributor of DIRECTV services in Brazil, from Tevecap S.A. for
approximately $114.0 million plus the assumption of debt. In connection with
the transaction, Tevecap sold its 10% equity interest in GLA to Hughes and the
Cisneros Group, the remaining GLA partners. Hughes' share of the GLA purchase
amounted to approximately $101.1 million and increased Hughes' ownership of GLA
to 77.8%.
On January 22, 1999, Hughes agreed to acquire PRIMESTAR's 2.3 million
subscriber medium-power direct-to-home satellite business and the high-power
satellite assets and direct-broadcast satellite orbital frequencies of Tempo
Satellite, a wholly-owned subsidiary of TCI Satellite Entertainment, Inc. On
April 28, 1999, the acquisition of PRIMESTAR's direct-to-home business was
completed. The purchase price consisted of $1.1 billion in cash and 4.9 million
shares of GM Class H common stock, for a total purchase price of $1.3 billion,
based on the average market price of $47.87 per share of Class H common stock at
the time the acquisition agreement was signed. The purchase price will be
adjusted based upon the final adjusted net working capital of PRIMESTAR at the
date of closing. The purchase price for the Tempo Satellite assets consisted of
$500 million in cash. Of this purchase price, $150 million was paid on March
10, 1999 for a satellite that has not yet been launched and the remaining $350
million was paid on June 4, 1999 for an in-orbit satellite and 11 related
satellite orbital frequencies.
In December 1998, Hughes agreed to acquire all of the outstanding capital
stock of United States Satellite Broadcasting Company, Inc. ("USSB"). USSB
provided direct-to-home premium satellite programming in conjunction with
DIRECTV's basic programming service. The USSB acquisition was closed on May 20,
1999. On July 6, 1999, based upon elections made by the former USSB
shareholders, Hughes paid approximately $0.4 billion in cash and issued
approximately 22.6 million shares of Class H common stock, for a total purchase
price of approximately $1.6 billion.
New Accounting Standards. In September 1999, the Financial Accounting
Standards Board ("FASB") issued Emerging Issues Task Force Issue 99-10 ("EITF
99-10"), Percentage Used to Determine the Amount of Equity Method losses. EITF
99-10 addresses the issue of which percentage of ownership should be used to
compute equity method losses when the investment account has been reduced to
zero and the investor holds other securities of the investee. EITF 99-10
requires that equity method losses should not be recognized solely on the
percentage of common stock owned; rather, an entity-wide approach should be
adopted. Under such an approach, equity method losses may be recognized based on
the ownership level that includes other equity securities (e.g., preferred
stock) and loans/advances to the investee or based on the change in the
investor's claim on the investor's book value. Hughes adopted EITF 99-10 during
the third quarter of 1999, as required. The impact of adopting EITF 99-10 was
not material to the third quarter 1999 results.
In June 1998, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS No. 133 requires all derivatives to be recorded as either assets or
liabilities and the instruments to be measured at fair value. Gains or losses
resulting from changes in the values of those derivatives are to be recognized
immediately or deferred depending on the use of the derivative and whether or
not it qualifies as a hedge. Hughes plans to adopt SFAS No. 133 by January 1,
2001, as required. Management is currently assessing the impact of this
statement on Hughes' results of operations and financial position.
- 57 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
Year 2000
Many computer technologies made or used by Hughes throughout its business have
the potential for operational problems if they lack the ability to handle the
transition to the Year 2000. Computer technologies include both information
technology ("IT") in the form of hardware and software, as well as non-
information technology ("Non-IT") which includes embedded technology such as
microprocessors.
Because of the potential disruption that this issue could cause to Hughes'
business operations and its customers, a comprehensive, company-wide, Year 2000
program was initiated in 1996 to identify and remediate potential Year 2000
problems. The Year 2000 program addresses both IT and Non-IT systems related to
internal systems and Hughes' products and services.
Hughes' Year 2000 program is being implemented in seven phases, some of which
are being conducted concurrently:
(1) Awareness - establish project teams made up of project leaders from each
Hughes operating company, assign responsibilities and establish awareness
of Year 2000 issues. The awareness phase has been completed.
(2) Inventory - identify all systems within Hughes, determine if they are
critical and identify responsible personnel for compliance. The inventory
phase has been completed. Many of Hughes' systems are already Year 2000
compliant, or had already been scheduled for replacement as part of
Hughes' ongoing systems plans.
(3) Assessment - categorize all systems and determine activities that are
required to achieve compliance, including contacting and assessing the
Year 2000 readiness of material third party vendors and suppliers of
hardware and software. The assessment phase has been completed. All
critical systems were identified in this phase and were the primary focus
of the project teams. Critical systems identified requiring remediation
included satellite control and communication software, broadcast systems
and systems utilized in customer service/billing, engineering and
manufacturing operations. Hughes has also identified the need to upgrade
network control software for customers who have maintenance agreements
with Hughes. Hughes' in-orbit satellites do not have date-dependent
processing.
(4) Remediation - modify, repair or replace categorized systems. Remediation
tasks have been completed on all critical systems.
(5) Testing - test remediated systems to assure normal function when placed in
their original operating environment and further test for Year 2000
compliance. Testing has been successfully completed on all critical
systems.
(6) Implementation - once a remediated system and its interfaces have been
successfully tested, the system will be put into its operating
environment. The majority of the remediated systems have been placed into
their operating environment.
(7) Contingency Planning - development and execution of plans that narrow the
focus on specific areas of significant concern and concentrate resources
to address them. Hughes has developed contingency plans to address the
risk of any critical system not being Year 2000 compliant. These
contingency plans are frequently reviewed and updated as necessary. Hughes
currently believes that the most reasonably likely worst case scenario is
a temporary loss of functionality in satellite control and communication
software for the HSC built satellites. The loss of real-time satellite
control software functionality for these satellites would be addressed
through the use of back-dated processors or through manual procedures.
These alternative procedures would restore any loss in functionality but
could result in slightly higher operating costs until the Year 2000
problems are corrected.
- 58 -
<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
has incurred and expensed approximately $15.0 million during the first nine
months of 1999 and approximately $7.0 million during 1998, related to the
assessment of, and on-going efforts in connection with, its Year 2000 program.
Future spending for remaining system remediation and testing is currently
estimated to be from $7.0 million to $9.0 million. Each Hughes operating company
is funding its respective Year 2000 efforts with current and future operating
cash flows.
Hughes has received certification of Year 2000 compliance from a majority of
its critical third parties. For those third party systems that are not yet Year
2000 compliant, Hughes has identified action plans or alternatives to meet
Hughes' requirements.
In view of the foregoing, Hughes does not currently anticipate that it will
experience a significant disruption of its business as a result of the Year 2000
issue. However, there is still uncertainty about the broader scope of the Year
2000 issue as it may affect Hughes and third parties that are critical to
Hughes' operations. For example, lack of readiness by electrical and water
utilities, financial institutions, governmental agencies or other providers of
general infrastructure could pose significant impediments to Hughes' ability to
carry on its normal operations. If the modifications and conversions required
to make Hughes Year 2000 ready are not made or are not completed on a timely
basis and in the event that Hughes is unable to implement adequate contingency
plans in the event that problems are encountered internally or externally by
third parties, the resulting problems could have a material adverse effect on
Hughes' results of operations and financial condition.
Security Ratings
In September 1999, Standard and Poor's Rating Services ("S&P") lowered Hughes'
long-term debt rating from BBB to BBB - minus. The S&P BBB - minus credit
rating indicates the issuer has adequate capacity to pay interest and repay
principal. Additionally, S&P lowered the short-term corporate credit and
commercial paper ratings to A-3 from A-2. S&P has assigned a negative outlook
to Hughes' ratings.
In September 1999, Moody's Investors Service ("Moody's") placed Hughes' Baa2
long-term credit and P-2 commercial paper ratings on review for possible
downgrade. The Baa2 rating for senior debt indicates adequate likelihood of
interest and principal payment and principal security. The P-2 commercial paper
rating is the second highest rating available and indicates that the issuer has
a strong ability for repayment relative to other issuers.
Debt ratings by the various rating agencies reflect each agency's opinion of
the ability of issuers to repay debt obligations as they come due. The lowered
rating and review for possible downgrade, as well as the negative outlook,
reflects increased financial leverage at Hughes resulting from a significant
acceleration of its growth initiatives, including the PRIMESTAR, Tempo Satellite
and USSB transactions, PanAmSat's satellite deployment and restoration plan, the
previously announced increased development costs and schedule delays experienced
by HSC and the investment in Spaceway.
Lower ratings generally result in higher borrowing costs. A security rating
is not a recommendation to buy, sell, or hold securities and may be subject to
revision or withdrawal at any time by the assigning rating organization. Each
rating should be evaluated independently of any other rating.
- 59 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
Supplemental Data
The financial statements reflect the application of purchase accounting
adjustments related to GM's purchase of Hughes in 1985. 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 1999 and 1998 and $15.9 million for the nine months ended September
30, 1999 and 1998. Such amounts are excluded from the earnings available for
the payment of dividends on GM Class H common stock and are charged against
earnings available for the payment of dividends on GM's $1-2/3 par value common
stock. Unamortized purchase accounting adjustments associated with GM's
purchase of Hughes were $410.7 million at September 30, 1999 and $426.6 million
at December 31, 1998.
In order to provide additional analytical data to the users of Hughes'
financial information, supplemental data in the form of unaudited summary pro
forma financial data are provided. Consistent with the basis on which earnings
of Hughes available for the payment of dividends on the GM Class H common stock
is determined, the pro forma data exclude purchase accounting adjustments
related to GM's acquisition of Hughes. Included in the supplemental data are
certain financial ratios which provide measures of financial returns excluding
the impact of purchase accounting adjustments. The pro forma data are not
presented as a measure of GM's total return on its investment in Hughes.
- 60 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
Unaudited Summary Pro Forma Financial Data*
Pro Forma Condensed Statement of Income (Loss)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- ---------
(Dollars in Millions Except Per Share Amounts)
<S> <C> <C> <C> <C>
Total revenues $1,990.5 $1,513.3 $5,218.3 $4,173.3
Total operating costs and expenses 1,995.4 1,445.8 5,356.6 3,944.0
-------- -------- -------- --------
Operating profit (loss) (4.9) 67.5 (138.3) 229.3
Non-operating income (loss) (71.7) (16.5) 27.7 (23.7)
Income tax provision (benefit) (38.2) 17.4 (44.9) 72.1
Minority interests in net losses of subsidiaries 8.8 9.3 22.1 19.2
Cumulative effect of accounting change, net
of taxes - - - (9.2)
Preferred stock dividends (24.7) - (26.3) -
-------- -------- -------- --------
Earnings (Loss) Used for Computation of
Available Separate Consolidated Net
Income (Loss) (1) $ (54.3) $ 42.9 $ (69.9) $ 143.5
======== ======== ======== ========
Earnings (Loss) Attributable to General Motors
Class H Common Stock on a Per Share Basis-
Basic and Diluted $ (0.13) $ 0.11 $ (0.17) $ 0.36
======== ======== ======== ========
</TABLE>
Pro Forma Condensed Balance Sheet
September 30, December 31,
Assets 1999 1998
------------- ------------
(Dollars in Millions)
Total Current Assets $ 3,639.2 $ 3,846.4
Satellites, net 3,690.6 3,197.5
Property, net 1,303.0 1,059.2
Net Investment in Sales-type Leases 155.9 173.4
Intangible Assets, Investments and Other Assets, 9,606.9 4,731.9
--------- ---------
Total Assets $18,395.6 $13,008.4
========= =========
Liabilities and Stockholder's Equity
Total Current Liabilities $ 2,596.3 $ 2,009.5
Long-Term Debt 1,929.2 778.7
Postretirement Benefits Other Than Pensions,
Other Liabilities and Deferred Credits 2,266.6 1,783.2
Minority Interests 530.0 481.7
Total Stockholder's Equity (2) 11,073.5 7,955.3
--------- ---------
Total Liabilities and Stockholder's Equity (2) $18,395.6 $13,008.4
========= =========
- --------------
* The summary excludes purchase accounting adjustments related to GM's
acquisition of Hughes.
(1) Includes accrued and/or paid preferred stock dividends of $24.7 million and
$26.3 million in the third quarter and first nine months of 1999,
respectively.
(2) General Motors' equity in its wholly-owned subsidiary, Hughes. Holders of
GM Class H common stock have no direct rights in the equity or assets of
Hughes, but rather have rights in the equity and assets of GM (which
includes 100% of the stock of Hughes).
- 61 -
<PAGE>
<TABLE>
HUGHES ELECTRONICS CORPORATION
Unaudited Summary Pro Forma Financial Data* - Continued
Pro Forma Selected Segment Data
<CAPTION>
Direct-To-
Home Satellite Satellite Network Eliminations
(Dollars in Millions) Broadcast Services Systems Systems and Other Total
- ------------------------------------------------------------------------------------------------------------
For the Three Months Ended:
September 30, 1999
<S> <C> <C> <C> <C> <C> <C>
Total Revenues $1,144.6 $ 210.7 $ 510.8 $426.2 $(301.8) $1,990.5
- ------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) $ (67.6) $ 99.1 $ 41.3 $ 32.2 $(109.9) $ (4.9)
Operating Profit Margin - 47.0% 8.1% 7.6% - -
EBITDA (1) $ 47.7 $ 169.0 $ 56.3 $ 44.3 $(105.7) $ 211.6
EBITDA Margin(1) 4.2% 80.2% 11.0% 10.4% - 10.6%
- ------------------------------------------------------------------------------------------------------------
Depreciation and
Amortization $ 115.3 $ 69.9 $ 15.0 $ 12.1 $ 4.2 $ 216.5
Capital Expenditures $ 97.6(2) $ 347.8(3) $ 17.0 $ 5.4 $ 41.4 $ 509.2
- ------------------------------------------------------------------------------------------------------------
September 30, 1998
Total Revenues $ 459.1 $ 186.5 $ 688.9 $267.7 $ (88.9) $1,513.3
- ------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) $ (61.8) $ 79.1 $ 63.8 $ 16.9 $ (30.5) $ 67.5
Operating Profit Margin - 42.4% 9.3% 6.3% - 4.5%
EBITDA(1) $ (30.6) $ 135.7 $ 76.7 $ 28.3 $ (31.3) $ 178.8
EBITDA Margin(1) - 72.8% 11.1% 10.6% - 11.8%
- ------------------------------------------------------------------------------------------------------------
Depreciation and
Amortization $ 31.2 $ 56.6 $ 12.9 $ 11.4 $ (0.8) $ 111.3
Capital Expenditures $ 82.0(2) $ 190.7(3) $ 18.2 $ 10.7 $ (21.4) $ 280.2
- ------------------------------------------------------------------------------------------------------------
For the Nine Months Ended:
September 30, 1999
Total Revenues $2,571.4 $ 604.6 $1,694.9 $998.2 $(650.8) $5,218.3
- ------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) $ (159.4) $ 261.4 $ (106.1) $ 25.7 $(159.9) $ (138.3)
Operating Profit Margin - 43.2% - 2.6% - -
EBITDA(1) $ 44.8 $ 465.9 $ (64.7) $ 63.4 $(148.4) $ 361.0
EBITDA Margin(1) 1.7% 77.1% - 6.4% - 6.9%
- ------------------------------------------------------------------------------------------------------------
Depreciation and
Amortization $ 204.2 $ 204.5 $ 41.4 $ 37.7 $ 11.5 $ 499.3
Capital Expenditures $ 253.4(2) $ 823.0(3) $ 52.1 $ 23.1 $ 45.9 $1,197.5
- ------------------------------------------------------------------------------------------------------------
September 30, 1998
Total Revenues $1,248.5 $ 570.6 $1,988.0 $674.1 $(307.9) $4,173.3
- ------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) $ (133.6) $ 239.2 $ 178.9 $(20.2) $ (35.0) $ 229.3
Operating Profit Margin - 41.9% 9.0% - - 5.5%
EBITDA(1) $ (56.4) $ 409.0 $ 214.0 $ 9.6 $ (37.7) $ 538.5
EBITDA Margin(1) - 71.7% 10.8% 1.4% - 12.9%
- ------------------------------------------------------------------------------------------------------------
Depreciation and
Amortization $ 77.2 $ 169.8 $ 35.1 $ 29.8 $ (2.7) $ 309.2
Capital Expenditures $ 130.1(2) $ 605.0(3) $ 50.5 $ 26.4 $ 114.5 $ 926.5
- ------------------------------------------------------------------------------------------------------------
</TABLE>
* The Financial Statements reflect the application of purchase accounting
adjustments related to GM's acquisition of Hughes. However, as provided in
the General Motors' Restated Certificate of Incorporation, the earnings
attributable to GM Class H common stock for purposes of determining the
amount available for the payment of dividends on GM Class H common stock
specifically excludes such adjustments. In order to provide additional
analytical data, the above unaudited pro forma selected segment data, which
exclude the purchase accounting adjustments related to GM's acquisition of
Hughes, are presented.
(1) EBITDA is defined as operating profit (loss), plus depreciation and
amortization. EBITDA is not presented as an alternative measure of operating
results or cash flow from operations, as determined in accordance with
generally accepted accounting principles. EBITDA margin is calculated by
dividing EBITDA by total revenues. See discussion in Management's Discussion
and Analysis of Financial Condition and Results of Operations.
(2) Includes satellite expenditures amounting to $13.6 million, $38.0 million,
$89.1 and $38.0 million, respectively.
(3) Includes satellite expenditures amounting to $93.2 million, $182.2 million,
$408.8 million and $422.2 million, respectively. Also included are
expenditures related to the early buy-out of satellite sale-leasebacks
totaling $228.2 million for the third quarter of 1999 and $369.5 million and
$155.5 million for the first nine months of 1999 and 1998, respectively.
- 62 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
Unaudited Summary Pro Forma Financial Data* - Concluded
Pro Forma Selected Financial Data
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ------------------
1999 1998 1999 1998
-------- --------- -------- -------
(Dollars in Millions Except Per Share Amounts)
<S> <C> <C> <C> <C>
Operating profit (loss) $ (5) $ 68 $ (138) $ 229
EBITDA (1) $ 212 $ 179 $ 361 $ 539
EBITDA margin (2) 10.6% 11.8% 6.9% 12.9%
Income (Loss) before income taxes, minority
interests and cumulative effect of accounting
change $ (77) $ 51 $ (111) $ 206
Earnings (Loss) used for computation of
available separate consolidated net income
(loss) (3) $ (54) $ 43 $ (70) $ 144
Average number of GM Class H dividend base
shares (4) 428.9 399.9 414.7 399.9
Stockholder's equity $11,074 $7,827 $11,074 $7,827
Working capital $ 1,043 $2,418 $ 1,043 $2,418
Operating profit as a percent of revenues N/A 4.5% N/A 5.5%
Income before income taxes, minority interests
and cumulative effect of accounting change
as a percent of revenues N/A 3.4% N/A 4.9%
Net income as a percent of revenues N/A 2.8% N/A 3.4%
</TABLE>
- ----------------
* The summary excludes purchase accounting adjustments related to GM's
acquisition of Hughes.
(1) EBITDA is defined as operating profit (loss), plus depreciation and
amortization. EBITDA is not presented as an alternative measure of
operating results or cash flow from operations, as determined in accordance
with generally accepted accounting principles. See discussion in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
(2) EBITDA margin is calculated by dividing EBITDA by total revenues.
(3) Includes accrued and/or paid preferred stock dividends of $24.7 million and
$26.3 million in the third quarter and first nine months of 1999,
respectively.
(4) Average Class H dividend base shares is used in calculating earnings
attributable to GM Class H common stock on a per share basis. This is not
the same as the average number of GM Class H shares outstanding, which was
135.1 million and 105.7 million for the third quarters of 1999 and 1998,
respectively, and 120.8 million and 105.0 million for the nine months ended
September 30, 1999 and 1998, respectively.
* * * * *
- 63 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
General Motors Corporation September 30, 1998 Consolidated Financial Statements
and is qualified in its entirety by reference to Third Quarter 1999 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> 6,981
<SECURITIES> 8,668
<RECEIVABLES> 67,718
<ALLOWANCES> 0
<INVENTORY> 11,062
<CURRENT-ASSETS> 34,419
<PP&E> 65,948
<DEPRECIATION> 34,296
<TOTAL-ASSETS> 229,624
<CURRENT-LIABILITIES> 44,172
<BONDS> 103,758
221
1
<COMMON> 1,103
<OTHER-SE> 13,613
<TOTAL-LIABILITY-AND-EQUITY> 229,624
<SALES> 95,202
<TOTAL-REVENUES> 110,821
<CGS> 82,607
<TOTAL-COSTS> 90,560
<OTHER-EXPENSES> 76
<LOSS-PROVISION> 323
<INTEREST-EXPENSE> 4,951
<INCOME-PRETAX> 2,175
<INCOME-TAX> 710
<INCOME-CONTINUING> 1,365
<DISCONTINUED> (181)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,184
<EPS-BASIC> 1.65
<EPS-DILUTED> 1.60
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
General Motors Corporation September 30, 1999 Consolidated Financial Statements
and is qualified in its entirety by reference to Third Quarter 1999 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-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Sep-30-1999
<EXCHANGE-RATE> 1
<CASH> 12,384
<SECURITIES> 10,603
<RECEIVABLES> 81,929
<ALLOWANCES> 0
<INVENTORY> 10,603
<CURRENT-ASSETS> 43,543
<PP&E> 66,488
<DEPRECIATION> 34,727
<TOTAL-ASSETS> 261,942
<CURRENT-LIABILITIES> 50,190
<BONDS> 123,904
219
0
<COMMON> 1,085
<OTHER-SE> 15,490
<TOTAL-LIABILITY-AND-EQUITY> 261,942
<SALES> 112,629
<TOTAL-REVENUES> 130,296
<CGS> 94,011
<TOTAL-COSTS> 102,893
<OTHER-EXPENSES> 157
<LOSS-PROVISION> 328
<INTEREST-EXPENSE> 5,624
<INCOME-PRETAX> 7,242
<INCOME-TAX> 2,538
<INCOME-CONTINUING> 4,431
<DISCONTINUED> 426
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,857
<EPS-BASIC> 7.45
<EPS-DILUTED> 7.32
</TABLE>
