UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549-1004
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
Commission file number 1-143
GENERAL MOTORS CORPORATION
(Exact name of registrant as specified in its charter)
STATE OF DELAWARE 38-0572515
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Renaissance Center, Detroit, Michigan 48243-7301
3044 West Grand Boulevard, Detroit, Michigan 48202-3091
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (313) 556-5000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X . No .
As of June 30, 1999, there were outstanding 644,175,179 shares of the
issuer's $1-2/3 par value common stock and 112,363,444 shares of GM Class H
$0.10 par value common stock.
- 1 -
<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 Six Months Ended June 30, 1999 and 1998 3
Consolidated Balance Sheets as of June 30, 1999,
December 31, 1998 and June 30, 1998 5
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1999 and 1998 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Part II - Other Information (Unaudited)
Item 1. Legal Proceedings 38
Item 4. Submission of Matters to a Vote of Security Holders 40
Item 6. Exhibits and Reports on Form 8-K 42
Signature 42
Exhibit 99 Hughes Electronics Corporation Financial Statements and
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Unaudited) 43
Exhibit 27 Financial Data Schedule
(for Securities and Exchange Commission information only)
- 2 -
<PAGE>
PART I
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in Millions Except Per Share Amounts)
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Manufactured products sales
and revenues $39,261 $31,845 $75,881 $66,738
Financing revenues 3,571 3,420 7,080 6,730
Other income (Note 12) 2,235 2,007 4,541 3,828
------- ------- ------- -------
Total net sales and revenues 45,067 37,272 87,502 77,296
------ ------ ------ ------
Cost of sales and other operating
expenses, exclusive of items
listed below 32,284 27,724 62,950 57,329
Selling, general and
administrative expenses 4,502 4,102 8,324 7,612
Depreciation and amortization
expense 3,227 2,648 5,951 5,355
Interest expense 1,794 1,691 3,639 3,261
Other expenses (Note 12) 476 596 914 1,145
------- ------- ------- -------
Total costs and expenses 42,283 36,761 81,778 74,702
Income from continuing operations
before income taxes
and minority interests 2,784 511 5,724 2,594
Income tax expense 956 159 1,985 854
Minority interests (7) - (21) (10)
Losses of nonconsolidated
associates (87) (46) (164) (56)
----- ---- ------ -------
Income from continuing operations 1,734 306 3,554 1,674
Income from discontinued operations
(Note 2) 184 83 426 319
----- ---- ------ -------
Net income 1,918 389 3,980 1,993
Dividends on preference stocks (7) (16) (23) (32)
----- ---- ------ ------
Earnings on common stocks $1,911 $373 $3,957 $1,961
===== === ===== =====
Basic earnings (losses) per share
attributable to common stocks (Note 11)
$1-2/3 par value common stock
Continuing operations $2.71 $0.41 $5.44 $2.40
Discontinued operations 0.28 0.13 0.65 0.48
---- ---- ---- ----
Earnings per share attributable
to $1-2/3 par value $2.99 $0.54 $6.09 $2.88
===== ===== ===== =====
Earnings per share attributabl
to Class H $(0.23) $0.14 $(0.04) $0.27
===== ===== ===== =====
Diluted earnings (losses) per share
attributable to common stocks (Note 11)
$1-2/3 par value common stock
Continuing operations $2.66 $0.40 $5.33 $2.35
Discontinued operations 0.28 0.12 0.64 0.47
---- ---- ---- ----
Earnings per share attributable
to $1-2/3 par value $2.94 $0.52 $5.97 $2.82
== = = ===== ===== ===== =====
Earnings per share attributable
to Class H $(0.23) $0.14 $(0.04) $0.27
===== ===== ===== =====
Reference should be made to the notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF INCOME - Concluded
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in Millions)
AUTOMOTIVE, ELECTRONICS AND OTHER OPERATIONS
Manufactured products sales
and revenues $39,261 $31,845 $75,881 $66,738
Other income 856 826 1,759 1,503
Total net sales and revenues 40,117 32,671 77,640 68,241
------ ------ ------ ------
Cost of sales and other
operating expenses, exclusive
of items listed below 32,284 27,724 62,950 57,329
Selling, general and
administrative expenses 3,370 3,086 6,111 5,655
Depreciation and amortization
expense 1,952 1,444 3,404 2,927
----- ----- ----- -----
Total operating costs and
expenses 37,606 32,254 72,465 65,911
------ ------ ------ ------
Interest expense 180 277 374 472
Other expenses 149 186 207 376
Net expense (income) from
transactions with Financing and
Insurance Operations 66 6 160 (12)
Income (loss) from continuing
operations before income taxes
and minority interests 2,116 (52) 4,434 1,494
Income tax expense (benefit) 720 (6) 1,508 522
Minority interests - 4 (6) -
Losses of nonconsolidated associates (87) (46) (164) (56)
--- -- ----- ----
Income (loss) from continuing
operations 1,309 (88) 2,756 916
Income from discontinued
operations (Note 2) 184 83 426 319
- --- -- --- ---
Net income (loss) - Automotive,
Electronics and
Other Operations $1,493 $(5) $3,182 $1,235
===== = ===== =====
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in Millions)
FINANCING AND INSURANCE OPERATIONS
Financing revenues $3,571 $3,420 $7,080 $6,730
Insurance, mortgage and other
income 1,379 1,181 2,782 2,325
----- ----- ----- -----
Total revenues and other income 4,950 4,601 9,862 9,055
----- ----- ----- -----
Interest expense 1,614 1,414 3,265 2,789
Depreciation and amortization
expense 1,275 1,204 2,547 2,428
Operating and other expenses 1,132 1,016 2,213 1,957
Provisions for financing losses 111 128 230 229
Insurance losses and loss
adjustment expenses 216 282 477 540
--- --- --- ---
Total costs and expenses 4,348 4,044 8,732 7,943
Net (income) expense from
transactions with Automotive,
Electronics and Other Operations (66) (6) (160) 12
---- ----- ------ ------
Income before income taxes 668 563 1,290 1,100
Income tax expense 236 165 477 332
Minority interests (7) (4) (15) (10)
----- ----- ---- ----
Net income - Financing and
Insurance Operations $425 $394 $798 $758
==== ==== ==== ====
The above supplemental consolidating information is explained in Note 1.
Reference should be made to the notes to consolidated financial statements.
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<PAGE>
CONSOLIDATED BALANCE SHEETS
June 30, June 30,
1999 Dec. 31, 1998
GENERAL MOTORS CORPORATION AND SUBSIDIARIES (Unaudited) 1998 (Unaudited)
--------- -------- ---------
ASSETS
(Dollars in Millions)
Automotive, Electronics and Other Operations
Cash and cash equivalents $11,997 $9,728 $7,569
Marketable securities 1,666 402 463
------- -------- ------
Total cash and marketable securities 13,663 10,130 8,032
Accounts and notes receivable (less allowances) 6,349 4,750 3,845
Inventories (less allowances) (Note 3) 10,766 10,437 11,317
Net assets of discontinued operations (Note 2) - 77 359
Equipment on operating leases
(less accumulated depreciation) 6,394 4,954 4,754
Deferred income taxes and other current assets 6,232 10,051 5,841
------ ------ -------
Total current assets 43,404 40,399 34,148
Equity in net assets of nonconsolidated
associates 1,691 950 1,098
Property - net (Note 4) 31,509 32,222 30,451
Intangible assets - net 11,934 9,994 11,330
Deferred income taxes 18,297 14,967 17,883
Other assets 14,016 16,062 15,085
------ ------ ------
Total Automotive, Electronics and
Other Operations assets 120,851 114,594 109,995
Financing and Insurance Operations
Cash and cash equivalents 2,694 146 164
Investments in securities 8,499 8,748 7,932
Finance receivables - net 74,305 70,436 59,875
Investment in leases and other receivables 33,451 32,798 32,130
Other assets 16,660 18,807 12,688
Net receivable from Automotive, Electronics
and Other Operations 478 816 1,154
--- --- -----
Total Financing and Insurance Operations
assets 136,087 131,751 113,943
------- ------- -------
Total assets $256,938 $246,345 $223,938
LIABILITIES AND STOCKHOLDERS' EQUITY
Automotive, Electronics and Other Operations
Accounts payable (principally trade) $15,814 $13,542 $10,311
Loans payable 854 1,204 1,907
Accrued expenses 34,530 30,548 29,239
Net payable to Financing and Insurance
Operations 478 816 1,154
------ ------ -------
Total current liabilities 51,676 46,110 42,611
Long-term debt 7,408 7,118 6,935
Postretirement benefits other than
pensions (Note 5) 34,317 33,503 32,925
Pensions (Note 6) 3,149 4,410 2,925
Other liabilities and deferred income taxes 17,928 17,807 17,794
------ ------ ------
Total Automotive, Electronics and
Other Operations liabilities 114,478 108,948 103,190
Financing and Insurance Operations
Accounts payable 4,786 4,148 3,982
Debt 110,135 107,753 91,081
Deferred income taxes and other liabilities 10,517 9,661 9,174
------ ----- -----
Total Financing and Insurance
Operations liabilities 125,438 121,562 104,237
Minority interests 591 563 510
General Motors - obligated mandatorily
redeemable preferred securities of
subsidiary trusts holding solely junior
subordinated debentures of General Motors
(Note 7)
Series D 79 79 79
Series G 141 141 143
Stockholders' equity
Preference stocks (Note 8) - 1 1
$1-2/3 par value common stock
(issued, 645,004,212, 655,008,344
and 655,007,825 shares) (Note 9) 1,075 1,092 1,092
Class H common stock (issued, 112,425,599,
106,159,776 and 105,731,028 shares) 11 11 11
Capital surplus (principally additional
paid-in capital) (Note 13) 15,533 12,661 12,773
Retained earnings 5,045 6,984 6,706
------- ------- -------
Subtotal 21,664 20,749 20,583
Accumulated foreign currency
translation adjustments (1,987) (1,089) (1,249)
Net unrealized gains on securities 561 481 507
Minimum pension liability adjustment (Note 6) (4,027) (5,089) (4,062)
Accumulated other comprehensive loss (5,453) (5,697) (4,804)
----- ----- -----
Total stockholders' equity 16,211 15,052 15,779
-------- -------- --------
Total liabilities and stockholders' equity $256,938 $246,345 $223,938
======= ======= ========
Reference should be made to the notes to consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS - Concluded
June 30, June 30,
1999 Dec. 31, 1998
AUTOMOTIVE, ELECTRONICS AND OTHER OPERATIONS (Unaudited) 1998 (Unaudited)
--------- -------- ---------
(Dollars in Millions)
ASSETS
Cash and cash equivalents $11,997 $9,728 $7,569
Marketable securities 1,666 402 463
------- -------- ------
Total cash and marketable securities 13,663 10,130 8,032
Accounts and notes receivable (less allowances) 6,349 4,750 3,845
Inventories (less allowances) (Note 3) 10,766 10,437 11,317
Net assets of discontinued operations (Note 2) - 77 359
Equipment on operating leases
(less accumulated depreciation) 6,394 4,954 4,754
Deferred income taxes and other current assets 6,232 10,051 5,841
------ ------ -------
Total current assets 43,404 40,399 34,148
Equity in net assets of nonconsolidated
associates 1,691 950 1,098
Property - net (Note 4) 31,509 32,222 30,451
Intangible assets - net 11,934 9,994 11,330
Deferred income taxes 18,297 14,967 17,883
Other assets 14,016 16,062 15,085
------ ------ ------
Total Automotive, Electronics and
Other Operations assets $120,851 $114,594 $109,995
======== ======== ========
LIABILITIES AND GM INVESTMENT
Accounts payable (principally trade) $15,814 $13,542 $10,311
Loans payable 854 1,204 1,907
Accrued expenses 34,530 30,548 29,239
Net payable to Financing and
Insurance Operations 478 816 1,154
------ ------ ------
Total current liabilities 51,676 46,110 42,611
Long-term debt 7,408 7,118 6,935
Postretirement benefits other than pensions
(Note 5) 34,317 33,503 32,925
Pensions (Note 6) 3,149 4,410 2,925
Other liabilities and deferred income taxes 17,928 17,807 17,794
------ ------ ------
Total Automotive, Electronics and
Other Operations liabilities 114,478 108,948 103,190
Minority interests 524 511 467
GM investment in Automotive, Electronics
and Other Operations 5,849 5,135 6,338
----- ----- -----
Total Automotive, Electronics and
Other Operations liabilities
and GM investment $120,851 $114,594 $109,995
======== ======== ========
June 30, June 30,
1999 Dec. 31, 1998
FINANCING AND INSURANCE OPERATIONS (Unaudited) 1998 (Unaudited)
--------- -------- ---------
(Dollars in Millions)
ASSETS
Cash and cash equivalents $2,694 $146 $164
Investments in securities 8,499 8,748 7,932
Finance receivables - net 74,305 70,436 59,875
Investment in leases and other receivables 33,451 32,798 32,130
Other assets 16,660 18,807 12,688
Net receivable from Automotive, Electronics
and Other Operations 478 816 1,154
------ ------ ------
Total Financing and Insurance
Operations assets $136,087 $131,751 $113,943
======== ======== ========
LIABILITIES AND GM INVESTMENT
Accounts payable $4,786 $4,148 $3,982
Debt 110,135 107,753 91,081
Deferred income taxes and other liabilities 10,517 9,661 9,174
------- ------- ------
Total Financing and Insurance Operations
liabilities 125,438 121,562 104,237
Minority interests 67 52 43
GM investment in Financing and
Insurance Operations 10,582 10,137 9,663
------ ------ -----
Total Financing and Insurance Operations
liabilities and GM investment $136,087 $131,751 $113,943
======== ======== ========
The above supplemental consolidating information is explained in Note 1.
Reference should be made to the notes to consolidated financial statements.
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<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
1999 1998
------ ------
(Dollars in Millions)
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Net cash provided by operating activities $21,342 $4,405
Cash flows from investing activities
Expenditures for property (3,125) (3,827)
Investments in marketable securities
- acquisitions (13,739) (12,969)
Investments in marketable securities
- liquidations 12,168 16,766
Mortgage servicing rights - acquisitions (662) (742)
Mortgage servicing rights - liquidations 4 7
Finance receivables - acquisitions (90,613) (78,491)
Finance receivables - liquidations 67,691 58,991
Proceeds from sales of finance receivables 18,683 17,356
Operating leases - acquisitions (12,814) (12,379)
Operating leases - liquidations 6,896 7,556
Investments in companies, net of
cash acquired (Note 13) (2,684) (424)
Other 121 (185)
--- ----
Net cash used in investing activities (18,074) (8,341)
------- -----
Cash flows from financing activities
Net (decrease) increase in loans payable (6,035) 2,464
Increase in long-term debt 17,681 11,019
Decrease in long-term debt (9,360) (7,591)
Repurchases of common and preference stocks (1,868) (3,071)
Proceeds from issuing common and
preference stocks 1,799 343
Cash dividends paid to stockholders (673) (702)
------ ------
Net cash provided by financing activities 1,544 2,462
----- -----
Effect of exchange rate changes on cash and
cash equivalents (123) (67)
Net cash provided by (used in)
continuing operations 4,689 (1,541)
Net cash provided by (used in)
discontinued operations 128 (999)
------ ------
Net increase (decrease) in cash and
cash equivalents 4,817 (2,540)
Cash and cash equivalents at beginning
of the period 9,874 10,273
------ ------
Cash and cash equivalents at end
of the period $14,691 $7,733
======= ======
Reference should be made to the notes to consolidated financial statements.
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<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - Concluded
(Unaudited)
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 1998
------------------------------------------------
Automotive, Financing Automotive, Financing
Elecronics and Electronics and
and Other Insurance and Other Insurance
--------- --------- --------- ---------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Net cash provided by operating
activities $12,803 $8,539 $368 $4,037
Cash flows from investing activities
Expenditures for property (3,019) (106) (3,753) (74)
Investments in marketable securities
- acquisitions (3,119) (10,620) (4,466) (8,503)
Investments in marketable securities
- liquidations 1,855 10,313 7,815 8,951
Mortgage servicing rights - acquisitions - (662) - (742)
Mortgage servicing rights - liquidations - 4 - 7
Finance receivables - acquisitions - (90,613) - (78,491)
Finance receivables - liquidations - 67,691 - 58,991
Proceeds from sales of finance receivables - 18,683 - 17,356
Operating leases - acquisitions (4,613) (8,201) (3,042) (9,337)
Operating leases - liquidations 2,889 4,007 2,815 4,741
Investments in companies, net of
cash acquired (Note 13) (2,558) (126) (409) (15)
Net investing activity with Financing and
Insurance Operations 75 - 150 -
Other (876) 997 (1,049) 864
---- --- ------ ---
Net cash used in investing activities (9,366) (8,633) (1,939) (6,252)
----- ----- ----- -----
Cash flows from financing activities
Net (decrease) increase in loans payable (393) (5,642) 898 1,566
Increase in long-term debt 2,433 15,248 2,648 8,371
Decrease in long-term debt (2,130) (7,230) (1,079) (6,512)
Net financing activity with Automotive,
Electronics and Other Operations - (75) - (150)
Repurchases of common and
preference stocks (1,868) - (3,071) -
Proceeds from issuing common and
preference stocks 1,799 - 343 -
Cash dividends paid to stockholders (673) - (702) -
--- ----- --- -----
Net cash (used in) provided by
financing activities (832) 2,301 (963) 3,275
--- ----- --- -----
Effect of exchange rate changes on
cash and cash equivalents (126) 3 (67) -
Net transactions with Automotive/
Financing Operations (338) 338 1,473 (1,473)
---- --- ----- ------
Net cash provided by (used in)
continuing operations 2,141 2,548 (1,128) (413)
Net cash provided by (used in)
discontinued operations 128 - (999) -
----- ----- ----- ---
Net increase (decrease) in cash and
cash equivalents 2,269 2,548 (2,127) (413)
Cash and cash equivalents at beginning
of the period 9,728 146 9,696 577
----- --- ----- ---
Cash and cash equivalents at end
of the period $11,997 $2,694 $7,569 $164
======= ====== ====== ====
</TABLE>
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>
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Financial Statement Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. The consolidated financial statements include the
accounts of General Motors Corporation (hereinafter referred to as the
"Corporation") and domestic and foreign subsidiaries that are more than 50%
owned, principally General Motors Acceptance Corporation and Subsidiaries (GMAC)
and Hughes Electronics Corporation (Hughes), (collectively referred to as
"General Motors" or "GM"). The financial data related to Delphi Automotive
Systems Corporation (Delphi) is presented as discontinued operations for all
periods presented. In the opinion of management, all adjustments (consisting of
only normal recurring items), which are necessary for a fair presentation have
been included. The results for interim periods are not necessarily indicative of
results which may be expected for any other interim period or for the full year.
For further information, refer to the December 31, 1998 consolidated financial
statements and notes thereto included in GM's Current Report on Form 8-K, dated
April 12, 1999 and filed with the Securities and Exchange Commission on April
15, 1999, Hughes financial statements and notes thereto included as Exhibit 99
to GM's 1998 Annual Report on Form 10-K for the period ended December 31, 1998,
the GMAC Annual Report on Form 10-K for the period ended December 31, 1998, the
Hughes financial statements and notes thereto for the period ended June 30,
1999, included as Exhibit 99 to this GM Quarterly Report on Form 10-Q for the
period ended June 30, 1999 and related Quarterly Report on Form 10-Q filed with
the Securities and Exchange Commission, and the GMAC Quarterly Report on Form
10-Q for the period ended June 30, 1999, filed with the Securities and Exchange
Commission.
GM presents separate supplemental consolidating financial information for the
following businesses: (1) Automotive, Electronics and Other Operations which
consists of the design, manufacturing and marketing of cars, trucks, locomotives
and heavy duty transmissions and related parts and accessories, as well as the
operations of Hughes; and (2) Financing and Insurance Operations which consists
primarily of GMAC, which provides a broad range of financial services, including
consumer vehicle financing, full-service leasing and fleet leasing, dealer
financing, car and truck extended service contracts, residential and commercial
mortgage services, vehicle and homeowners insurance, and asset-backed lending.
Transactions between businesses have been eliminated in the Corporation's
consolidated statements of income.
Certain amounts for 1998 were reclassified to conform with the 1999
classifications.
Note 2. Discontinued Operations
Delphi is a diverse supplier of automotive systems and components. Delphi
offers products and services in the areas of electronics and mobile
communication; safety, thermal and electrical architecture; and dynamics and
propulsion. In February 1999, Delphi completed an initial public offering (IPO)
of 100 million shares of its common stock, which represented 17.7% of its
outstanding common shares. On April 12, 1999, the GM Board of Directors (GM
Board) approved the complete separation of Delphi from GM by means of a tax-free
spin-off. On May 28, 1999 GM distributed 80.1 percent of the ownership of
Delphi, 0.69893 shares of Delphi common stock for each share of GM $1-2/3 par
value common stock based on a record date of May 25, 1999. In addition,
following the receipt of a favorable ruling from the Internal Revenue Service on
May 3, 1999, GM contributed the other 2.2% of Delphi shares it owns, 12.4
million shares, to a Voluntary Employee Beneficiary Association (VEBA) trust to
fund benefits to hourly retirees.
The financial data related to GM's investment in Delphi through May 28, 1999
is classified as discontinued operations for all periods presented. The
financial data of Delphi reflect the historical results of operations and cash
flows of the businesses that were considered part of the Delphi business segment
of GM during each respective period; they do not reflect many significant
changes that will occur in the operations and funding of Delphi as a result of
the separation from GM and the IPO. The Delphi financial data classified as
discontinued operations reflect the assets and liabilities transferred to Delphi
in accordance with the terms of a master separation agreement to which Delphi
and GM are parties (the "Separation Agreement"). Delphi and Delco Electronics
Corporation (Delco Electronics), the electronics and mobile communication
business that was transferred to Delphi in December 1997, were under the common
control of GM during such periods; therefore, the Delphi financial data include
amounts relating to Delco Electronics for all periods presented, although Delco
Electronics was not integrated with Delphi until December 1997.
Delphi net sales (including sales to GM) included in discontinued operations
totaled $5.0 billion and $7.1 billion for the quarters ended June 30, 1999 and
1998, respectively. Income from Delphi discontinued operations of $184 million
and $83 million for the quarter ended June 30, 1999 and 1998, respectively, is
reported net of income tax expense of $140 million and $16 million,
respectively.
Delphi net sales (including sales to GM) included in discontinued operations
totaled $12.5 billion and $14.7 billion for the six months ended June 30, 1999
and 1998, respectively. Income from Delphi discontinued operations of $426
million and $319 million for the six months ended June 30, 1999 and 1998 is
reported net of income tax expense of $314 million and $129 million,
respectively.
- 9 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Note 2. Discontinued Operations (concluded)
The net assets of Delphi were as follows (in millions):
Dec. 31, June 30,
1998 1998
---- ----
Current assets $6,405 $6,513
Property and equipment - net 4,965 4,842
Deferred income taxes and other assets 4,136 3,647
Current liabilities (4,057) (3,545)
Long-term debt (3,141) (3,327)
Other liabilities (8,299) (7,854)
Accumulated translation adjustments 68 83
-- ----
Net assets of discontinued operations $77 $359
=== ====
As a result of the complete separation of Delphi by means of the tax-free
spin-off and VEBA trust contribution on May 28, 1999, GM recorded a decrease to
stockholders' equity of $5.2 billion in the second quarter of 1999. This amount
reflects the elimination of Delphi net assets of $3.4 billion, as well as a
pension curtailment/settlement charge and other adjustments totaling $1.8
billion.
In the first quarter of 1999, GM recorded an increase to stockholders'
equity of $1.2 billion reflecting IPO proceeds of $1.7 billion, less the cost of
GM's investment in Delphi sold in the IPO and the costs of the IPO and
establishing Delphi as an independent entity. In total, the complete separation
of Delphi, including a pension curtailment/settlement charge and other
adjustments in the six-month period ending June 30, 1999, resulted in a
reduction to stockholders' equity of $4.0 billion.
Note 3. Inventories
Inventories included the following for Automotive, Electronics and Other
Operations (in millions):
June 30, Dec. 31, June 30,
1999 1998 1998
---- ---- ----
Productive material, work in process,
and supplies $5,660 $5,377 $5,878
Finished product, service parts, etc. 7,008 6,962 7,276
------ ------ ------
Total inventories at FIFO 12,668 12,339 13,154
Less LIFO allowance 1,902 1,902 1,837
------- ------- -------
Total inventories (less allowances) $10,766 $10,437 $11,317
====== ====== ======
Note 4. Property - Net
Property - net included the following for Automotive, Electronics and Other
Operations (in millions):
June 30, Dec. 31, June 30,
1999 1998 1998
---- ---- ----
Real estate, plants, and equipment $58,592 $59,565 $57,029
Less accumulated depreciation (34,169) (34,641) (33,397)
------ ------ ------
Real estate, plants, and equipment - net 24,423 24,924 23,632
Special tools - net 7,086 7,298 6,819
------- ------- -------
Total property - net $31,509 $32,222 $30,451
====== ====== ======
Financing and Insurance Operations had net property of $395 million, $386
million, and $266 million recorded in other assets at June 30, 1999, December
31, 1998, and June 30, 1998, respectively.
Note 5. Postretirement Benefits Other than Pensions
GM has disclosed in the consolidated financial statements certain amounts
associated with estimated future postretirement benefits other than pensions and
characterized such amounts as "accumulated postretirement benefit obligations,"
"liabilities," or "obligations." Notwithstanding the recording of such amounts
and the use of these terms, GM does not admit or otherwise acknowledge that such
amounts or existing postretirement benefit plans of GM (other than pensions)
represent legally enforceable liabilities of GM.
- 10 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Note 6. Pensions
As a result of the Delphi Separation, GM recognized a
curtailment/settlement charge of $2.3 billion pre-tax related to the U.S. Hourly
Pension plan as a reduction of stockholders' equity (see Note 2). Furthermore,
the GM U.S. Hourly Pension plan has been remeasured as of May 28, 1999. The
remeasurement was based on May 28, 1999 demographics, updated mortality
assumptions, assets and liabilities adjusted for the plan split, and an updated
discount rate of 7.0% compared to the December 31, 1998 discount rate of 6.8%.
No change was made to the expected return on plan assets of 10.0% and the
expected rate of compensation increase of 5.0%.
Note 7. Preferred Securities of Subsidiary Trusts
General Motors - Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts
In July 1997, the General Motors Capital Trust D (Series D Trust) issued
approximately $79 million of its 8.67% Trust Originated Preferred Securitiessm
(TOPrSsm) Series D, (Series D Preferred Securities), in a one-for-one exchange
for 3,055,255 of the outstanding GM Series D 7.92% Depositary Shares, each
representing one-fourth of a share of GM Series D Preference Stock, $0.10 par
value per share. In addition, the General Motors Capital Trust G (Series G
Trust) issued approximately $143 million of its 9.87% TOPrS, Series G (Series G
Preferred Securities), in a one-for-one exchange for 5,064,489 of the
outstanding GM Series G 9.12% Depositary Shares, each representing one-fourth of
a share of GM Series G Preference Stock, $0.10 par value per share.
Concurrently with the exchanges and the related purchases by GM from the
Series D and Series G Trusts (Trusts) of the common securities of such Trusts,
which represent approximately 3 percent of the total assets of such Trusts, GM
issued to the wholly-owned Trusts, as the Series D Trust's sole assets its 8.67%
Junior Subordinated Deferrable Interest Debentures, Series D, due July 1, 2012
and as the Series G Trust's sole assets, its 9.87% Junior Subordinated
Deferrable Interest Debentures, Series G, due July 1, 2012 (the "Series D
Debentures" and "Series G Debentures" or collectively the "Debentures"), having
aggregate principal amounts equal to the aggregate stated liquidation amounts of
the Series D and Series G Preferred Securities and the related common
securities, respectively ($79 million with respect to the Series D Debentures
and $131 million with respect to the Series G Debentures).
The Series D Debentures are redeemable, in whole or in part, at GM's option
on or after August 1, 1999, at a redemption price equal to 100% of the
outstanding principal amount of the Series D Debentures plus accrued and unpaid
interest. The Series D Preferred Securities will be redeemed upon the maturity
or earlier redemption of the Series D Debentures.
The Series G Debentures are redeemable, in whole or in part, at GM's option
on or after January 1, 2001, at a redemption price equal to 100% of the
outstanding principal amount of the Series G Debentures plus accrued and unpaid
interest, or, under certain circumstances, prior to January 1, 2001, at a
redemption price equal to 114% of the outstanding principal of the Series G
Debentures from the Series G expiration date through December 31, 1997,
declining ratably on each January 1 thereafter to 100% on January 1, 2001, plus
accrued and unpaid interest. The Series G Preferred Securities will be redeemed
upon the maturity or earlier redemption of the Series G Debentures.
GM has guaranteed the payment in full to the holders of the Series D and
Series G Preferred Securities (collectively the "Preferred Securities") of all
distributions and other payments on the Preferred Securities to the extent not
paid by the Trusts only if and to the extent that the Trusts have assets
therefore, GM has made payments of interest or principal on the related
Debentures. These guarantees, when taken together with GM's obligations under
the Preferred Securities Guarantees, the Debentures, and the Indentures relating
thereto and the obligations under the Declaration of Trust of the Trusts,
including the obligations to pay certain costs and expenses of the Trusts,
constitute full and unconditional guarantees by GM of each Trust's obligations
under its Preferred Securities.
sm "Trust Originated Preferred Securities" and "TOPrS" are service trademarks of
Merrill Lynch & Co.
- 11 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Note 8. America Online's Investment in GM Preference Stock
On May 11, 1999, it was announced that DIRECTV and Hughes Network Systems
(HNS) will collaborate with America Online (AOL) on a new service that will
combine digital satellite television programming from DIRECTV with AOL's new
interactive television Internet service. HNS will design and build the initial
dual-purpose DIRECTV/AOL receiver equipment. The new service will be suited for
both frequent Internet users and the mass market consumer who wants to connect
to the Internet. On June 21, 1999, Hughes announced a more extensive strategic
alliance with AOL to develop and market digital entertainment and Internet
services nationwide. The new alliance is expected to accelerate subscriber
growth and revenue-per-subscriber for DIRECTV and DirecPC, as well as expand the
subscriber base for AOL's developing AOL TV and AOL-Plus services. As part of
the alliance, Hughes and AOL plan to jointly develop new content and interactive
services for U.S. and international markets. Additionally, an extensive
cross-marketing initiative will be instituted to market each company's products
through their respective retail outlets and to their respective subscribers. As
part of the marketing initiative, Hughes has committed to spend over the next
three years for sales and marketing activities more than $500 million for
DirecPC/AOL-Plus, up to approximately $500 million for DlRECTV, approximately
$400 million for DlRECTV/AOL TV, and approximately $100 million for DirecDuo.
As part of the alliance, AOL invested $1.5 billion in return for
approximately 2.7 million shares of GM Series H 6.25% Automatically Convertible
Preference Stock, par value $0.10 per share. This preference stock will
automatically convert into GM Class H common stock in three years, based upon a
variable conversion factor linked to the GM Class H common stock price at the
time of conversion, and accrues quarterly dividends at a rate of 6.25% per year.
It may be converted earlier in certain limited circumstances. GM immediately
invested the $1.5 billion received from AOL into shares of Hughes Series A
Preferred Stock designed to correspond to the financial terms of the GM Series H
6.25% Automatically Convertible Preference Stock. Dividends on the Hughes Series
A Preferred Stock are payable to GM quarterly at an annual rate of 6.25%. These
preferred stock dividends payable to GM will reduce Hughes' earnings used for
computation of the ASCNI of Hughes, which will have an equivalent effect to the
payment of dividends on the Series H preference stock as if those dividends were
paid by Hughes. Upon conversion of the GM Series H 6.25% Automatically
Convertible Preference Stock into GM Class H common stock, Hughes will redeem
the Series A Preferred Stock through a cash payment to GM equal to the fair
market value of GM Class H common stock issuable upon the conversion.
Simultaneous with GM's receipt of the cash redemption proceeds, GM will make a
capital contribution to Hughes of the same amount. In connection with this
capital contribution, the denominator of the fraction used in the computation of
ASCNI of Hughes will be increased by the corresponding number of shares of GM
Class H common stock issued. Accordingly, upon conversion of the GM Series H
6.25% Automatically Convertible Preference Stock into GM Class H common stock,
both the numerator and denominator used in the computation of ASCNI will
increase by the amount of the GM Class H common stock issued.
Note 9. Stock Repurchases
During the six months ended June 30, 1999, GM used $798 million to acquire
approximately 10 million shares of $1-2/3 par value common stock under the
Corporation's $4.0 billion stock repurchase program announced in February 1998.
GM also used approximately $569 million to repurchase shares of $1-2/3 par value
common stock for certain employee benefit plans and $501 million to repurchase
and retire Series B preference stock during the six months ended June 30, 1999.
- 12 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Note 10. Comprehensive Income
GM's total comprehensive income was as follows (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
Net income $1,918 $389 $3,980 $1,993
Other comprehensive income (loss):
Foreign currency translation
adjustments (205) (77) (898)(1) (439)
Unrealized gains (losses)
on securities 103 (32) 80 3
Minimum pension liability
adjustment (2) 1,062 - 1,062 -
----- ------ ----- -----
Other comprehensive income (loss) 960 (109) 244 (436)
----- --- ----- -----
Total comprehensive income $2,878 $280 $4,224 $1,557
===== === ===== =====
(1)Includes approximately $450 million of translation adjustments associated
with the devaluation of the Brazilian Real in the first quarter of 1999.
(2)Adjustment due to remeasurement of the U.S. Hourly Pension Plan as of May
28, 1999 of $614 million (see Note 6) and a curtailment/settlement of $448
million (see Note 2).
Note 11. Earnings Per Share Attributable to Common Stocks
Earnings per share attributable to each class of GM common stock was
determined based on the attribution of earnings to each such class of common
stock for the period divided by the weighted-average number of common shares for
each such class outstanding during the period. Diluted earnings per share
attributable to each class of GM common stock considers the impact of potential
common shares, unless the inclusion of the potential common shares would have an
antidilutive effect.
The attribution of earnings to each class of GM common stock was as follows
(in millions):
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
Earnings attributable to common stocks
$1-2/3 par value
Continuing operations $1,754 $275 $3,535 $1,613
Discontinued operations 184 83 426 319
----- ---- ------ -----
Earnings attributable to
$1-2/3 par value $1,938 $358 $3,961 $1,932
(Losses) earnings attributable
to Class H $(27) $15 $(4) $29
Earnings attributable to $1-2/3 par value common stock for the period
represent the earnings attributable to all GM common stocks for the period,
reduced by the ASCNI of Hughes for the respective period and dividends on
preference stocks.
Losses attributable to GM Class H common stock for the three and six months
ended June 30, 1999 represent the ASCNI of Hughes. Losses used for computation
of the ASCNI of Hughes is based on the separate consolidated net income (loss)
of Hughes, excluding the effects of purchase accounting adjustments arising at
the time of the Corporation's acquisition of Hughes Aircraft Company (HAC) which
remains after the spin-off of Hughes Defense, reduced by the amount of dividends
accrued on the Series A Preferred Stock of Hughes (as an equivalent measure of
the effect that GM's payment of dividends on the GM Series H 6.25% Automatically
Convertible Preference Stock would have if paid by Hughes). The calculated
losses used for computation of the ASCNI of Hughes is then multiplied by a
fraction, the numerator of which was a number equal to the weighted-average
number of shares of GM Class H common stock outstanding during the three and six
months ended June 30, 1999 (121 million and 114 million, respectively) and the
denominator of which was a number equal to the weighted-average number of shares
of GM Class H common stock, which if issued and outstanding would represent 100%
of the tracking stock interest in the earnings of Hughes (Average Class H
dividend base). The Average Class H dividend base was 415 million and 408
million during the three and six months ended June 30, 1999, respectively.
- 13 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Note 11. Earnings Per Share Attributable to Common Stocks (continued)
Earnings attributable to GM Class H common stock for the three and six months
ended June 30, 1998 represent the ASCNI of Hughes, excluding the effects of
purchase accounting adjustments arising at the time of the Corporation's
acquisition of HAC which remains after the spin-off of Hughes Defense,
calculated for such period and multiplied by a fraction, the numerator of which
was a number equal to the weighted-average number of shares of GM Class H common
stock outstanding for each of the periods (105 million) and the denominator of
which was a number equal to the weighted-average number of shares of GM Class H
common stock which if issued and outstanding, would represent 100% of the
tracking stock interest in the earnings of Hughes (Average Class H dividend
base). The Average Class H dividend base was 400 million during both the three
and six months ended June 30, 1998.
In connection with the PRIMESTAR and USSB transactions (see further
discussion in Note 13), GM contributed, or will contribute, to Hughes an amount
of cash at least sufficient to enable Hughes to purchase from GM, for fair value
as determined by the GM Board, the number of shares of GM Class H common stock
delivered, or to be delivered, by Hughes. In accordance with the GM certificate
of incorporation, the GM Class H dividend base will be increased to reflect that
number of shares. The number of shares issued as part of the PRIMESTAR
acquisition and the number of shares to be issued as part of the USSB merger
have been included in the calculation of both the numerator and denominator of
the fraction described above since the consummation dates of the transactions.
The denominator used in determining the ASCNI of Hughes may be adjusted from
time-to-time as deemed appropriate by the GM Board to reflect subdivisions or
combinations of the GM Class H common stock and to reflect certain transfers of
capital to or from Hughes, the contribution of shares of capital stock of GM to
or for the benefit of Hughes employees and the retirement of GM Class H common
stock purchased by Hughes. The GM Board's discretion to make such adjustments is
limited by criteria set forth in the Corporation's Restated Certificate of
Incorporation.
- 14 -
<PAGE>
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
Note 11. Earnings Per Share Attributable to Common Stocks (concluded)
Prior to January 1, 1999, the assumed exercise of stock options had no effect
on GM Class H common stock earnings per share, because to the extent that shares
of GM Class H common stock deemed to be outstanding would increase, such
increased shares would also increase the numerator of the fraction used to
determine ASCNI.
Effective January 1, 1999, shares of GM Class H common stock delivered by GM
in connection with the award of such shares to and the exercise of stock options
by employees of Hughes will increase the denominator of the fraction referred to
above.
The reconciliation of the amounts used in the basic and diluted earnings per
share computations for income from continuing operations was as follows (in
millions except per share amounts):
<TABLE>
<CAPTION>
$1-2/3 Par Value Common Stock Class H Common Stock
Per Share Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended June 30, 1999
Income (loss) from continuing
operations $1,761 $(27)
Less:Dividends on preference stocks 7 -
----- ---
Basic EPS
Income (loss) from continuing operations
available to common stockholders 1,754 648 $2.71 (27) 121 $(0.23)
==== ====
Effect of Dilutive Securities
Assumed exercise of dilutive
stock options - 12 - -
------ ----- ---- ----
Diluted EPS
Adjusted income (loss) from
continuing operations
available to common stockholders $1,754 660 $2.66 $(27) 121 $(0.23)
===== === ==== == === ====
Three Months Ended June 30, 1998
Income from continuing operations $291 $15
Less:Dividends on preference stocks 16 -
---- ---
Basic EPS
Income from continuing operations
available to common stockholders 275 661 $0.41 15 105 $0.14
==== ====
Effect of Dilutive Securities
Assumed exercise of dilutive
stock options (1) 11 1 6
---- ---- --- ----
Diluted EPS
Adjusted income from continuing operations
available to common stockholders $274 672 $0.40 $16 111 $0.14
=== === ==== == === ====
Six Months Ended June 30, 1999
Income (loss) from continuing
operations $3,558 $(4)
Less:Dividends on preference stocks 23 -
----- ---
Basic EPS
Income (loss) from continuing operations
available to common stockholders 3,535 651 $5.44 (4) 114 $(0.04)
==== ====
Effect of Dilutive Securities
Assumed exercise of dilutive
stock options - 13 - -
------ --- ---- ----
Diluted EPS
Adjusted income (loss) from
continuing operations
available to common stockholders $3,535 664 $5.33 $(4) 114 $(0.04)
===== === ==== = === ====
Six Months Ended June 30, 1998
Income from continuing operations $1,645 $29
Less:Dividends on preference stocks 32 -
------ ----
Basic EPS
Income from continuing operations
available to common stockholders 1,613 672 $2.40 29 105 $0.27
==== ====
Effect of Dilutive Securities
Assumed exercise of dilutive
stock options (2) 10 2 5
------ ---- ---- ----
Diluted EPS
Adjusted income from
continuing operations
available to common stockholders $1,611 682 $2.35 $31 110 $0.27
===== === ==== == === ====
</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 Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------- ------- ------- --------
Other income
Interest income $604 $532 $1,148 $1,108
Insurance premiums 334 369 674 738
Rental car lease revenue 452 328 900 665
Mortgage operations investment
income and servicing fees 658 489 1,342 933
Other 187 289 477 384
------ ------ ------ ------
Total other income $2,235 $2,007 $4,541 $3,828
===== ===== ===== =====
Other expenses
Provision for financing losses $111 $128 $230 $229
Insurance losses and loss
adjustment expenses 216 282 477 540
Other 149 186 207 376
--- --- --- ------
Total other expenses $476 $596 $914 $1,145
=== === === =====
Note 13. Acquisitions
On January 22, 1999, Hughes agreed to acquire PRIMESTAR's 2.3 million
subscriber medium-power direct-to-home satellite business and the high-power
satellite assets and direct-broadcast satellite orbital frequencies of Tempo
Satellite, a wholly-owned subsidiary of TCI Satellite Entertainment, Inc. On
April 28, 1999, the acquisition of PRIMESTAR's direct-to-home business was
completed. The purchase price consisted of $1.1 billion in cash and 4.9 million
shares of GM Class H common stock, for a total purchase price of $1.3 billion,
based on the average market price of $47.87 per share of GM Class H common stock
at the time the acquisition agreement was signed. The purchase price will be
adjusted based upon the final adjusted net working capital of PRIMESTAR at the
date of closing. The purchase price for the Tempo Satellite assets consisted of
$500 million in cash. Of this purchase price, $150 million was paid on March 10,
1999 for a satellite that has not yet been launched and the remaining $350
million was paid on June 4, 1999 for an in-orbit satellite and 11 related
satellite orbital frequencies.
In December 1998, Hughes agreed to acquire all of the outstanding capital
stock of United States Satellite Broadcasting Company, Inc. (USSB). USSB
provided direct-to-home premium satellite programming in conjunction with
DIRECTV's basic programming service. The purchase price, consisting of cash and
GM Class H common stock, was approximately $1.6 billion, consisting of
approximately $360 million in cash and 22.6 million shares of GM Class H common
stock. The USSB acquisition was closed on May 20, 1999 and has been accounted
for using the purchase method of accounting. Payment and delivery of shares were
made to the former USSB shareholders in July 1999. As such, approximately $1.3
billion of GM Class H common stock to be issued was included in capital surplus
as of June 30, 1999.
The financial information presented as of and for the periods ended June 30,
1999 reflect the effects of the PRIMESTAR, Tempo Satellite and USSB
transactions, discussed below, from their respective dates of acquisition. These
transactions have been accounted for using the purchase method of accounting;
however the adjustments made in the June 30, 1999 financial statements reflect a
preliminary allocation of the purchase price for the transactions based upon
information currently available. Adjustments relating to the tangible assets
(i.e., satellites, equipment located on customer premises, etc.), intangible
assets (i.e., licenses granted by the Federal Communications Commission,
customer lists, dealer network, etc.), and accrued liabilities for programming
contracts and leases with above-market rates are estimates pending the
completion of independent appraisals currently in process. Additionally, the
adjustment to recognize the benefit of net operating loss carry forwards of USSB
represents a preliminary estimate pending further review and analysis by the
management of Hughes. These appraisals, valuations and studies are expected to
be completed by December 31, 1999. Accordingly, the final purchase price
allocations may be different from the amounts reflected herein.
- 16 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Note 13. Acquisitions (concluded)
As the GM 1999 financial statements include only USSB's and PRIMESTAR's
results of operations since the date of acquisition, the following selected
unaudited pro forma information is provided to present a summary of the combined
results of GM, USSB and PRIMESTAR as if the acquisitions had occurred as of the
beginning of the respective periods, giving effect to purchase accounting
adjustments. The pro forma data is presented for informational purposes only and
may not necessarily reflect the results of operations of GM had USSB and
PRIMESTAR operated as part of GM for the six months ended June 30, 1999 and June
30 1998, nor are they necessarily indicative of the results of future
operations.
The proforma information is as follows (in millions except per share
amounts):
Six Months Ended Six months Ended
June 30, 1999 June 30, 1998
-----------------------------------
Total net sales and revenues $88,292 $78,103
------ ------
Net income from continuing operations 3,558 1,642
Net income from discontinued operations 426 319
------ ------
Net income $3,984 $1,961
====== ======
Basic earnings (losses) per share
attributable to common stocks
$1-2/3 par value common stock
Continuing operations $5.40 $2.32
Discontinued operations 0.65 0.48
---- ----
Earnings per share attributable
to $1-2/3 par value $6.05 $2.79
Earnings per share attributable
to Class H (1) $(0.13) $0.05
===== =====
Diluted earnings (losses) per share
attributable to common stocks
$1-2/3 par value common stock
Continuing operations $5.29 $2.28
Discontinued operations 0.64 0.47
---- ----
Earnings per share attributable
to $1-2/3 par value $5.93 $2.75
===== =====
Earnings per share attributable
to Class H (1) $(0.13) $0.05
===== =====
(1) Both periods include the pro forma effect of dividends amounting to $47
million related to the Hughes Series A Preferred Stock as if the preferred
stock had been outstanding as of the beginning of the respective periods.
- 17 -
<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- Total Other Total
GMNA GME GMLAAM GMAP ations GMA Hughes Other Automotive GMAC Financing Financing
---- --- ------ ---- ------ --- ------ --------------------- -------------------
(in millions)
For the Three Months Ended June 30, 1999
Manufactured products
sales & revenues:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
External customers $28,198 $6,790 $1,156 $637 $ - $36,781 $1,765 $715 $39,261 $ - $ - $ -
Intersegment 475 91 50 50 (666) - 11 (11) - - - -
------ ----- ------ ----- --- ------- ------- ---- ------ ----- ----- -----
Total manufactured
products 28,673 6,881 1,206 687 (666) 36,781 1,776 704 39,261 - - -
Financing revenues - - - - - - - - - 3,361 210 3,571
Other income (a) 813 120 9 28 1 971 8 (123) 856 1,540 (161) 1,379
------- ----- ------ ---- ---- ----- ------ ---- ------ ----- ----- -----
Total net sales
and revenues $29,486 $7,001 $1,215 $715 $(665)$37,752 $1,784 $581 $40,117 $4,901 $49 $4,950
====== ===== ===== === === ====== ===== === ====== ===== == =====
Interest income (a) $307 $96 $9 $1 $1 $414 $5 $(169) $250 $409 $(55) $354
Interest expense $295 $76 $20 $3 $1 $395 $12 $(227) $180 $1,538 $76 $1,614
Net income (loss) $1,473 $187 $(38) $(81) $10 $1,551 $(92)(c) $34(b) $1,493 $391 $34 $425
Segment assets $76,676$18,800 $4,139 $1,382$(2,034)$98,963 $17,857(d) $4,031 $120,851$135,998 $89 $136,087
For the Three Months Ended June 30, 1998
Manufactured products
sales & revenues:
External customers $21,233 $5,830 $2,118 $749 $ - $29,930 $1,366 $549 $31,845 $ - $ - $ -
Intersegment 671 397 75 7 (1,150) - 3 (3) - - - -
------- ----- ------ ---- ---- ----- ------ ---- ------ ----- ----- -----
Total manufactured
products 21,904 6,227 2,193 756 (1,150) 29,930 1,369 546 31,845 - - -
Financing revenues - - - - - - - - - 3,204 216 3,420
Other income (a) 657 197 62 3 - 919 (6) (87) 826 1,324 (143) 1,181
------- ----- ------ ---- ---- ----- ------ ---- ------ ----- ----- -----
Total net sales
and revenues $22,561 $6,424 $2,255 $759$(1,150)$30,849 $1,363 $459 $32,671 $4,528 $73 $4,601
======= ===== ====== ==== ===== ====== ===== ==== ====== ===== ===== =====
Interest income (a) $164 $136 $33 $3 $ - $336 $30 $(168) $198 $366 $(32) $334
Interest expense $258 $97 $24 $2 $(1) $380 $3 $(106) $277 $1,455 $(41) $1,414
Net (loss) income $(194) $124 $48 $(36) $34 $(24) $56(c) $(37)(b) $(5) $365 $29 $394
Segment assets $64,349$18,065 $5,737 $1,333 $(599)$88,885 $12,347(d) $8,763 $109,995$114,338 $(395) $113,943
</TABLE>
(a)Interest income is included in other income.
(b)The amount reported for Other net income (loss) includes income from
discontinued operations of $184 million and $83 million for the three months
ended June 30, 1999 and 1998, respectively.
(c)The amount reported for Hughes excludes amortization of GM purchase
accounting adjustments of approximately $5 million for both 1999 and 1998,
related to GM's acquisition of Hughes Aircraft Company. Such amortization was
allocated to GM's Other segment which is consistent with the basis upon which
the segments are evaluated.
(d)The amount reported for Hughes excludes the unamortized GM purchase
accounting adjustments of approximately $416 million and $437 million, for
1999 and 1998, respectively, related to GM's acquisition of Hughes Aircraft
Company. These adjustments were allocated to GM's Other segment which is
consistent with the basis upon which the segments are evaluated.
- 18 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Note 14. Segment Reporting (concluded)
<TABLE>
<CAPTION>
Elimin- Total Other Total
GMNA GME GMLAAM GMAP ations GMA Hughes Other Automotive GMAC Financing Financing
---- --- ------ ---- ------ --- ------ --------------------- -------------------
(in millions)
(in millions)
For the Six Months Ended June 30, 1999
Manufactured products
sales & revenues:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
External customers $55,014$12,856 $2,123 $1,220 $ - $71,213 $3,208 $1,460 $75,881 $ - $ - $ -
Intersegment 977 159 105 87 (1,328) - 20 (20) - - - -
------- ----- ------ ---- ---- ----- ------ ---- ------ ----- ----- -----
Total manufactured
products 55,991 13,015 2,228 1,307 (1,328) 71,213 3,228 1,440 75,881 - - -
Financing revenues - - - - - - - - - 6,638 442 7,080
Other income (a) 1,563 263 20 55 1 1,902 191 (334) 1,759 3,090 (308) 2,782
------- ----- ------ ---- ---- ----- ------ ---- ------ ----- ----- -----
Total net sales
and revenues $57,554$13,278 $2,248 $1,362$(1,327)$73,115 $3,419 $1,106 $77,640 $9,728 $134 $9,862
======= ===== ====== ==== ===== ====== ===== ==== ====== ===== ===== =====
Interest income (a) $502 $198 $25 $4 $1 $730 $19 $(329) $420 $822 $(94) $728
Interest expense $601 $153 $35 $7 $1 $797 $19 $(442) $374 $3,051 $214 $3,265
Net income (loss) $2,881 $361 $(63) $(141) $23 $3,061 $(14)(c) $135(b) $3,182 $783 $15 $798
For the Six Months Ended June 30, 1998
Manufactured products
sales & revenues:
External customers $46,318$11,042 $4,113 $1,477 $ - $62,950 $2,651 $1,137 $66,738 $ - $ - $ -
Intersegment 1,475 582 104 7 (2,168) - 9 (9) - - - -
------- ----- ------ ---- ---- ----- ------ ---- ------ ----- ----- -----
Total manufactured
products 47,793 11,624 4,217 1,484 (2,168) 62,950 2,660 1,128 66,738 - - -
Financing revenues - - - - - - - - - 6,311 419 6,730
Other income (a) 1,195 333 126 29 - 1,683 42 (222) 1,503 2,537 (212) 2,325
------ ----- ------ ---- ---- ----- ------ ---- ------ ----- ----- -----
Total net sale
and revenues $48,988$11,957 $4,343 $1,513$(2,168)$64,633 $2,702 $906 $68,241 $8,848 $207 $9,055
======= ===== ====== ==== ===== ====== ===== ==== ====== ===== ===== =====
Interest income (a) $281 $272 $61 $4 $- $618 $68 $(292) $394 $717 $(3) $714
Interest expense $407 $201 $50 $4 $(1) $661 $6 $(195) $472 $2,839 $(50) $2,789
Net income (loss) $647 $223 $101 $(30) $27 $968 $110 (c) $157(b) $1,235 $714 $44 $758
</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 $319 million for the six months
ended June 30, 1999 and 1998, respectively.
(c)The amount reported for Hughes excludes amortization of GM purchase
accounting adjustments of approximately $11 million for both 1999 and 1998,
related to GM's acquisition of Hughes Aircraft Company. Such amortization was
allocated to GM's Other segment which is consistent with the basis upon which
the segments are evaluated. 1998 results exclude the cumulative effect of
accounting change of $9 million due to Hughes' adoption of SOP 98-5. GM had
reported the $9 million change in fourth quarter 1998 results and Hughes
reported the change as a restatement of first quarter 1998 results.
- 19 -
<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.
A dispute currently exists regarding the post-closing adjustments which Hughes
and Raytheon have proposed to one another and related issues regarding the
adequacy of disclosures made by Hughes to Raytheon in the period prior to
consummation of the merger. In an attempt to resolve the dispute, Hughes gave
notice to Raytheon to commence an arbitration process pursuant to the procedures
under the merger agreement. Raytheon responded by filing an action in Delaware
Chancery Court which seeks to enjoin the arbitration as premature. That
litigation is now inactive and Raytheon and Hughes are now proceeding with the
dispute resolution process. It is possible that the ultimate resolution of the
post-closing financial adjustment and of related disclosure issues may result in
Hughes making a payment to Raytheon that would be material to Hughes. However,
the amount of any payment that either party might be required to make to the
other cannot be determined at this time. Hughes intends to vigorously pursue
resolution of the disputes through the arbitration processes, opposing the
adjustments proposed by Raytheon, and seeking the payment from Raytheon that it
has proposed.
General Electric Capital Corporation (GECC) and DIRECTV, Inc. entered into a
contract on July 31, 1995, in which GECC agreed to provide financing for
consumer purchases of DIRECTV hardware and related programming. Under the
contract, GECC also agreed to provide certain related services to DIRECTV,
including credit risk scoring, billing and collections services. DIRECTV agreed
to act as a surety for loans complying with the terms of the contract. Hughes
guaranteed DIRECTV's performance under the contract. A complaint and
counterclaim have been filed by the parties in the U.S. District Court for the
District of Connecticut concerning GECC's performance and DIRECTV's obligation
to act as a surety. GECC claims damages from DIRECTV in excess of $140 million.
DIRECTV is seeking damages from GECC in excess of $70 million. Hughes intends to
vigorously contest GECC's allegations and pursue Hughes' own contractual rights
and remedies. Hughes does not believe that the litigation will have a material
adverse impact on Hughes' results of operations or financial position. Pretrial
discovery is not yet completed in the case and no trial date has been set.
As part of a marketing agreement entered into with AOL on June 21, 1999,
Hughes committed to increase its sales and marketing expenditures over the next
three years by approximately $1.5 billion relating to DirecPC/AOL-Plus, DlRECTV,
DlRECTV/AOL TV and DirecDuo.
Hughes Space and Communications International (HSCI) has a contract with
ICO Global Communications Operations to build the satellites and related
components for a global wireless communications system. Hughes owns
approximately 2.6% of the equity in its parent company, ICO Global
Communications (Holdings) (ICO). ICO has indicated in its public disclosure that
it requires substantial additional financing to continue operating its business
and to fund the construction of its communications network. ICO also has
indicated that it currently is attempting to obtain financing through its
existing stockholders including Hughes, and/or third parties. There can be no
assurance that ICO will be successful in obtaining adequate financing to
continue operating its business or to complete construction of its
communications network. If ICO is unable to obtain the necessary additional
financing, it and its subsidiary would likely be unable to pay the remaining
amounts due to HSCI under the contract. If ICO fails to pay HSCI these remaining
amounts, HSCI could terminate the contract for non-payment. In the event of
non-payment, Hughes would expect to record a pre-tax charge to earnings of
approximately $500 million.
- 20 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
Note 15. Contingent Matters (concluded)
On July 9, 1999, a jury in a Los Angeles Superior Court in the matter of
Anderson et. al, v. General Motors Corporation, returned a verdict of $4.9
billion against GM in a product liability lawsuit involving a post-collision,
fuel fed fire in a 1979 Chevrolet Malibu. The award consisted of $102 million in
compensatory damages and $4.8 billion in punitive damages.
The Anderson case arose out of an accident on December 24,1993. While the
plaintiffs were stopped at a red light, they were struck in the rear by a 1977
Buick Regal going approximately 70 mph. The driver of the Regal was intoxicated,
having a blood alcohol level of .20, almost three times the California limit.
The ensuing post-crash fire burned all of the occupants of the Malibu with the
children receiving the most severe burns. Plaintiffs claimed that the Malibu's
fuel tank, which was located behind the rear axle, should have been located over
the axle. Alternatively they claimed the tank should have been shielded or
incorporated a bladder.
GM believes that, by any measure, the 1979 Malibu was a safe passenger car.
The Malibu's fuel tank location was similar to that in most other vehicles of
the same size and vintage and its design met or exceeded the applicable FMVSS
301 standard, having passed a 50 mph rear-impact test that few other cars on the
market in 1979 would have passed. Even the alternative designs suggested by the
plaintiffs would have been compromised in such a severe crash. GM was not
allowed to introduce other compelling evidence that the Malibu's fuel system was
well-designed. Lastly, although the jury was asked to apportion the non-economic
compensatory damages between GM and the driver of the Regal, they were not
informed about his intoxication.
GM will vigorously pursue post-trial motions and its right of appeal. GM
believes that the design of the subject Chevrolet Malibu was not responsible for
plaintiff's injuries, that numerous evidentiary and procedural reversible errors
occurred at the trial and that as a matter of law, GM's conduct does not support
any punitive damages. The cost of any bond GM may have to post is not expected
to be material to the Corporation's financial results.
GM is subject to potential liability under government regulations and various
claims and legal actions which are pending or may be asserted against them. Some
of the pending actions purport to be class actions. The aggregate ultimate
liability of GM under these government regulations and under these claims and
actions, was not determinable at December 31, 1998. After discussion with
counsel, it is the opinion of management that such liability is not expected to
have a material adverse effect on the Corporation's consolidated financial
condition or results of operations.
Note 16. Subsequent Event
On July 6, 1999, as part of the USSB merger, Hughes paid approximately $0.4
billion in cash and issued approximately 22.6 million shares of GM Class H
common stock to the former USSB shareholders.
On July 22, 1999, GMAC completed the acquisition of the asset-based lending
and factoring business unit of The Bank of New York for approximately $1.8
billion. GMAC also completed the acquisition of the full service leasing
business of Arriva Automotive Solutions Limited, on July 30, 1999. Both
transactions were accounted for using the purchase method of accounting.
On July 28, 1999, Galaxy Latin America (GLA), Hughes' 70% owned subsidiary,
acquired Galaxy Brasil, Ltda., the exclusive distributor of DIRECTV services in
Brazil, from Tevecap S.A. for approximately $114 million plus the assumption of
debt. In connection with the transaction, Tevecap sold its 10% equity interest
in GLA to Hughes and Cisneros Group, the remaining GLA partners. Hughes' share
of the purchase amounted to approximately $101 million and increased Hughes'
ownership of GLA to 77.8%.
* * * * * *
- 21 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following management's discussion and analysis of financial condition and
results of operations (MD&A) should be read in conjunction with the consolidated
financial statements and notes thereto along with the MD&A included in GM's
Current Reports on Form 8-K, dated April 12, 1999 and filed with the Securities
and Exchange Commission on April 15, 1999 and April 21, 1999, respectively,
Hughes Electronics Corporation (Hughes) financial statements and MD&A for the
period ended December 31, 1998, included as Exhibit 99 to GM's 1998 Annual
Report on Form 10-K, the General Motors Acceptance Corporation (GMAC) Annual
Report on Form 10-K for the period ended December 31, 1998, the Hughes financial
statements and MD&A for the period ended June 30, 1999, included as Exhibit 99
to this GM Quarterly Report on Form 10-Q for the period ended June 30, 1999 and
related Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission, and the GMAC Quarterly Report on Form 10-Q for the period ended June
30, 1999, filed with the Securities and Exchange Commission. All earnings per
share amounts included in the MD&A are reported as diluted.
GM presents separate supplemental consolidating financial information for the
following businesses: Automotive, Electronics and Other Operations and Financing
and Insurance Operations.
GM's reportable operating segments within its Automotive, Electronics and
Other Operations business consist of:
. GM Automotive (GMA), is comprised of four regions: GM North America
(GMNA), GM Europe (GME), GM Asia/Pacific (GMAP), and GM Latin
America/Africa/Mid-East (GMLAAM). GMNA designs, manufactures, and markets
vehicles primarily in North America under the following nameplates:
Chevrolet, Pontiac, GMC, Oldsmobile, Buick, Cadillac, and Saturn. GME,
GMAP and GMLAAM meet the demands of customers outside North America with
vehicles designed, manufactured and marketed under the following
nameplates: Opel, Vauxhall, Holden, Isuzu, Saab, Chevrolet, GMC, and
Cadillac.
. Hughes includes activities relating to designing, manufacturing, and
marketing advanced technology electronic systems, products, and services
for the satellite & wireless communications industries.
. The Other segment includes the design, manufacturing and marketing of
locomotives and heavy-duty transmissions and the elimination of
intersegment transactions.
GM's reportable operating segments within its Financing and Insurance
Operations business consist of GMAC and Other. GMAC provides a broad range of
financial services, including consumer vehicle financing, full-service leasing
and fleet leasing, dealer financing, car and truck extended service contracts,
residential and commercial mortgage services, vehicle and homeowners insurance,
and asset-backed lending. The Financing and Insurance Operations' Other segment
includes financing entities operating in Canada, Germany and Brazil.
The disaggregated financial results for GMA have been prepared using a
management approach, which is consistent with the basis and manner in which GM
management internally disaggregates financial information for the purposes of
assisting in making internal operating decisions. In this regard, certain common
expenses were allocated among regions less precisely than would be required for
standalone financial information prepared in accordance with generally accepted
accounting principles (GAAP) and certain expenses (primarily certain U.S. taxes
related to non-U.S. operations) were included in the Automotive, Electronics and
Other Operations' Other segment. The financial results represent the historical
information used by management for internal decision making purposes; therefore,
other data prepared to represent the way in which the business will operate in
the future, or data prepared on a GAAP basis, may be materially different.
- 22-
<PAGE>
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
RESULTS OF OPERATIONS
In the second quarter of 1999, GM's consolidated income from continuing
operations totaled $1.7 billion or $2.66 per share of $1-2/3 par value common
stock, which represents an increase of $1.4 billion compared with $306 million
or $0.40 per share of $1-2/3 par value common stock in the second quarter of
1998. GM's net income from continuing operations for the six months ended June
30, 1999 was $3.6 billion or $5.33 per share of $1-2/3 par value common stock,
which represents an increase of $1.9 billion compared with $1.7 billion or $2.35
per share of $1-2/3 par value common stock for the six months ended June 30,
1998.
On April 12, 1999, the GM Board of Directors (GM Board) approved the complete
separation of Delphi from GM by means of a tax-free spin-off which was completed
on May 28,1999 and, accordingly, the financial results related to Delphi for all
periods presented are reported as discontinued operations. GM's net income for
the second quarter of 1999, including the income from discontinued operations
totaled $1.9 billion or $2.94 per share of $1-2/3 par value common stock
compared with $389 million or $0.52 per share of $1-2/3 par value common stock
in the second quarter of 1998. GM's net income for the six months ended June 30,
1999, including the income from discontinued operations totaled $4.0 billion or
$5.97 per share of $1-2/3 par value common stock compared with $2.0 billion or
$2.82 per share of $1-2/3 par value common stock for the six months ended June
30, 1998. Additional information regarding the spin-off of Delphi is contained
in Note 2 to the GM consolidated financial statements. Additionally, refer to
Note 13 of the GM consolidated financial statements for financial information
regarding the effect of the current year acquisitions.
Automotive, Electronics and Other Operations
Highlights of financial performance by GM's Automotive, Electronics and Other
Operations business were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ------------------
1999 1998 1999 1998
-------- --------- ------- ---------
(Dollars in Millions)
Manufactured products sales and revenues
GMA $36,781 $29,930 $71,213 $62,950
Hughes 1,776 1,369 3,228 2,660
Other 704 546 1,440 1,128
-------- -------- ------- -------
Manufactured products
sales and revenues $39,261 $31,845 $75,881 $66,738
Net income (loss)
GMA $1,551 $(24) $3,061 $968
Hughes (92) 56 (14) 110
Other (150) (120) (291) (162)
------ --- ------ ---
Income (loss) from continuing
operations 1,309 (88) 2,756 916
Discontinued operations 184 83 426 319
------ -- ------ ------
Net income (loss) $1,493 $(5) $3,182 $1,235
===== = ===== =====
- 23-
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
GMA Financial Highlights
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -------------------
1999 1998 1999 1998
------- -------- ------- --------
(Dollars in Millions)
GMNA
Manufactured products
sales and revenues $28,673 21,904 $55,991 $47,793
Pre-tax income (loss) 2,122 (335) 4,219 889
Income tax expense (benefit) 670 (124) 1,335 262
Earnings of nonconsolidated associates
and minority interests 21 17 (3) 20
----- ---- ----- ----
GMNA income (loss) $1,473 $(194) $2,881 $647
===== === ===== ===
GME
Manufactured products
sales and revenues $6,881 $6,227 $13,015 $11,624
----- ----- ------ ------
Pre-tax income 272 244 553 447
Income tax expense 84 129 189 220
Earnings of nonconsolidated associates
and minority interests (1) 9 (3) (4)
----- ----- ----- -----
GME income $187 $124 $361 $223
=== === === ===
GMLAAM
Manufactured products
sales and revenues $1,206 $2,193 $2,228 $4,217
----- ----- ----- -----
Pre-tax (loss) income (87) 17 (145) 33
Income tax benefit (33) (10) (69) (29)
Earnings of nonconsolidated associates
and minority interests 16 21 13 39
-- -- -- ----
GMLAAM (loss) income $(38) $48 $(63) $101
== == == ===
GMAP
Manufactured products
sales and revenues $687 $756 $1,307 $1,484
--- --- ----- -----
Pre-tax (loss) income (36) 4 (61) (4)
Income tax (benefit) expense (13) 4 (19) 4
Earnings of nonconsolidated associates
and minority interests (58) (36) (99) (22)
-- -- ---- --
GMAP (loss) $(81) $(36) $(141) $(30)
== == === ==
GMA (1)
Manufactured products
sales and revenues $36,781 $29,930 $71,213 $62,950
Pre-tax income (loss) 2,288 (15) 4,603 1,407
Income tax expense 715 21 1,450 473
Earnings of nonconsolidated associates
and minority interests (22) 12 (92) 34
----- -- ----- ----
GMA income (loss) $1,551 $(24) $3,061 $968
===== == ===== ===
(1) GMA's results include eliminations of transactions among GMNA, GME, GMLAAM,
and GMAP.
- 24 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Vehicle Unit Deliveries of Cars and Trucks - GMA
Three Months Ended June 30,
1999 1998
------------------------ ------------------------
GM as GM as
a % of a % of
Industry GM Industry Industry GM Industry
-------- -- -------- -------- -- --------
(Units in Thousands)
GMNA
United States
Cars 2,411 727 30.2 2,332 750 32.1
Trucks 2,325 669 28.8 2,209 683 30.9
----- ------ ----- ------
Total United States 4,736 1,396 29.5 4,541 1,433 31.6
Canada and Mexico 636 178 28.0 683 193 28.3
------ ------ ------ ------
Total GMNA 5,372 1,574 29.3 5,224 1,626 31.1
GME 5,362 538 10.0 4,899 451 9.2
GMLAAM 812 131 16.1 1,052 177 16.8
GMAP 2,691 109 4.0 2,573 118 4.6
------- ------ ------- ------
Total Worldwide 14,237 2,352 16.5 13,748 2,372 17.3
====== ===== ====== =====
Six Months Ended June 30,
1999 1998
------------------------ ------------------------
GM as GM as
a % of a % of
Industry GM Industry Industry GM Industry
-------- -- -------- -------- -- --------
(Units in Thousands)
GMNA
United States
Cars 4,431 1,355 30.6 4,205 1,320 31.4
Trucks 4,336 1,203 27.7 3,959 1,207 30.5
----- ----- ----- -----
Total United States 8,767 2,558 29.2 8,164 2,527 30.9
Canada and Mexico 1,179 330 28.0 1,207 331 27.5
----- ------ ----- ------
Total GMNA 9,946 2,888 29.0 9,371 2,858 30.5
GME 10,707 1,048 9.8 9,920 943 9.5
GMLAAM 1,611 256 15.9 2,125 350 16.5
GMAP 5,768 209 3.6 5,555 253 4.5
------- ------ ------- ------
Total Worldwide 28,032 4,401 15.7 26,971 4,404 16.3
====== ===== ====== =====
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1999 1998 1999 1998
------- -------- ------- -------
(Units in Thousands)
Wholesale Sales
GMNA
Cars 754 637 1,537 1,303
Trucks 783 554 1,502 1,234
----- ------ ----- -----
Total GMNA 1,537 1,191 3,039 2,537
----- ----- ----- -----
GME
Cars 520 555 954 938
Trucks 36 34 71 71
---- ---- ----- -----
Total GME 556 589 1,025 1,009
--- --- ----- -----
GMLAAM
Cars 93 116 168 224
Trucks 43 64 90 134
---- ---- ---- ---
Total GMLAAM 136 180 258 358
--- --- --- ---
GMAP
Cars 36 50 75 95
Trucks 62 48 116 118
-- -- --- ---
Total GMAP 98 98 191 213
-- -- --- ---
Total Worldwide 2,327 2,058 4,513 4,117
===== ===== ===== =====
- 25 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
GMA Financial Review
GMA reported income of $1.6 billion for the 1999 second quarter compared with
a loss of $24 million for the prior year quarter. The increase in income from
the prior year quarter was primarily due to continued improvement in the
profitability of new vehicles and lower production at GMNA in the prior year
quarter due to the work stoppages at two component plants in Flint, Michigan
that halted production of wholesale units at 26 of 29 assembly plants in North
America. These factors also contributed to the strong improvement in GMA's net
margin to 4.2% for the second quarter of 1999 from (0.1%) for the second quarter
of 1998. Income for the six months ended June 30, 1999 totaled $3.1 billion
compared with income of $968 million for the prior year six-month period. The
increase in income from the prior year six-month period was primarily due to
improvement in the profitability of new vehicles, lower production at GMNA in
the prior year quarter due to the work stoppages, and lower material and
engineering costs.
Manufactured products sales and revenues for GMA in the second quarter of
1999 were $36.8 billion compared with $30.0 billion in the second quarter of
1998. GMA's manufactured products sales and revenues for the six months ended
June 30, 1999 totaled $71.2 billion compared with $63.0 billion for the prior
year six-month period. These increases were primarily due to increases in
wholesale sales volumes of 269,000 units from the prior year second quarter and
396,000 units from the prior year six months ended June 30, 1998. These
increases in wholesale sales volumes are primarily due to GMNA's work stoppages
in the prior year periods.
Pre-tax income for the second quarter of 1999 increased to $2.3 billion
compared with the prior year quarter pre-tax loss of $15 million and pre-tax
income for the six months ended June 30, 1999 increased to $4.6 billion from
$1.4 billion in the prior year period. These increases in pre-tax income were
primarily due to continued improvement in the profitability of new vehicles and
lower production at GMNA in the prior year quarter due to the work stoppages.
GMA's worldwide vehicle deliveries were 2,352,000 for the second quarter of
1999, which represented a market share of 16.5% compared with 2,372,000 for the
second quarter of 1998, which represented a market share of 17.3%. GMNA's market
share for the second quarter of 1999 was 29.3% compared with 31.1% for the
second quarter of 1998. For the six months ended June 30, 1999, GMNA's market
share was 29.0% compared with 30.5% for the prior year six-month period.
GMNA reported income of $1.5 billion for the 1999 second quarter compared
with a loss of $(194) million for the prior year quarter. The improvement in
GMNA's 1999 second quarter income was primarily due to the prior year's work
stoppages, higher wholesale sales volumes, and lower material and engineering
costs, partially offset by increased manufacturing costs and pre-production and
launch costs associated with the new LeSabre, Impala, Monte Carlo, and Saturn LS
models. Income for the six months ended June 30, 1999 totaled $2.9 billion
compared with $647 million for the prior year six-month period. The improvement
in income for the first six months of 1999 was primarily due to the prior year's
work stoppages, higher wholesale sales volumes, continued improvement in the
cost and profitablility of new vehicles, and lower material and engineering
costs. This improvement was partially offset by increased manufacturing costs
and pre-production and launch costs associated with the new vehicles mentioned
above. Net price was slightly lower for the quarter at negative 0.2% year over
year. Net price comprehends the percent increase/decrease a customer pays in the
current period for the same comparably equipped vehicle produced in the previous
year's period.
GME reported income of $187 million for the 1999 second quarter compared with
$124 million in the prior year quarter. The improvement in GME's 1999 second
quarter income was primarily due to increased volumes primarily related to the
Astra and Zafira and continued material cost improvements as a result of GM's
global purchasing efforts. These factors were partially offset by competitive
pricing pressure and by increased engineering expense associated with the model
year 2000 mid lifecycle enhancements for the Vectra and Omega and the new model
year 2001 Corsa. Income for the six months ended June 30, 1999 totaled $361
million compared with $223 million for the prior year six-month period. The
improvement in income for the first six months of 1999 was primarily due to
higher wholesale sales volumes. These improvements were partially offset by
competitive pricing pressure during the second quarter and by increased
engineering expense associated with the model year 2000 mid lifecycle
enhancements for the Vectra and Omega and the new model year 2001 Corsa.
GMLAAM reported a loss of $38 million for the 1999 second quarter compared
with income of $48 million for the prior year quarter. The decrease in 1999
second quarter earnings compared to 1998 second quarter results was primarily
due to significantly lower industry volumes due to the ongoing economic crisis
throughout Latin America, partially offset by reduced material and structural
costs. These factors also contributed to the losses for the six months ended
June 30, 1999 which totaled $63 million compared with income of $101 million for
the prior year six-month period.
- 26 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
GMA Financial Review (concluded)
GMAP reported a loss of $81 million for the 1999 second quarter compared with
a loss of $36 million for the prior year quarter. The decrease in 1999 second
quarter earnings compared to 1998 second quarter results was primarily due to
decreased wholesale sales in the region, as well as decreased equity earnings
due to ramp-up costs at Shanghi as Buick production gets underway and the
finalization of the terms of our investment in India. Losses for the six months
ended June 30, 1999 totaled $141 million compared with losses of $30 million for
the prior year six-month period. The decrease in income for the first six-month
period in 1999 was primarily due to decreased volumes in the region, decreased
equity earnings at Isuzu due to the economic downturn in Asia, and continued
spending associated with GMAP's growth strategy.
Hughes Financial Highlights
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1999 1998 1999 1998
------- --------- ------- -------
(Dollars in Millions Except Per Share Amounts)
Revenues $1,776 $1,369 $3,228 $2,660
----- ----- ----- -----
Pre-tax (loss) income (113) 88 20 195
Income tax (benefit) expense (43) 24 (7) 55
Minority interests 6 9 13 10
Losses in nonconsolidated associates (34) (22) (65) (51)
-- -- -- --
Net (loss) income $(98) $ 51 $ (25) $ 99
== == == ==
(Loss) Earnings used for computation of
Available Separate Consolidated Net
(Loss) Income (1) (2) $(94) $56 $(16) $110
(Loss) Earnings per share attributable
to Class H common stock -
Basic and Diluted (2) $(0.23) $0.14 $(0.04) $0.27
- ------------
(1)Excludes amortization of GM purchase accounting adjustments of $5 million
for the second quarters of 1999 and 1998 and $11 million for the six-month
periods ended June 30, 1999 and 1998, related to GM's acquisition of Hughes
Aircraft Company (HAC) in 1985. Includes accrued preferred stock dividends of
$2 million in 1999.
(2)1998 results exclude the cumulative effect of accounting change of $9
million, after tax, due to Hughes' adoption of SOP 98-5, Reporting on the
Costs of Start-Up Activities. GM has reported the $9 million charge in fourth
quarter 1998 results and Hughes reported the change as a restatement of first
quarter 1998 results.
Hughes Financial Review
Second quarter revenues increased 29.7% to $1.8 billion, compared with $1.4
billion in the second quarter of 1998. Revenues for the first six months of 1999
increased 21.3% to $3.2 billion compared with $2.7 billion in the same period of
1998. Revenue growth for the second quarter and first six months of 1999
compared to the same period in 1998 was primarily attributable to continued
strong subscriber growth and higher average monthly revenues per subscriber for
the DIRECTV(R) businesses, revenues from the PRIMESTAR medium-power
direct-to-home and United States Satellite Broadcasting Company, Inc. (USSB)
businesses, which were acquired on April 28, 1999 and May 20, 1999,
respectively, increased sales of DIRECTV(TM) receiver equipment by Hughes
Network Systems (HNS) and increased PanAmSat revenues from operating leases.
These increases were offset by a decrease in Hughes Space and Communications
(HSC) revenues due to contract revenue adjustments and delayed revenue
recognition that resulted from increased costs and schedule delays on several
new product lines.
Hughes reported an operating loss, excluding amortization of purchase
accounting adjustments related to GM's acquisition of HAC, of $97 million for
the second quarter of 1999 compared with an operating profit, on the same basis,
of $78 million for the second quarter of 1998. The operating loss for the first
six months of 1999 was $133 million compared with an operating profit of $162
million for the first six months of 1998. The operating loss for the second
quarter of 1999 was principally a result of the increased development costs and
schedule delays at HSC that, resulted in a second quarter 1999 pre-tax charge of
$125 million, higher goodwill amortization that resulted from the second quarter
1999 acquisitions of USSB and PRIMESTAR, and higher depreciation expense related
to additions to PanAmSat's satellite fleet in late 1998 and early 1999. The
operating loss for the first six months of 1999 also included a one-time pre-tax
charge of $92 million that resulted from the termination of the Asia-Pacific
Mobile Telecommunications satellite system contract due to export licenses not
being issued.
- 27 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Hughes Financial Review (continued)
Hughes reported a pre-tax loss of $113 million for the second quarter of
1999, compared with pre-tax income of $88 million for the same period of 1998.
Pre-tax income was $20 million for the first six months of 1999, compared with
pre-tax income of $195 million for the first six months of 1998. The pre-tax
loss for the second quarter of 1999 and the decrease in pre-tax income for the
first six months of 1999 resulted primarily from the operating losses described
above, lower interest income due to a decrease in cash and cash equivalents and
increased interest expense related to increased borrowings. These losses were
offset by the $155 million pre-tax gain that resulted from the settlement of the
Williams patent infringement case.
Taxes for the second quarter and first six months of 1999 and 1998
benefited from the favorable resolution of tax contingencies related to prior
years. The income tax benefit recorded for the six months of 1999 resulted from
the effect of these benefits on the low level of pre-tax income recognized in
1999 compared to 1998.
Earnings (loss) used for computation of available separate consolidated net
income (loss) for the second quarter of 1999 was a loss of $94 million, compared
with earnings of $56 million for the second quarter of 1998, and a loss of $16
million for the first six months of 1999, compared with earnings of $110 million
for the first six months of 1998.
On July 28, 1999, Galaxy Latin America (GLA), Hughes' 70% owned subsidiary,
acquired 77.8% of Galaxy Brasil, Ltda., the exclusive distributor of DIRECTV
services in Brazil, from Tevecap S.A. for approximately $89 million plus the
assumption of debt. In connection with the transaction, Tevecap sold its 10%
equity interest in GLA to Hughes and the Cisneros Group, the remaining Galaxy
Latin America partners. Our share of the purchase amounted to approximately $101
million and increased Hughes' ownership of GLA to 77.8%.
On January 22, 1999, Hughes agreed to acquire PRIMESTAR's 2.3 million
subscriber medium-power direct-to-home satellite business and the high-power
satellite assets and direct-broadcast satellite orbital frequencies of Tempo
Satellite, a wholly-owned subsidiary of TCI Satellite Entertainment, Inc. On
April 28, 1999, the acquisition of PRIMESTAR's direct-to-home business was
completed. The purchase price consisted of $1.1 billion in cash and 4.9 million
shares of GM Class H common stock, for a total purchase price of $1.3 billion,
based on the average market price of $47.87 per share of GM Class H common stock
at the time the acquisition agreement was signed. The purchase price will be
adjusted based upon the final adjusted net working capital of PRIMESTAR at the
date of closing. The purchase price for the Tempo Satellite assets consisted of
$500 million in cash. Of this purchase price, $150 million was paid on March 10,
1999 for a satellite that has not yet been launched and the remaining $350
million was paid on June 4, 1999 for an in-orbit satellite and 11 related
satellite orbital frequencies.
In December 1998, Hughes agreed to acquire all of the outstanding capital
stock of USSB. USSB provided direct-to-home premium satellite programming in
conjunction with DIRECTV's basic programming service. The purchase price,
consisting of cash and GM Class H common stock, was approximately $1.6 billion,
consisting of approximately $360 million in cash and 22.6 million shares of GM
Class H common stock. The USSB acquisition was completed on May 20, 1999 and
payment and delivery of GM shares were made to the former USSB shareholders in
July 1999.
Hughes has filed a shelf registration statement with the Securities and
Exchange Commission with respect to an issuance up to $2.0 billion of debt
securities from time to time. Subject to market conditions, Hughes expects to
issue up to $1.0 billion of these securities in the third quarter of 1999.
Hughes will use these funds principally to repay commercial paper borrowings
incurred in connection with the PRIMESTAR, Tempo Satellite and USSB transactions
and to fund short-term working capital requirements.
On May 11, 1999, it was announced that Hughes will collaborate with America
Online (AOL) on a new service that will combine digital satellite television
programming from DIRECTV with AOL's new interactive television Internet service.
HNS will design and build the initial dual purpose DIRECTV/AOL receiver
equipment. The new service will be suited for both frequent Internet users and
the mass market consumer who wants to connect to the Internet. On June 21, 1999,
Hughes announced a more extensive strategic alliance with AOL to develop and
market digital entertainment and Internet services nationwide. The new alliance
is expected to accelerate subscriber growth and revenue-per-subscriber for the
DIRECTV and DirecPC services, as well as expand the subscriber base for AOL's
developing AOL TV and AOL-Plus broadband services. As part of the alliance,
Hughes and AOL plan to jointly develop new content and interactive services for
U.S. and international markets. Additionally, an extensive cross-marketing
initiative will be instituted to market each company's products through their
respective retail outlets and to their respective subscribers. As part of its
marketing initiative with AOL, Hughes has committed to increase its sales and
marketing expenditures over the next three years by approximately $1.5 billion
for its DirecPC/AOL-Plus, DlRECTV, DlRECTV/AOL TV, and DirecDuo products and
services.
- 28 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Hughes Financial Review (concluded)
As part of the alliance, AOL invested $1.5 billion in shares of GM Series H
6.25% Automatically Convertible Preference Stock. GM immediately invested the
$1.5 billion received from AOL into shares of Hughes Series A Preferred Stock
designed to correspond to the financial terms of the GM Series H 6.25%
Automatically Convertible Preference Stock. For further discussion, refer to
Note 8 to the GM consolidated financial statements.
Financing and Insurance Operations
Highlights of financial performance by GM's Financing and Insurance
Operations business were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -------------------
1999 1998 1999 1998
------- -------- ------- -------
(Dollars in Millions)
Financing revenues
GMAC $3,361 $3,205 $6,638 $6,311
Other 210 215 442 419
------ ------ ------ ------
Total $3,571 $3,420 $7,080 $6,730
===== ===== ===== =====
Net income
GMAC $391 $365 $783 $714
Other 34 29 15 44
---- ---- ---- ----
Total $425 $394 $798 $758
=== === === ===
- 29 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
GMAC Financial Highlights
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ------------------
1999 1998 1999 1998
------ --------- ------ -------
(Dollars in Millions)
Financing revenues
Retail and lease financing $1,069 $950 $2,075 $1,852
Operating leases 1,797 1,809 3,592 3,594
Wholesale and term loans 495 446 971 865
------ ------ ------ ------
Total automotive financing
revenues 3,361 3,205 6,638 6,311
Interest and discount 1,538 1,455 3,051 2,839
Depreciation on operating leases 1,162 1,161 2,350 2,339
----- ----- ----- -----
Net automotive financing revenue 661 589 1,237 1,133
Insurance premiums earned 442 480 889 951
Mortgage revenue 730 500 1,458 918
Other income 366 337 740 668
------ ------ ------ ------
Net financing revenue and other 2,199 1,906 4,324 3,670
Expenses 1,559 1,378 3,043 2,627
----- ----- ----- -----
Pre-tax income 640 528 1,281 1,043
Income tax expense 249 163 498 329
--- --- --- ---
Net income $391 $365 $783 $714
=== === === ===
Net income from automotive
financing operations $275 $288 $504 $534
Net income from insurance operations 50 54 115 134
Net income from mortgage operations 66 23 164 46
---- ---- --- ----
Net income $391 $365 $783 $714
=== === === ===
GMAC Financial Review
Consolidated net income for the second quarter and first six months of 1999
increased by 7% and 10% compared to the same periods during 1998. Net income
from automotive financing operations declined 5% during the second quarter of
1999, compared to the same period in 1998. The reduction in earnings was
primarily a result of a significantly lower effective income tax rate for the
same period in 1998.
Earnings from insurance operations decreased by 7% during the second quarter
of 1999, compared to the same period during 1998. Earnings were lower primarily
due to lower underwriting results in the current quarter, partially offset by
higher capital gains.
Net income from mortgage operations during the second quarter was $43 million
higher than the second quarter of 1998. The increase was primarily attributable
to improved liquidity in the capital markets coupled with unusually low earnings
in the second quarter of 1998, which were negatively impacted by accelerated
prepayment experience on mortgage assets.
During the three months and six months ended June 30, 1999, GMAC financed
33.1% and 32.4% of new GM vehicles delivered in the U.S., respectively, down
from 36.5% and 35.7% for the same periods in 1998. The decline in financing
penetration was primarily the result of a reduction in retail rate incentive
programs sponsored by GM during 1999 and competitive market conditions.
In the United States, inventory financing was provided for 860,000 and
1,728,000 new GM vehicles during the second quarter and first six months of
1999, respectively, compared with 643,000 and 1,367,000 new GM vehicles during
the respective periods in 1998. The primary cause of the increase in new GM
vehicles financed was due to work stoppages at two GM component plants in June
of last year that halted production of wholesale units at 26 of 29 assembly
plans in North America. GMAC's wholesale financing represented 65.0% of all GM
U.S. vehicle sales to dealers during the first six months of 1999, up from 63.1%
for the comparable period a year ago. The increase in wholesale penetration
levels was a result of competitive pricing strategies by GMAC.
Automotive financing revenue totaled $3.4 billion and $6.6 billion in the
second quarter and first six months of 1999, respectively, compared to $3.2
billion and $6.3 billion for the same periods in 1998. The increase was mainly
due to higher average retail and other loan receivable balances which resulted
from continued retail financing incentives sponsored by GM. Additionally,
increased wholesale revenues resulting from higher average wholesale balances
contributed to the change. The increased wholesale balances were primarily
attributable to the 1998 work stoppages previously mentioned.
Insurance premiums earned, mortgage revenue and other income totaled $1.5
billion and $3.1 billion for the second quarter and six months ended June 30,
1999, respectively, compared to $1.3 billion and $2.5 billion during the
comparable 1998 periods. The increase in 1999 over 1998 was primarily the result
of substantial increases in mortgage servicing and processing fees. These
increases were slightly offset by a reduction in insurance premiums earned due
to a decline in personal line coverages.
- 30 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
GMAC Financial Review (concluded)
GMAC's worldwide cost of borrowing for the second quarter and first six
months of 1999 averaged 5.53% and 5.52%, respectively, a decrease of 51 and 55
basis points from the comparable periods of a year ago. Total borrowing costs
for U.S. operations averaged 5.45% for both the second quarter and first six
months of 1999, compared to 5.96% and 6.03% for the respective periods in 1998.
The lower average borrowing costs for the first six months of 1999 are largely a
result of lower market interest rates.
Consolidated salaries and other operating expenses totaled $1.1 billion and
$2.1 billion for the second quarter and first six months of 1999, respectively,
compared to $870 million and $1.7 billion for the comparable periods last year.
The increase was mainly attributable to continued growth.
Annualized net retail losses were 0.51% and 0.61% of total average serviced
automotive receivables during the second quarter and first six months of 1999,
respectively, compared to 0.73% and 0.88% for the same periods last year. The
provision for credit losses totaled $230 million and $229 million for the six-
month periods ended June 30, 1999 and 1998, respectively. Although comparable
period loss rates declined, the higher loss provision reflects an increase in
retail receivables during the first six months of 1999 and favorable wholesale
loss provision adjustments during the first quarter of 1998.
The effective income tax rate for the first six months of 1999 was 38.8%,
compared to 31.6% and 31.5% for the periods ended December 31, 1998 and June 30,
1998, respectively. The increase in the effective tax rate can be attributed to
a significantly lower effective tax rate for the first six months of 1998 due to
a decrease in U.S. and foreign taxes assessed on foreign source income.
On March 8, 1999, GMAC announced it acquired a majority interest in On:Line
Finance Holdings and its subsidiaries. The acquisition will expand GMAC's range
of finance products available through dealers to automotive customers. On:Line
Finance is one of the largest independent retail used car finance providers in
the United Kingdom.
On June 8, 1999, GMAC announced an agreement to acquire the asset-based
lending and factoring business of The Bank of New York for approximately $1.8
billion. The purchase of BNY Financial Corporation (BNYFC) will enable GMAC to
expand its existing asset-based lending internationally and enter the factoring
business in a substantial way. BNYFC is one of the leading asset-based lending
and factoring operations in North America and the United Kingdom. The
transaction was completed on July 22, 1999. The name of the new GMAC subsidiary
is GMAC Commercial Credit LLC.
On June 11, 1999, GMAC announced it has agreed to terms for the purchase of
Arriva Automotive Solutions Limited, a leading contract leasing provider in the
United Kingdom. The transaction, including debt refinancing, is valued at
(pound)484 million (approximately $775 million at the June 30, 1999 exchange
rate), and was completed on July 30, 1999.
Year 2000
Computers, software applications and microprocessors (embedded in a variety
of products either made or used by GM) have the potential for operational
problems if they lack the capability to handle the transition to the Year 2000.
Because this issue has the potential to cause disruption of GM's business
operations, GM has implemented a comprehensive, worldwide program to identify
and remediate potential Year 2000 problems in its business information systems
and other systems embedded in its engineering and manufacturing operations.
Additionally, GM has established communications and site assessments with its
suppliers, its dealers and other third parties to assess and reduce the risk
that GM's operations could be adversely affected by the failure of these third
parties to adequately address the Year 2000 issue.
One of GM's first priorities was the analysis of microprocessors in GM
passenger cars and trucks. This review included all current and planned models
as well as the electronics in older cars and trucks produced during the period
of approximately the last 15 years, back to when GM began installing
microprocessors capable of processing date information. Most of the
microprocessors reviewed have no date-related functionality and, accordingly,
have no Year 2000 issues. Of the vehicles with microprocessors that perform
date-related functions, none were found to have any Year 2000 issues.
GM has multiple Year 2000 program teams responsible for remediating all of
GM's information technology and embedded systems. Information technology
principally consists of business information systems (such as mainframe and
other shared computers and associated business application software) and
infrastructure (such as personal computers, operating systems, networks and
devices like switches and routers). Embedded systems include microprocessors
used in factory automation and in systems such as elevators, security and
facility management.
GM's Year 2000 program includes assessment and remediation services provided
by Electronic Data Systems Corporation (EDS), GM's primary information
technology supplier, pursuant to a Master Service Agreement with GM. The
expenditures and other figures contained herein have been adjusted to reflect
the spin-off of Delphi Automotive Systems.
- 31 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Year 2000 (continued)
The Year 2000 program is being implemented in seven phases, some of which are
being conducted concurrently:
Inventory -- This first phase consisted of the identification and validation
of an inventory of all systems that could be affected by the Year 2000
issue. The inventory phase began in earnest in 1996 and is complete. The
effort identified approximately 6,100 business information systems and about
1.4 million infrastructure items and embedded systems.
Assessment -- The assessment phase included the initial testing, code
scanning, and supplier contacts to determine whether remediation was needed
and, if so, the development of a remediation plan. The assessment of
business information systems is completed and included the determination
that about one quarter of these systems were "critical" based on criteria
such as the potential for business disruption. The assessment of
infrastructure items and embedded systems is also complete.
Remediation -- This phase involves the design and execution of a remediation
plan, followed by testing for adherence to the design. GM has substantially
completed the remediation of its systems. Remediation of remaining systems
is scheduled for completion by the end of September 1999.
System Test -- The system test phase involves testing of remediated items to
ensure that they function normally after being replaced in their original
operating environment. System test is closely related to the remediation
phase and follows essentially the same schedule.
Implementation -- Implementation is the return of items to normal operation
after satisfactory performance in system testing. This phase follows
essentially the same schedule as remediation and system testing.
Readiness Testing -- This phase includes the planning for and testing of
integrated systems in a Year 2000 ready environment, including ongoing
auditing and follow-up. Three distinct types of readiness tests are being
conducted: (1) individual system tests; (2) tests of groups of related
systems that comprise a major business process or manufacturing function;
and (3) running plant floor systems while production is in process.
The readiness test phase began in the fourth quarter of 1998. To date,
individual system tests have been completed on more than 99% of GM's
critical applications. Approximately 300 integrated business process tests
and 900 integrated manufacturing system tests have been completed. More than
100 live production tests have also been completed and adjudged to be
successful. All readiness testing is scheduled for completion by the end of
September 1999.
In addition to GM readiness testing, a third party Independent Validation
& Verification (IV&V) process is being used to examine remediated code to
identify potential oversights or errors in select mission-critical systems.
While the IV&V process is ongoing, the results to date have validated the
success of GM's testing program.
Contingency Planning -- This final step involves the development and
execution of plans that focus on areas of significant concern and the
concentration of resources to address those issues both proactively and
reactively. GM believes that the most reasonably likely worst case scenario
is that there will be some localized disruptions of systems that will affect
individual business processes, facilities or suppliers for a short time,
rather than systemic or long-term problems affecting its business operations
as a whole.
GM's contingency planning has identified systems, business processes and
some suppliers that it believes are potentially vulnerable to Year 2000
problems. GM contingency planning also has addressed those business
operations in which a localized disruption could have the potential for
causing a wider problem by interrupting the flow of products, materials or
data to other operations. Because there is uncertainty as to which
activities may be affected and the exact nature of the problems that may
arise, GM's contingency planning has focused on minimizing the scope and
duration of any disruptions by developing comprehensive, detailed plans.
These reactive plans permit a flexible, real-time response to specific
problems that may arise at individual locations around the world.
- 32-
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Year 2000 (continued)
A natural extension of GM's contingency planning is the deployment of a
command center structure, that is scheduled to begin limited operations in
September 1999. The Global Command Center at the GM Technical Center will
have redundant communication and other systems, allowing for uninterrupted
operations and connectivity with other GM command centers strategically
located around the world. Detailed plans and procedures are currently being
developed and will be validated during the fourth quarter of 1999. The
centers will be staffed with appropriate personnel 24 hours a day, seven
days a week beginning the week of December 27, 1999. Operation will continue
for as long as conditions warrant.
GM's communication with its suppliers is a focused element of the assessment
and remediation phases described above. GM is a leading participant in an
industry trade association, the Automotive Industry Action Group, which has
distributed Year 2000 compliance questionnaires as well as numerous awareness
and assistance mailings to about half of the 90,000 supplier sites that service
GM throughout the world. Responses to these questionnaires, which were generally
sent to GM's principal suppliers, were received from about half of the supplier
sites to which they were sent. Many of the non-responding suppliers are
communicating directly with GM on an informal basis.
However, GM is not relying on the receipt of responses to questionnaires or
written assurances from suppliers regarding their Year 2000 readiness. GM has
its own review and assistance program for suppliers considered to be critical to
GM's operations, including more than 4,200 on-site assessments to date and more
than 2,500 Year 2000 program management workshops for more than 2,500 supplier
companies. GM's assessment efforts have been substantially completed with
respect to the critical supplier sites. Based on its assessment activity to
date, GM believes that a substantial majority of its suppliers are making
acceptable progress toward Year 2000 readiness.
Additionally, GM has established a program to provide further remediation
assistance to suppliers that, based upon GM's assessment efforts, are believed
to be at high risk of non-compliance. This supplier assistance program currently
includes providing remediation consultants to work with suppliers on developing,
implementing and accelerating their own Y2K readiness efforts.
With specific regard to the "off-shore" component of critical suppliers, GM's
readiness activities are being managed by a global Y2K supplier readiness
organization with regional offices and personnel in Mexico City, Mexico;
Russelsheim, Germany; Sao Paulo, Brazil; Melbourne, Australia; and Singapore, in
addition to the supplier readiness program headquarters in Detroit.
Of the critical supplier sites being tracked globally in 54 countries for
specific risk management action, approximately 40% are outside of North America.
Of the high-risk suppliers who have received or are receiving direct remediation
assistance, approximately 77% are outside of North America.
For the small percentage of suppliers still judged to be "failure-likely"
after completion of the remediation assistance program, GM is currently taking
proactive steps to minimize the possibility of business interruption. These
steps include, among other actions, deploying further intensive supplier
assistance and follow-up, establishing buffer inventories, and working with
supplier personnel to develop internal supplier contingency plans to deal with
likely failure scenarios.
To address uncertainties in GM's risk management process and Y2K readiness
factors outside the direct control of GM or its suppliers, GM has developed
reactive contingency plans to minimize business disruption related to these
uncertainties. These initiatives include emergency response teams, allocation
plans, strategically located Command Centers, and "early warning" communication
links with key suppliers during the millennium transition. GM is placing a high
priority on contingency planning, Command Centers and in-depth risk management
for those countries and global regions that, as a result of prior assessment
activities, show a high concentration of failure-likely suppliers or utility
sites.
GM also has a program to work with its independent dealers on their Year 2000
readiness. This program includes distributing materials that assist dealers in
designing and executing their own assessment and remediation efforts. GM has
also included Year 2000 compliance criteria as part of its established program
for certifying that third-party business information systems properly interface
with other systems provided to dealers by GM.
GM's direct Year 2000 program cost is being expensed as incurred with the
exception of capitalizable replacement hardware and, beginning in 1999,
internal-use software. Total incremental spending by GM is not expected to be
material to the Corporation's operations, liquidity or capital resources.
In addition to the work for which GM has direct financial responsibility, EDS
is providing Year 2000-related services to GM, as required under the Master
Service Agreement. EDS is providing these services as part of normal fixed price
services and other ongoing payments.
- 33 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Year 2000 (concluded)
GM's current forecast is that its total direct expenditures, plus the value
of services performed by EDS attributable to GM's Year 2000 program, will be
between $564 million and $624 million. This amount includes the following:
- an estimated $360 million to $420 million in direct GM expenditures. This
estimate includes a $62 million payment from GM to EDS at the end of the
first quarter of 2000 if systems remediated by EDS under the Master
Service Agreement do not cause a significant business disruption that
results in material financial loss to GM due to the millennium change;
- and an estimated $204 million representing the value of Year 2000
services that EDS is providing to GM as part of normal fixed price
services and other ongoing payments to EDS under the Master Service
Agreement. This estimate does not include the $62 million additional
payment from GM to EDS at the end of the first quarter of 2000 mentioned
above.
GM has incurred approximately $142 million of direct spending during 1997 and
1998, and approximately $96 million in 1999 through the end of the second
quarter. The estimated value of services provided to GM by EDS under the Master
Service Agreement from January 1997 through the end of the second quarter of
1999 attributable to work performed in connection with GM's Year 2000 program
was approximately $233 million. Thus, the total direct expenditures by GM, and
value of Year 2000-related services performed by EDS attributable to GM's Year
2000 program, for the period from January 1997 through June 1999, amounted to
approximately $471 million.
Despite the incremental Year 2000 spending expected to be incurred throughout
the Corporation, GM's current business plan projects declining information
technology expenses. GM's total Year 2000 costs noted above do not include the
cost of information technology projects that have been delayed due to Year 2000,
which are estimated to be approximately $27 million or information technology
projects that have been accelerated due to Year 2000 which are estimated to be
approximately $20 million.
In view of the foregoing, GM does not currently anticipate that it will
experience a significant disruption of its business as a result of the Year 2000
issue. However, there is still uncertainty about the broader scope of the Year
2000 issue as it may affect GM and third parties that are critical to GM's
operations. For example, lack of readiness by electrical and water utilities,
financial institutions, government agencies or other providers of general
infrastructure could, in some geographic areas, pose significant impediments to
GM's ability to carry on its normal operations in the area or areas so affected.
In the event that GM is unable to complete its remedial actions as described
above, and is unable to implement adequate contingency plans in the event that
problems are encountered, there could be a material adverse effect on GM's
business, results of operations, or financial condition.
The foregoing discussion describes the Year 2000 program being implemented by
GM and its consolidated subsidiaries other than Hughes. Information about the
Year 2000 efforts of Hughes can be found in Exhibit 99. As previously stated,
the financial and other data contained herein have been adjusted to reflect the
spin-off of Delphi Automotive Systems.
Statements made herein regarding the implementation of various phases of GM's
Year 2000 program, the costs expected to be associated with that program and the
results that GM expects to achieve constitute forward-looking information. As
noted above, there are many uncertainties involved in the Year 2000 issue,
including the extent to which GM will be able to successfully remediate systems
and adequately provide for contingencies that may arise, as well as the broader
scope of the Year 2000 issue as it may affect third parties that are not
controlled by GM. Accordingly, the costs and results of GM's Year 2000 program
and the extent of any impact on GM's operations could vary materially from those
stated herein.
LIQUIDITY AND CAPITAL RESOURCES
Automotive, Electronics and Other Operations
Cash, marketable securities, and $3.0 billion of assets of the Voluntary
Employees' Beneficiary Association (VEBA) trust invested in fixed-income
securities, at June 30, 1999 totaled $16.7 billion compared with $11.0 billion
at June 30, 1998 and $13.1 billion at December 31, 1998. The increase in cash
and marketable securities from June 30, 1998 and December 31, 1998 to June 30,
1999 was primarily due to stronger operating cash flows in the first six months
of 1999 versus 1998 due to the work stoppages during 1998. The total VEBA assets
in the VEBA trust used to pre-fund part of GM's other postretirement benefits
liability approximated $4.9 billion at June 30, 1999 and $4.6 billion at
December 31, 1998, and June 30, 1998.
- 34 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Automotive, Electronics and Other Operations (concluded)
Net liquidity, calculated as cash and marketable securities less the total of
loans payable and long-term debt, was $5.4 billion at June 30, 1999, compared
with $1.8 billion at December 31, 1998 and $(810) million at June 30, 1998. GM
previously indicated that it had a goal of maintaining $13.0 billion of cash and
marketable securities in order to continue funding product development programs
throughout the next downturn in the business cycle. This $13.0 billion target
includes cash to pay certain costs that were pre-funded in part by VEBA
contributions.
Long-term debt was $7.4 billion at June 30, 1999, compared to $7.1 billion at
December 31, 1998 and $6.9 billion at June 30, 1998. The ratio of long-term debt
to long-term debt and GM investment in Automotive, Electronics and Other
Operations was 55.9% at June 30, 1999, compared to 58.1% at December 31, 1998
and 52.2% at June 30, 1998. The ratio of long-term debt and short-term loans
payable to the total of this debt and GM investment was 58.6% at June 30, 1999,
compared to 61.8% at December 31, 1998 and 58.2% at June 30, 1998.
Financing and Insurance Operations
GM's Financing and Insurance Operations primarily consist of GMAC. At June
30, 1999, GMAC owned assets and serviced automotive receivables totaling $146.7
billion, $8.0 billion above year-end 1998, and $21.9 billion above June 30,
1998. Earning assets totaled $127.1 billion at June 30, 1999, compared to $125.1
billion and $108.1 billion at December 31 and June 30, 1998, respectively. The
higher balances compared to second quarter of last year was primarily
attributable to increases in serviced wholesale, retail, and term loan
receivables as well as continued growth in mortgage related assets.
GMAC's finance receivables, including sold receivables, totaled $87.3 billion
at June 30, 1999, $7.4 billion above December 31, 1998 levels and $14.8 billion
above June 30, 1998 levels. The change from December 31, 1998 can be attributed
to a $3.5 billion increase in serviced retail receivables, and a $2.3 billion
increase in serviced wholesale receivables. Additionally, on-balance sheet term
loans increased by $2.0 billion. The year-to-year increase was a result of a
$6.9 billion increase in serviced wholesale receivables, and a $5.0 billion
increase in serviced retail receivables. In addition, other finance receivables
increased by $3.3 billion. The increase in retail receivable balances over
December 31 and June 30, 1998 was due to continued retail financing incentives
sponsored by GM. The increase in wholesale receivable balances over December 31
and June 30, 1998 was a result of the 1998 work stoppages previously mentioned
and higher penetration.
GMAC's liquidity, as well as its ability to profit from ongoing acquisition
activity, is in large part dependent on its access to capital and the costs
associated with raising funds in different segments of the capital markets. In
this regard, GMAC regularly accesses the short-, medium-, and long-term debt
markets, principally through commercial paper, term notes, and underwritten
issuances. GMAC's borrowings outstanding at June 30, 1999 totaled $109.1
billion, compared with $106.2 billion at December 31, 1998 and $89.6 billion at
June 30, 1998. GMAC's ratio of debt to total stockholder's equity at June 30,
1999 was 10.5:1, compared to 10.8:1 at December 31, 1998 and 9.6:1 at June 30,
1998. The higher borrowings were used to fund increased earning asset levels.
GMAC and its subsidiaries maintain substantial bank lines of credit which
totaled $45.6 billion at June 30, 1999, compared to $42.9 billion at year-end
1998 and $40.7 billion at June 30, 1998. The unused portion of these credit
lines totaled $35.8 billion at June 30, 1999, $2.6 billion and $3.9 billion
higher than December 31 and June 30, 1998, respectively.
Book Value Per Share
Book value per share of $1-2/3 par value common stock was $20.02 at June 30,
1999, compared with $20.00 at December 31, 1998 and $21.02 at June 30, 1998.
Book value per share of GM Class H common stock was $12.01 at June 30, 1999,
compared with $12.00 at December 31, 1998 and $12.61 at June 30, 1998. Book
value per share was determined based on the liquidation rights of the various
classes of common stock.
Return on Net Assets (RONA)
As part of its shareholder value initiatives, GM has adopted RONA as a
performance measure to heighten management's focus on balance sheet investments
and the return on those investments. GM's RONA calculation is based on
principles established by management and approved by the Board of Directors.
GM's 1999 second quarter RONA for continuing operations on an annualized basis,
excluding Hughes, was 16.3%.
- 35 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
CASH FLOWS
Automotive, Electronics and Other Operations
Net cash provided by operating activities was $12.8 billion during the six
months ended June 30, 1999 compared with $368 million for the prior year period.
The increase in net cash provided by operating activities was primarily the
result of increased income from continuing operations and the net changes in
operating assets and liabilites. These were primarily related to increases in
accounts payable resulting from an extension of payment terms and increases in
accrued and other liabilities.
Net cash used in investing activities amounted to $9.4 billion during the six
months ended June 30, 1999 compared with $1.9 billion in the prior year period.
The increase in net cash used in investing activities was primarily attributable
to increased cash used for investments in companies, investments in marketable
securities, and operating leases.
Net cash used in financing activities was $832 million during the six months
ended June 30, 1999 compared with $963 million in the prior year period. The
decrease in cash used for financing activities during the first six months of
1999 was primarily due to net decreases in long-term debt and reduced stock
repurchases and proceeds from issuing preference stock in the second quarter of
1999 partially offset by larger decreases in long-term debt and short-term loans
payable.
Financing and Insurance Operations
Cash provided by operating activities totaled $8.5 billion and $4.0 billion
during the six months ended June 30, 1999 and 1998, respectively. The additional
operating cash flow was primarily the result of increased proceeds on the sale
of mortgage loans and mortgage related securities held for trading and decreases
in other miscellaneous assets and investments. These inflows were partially
offset by increases in purchases of mortgage loans and mortgage related
securities held for trading.
Cash used for investing activities during the six months ended June 30, 1999
totaled $8.6 billion, a $2.4 billion increase in cash used compared to the same
period last year. Cash usage increased primarily as a result of net increases in
acquisitions of finance receivables compared to liquidations of such
receivables, partially offset by higher proceeds from sales of finance
receivables.
Cash provided by financing activities during the six months ended June 30,
1999 totaled $2.3 billion, compared with cash provided of $3.3 billion during
the comparable 1998 period. The change was primarily the result of a reduction
in short-term debt, partially offset by an increase in long-term debt.
Dividends
Dividends may be paid on common stocks only when, as and if declared by the
GM Board in its sole discretion. GM's policy is to distribute dividends on its
$1-2/3 par value common stock based on the outlook and indicated capital needs
of the business. On August 2, 1999, the GM Board declared a quarterly cash
dividend of $0.50 per share on $1-2/3 par value common stock, payable September
10, 1999, to holders of record as of August 2, 1999. The GM Board also declared
quarterly dividends on the Series D and Series G Depositary Shares of $0.495 and
$0.57 per share, respectively, payable November 1, 1999, to holders of record on
October 4, 1999. The Series B preference stock was redeemed on April 5, 1999,
and as a result, the amount paid out on that date to the Series B shareholders
of record included accrued and unpaid dividends as part of the total redemption
price. With respect to GM Class H common stock, the GM Board determined that it
will not pay any cash dividends at this time in order to allow the earnings of
Hughes to be retained for investment in its telecommunications and space
businesses. On August 2, 1999 the GM Board declared two dividends on the GM
Series H 6.25% Automatically Convertible Preference Stock. A dividend of $0.5853
per share of GM Series H 6.25% Automotically Convertible Preference Stock is
payable on August 2, 1999, to the sole holder of record on that date for the
period between the close of the transaction and the end of the second quarter. A
quarterly dividend of $8.7793 per share for the GM Series H 6.25% Automatically
Convertible Preference Stock is payable November 1, 1999, to the holder of
record on October 4, 1999.
- 36 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Employment and Payrolls
Worldwide employment at June 30, (in thousands) 1999 1998
---- ----
GMNA 219 231
GME 83 81
GMLAAM 22 26
GMAP 10 9
GMAC 26 22
Hughes 18 15
Other 12 11
---- -----
Total employees 390 395
=== ===
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ------------------
1999 1998 1999 1998
------- ------- ------- ------
Worldwide payrolls - (in billions) $5.6 $5.0 $11.0 $10.3
=== === ==== ====
New Accounting Standard
In June 1999, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 - an Amendment of FASB Statement No. 133. This
statement defers, for one year, the effective date of SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, to those fiscal years
beginning after June 15, 2000. SFAS No. 133 requires all derivatives to be
recorded as either assets or liabilities and the instruments to be measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives are to be recognized immediately or deferred depending on the use of
the derivative and whether or not it qualifies as a hedge. GM will adopt SFAS
No. 133 by January 1, 2001, as required. Management is currently assessing the
impact of this statement on GM's results of operations and financial position.
- 37 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
PART II
ITEM 1. LEGAL PROCEEDINGS
(a) Material pending legal proceedings, other than ordinary routine litigation
incidental to the business, to which the Corporation became, or was, a party
during the quarter ended June 30, 1999 or subsequent thereto, but before the
filing of this report are summarized below.
With respect to the previously reported putative class actions alleging
defects in vehicle paint, two additional suits have been filed involving similar
factual and legal issues.
On May 16, 1999, the Corporation was served with a putative class action
filed in the Court of Common Pleas of Philadelphia County, Pennsylvania (Scott
Haverdink v. General Motors Corporation). The named plaintiff purports to
represent a class of Pennsylvania residents who purchased or leased model year
1985 through 1997 GM vehicles which have exhibited peeling paint and alleges
that vehicles painted using a application process which omits a primer surfacer
layer are inherently defective. The Complaint includes claims of breach of
express warranty, breach of contract and alleged violation of the Pennsylvania
Unfair Trace Practices Consumer Protection Law.
On June 2, 1999, a statement of claim against General Motors Corporation and
General Motors of Canada Limited was filed in support of a putative class action
in the Supreme Court of British Columbia. (Darryl Oshanek v. General Motors
Corporation). The named plaintiff purports to represent a class of consumers
resident in British Columbia who purchased 1986 through 1997 model year GM
vehicles which have experienced peeling paint and asserts a single count under
British Columbia's Deceptive Trade Practices Act. No determination has been made
as to whether either case may proceed as a class action.
* * *
With respect to the previously reported nationwide settlement of the class
action involving the 1973-1987 model Chevrolet and GMC full-size pickup trucks
with fuel tanks mounted outside the frame rails, the Louisiana trial court has
given final approval to that settlement. No appeals from the approval were
filed. However, after the appeal time had run, over GM's objections, plaintiffs
obtained an order from the trial court modifying certain express provisions of
the approved settlement. Those changes are directly contrary to the order
approving the settlement and two prior consent orders. GM appealed to the
Louisiana Court of Appeal which granted a stay of the order modifying the
settlement and ordered that the appeal be permitted.
* * *
On June 3, 1999, the National Rural Telecommunications Cooperative (NRTC)
filed a lawsuit against DIRECTV, Inc. and Hughes Communications Galaxy, Inc.
(together, "DIRECTV") in United States District Court for the Central District
of California, alleging that DIRECTV has breached the DBS Distribution Agreement
(the "Agreement") with the NRTC. The Agreement provides the NRTC with exclusive
distribution rights, in certain specified portions of the United States, to
DIRECTV programming delivered over 27 of the 32 frequencies at the 101 degrees
west longitude orbital location. The NRTC claims that DIRECTV has wrongfully
deprived it of the exclusive right to distribute programming formerly provided
by USSB over the other 5 frequencies at 101 degrees. DIRECTV denies that the
NRTC is entitled to exclusive distribution rights to the former USSB programming
because the NRTC's exclusive distribution rights are limited to programming
distributed over 27 of the 32 frequencies at 101 degrees. The NRTC's complaint
seeks, in the alernative, the right to distribute former USSB programming on a
non-exclusive basis. DIRECTV maintains that the NRTC's right under the Agreement
is to market and sell the former USSB programming as its agent. DIRECTV intends
to vigorously defend the NRTC claims.
DIRECTV has also filed a counterclaim against the NRTC seeking a declaration
of the parties' rights under the Agreement in connection with two issues: the
term of the Agreement and the NRTC's right of first refusal. DIRECTV contends
that the term of the Agreement is measured by the life of the DBS-1 satellite
and that the term of the Agreement ends when either the fuel on board DBS-1 is
depleted to less than 6% of the initial fuel mass or fewer than 8 transponders
are capable of meeting performance specifications. The NRTC contends that the
term of the Agreement is measured by some combination of the lives of DBS-1 and
the other satellites at 101 degrees. Upon the expiration of DBS-1, the NRTC has
a right of first refusal under the Agreement to distribute in its territories a
20-channel video service for which it will have to secure programming rights.
The NRTC contends that the right of first refusal would permit it to contunue
its business as currently conducted. DIRECTV seeks a declaration that the NRTC's
right of first refusal is limited to what is set forth in the Agreement.
* * *
- 38 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS - (concluded)
In connection with the previously reported matter filed before the
International Trade Commission (ITC) by Personalized Media Communications, Inc.
(PMC) against DIRECTV, U.S. Satellite Broadcasting Company, Hughes Network
Systems and other manufacturers of receivers for the DIRECTV system alleging
infringement of one of PMC's patents, PMC moved for dismissal of the proceeding,
which was granted, terminating the action. The related action filed by PMC in
the U.S. District for the Northern District of California, which was stayed
pending outcome of the ITC proceeding, remains outstanding.
* * *
On July 9, 1999, a jury in a Los Angeles Superior Court in the matter of
Anderson et. al, v. General Motors Corporation, returned a verdict of $4.9
billion against General Motors in a product liability lawsuit involving a
post-collision, fuel fed fire in a 1979 Chevrolet Malibu. The award consisted of
$102 million in compensatory damages and $4.8 billion in punitive damages.
This case arose out of an accident on December 24,1993. While the plaintiffs
were stopped at a red light, they were struck in the rear by a 1977 Buick Regal
going approximately 70 mph. The driver of the Regal was intoxicated, having a
blood alcohol level of .20, almost three times the California limit. The ensuing
post-crash fire burned all of the occupants of the Malibu with the children
receiving the most severe burns. Plaintiffs claimed that the Malibu's fuel tank,
which was located behind the rear axle, should have been located over the axle.
Alternatively they claimed the tank should have been shielded or incorporated a
bladder.
GM believes that, by any measure, the 1979 Malibu was a safe passenger car.
The Malibu's fuel tank location was similar to that in most other vehicles of
the same size and vintage and its design met or exceeded the applicable FMVSS
301 standard, having passed a 50 mph rear-impact test that few other cars on the
market in 1979 would have passed. Even the alternative designs suggested by the
plaintiffs would have been compromised in such a severe crash. GM was not
allowed to introduce other compelling evidence that the Malibu's fuel system was
well-designed. Lastly, although the jury was asked to apportion the non-economic
compensatory damages between GM and the driver of the Regal, they were not
informed about his intoxication.
GM will vigorously pursue post-trial motions and it's right of appeal. GM
believes that the design of the subject Chevrolet Malibu was not responsible for
plaintiff's injuries, that numerous evidentiary and procedural reversible errors
occurred at the trial and that as a matter of law, GM's conduct does not support
any punitive damages. The cost of any bond GM may have to post, if any, is not
expected to be material to the Corporation's financial results.
GM is subject to potential liability under government regulations and various
claims and legal actions which are pending or may be asserted against them. Some
of the pending actions purport to be class actions. The aggregate ultimate
liability of GM under these government regulations and under these claims and
actions, was not determinable at December 31, 1998. After discussion with
counsel, it is the opinion of management that such liability is not expected to
have a material adverse effect on the Corporation's consolidated financial
condition or results of operations.
* * * * * *
- 39 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The annual meeting of stockholders of the Registrant was held on
June 7, 1999.
At that meeting, the following matters were submitted to a vote of the
stockholders of General Motors Corporation:
1999 General Motors Annual Meeting
Final Voting Results
(All classes of common stock)
Proposal Voting Results
- -------- --------------
Votes* Percent**
------ ---------
Item No. 1
Nomination and Election of Directors
The Judges subscribed and delivered a certificate reporting that the
following nominees for directors had received the number of votes* set opposite
their respective names.
Percy N. Barnevik For 539,701,037 98.2%
Withheld 9,943,505 1.8
John H. Bryan For 537,705,273 97.8
Withheld 11,939,269 2.2
Thomas E. Everhart For 539,462,782 98.1
Withheld 10,181,760 1.9
Charles T. Fisher, III For 537,450,910 97.8
Withheld 12,193,633 2.2
George M. C. Fisher For 539,583,839 98.2
Withheld 10,060,703 1.8
Karen Katen For 539,640,392 98.2
Withheld 10,004,150 1.8
J. Willard Marriott, Jr. For 537,531,107 97.8
Withheld 12,113,435 2.2
Ann D. McLaughlin For 537,110,060 97.7
Withheld 12,534,482 2.3
Harry J. Pearce For 537,546,040 97.8
Withheld 12,098,502 2.2
Eckhard Pfeiffer For 539,681,075 98.2
Withheld 9,963,467 1.8
John G. Smale For 539,251,944 98.1
Withheld 10,392,698 1.9
John F. Smith, Jr. For 539,640,443 98.2
Withheld 10,004,099 1.8
Louis W. Sullivan For 539,172,056 98.1
Withheld 10,472,486 1.9
G. Richard Wagoner, Jr. For 539,736,414 98.2
Withheld 9,908,128 1.8
Dennis Weatherstone For 539,605,894 98.2
Withheld 10,038,648 1.8
Item No. 2
A proposal of the Board of For 545,162,088 99.2%
Directors that the stockholders Against 2,160,204 0.4
ratify the selection of Abstain 2,322,049 0.4
Deloitte & Touche LLP as
independent public accountants
for the year 1999.
- 40 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - Concluded
Proposal Voting Results
- -------- --------------
Votes* Percent**
------ ---------
Item No. 3
A stockholder proposal that the For 23,966,618 5.1%
Board of Directors take necessary Against 443,018,481 93.7
steps to identify by name and Abstain 5,896,913 1.2
corporate title those executive
officers who are contractually
entitled to receive in excess of
$250,000 annually.
Item No. 4
A stockholder proposal that the For 20,807,472 4.4%
Officers and Board of Directors Against 445,982,796 94.3
consider the discontinuance of all Abstain 6,081,081 1.3
bonuses immediately, and options,
rights, SAR's, etc. after termination
of any existing programs for top
management.
Item No. 5
A stockholder proposal regarding For 20,541,768 4.4%
global warming on our public Against 429,395,033 90.8
health and welfare. Abstain 22,827,068 4.8
Item No. 6
A stockholder proposal regarding For 127,113,345 26.9%
steps necessary to provide for Against 323,132,436 68.3
cumulative voting in the election Abstain 22,603,150 4.8
of directors.
Item No. 7
A stockholder proposal to limit For 31,860,929 6.8%
the outside board memberships Against 435,198,586 92.0
of GM directors. Abstain 5,812,021 1.2
Item No. 8
A stockholder proposal to have For 18,818,674 4.0%
the board nominate an employee Against 447,623,101 94.6
director, chosen from one of Abstain 6,429,677 1.4
the company's recognized labor
unions.
Item No. 9
A stockholder proposal to have For 63,055,754 13.3%
only independent directors Against 403,328,008 85.3
be eligible for key board Abstain 6,470,228 1.4
committees.
* Numbers represent the aggregate voting power of all votes cast with holders
of $1-2/3 par value common stock casting one vote per share and holders of GM
Class H common stock casting 0.6 vote per share.
** Percentages represent the aggregate voting power of both classes of GM common
stock cast for each item.
* * * * * *
- 41 -
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS (Including Those Incorporated by Reference).
Exhibit
Number Exhibit Name Page No.
- ------ ------------ --------
99 Hughes Electronics Corporation Financial Statements and
Management's Discussion and Analysis of Financial
Condition and Results of Operations 43
27 Financial Data Schedule
(for Securities and Exchange Commission information only)
(b) REPORTS ON FORM 8-K.
Eleven reports on Form 8-K, dated April 5, 1999, April 9, 1999, April 12,
1999 (3), April 14, 1999, April 28, 1999, May 12, 1999, May 25, 1999, May 28,
1999 and June 21, 1999 were filed during the quarter ended June 30, 1999
reporting matters under Item 5, Other Events and reporting certain agreements
under Item 7, Financial Statements, Pro Forma Financial Information, and
Exhibits.
* * * * * *
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
GENERAL MOTORS CORPORATION
--------------------------
(Registrant)
Date August 16, 1999 /s/Peter R. Bible
- -------------------- -----------------
(Peter R. Bible,
Chief Accounting Officer)
- 42 -
EXHIBIT 99
HUGHES ELECTRONICS CORPORATION
ITEM 1. FINANCIAL STATEMENTS
STATEMENTS OF INCOME (LOSS) AND
AVAILABLE SEPARATE CONSOLIDATED NET INCOME (LOSS)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---------- -------- -------- ---------
(Dollars in Millions Except Per Share Amounts)
Revenues
Direct broadcast, leasing and
other services $1,065.1 $606.4 $1,800.8 $1,205.3
Product sales 710.9 762.6 1,427.0 1,454.7
------- ------- ------- -------
Total Revenues 1,776.0 1,369.0 3,227.8 2,660.0
------- ------- ------- -------
Operating Costs and Expenses
Cost of products sold 685.7 580.6 1,354.9 1,122.9
Broadcast programming and
other costs 478.6 250.8 770.2 515.6
Selling, general and
administrative expenses 548.5 359.2 953.3 661.8
Depreciation and amortization 159.8 100.2 282.8 197.9
Amortization of GM purchase
accounting adjustments 5.3 5.3 10.6 10.6
------- ------- ------- -------
Total Operating Costs and Expenses 1,877.9 1,296.1 3,371.8 2,508.8
------- ------- ------- -------
Operating Profit (Loss) (101.9) 72.9 (144.0) 151.2
Interest income 4.9 30.6 18.5 68.1
Interest expense (12.4) (2.9) (19.3) (5.9)
Other, net (37.5) (35.1) 100.2 (69.4)
-------- ------- -------- -------
Income (Loss) Before Income Taxes,
Minority Interests and Cumulative
Effect of Accounting Change (146.9) 65.5 (44.6) 144.0
Income tax provision (benefit) (42.5) 23.3 (6.7) 54.7
Minority interests in net losses
of subsidiaries 6.8 8.6 13.3 9.9
-------- ------- -------- -------
Income (Loss) before cumulative effect
of accounting change (97.6) 50.8 (24.6) 99.2
Cumulative effect of accounting
change, net of taxes - - - (9.2)
------- ------- ------- -------
Net Income (Loss) (97.6) 50.8 (24.6) 90.0
Adjustments to exclude the effect of
GM purchase accounting adjustments 5.3 5.3 10.6 10.6
------ ----- ----- ------
Earnings (Loss) excluding the effect of
GM purchase accounting adjustments (92.3) 56.1 (14.0) 100.6
Preferred stock dividends (1.6) - (1.6) -
------ ------- ----- ---------
Earnings (Loss) Used for Computation of
Available Separate Consolidated Net
Income (Loss) $(93.9) $56.1 $(15.6) $100.6
====== ==== ====== =====
Available Separate Consolidated Net Income (Loss)
Average number of shares of General Motors
Class H Common Stock outstanding
(in millions) (Numerator) 121.0 105.2 113.6 104.7
Average Class H dividend base
(in millions) (Denominator) 414.9 399.9 407.5 399.9
Available Separate Consolidated
Net Income (Loss) $(27.4) $14.7 $(4.3) $26.2
====== ==== ===== ====
Earnings (Loss) Attributable to General Motors
Class H Common Stock on a Per Share
Basis - Basic and Diluted $(0.23) $0.14 $(0.04) $0.25
===== ==== ===== ====
Reference should be made to the Notes to Financial Statements.
- 43 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
BALANCE SHEETS
June 30,
1999 December 31,
ASSETS (Unaudited) 1998
----------- ----
(Dollars in Millions)
Current Assets
Cash and cash equivalents $858.7 $1,342.1
Accounts and notes receivable (less allowances) 1,345.0 922.4
Contracts in process, less advances and progress
payments of $24.7 and $27.0 690.6 783.5
Inventories 653.8 471.5
Prepaid expenses and other, including deferred income
taxes of $96.7 and $33.6 591.5 326.9
-------- --------
Total Current Assets 4,139.6 3,846.4
Satellites, net 3,515.8 3,197.5
Property, net 1,303.0 1,059.2
Net Investment in Sales-type Leases 162.0 173.4
Intangible Assets, net of accumulated amortization
of $486.7 and $413.2 7,420.0 3,552.2
Investments and Other Assets 1,732.6 1,606.3
--------- ---------
Total Assets $18,273.0 $13,435.0
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable $1,020.4 $764.1
Advances on contracts 178.0 291.8
Deferred revenues 94.7 43.8
Current portion of long-term debt 184.4 156.1
Accrued liabilities 1,542.2 753.7
------- --------
Total Current Liabilities 3,019.7 2,009.5
Long-Term Debt 1,239.6 778.7
Deferred Gains on Sales and Leasebacks 59.6 121.5
Postretirement Benefits Other Than Pensions 153.9 150.7
Other Liabilities and Deferred Credits 1,495.1 867.1
Deferred Income Taxes 447.2 643.9
Commitments and Contingencies
Minority Interests 502.2 481.7
Stockholder's Equity
Capital stock and additional paid-in capital 9,689.8 8,146.1
Preferred stock 1,485.0 -
Net income retained for use in the business 231.6 257.8
-------- -------
Subtotal Stockholder's Equity 11,406.4 8,403.9
-------- -------
Accumulated Other Comprehensive Income (Loss)
Minimum pension liability adjustment (37.1) (37.1)
Accumulated unrealized gains (losses) on securities (8.0) 16.1
Accumulated foreign currency translation adjustments (5.6) (1.0)
Accumulated other comprehensive loss (50.7) (22.0)
-------- -------
Total Stockholder's Equity 11,355.7 8,381.9
-------- --------
Total Liabilities and Stockholder's Equity $18,273.0 $13,435.0
======== ========
Reference should be made to the Notes to Financial Statements.
- 44 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
1999 1998
---- ----
(Dollars in Millions)
Cash Flows from Operating Activities
Net Cash (Used in) Provided by Operating Activities $(15.3) $157.1
------ -----
Cash Flows from Investing Activities
Investment in companies, net of cash acquired (1,784.4) (908.0)
Expenditures for property (170.8) (121.4)
Increase in satellites (384.8) (255.5)
Early buyout of satellite under sale and leaseback (141.3) (155.5)
Proceeds from disposal of property 5.1 46.7
-------- --------
Net Cash Used in Investing Activities (2,476.2) (1,393.7)
-------- --------
Cash Flows from Financing Activities
Net increase in notes and loans payable 28.3 100.0
Long-term debt borrowings 2,422.0 875.3
Repayment of long-term debt (1,961.1) (725.0)
Net proceeds from issuance of preferred stock 1,485.0 -
Stock options exercised 42.8 -
Purchase and retirement of GM Class H common stock (8.9) -
Payment to General Motors for Delco post-closing
price adjustment - (204.7)
-------- --------
Net Cash Provided by Financing Activities 2,008.1 45.6
-------- --------
Net decrease in cash and cash equivalents (483.4) (1,191.0)
Cash and cash equivalents at beginning of the period 1,342.1 2,783.8
-------- -------
Cash and cash equivalents at end of the period $858.7 $1,592.8
======== =======
Reference should be made to the Notes to Financial Statements.
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<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, the
unaudited information relating to Hughes filed as Exhibit 99 in GM's Quarterly
Report on Form 10-Q dated March 31, 1999, and Current Reports on Form 8-K filed
subsequent to the filing date for the GM 1998 Annual Report on Form 10-K.
The financial statements include the applicable portion of intangible assets,
including goodwill, and related amortization resulting from purchase accounting
adjustments associated with GM's purchase of Hughes in 1985.
In 1998, Hughes adopted American Institute of Certified Public Accountants
Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-Up
Activities. SOP 98-5 requires that all start-up costs previously capitalized be
written off and recognized as a cumulative effect of accounting change, net of
taxes, as of the beginning of the year of adoption. On a prospective basis,
these types of costs are required to be expensed as incurred. The unfavorable
cumulative effect of this accounting change was $9.2 million after-tax, or $0.02
per share of GM Class H common stock in the first quarter of 1998.
Note 2. Inventories
Major Classes of Inventories
June 30, December 31,
(Dollars in Millions) 1999 1998
---- ----
Productive material and supplies $80.6 $73.4
Work in process 463.8 285.1
Finished goods 109.4 113.0
----- -----
Total $653.8 $471.5
===== =====
Note 3. Comprehensive Income
Hughes' total comprehensive income was as follows:
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in Millions) 1999 1998 1999 1998
---- ---- ---- ----
Net income (loss) $(97.6) $50.8 $(24.6) $90.0
Other comprehensive loss:
Foreign currency translation
adjustments (1.1) (2.2) (4.6) (2.5)
Unrealized loss on securities:
Unrealized holding gains
(losses) (19.5) 1.6 (24.1) 1.0
Less: reclassification
adjustment for
unrealized gains
included in net income - (7.3) - (7.3)
----- ------ ----- ------
Unrealized loss on
securities (19.5) (5.7) (24.1) (6.3)
----- ------ ------ ------
Other comprehensive loss (20.6) (7.9) (28.7) (8.8)
------ ----- ------ -----
Total comprehensive income
(loss) $(118.2) $42.9 $(53.3) $81.2
======= ==== ====== ====
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<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 (121.0 million and 105.2 million during the second
quarters of 1999 and 1998, respectively) and the denominator of which is a
number equal to the weighted- average number of shares of GM Class H common
stock which, if issued and outstanding, would represent 100% of the tracking
stock interest in the earnings of Hughes (Average Class H dividend base). The
Average Class H dividend base was 414.9 million and 399.9 million during the
second quarters of 1999 and 1998, respectively. Upon conversion of the General
Motors Series H preference stock into General Motors Class H common stock, both
the numerator and the denominator used in the computation of ASCNI will increase
by the number of shares of the General Motors Class H common stock issued (see
further discussion in Note 5). In addition, the denominator used in determining
the ASCNI of Hughes may be adjusted from time-to-time as deemed appropriate by
the GM Board of Directors ("GM Board") to reflect subdivisions or combinations
of the GM Class H common stock, certain transfers of capital to or from Hughes,
the contribution of shares of capital stock of GM to or for the benefit of
Hughes employees and the retirement of GM Class H common stock purchased by
Hughes. The GM Board's discretion to make such adjustments is limited by
criteria set forth in GM's Restated Certificate of Incorporation.
In connection with the PRIMESTAR and USSB transactions (see further
discussion in Note 7), GM contributed to Hughes an amount of cash sufficient to
enable Hughes to purchase from GM, for fair value as determined by the GM Board,
the number of shares of GM Class H common stock delivered by Hughes. In
accordance with the GM certificate of incorporation, the Class H dividend base
was increased to reflect that number of shares. The number of shares issued as
part of the PRIMESTAR acquisition and the number of shares to be issued as part
of the USSB merger have been included in the calculation of both the numerator
and denominator of the fraction described above since the consummation dates of
the transactions.
Effective January 1, 1999, shares of Class H common stock delivered by GM in
connection with the award of such shares to and the exercise of stock options by
employees of Hughes increases the numerator and denominator of the fraction
referred to above. Prior to January 1, 1999, there was no dilutive effect
resulting from the assumed exercise of stock options, because the exercise of
stock options did not affect the GM Class H dividend base (denominator). From
time to time, in anticipation of exercises of stock options, Hughes purchases
Class H common stock from the open market. Upon purchase, these shares are
retired and therefore decrease the numerator and denominator of the fraction
referred to above.
For the three and six months ended June 30, 1999, diluted loss per share have
not been presented as the assumed exercise of stock options and the assumed
conversion of the preferred shares in the computation of diluted loss per share
would have been anti-dilutive.
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<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
equivalent effect to the payment of dividends on the Series H preference stock
as if those dividends were paid by Hughes. Upon conversion of the General Motors
Series H preference stock into General Motors Class H common stock, Hughes will
redeem the Series A Preferred Stock through a cash payment to General Motors
equal to the fair market value of the Class H common stock issuable upon the
conversion. Simultaneous with General Motors' receipt of the cash redemption
proceeds, General Motors will make a capital contribution to Hughes of the same
amount. In connection with this capital contribution, the denominator of the
fraction used in the computation of the ASCNI of Hughes will be increased by the
corresponding number of shares of General Motors Class H common stock issued.
Accordingly, upon conversion of the General Motors Series H preference stock
into General Motors Class H common stock, both the numerator and denominator
used in the computation of ASCNI will increase by the amount of the General
Motors Class H common stock issued.
Note 6. Other Postretirement Benefits
Hughes has disclosed in the financial statements certain amounts associated
with estimated future postretirement benefits other than pensions and
characterized such amounts as "accumulated postretirement benefit obligations,"
"liabilities" or "obligations." Notwithstanding the recording of such amounts
and the use of these terms, Hughes does not admit or otherwise acknowledge that
such amounts or existing postretirement benefit plans of Hughes (other than
pensions) represent legally enforceable liabilities of Hughes.
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<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 7. Acquisitions
On January 22, 1999, Hughes agreed to acquire PRIMESTAR's 2.3 million
subscriber medium-power direct-to-home satellite business and the high-power
satellite assets and direct-broadcast satellite orbital frequencies of Tempo
Satellite, a wholly-owned subsidiary of TCI Satellite Entertainment, Inc. On
April 28, 1999, the acquisition of PRIMESTAR's direct-to-home business was
completed. The purchase price consisted of $1.1 billion in cash and 4.9 million
shares of GM Class H common stock, for a total purchase price of $1.3 billion,
based on the average market price of $47.87 per share of Class H common stock at
the time the acquisition agreement was signed. The purchase price will be
adjusted based upon the final adjusted net working capital of PRIMESTAR at the
date of closing. The purchase price for the Tempo Satellite assets consisted of
$500 million in cash. Of this purchase price, $150 million was paid on March 10,
1999 for a satellite that has not yet been launched and the remaining $350
million was paid on June 4, 1999 for an in-orbit satellite and 11 related
satellite orbital frequencies.
In December 1998, Hughes agreed to acquire all of the outstanding capital
stock of United States Satellite Broadcasting Company, Inc. ("USSB"). USSB
provided direct-to-home premium satellite programming in conjunction with
DIRECTV's basic programming service. The purchase price was approximately $1.6
billion, consisting of approximately $360 million in cash and 22.6 million
shares of Class H common stock. The USSB acquisition was closed on May 20, 1999
and the payment of cash and delivery of shares was made to the former USSB
shareholders in July 1999.
The financial information presented as of and for the periods ended June 30,
1999 reflect the effects of the PRIMESTAR, Tempo Satellite and USSB
transactions, discussed above, from their respective dates of acquisition. These
transactions have been accounted for using the purchase method of accounting;
however, the adjustments made in the June 30, 1999 financial statements reflect
a preliminary allocation of the purchase price for the transactions based upon
information currently available. Adjustments relating to the tangible assets
(i.e., satellites, equipment located on customer premises, etc.), intangible
assets (i.e., licenses granted by the Federal Communications Commission,
customer lists, dealer network, etc.), and accrued liabilities for programming
contracts and leases with above-market rates are estimates pending the
completion of independent appraisals currently in process. Additionally, the
adjustment to recognize the benefit of net operating loss carryforwards of USSB
represents a preliminary estimate pending further review and analysis by the
management of Hughes. These appraisals, valuations and studies are expected to
be completed by December 31, 1999. Accordingly, the final purchase price
allocations may be different from the amounts reflected herein.
As the Hughes 1999 financial statements include only USSB's and PRIMESTAR's
results of operations since the date of acquisition, the following selected
unaudited pro forma information is provided to present a summary of the combined
results of Hughes, USSB and PRIMESTAR as if the acquisitions had occurred as of
the beginning of the respective periods, giving effect to purchase accounting
adjustments. The pro forma data is presented for informational purposes only and
may not necessarily reflect the results of operations of Hughes had USSB and
PRIMESTAR operated as part of Hughes for the six months ended June 30, 1999 and
June 30, 1998, nor are they necessarily indicative of the results of future
operations. The pro forma information excludes the effect of non-recurring
charges.
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
- --------------------------------------------------------------------------------
(Dollars in Millions Except Per Share Amounts)
Total revenues $4,017.6 $3,466.5
Income (Loss) before cumulative effect
of accounting Change (20.7) 66.8
Net income (loss) (20.7) 57.6
Pro forma available separate consolidated
net loss (1) (17.7) 6.6
Pro forma loss per share attributable to GM Class H
common stock on a per share basis (1) $(0.13) $0.05
(1) Both periods include the pro forma effect of dividends amounting to $46.9
million related to the Hughes Series A Preferred Stock as if the preferred stock
had been outstanding as of the beginning of the respective periods.
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<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 DIRECTV(TM) receiver
equipment. Other includes the corporate office and other entities.
Selected information for Hughes' operating segments for the three and six
months ended June 30, 1999 and 1998, are reported as follows:
Operating Segments:
Direct-To-
Home Satellite Satellite Network Elimin-
Broadcast Services Systems Systems Other ations Total
- --------------------------------------------------------------------------------
(Dollars in Millions)
For the Three Months Ended:
June 30, 1999
External Revenues $869.3 $167.3 $462.4 $277.0 - - $1,776.0
Intersegment
Revenues 0.9 33.1 91.4 64.1 $0.1 ($189.6) -
- --------------------------------------------------------------------------------
Total Revenues $870.2 $200.4 $553.8 $341.1 $0.1 $(189.6)$1,776.0
- --------------------------------------------------------------------------------
Operating Profit
(Loss)(1) $(68.4) $82.4 $(133.0) $11.3 $(26.5) $32.3 $(101.9)
- --------------------------------------------------------------------------------
For the Three Months Ended:
June 30, 1998
External Revenues $401.5 $161.6 $593.0 $207.0 $5.9 - $1,369.0
Intersegment
Revenues - 29.5 81.8 14.7 0.6 $(126.6) -
- --------------------------------------------------------------------------------
Total Revenues $401.5 $191.1 $674.8 $221.7 $6.5 $(126.6)$1,369.0
- --------------------------------------------------------------------------------
Operating Profit
(Loss)(1) $(40.2) $73.6 $60.0 $(25.2) $(0.6) $5.3 $72.9
- --------------------------------------------------------------------------------
For the Six Months Ended:
June 30, 1999
External Revenues$1,425.3 $327.0 $998.0 $477.5 - - $3,227.8
Intersegment
Revenues 1.5 66.9 186.1 94.5 $0.3 $(349.3) -
- --------------------------------------------------------------------------------
Total Revenues $1,426.8 $393.9 $1,184.1 $572.0 $0.3 $(349.3)$3,227.8
- --------------------------------------------------------------------------------
Operating Profit
(Loss)(1) $(91.8) $160.7 $(147.4) $(6.5) $(39.9) $(19.1) $(144.0)
- --------------------------------------------------------------------------------
For the Six Months Ended:
June 30, 1998
External Revenues $789.4 $328.7 $1,146.7 $386.1 $9.1 - $2,660.0
Intersegment
Revenues - 55.4 152.4 20.3 0.9 $(229.0) -
- -------------------------------------------------------------------------------
Total Revenues $789.4 $384.1 $1,299.1 $406.4 $10.0 $(229.0)$2,660.0
- --------------------------------------------------------------------------------
Operating Profit
(Loss)(1) $(71.8) $158.5 $115.1 $(37.1) $(11.4) $(2.1) $151.2
- --------------------------------------------------------------------------------
(1)Includes amortization arising from purchase accounting adjustments related
to GM's acquisition of Hughes amounting to $0.8 million in each of the
three-month periods and $1.6 million in each of the six-month periods for the
Satellite Services segment and $4.5 million in each of the three-month
periods and $9.0 million in each of the six-month periods for Other.
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<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.
A dispute currently exists regarding the post-closing adjustments which Hughes
and Raytheon have proposed to one another and related issues regarding the
adequacy of disclosures made by Hughes to Raytheon in the period prior to
consummation of the merger. Hughes and Raytheon are proceeding with the dispute
resolution process. It is possible that the ultimate resolution of the
post-closing financial adjustment and of related disclosure issues may result in
Hughes making a payment to Raytheon that would be material to Hughes. However,
the amount of any payment that either party might be required to make to the
other cannot be determined at this time. Hughes intends to vigorously pursue
resolution of the disputes through the arbitration processes, opposing the
adjustments proposed by Raytheon, and seeking the payment from Raytheon that it
has proposed.
General Electric Capital Corporation ("GECC") and DIRECTV, Inc. entered into
a contract on July 31, 1995, in which GECC agreed to provide financing for
consumer purchases of DIRECTV hardware and related programming. Under the
contract, GECC also agreed to provide certain related services to DIRECTV,
including credit risk scoring, billing and collections services. DIRECTV agreed
to act as a surety for loans complying with the terms of the contract. Hughes
guaranteed DIRECTV's performance under the contract. A complaint and
counterclaim have been filed by the parties in the U.S. District Court for the
District of Connecticut concerning GECC's performance and DIRECTV's obligation
to act as a surety. GECC claims damages from DIRECTV in excess of $140 million.
DIRECTV is seeking damages from GECC in excess of $70 million. Hughes intends to
vigorously contest GECC's allegations and pursue Hughes' own contractual rights
and remedies. Hughes does not believe that the litigation will have a material
adverse impact on Hughes' results of operations or financial position. Pretrial
discovery is not yet completed in the case and no trial date has been set.
As part of a marketing agreement entered into with AOL on June 21, 1999,
Hughes committed to increase its sales and marketing expenditures over the next
three years by approximately $1.5 billion relating to DirecPC/AOL-Plus, DlRECTV,
DlRECTV/AOL TV and DirecDuo.
Hughes Space and Communications International ("HSCI") has a contract with
ICO Global Communications Operations to build the satellites and related
components for a global wireless communications system. Hughes owns
approximately 2.6% of the equity in its parent company, ICO Global
Communications (Holdings) ("ICO"). ICO has indicated in its public disclosure
that it requires substantial additional financing to continue operating its
business and to fund the construction of its communications network. ICO also
has indicated that it currently is attempting to obtain financing through its
existing stockholders, including Hughes, and/or third parties. There can be no
assurance that ICO will be successful in obtaining adequate financing to
continue operating its business or to complete construction of its
communications network. If ICO is unable to obtain the necessary additional
financing, it and its subsidiary would likely be unable to pay the remaining
amounts due to HSCI under the contract. If ICO fails to pay HSCI these remaining
amounts, HSCI could terminate the contract for non-payment. In the event of
non-payment, Hughes would expect to record a pre-tax charge to earnings of
approximately $500.0 million.
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<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 10. Subsequent Event
On July 28, 1999, Galaxy Latin America ("GLA"), Hughes' 70% owned subsidiary,
acquired Galaxy Brasil, Ltda., the exclusive distributor of DIRECTV services in
Brazil, from Tevecap S.A. for approximately $114.0 million plus the assumption
of debt. In connection with the transaction, Tevecap sold its 10% equity
interest in GLA to Hughes and the Cisneros Group, the remaining GLA partners.
Hughes' share of the purchase amounted to approximately $101.1 million and
increased Hughes' ownership of GLA to 77.8%.
On July 6, 1999, as part of the USSB merger, Hughes paid approximately $0.4
billion in cash and issued approximately 22.6 million shares of Class H common
stock to the former USSB shareholders.
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<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 Report on Form 10-Q dated March 31,
1999, and Current Reports on Form 8-K filed subsequent to the filing date for
GM's 1998 Form 10-K. In addition, the following discussion excludes purchase
accounting adjustments related to GM's acquisition of Hughes (see Supplemental
Data beginning on page 64).
This Quarterly Report may contain certain statements that Hughes believes
are, or may be considered to be, "forward-looking statements", within the
meaning of Section 27 A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements generally can
be identified by use of statements that include phrases such as we "believe,"
"expect," "anticipate," "intend," "plan," "foresee" or other similar words or
phrases. Similarly, statements that describe our objectives, plans or goals also
are forward-looking statements. All of these forward-looking statements are
subject to certain risks and uncertainties that could cause our actual results
to differ materially from those contemplated by the relevant forward-looking
statement. The principal important risk factors which could cause actual
performance and future actions to differ materially from forward-looking
statements made herein include economic conditions, product demand and market
acceptance, government action, ability to obtain export licenses, competition,
ability to achieve cost reductions, technological risk, ability to address the
year 2000 issue, interruptions to production attributable to causes outside of
Hughes' control, the success and timeliness of satellite launches, in-orbit
performance of satellites, ability of customers to obtain financing and Hughes'
ability to access capital to maintain its financial flexibility. Additionally,
Hughes and its 81.0% owned subsidiary, PanAmSat Corporation ("PanAmSat"), have
experienced satellite anomalies in the past and may experience satellite
anomalies in the future that could lead to the loss or reduced capacity of such
satellites that could materially affect Hughes' operations. Readers are urged to
consider these factors carefully in evaluating the forward-looking statements.
The forward-looking statements included in this Quarterly Report are made only
as of the date of this Quarterly Report and we undertake no obligation to
publicly update these forward-looking statements to reflect subsequent events or
circumstances.
The financial information presented as of and for the period ended June 30,
1999 reflect the effects of the PRIMESTAR, Tempo Satellite and USSB
transactions, discussed below, from their respective dates of acquisition. These
transactions have been accounted for using the purchase method of accounting;
however, the adjustments made in the June 30, 1999 financial statements reflect
a preliminary allocation of the purchase price for the transactions based upon
information currently available. Adjustments relating to the tangible assets
(i.e., satellites, equipment located on customer premises, etc.), intangible
assets (i.e., licenses granted by the Federal Communications Commission,
customer lists, dealer network, etc.), and accrued liabilities for programming
contracts and leases with above-market rates are estimates pending the
completion of independent appraisals currently in process. Additionally, the
adjustment to recognize the benefit of net operating loss carryforwards of USSB
represents a preliminary estimate pending further review and analysis by the
management of Hughes. These appraisals, valuations and studies are expected to
be completed by December 31, 1999. Accordingly, the final purchase price
allocations may be different from the amounts reflected herein.
General
In 1998, PanAmSat adopted a comprehensive satellite expansion and restoration
plan pursuant to which PanAmSat would expand its fleet of satellites in 1999 and
2000. The additional satellites are intended to meet the expected demand for
additional satellite capacity, replace capacity affected by satellite anomalies,
and provide added backup to existing capacity. In connection with the plan,
seven satellites are under construction by Hughes Space and Communications
Company ("HSC"). As a result of manufacturing delays being experienced by HSC,
however, it is expected that there will be delays in the launch of these
satellites. PanAmSat now expects to launch one additional satellite in 1999,
followed by five satellites in 2000 and one in 2001. It is expected that these
delays will result in 1999 revenues and earnings at PanAmSat that are
significantly lower than previously anticipated. A substantial portion of these
revenues and earnings previously anticipated in 1999 are expected to be
recognized in future years after the satellites commence commercial service.
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<PAGE>
HUGHES ELECTRONICS CORPORATION
On February 24, 1999, the Department of Commerce notified Hughes that it
intended to deny a U.S. government export license Hughes was required to obtain
in connection with a contract with Asia-Pacific Mobile Telecommunications
Satellite Pte. Ltd. ("APMT") for the provision of a satellite-based mobile
telecommunications system. As a result, APMT and Hughes terminated the contract
on April 9, 1999, resulting in a pre-tax charge to Hughes' earnings of $92
million in the first quarter of 1999. This charge represents the write-off of
receivables and inventory, with no alternative use, related to the contract.
Hughes had maintained a lawsuit against the U.S. government since September
1973 regarding the U.S. government's infringement and use of a Hughes patent
covering "Velocity Control and Orientation of a Spin Stabilized Body,"
principally satellites (the "Williams Patent"). On April 7, 1998, the U.S. Court
of Appeals for the Federal Circuit reaffirmed earlier decisions in the Williams
Patent case, including an award of $114.0 million in damages, plus interest. In
March 1999, Hughes received and recognized as income a $154.6 million payment
from the U.S. government as a final settlement of the suit.
There is a pending grand jury investigation into whether Hughes should be
accused of criminal violations of the export control laws arising out of the
participation of two of its employees on a committee formed to review the
findings of Chinese engineers regarding the failure of a Long March rocket in
China in 1996. Hughes is also subject to the authority of the State Department
to impose sanctions for non-criminal violations of the Arms Export Control Act.
The possible criminal and/or civil sanctions could include fines as well as
debarment from various export privileges and participation in government
contracts. Hughes does not expect the grand jury investigation or State
Department review to result in a material adverse effect upon its business.
However, there can be no assurance as to those conclusions. In addition, a
congressional committee chaired by Representative Cox released a report in May
1999 containing negative commentary about the compliance of U.S. satellite
manufacturers, including Hughes, with export control laws. Hughes is uncertain
of the impact that this report will have on the satellite manufacturing and
launching industries. Many of Hughes' satellite launches, including those of
PanAmSat, are scheduled for non-U.S. launch providers. We cannot assure you that
future satellite launches by non-U.S. launch providers will not be adversely
affected by this investigation and report, including the possibility of
significant launch delays.
On May 11, 1999, it was announced that Hughes will collaborate with America
Online ("AOL") on a new service that will combine digital satellite television
programming from DIRECTV with AOL's new interactive television Internet service.
Hughes Network Systems ("HNS") will design and build the initial dual purpose
DIRECTV/AOL receiver equipment. The new service will be suited for both frequent
Internet users and the mass market consumer who wants to connect to the
Internet. On June 21, 1999, Hughes announced a more extensive strategic alliance
with AOL to develop and market digital entertainment and Internet services
nationwide. The new alliance is expected to accelerate subscriber growth and
revenue-per-subscriber for the DIRECTV and DirecPC services, as well as expand
the subscriber base for AOL's developing AOL TV and AOL-Plus broadband services.
As part of the alliance, Hughes and AOL plan to jointly develop new content and
interactive services for U.S. and international markets. Additionally, an
extensive cross-marketing initiative will be instituted to market each company's
products through their respective retail outlets and to their respective
subscribers. As part of its marketing initiative with AOL, Hughes committed to
increase its sales and marketing expenditures over the next three years by
approximately $1.5 billion relating to its DirecPC/AOL-Plus, DlRECTV,
DlRECTV/AOL TV and DirecDuo products and services.
As part of the alliance, AOL invested $1.5 billion in shares of General
Motors Series H 6.25% Automatically Convertible Preference Stock. General Motors
immediately invested the $1.5 billion received from AOL in shares of Hughes
Series A Preferred Stock designed to correspond to the financial terms of the
General Motors Series H preference stock. Dividends on the Hughes Series A
Preferred Stock are payable to General Motors quarterly at an annual rate of
6.25%. See further discussion in Notes 4 and 5 to the financial statements.
Hughes Space and Communications International ("HSCI") has a contract with
ICO Global Communications Operations to build the satellites and related
components for a global wireless communications system. Hughes owns
approximately 2.6% of the equity in its parent company, ICO Global
Communications (Holdings) ("ICO"). ICO has indicated in its public disclosure
that it requires substantial additional financing to continue operating its
business and to fund the construction of its communications network. ICO also
has indicated that it currently is attempting to obtain financing through its
existing stockholders, incluidng Hughes, and/or third parties. There can be no
assurance that ICO will be successful in obtaining adequate financing to
continue operating its business or to complete the construction of its
ommunications network. If ICO is unable to obtain the necessary additional
financing, it and its subsidiary would likely be unable to pay the remaining
amounts due to HSCI under the contract. If ICO fails to pay HSCI these remaining
amounts, HSCI could terminate the contract for non-payment. In the event of
non-payment, Hughes would expect to record a pre-tax charge to earnings of
approximately $500.0 million.
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HUGHES ELECTRONICS CORPORATION
Results of Operations
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Revenues. Second quarter 1999 revenues increased 29.7% to $1,776.0
million compared with $1,369.0 million for the second quarter of 1998. The
increase reflects continued subscriber growth for the DIRECTV(R) businesses,
revenues from the medium-power direct-to-home business ("PRIMESTAR") and the
premium movie channels and pay-per-view services business of United States
Satellite Broadcasting Company, Inc. ("USSB"), increased sales of DIRECTV(TM)
receiver equipment by HNS and increased PanAmSat revenues from operating leases.
These increases were partially offset by a decrease in Satellite Systems segment
revenues primarily due to contract revenue adjustments and delayed revenue
recognition that resulted from increased costs and schedule delays on several
new product lines.
The Direct-To-Home Broadcast segment's second quarter 1999 revenues more than
doubled to $870.2 million from $401.5 million in the second quarter of 1998, an
increase of 116.7%. The increase resulted from continued strong subscriber
growth and higher average monthly revenue per subscriber, as well as added
revenues from the PRIMESTAR and USSB businesses. Domestic DIRECTV contributed
significantly to this growth with quarterly revenues of $778 million, a 111.4%
increase over last year's second quarter revenues of $368 million. With its
best-ever second quarter, domestic DIRECTV added 369,000 net new subscribers,
excluding subscribers added through the PRIMESTAR and USSB transactions,
compared to 227,000 net new subscribers for the second quarter of 1998, a 63%
increase. Total domestic DIRECTV(R) subscribers, including 2,244,000 subscribers
acquired as part of the PRIMESTAR and USSB transactions, grew to 7,375,000 as of
June 30, 1999. Hughes' Latin American DIRECTV businesses which include Hughes'
subsidiary, Galaxy Latin America ("GLA"), more than doubled revenues to $77
million for the second quarter of 1999 from $32 million for the second quarter
of 1998, an increase of 140.6%. This increase in revenues was due to continued
subscriber growth and additional revenues resulting from the consolidation of
SurFin Ltd. ("SurFin"), beginning in November 1998, and Grupo Galaxy Mexicana,
S.A. de C.V. ("GGM"), beginning in February 1999. GLA added 47,000 net new
subscribers for the second quarter, compared to 49,000 net new subscribers
acquired for the same period last year, bringing the total cumulative DIRECTV
subscribers in Latin America to 601,000 as of June 30, 1999.
The Satellite Services segment's second quarter 1999 revenues increased to
$200.4 million compared with $191.1 million for the prior year. The 4.9%
increase in revenues resulted primarily from the commencement of new service
agreements for full-time video distribution services and growth in data and
Internet-related services.
For the second quarter of 1999, revenues for the Satellite Systems segment
decreased to $553.8 million from revenues of $674.8 million for the same period
in 1998. This decrease in revenues was principally due to contract revenue
adjustments and delayed revenue recognition that resulted from increased costs
and schedule delays on several new product lines.
Second quarter 1999 revenues for the Network Systems segment were $341.1
million compared with $221.7 million for the same period last year, an increase
of 53.9%. This increase in revenues was primarily due to higher sales of DIRECTV
receiver equipment.
Costs and Expenses. Selling, general and administrative expenses increased to
$548.5 million in the second quarter of 1999 from $359.2 million for the same
period of 1998. The increase resulted primarily from higher marketing and
subscriber acquisition costs in the Direct-To-Home Broadcast segment, added
costs from the PRIMESTAR and USSB businesses, and the consolidation of GGM and
SurFin. The increase in depreciation and amortization expense to $159.8 million
in the second quarter of 1999 from $100.2 million in the same period of 1998
resulted primarily from higher depreciation due to increased capital
expenditures for property and equipment, additions to PanAmSat's satellite fleet
and additional goodwill amortization of $16.1 million that resulted from the
PRIMESTAR, USSB and GGM transactions.
Operating Profit (Loss). Hughes incurred an operating loss of $96.6 million
for the second quarter of 1999 compared with operating profit, on the same
basis, of $78.2 million for the second quarter of 1998. The operating loss for
the second quarter of 1999 was principally a result of a pre-tax charge, after
intercompany eliminations, of $125.0 million that resulted from increased
development costs and schedule delays experienced by the Satellite Systems
segment and higher depreciation and amortization expenses discussed above.
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HUGHES ELECTRONICS CORPORATION
The operating loss in the Direct-To-Home Broadcast segment for the second
quarter of 1999 was $68.4 million compared with an operating loss of $40.2
million for the second quarter of 1998. The increased operating loss for the
second quarter of 1999 was principally due to increased marketing and subscriber
acquisition costs and increased depreciation and amortization costs related to
the acquisitions of PRIMESTAR and USSB, partially offset by increased subscriber
revenues discussed above. Domestic DIRECTV reported an operating loss for the
second quarter of 1999 of $39 million compared with an operating loss of $7
million for the second quarter of 1998. GLA's operating loss for second quarter
of 1999 was $23 million compared with an operating loss of $32 million for the
same period of 1998.
DIRECTV's cost of acquiring new subscribers has increased due to, among other
things, incentives granted by USSB to manufacturers of DIRECTV receiving
equipment which were assumed by DIRECTV in connection with its merger with USSB
in May 1999. Subscriber acquisition costs are expected to increase further due
to increased incentives to dealers and consumers. In addition, in connection
with the AOL alliance, DIRECTV's subscriber acquisition costs will increase with
respect to both the DIRECTV service and the new DIRECTV/AOL TV service. In the
future, subscriber acquisition costs will continue to be largely determined by
the competitive environment.
The Satellite Services segment's operating profit for the second quarter of
1999 increased 11.8% to $83.2 million from $74.4 million for the same period of
1998. The increase in operating profit was primarily due to the increase in
revenues discussed above, offset by increased depreciation due to additions to
the satellite fleet. Also affecting the comparison was a second quarter 1998
provision for losses related to the May 1998 failure of PanAmSat's Galaxy IV
satellite.
The Satellite Systems segment reported an operating loss for the second
quarter of 1999 of $133.0 million compared to operating profit of $60.0 million
and operating profit margin of 8.9% for the second quarter of 1998. The
operating loss for the second quarter of 1999 resulted from a pre-tax charge,
before intercompany eliminations, of $178.0 million that resulted from increased
development costs and schedule delays on several new product lines.
The Network Systems segment's operating income for the second quarter of 1999
was $11.3 million compared with an operating loss of $25.2 million for the
second quarter of 1998. The increase in operating income for the second quarter
of 1999 was primarily due to higher sales of DIRECTV receiver equipment and a
second quarter 1998 provision of $26.0 million associated with the bankruptcy
filing by a customer.
Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA").
EBITDA is defined as operating profit (loss), plus depreciation and
amortization. EBITDA is not presented as an alternative measure of operating
results or cash flow from operations, as determined in accordance with generally
accepted accounting principles. However, Hughes believes EBITDA is a meaningful
measure of the company's performance and that of its business units. EBITDA is a
performance measurement commonly used by other communications, entertainment and
media service providers and therefore can be used to analyze and compare Hughes'
financial performance to that of its competitors. EBITDA is also a measurement
used for certain of Hughes' debt covenants and is used by rating agencies in
determining credit ratings. EBITDA does not give effect to cash used for debt
service requirements and thus does not reflect funds available for investment in
the business of Hughes, dividends or other discretionary uses. EBITDA margin is
calculated by dividing EBITDA by total revenues.
For the second quarter of 1999, EBITDA was $63.2 million versus $178.4
million for the same period in 1998. EBITDA margin on the same basis was 3.6%
for the second quarter of 1999 compared to 13.0% for the second quarter of 1998.
The Direct-To-Home Broadcast segment had a negative EBITDA for the second
quarter of 1999 of $6.8 million compared with negative EBITDA of $16.7 million
for the second quarter of 1998. Domestic DIRECTV's EBITDA was $13 million for
the second quarter of 1999 compared to $12 million for the second quarter of
1998. The slight increase in domestic DIRECTV's EBITDA was due to EBITDA
contributions from the USSB and PRIMESTAR businesses, which were mostly offset
by higher marketing and advertising expenses. GLA reported negative EBITDA for
the second quarter of 1999 of $13 million compared to negative EBITDA of $26
million for the same period of 1998. The improvement in GLA's EBITDA for the
second quarter of 1999 was due to higher revenue growth and EBITDA contributions
resulting from the consolidation of SurFin.
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HUGHES ELECTRONICS CORPORATION
For the Satellite Services segment, EBITDA for the second quarter of 1999 was
$151.0 million compared with $133.1 million for the same period of last year.
EBITDA margin increased to 75.3% versus 69.6% for last year's second quarter.
The increases in EBITDA and EBITDA margin were principally due to the higher
revenues discussed above and lower satellite leaseback expenses resulting from
the exercise of certain early buy-out options under sale-leaseback agreements
during the second quarter of 1999. Also affecting the comparison was a second
quarter 1998 provision for losses related to the May 1998 failure of PanAmSat's
Galaxy IV satellite.
The Satellite Systems segment had a negative EBITDA of $119.6 million for the
second quarter of 1999, compared with EBITDA and EBITDA margin of $71.5 million
and 10.6% for the second quarter of 1998. The decrease in EBITDA for the second
quarter of 1999 was due to a second quarter 1999 pre-tax charge, before
intercompany eliminations, of $178.0 discussed above.
Network Systems segment EBITDA grew to $25.0 million for the second quarter
of 1999, compared to a negative EBITDA of $15.3 million for the second quarter
of 1998. EBITDA margin for the second quarter of 1999 was 7.3%. The increase in
EBITDA and EBITDA margin was primarily due to higher sales of DIRECTV receiver
equipment and a second quarter 1998 provision of $26.0 million associated with
the bankruptcy filing by a customer.
Interest Income and Expense. Interest income decreased to $4.9 million for
the second quarter of 1999 compared with $30.6 million for the second quarter of
1998. The decrease in interest income was due to lower cash balances in the
second quarter of 1999 compared to 1998. Interest expense increased $9.5 million
for the second quarter of 1999 from the same period in 1998 due to the increase
of $184.2 million in borrowings.
Other, net. Other, net for the second quarter of 1999 reflects losses from
unconsolidated subsidiaries of $34.1 million that are primarily attributable to
equity investments in DIRECTV Japan and American Mobile Satellite Corporation
("AMSC"). The second quarter 1998 amount reflects losses from unconsolidated
subsidiaries of $22.0 million, primarily related to DIRECTV Japan and AMSC, and
$17.5 million of estimated losses associated with bankruptcy filings by two
unaffiliated customers.
Income Taxes. In the second quarter of 1999, Hughes recorded an income tax
benefit at an effective income tax rate of 30.0% while in the second quarter of
1998, Hughes recorded an income tax provision of 32.9%.
Accounting Change. In 1998, Hughes adopted American Institute of Certified
Public Accountants Statement of Position ("SOP") 98-5, Reporting on the Costs of
Start-Up Activities. SOP 98-5 requires that all start-up costs previously
capitalized be written off and recognized as a cumulative effect of accounting
change, net of taxes, as of the beginning of the year of adoption. On a
prospective basis, these types of costs are required to be expensed as incurred.
The unfavorable cumulative effect of this accounting change was $9.2 million
after-tax, or $0.02 per share of GM Class H common stock in the first quarter of
1998.
Earnings (Loss). Second quarter 1999 loss and loss per share, including the
effect of preferred stock dividends, were $92.3 million and $0.23, respectively,
compared to second quarter 1998 earnings and earnings per share of $56.1 million
and $0.14, respectively.
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HUGHES ELECTRONICS CORPORATION
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Revenues. For the first six months of 1999, revenues increased 21.3% to
$3,227.8 million compared to $2,660.0 million for the first six months of 1998.
This increase in revenues was primarily the result of continued subscriber
growth in the DIRECTV businesses, revenues from PRIMESTAR and USSB which were
acquired on April 28, 1999 and May 20, 1999, respectively, increased sales of
DIRECTV receiver equipment by HNS and increased PamAmSat operating lease
revenues. These increases were partially offset by a decrease in HSC revenues
principally due to contract revenue adjustments and delayed revenue recognition
that resulted from increased costs and schedule delays on several new product
lines.
Direct-To-Home Broadcast segment revenues for the first six months of 1999
increased 80.7% to $1,426.8 million from $789.4 million for the same period of
1998. The increase resulted from continued record subscriber growth and higher
average monthly revenue per subscriber, as well as added revenues from the
PRIMESTAR and USSB businesses.
For the first six months of 1999, the Satellite Services segment's revenues
increased to $393.9 million compared with $384.1 million for the prior year. The
slight increase in revenues resulted primarily from growth in data and
Internet-related services.
Revenues for the first six months of 1999 for the Satellite Systems segment
decreased to $1,184.1 million from revenues of $1,299.1 million for the same
period in 1998. This decrease in revenues was principally due to the contract
revenue adjustments and delayed revenue recognition discussed above.
Network Systems segment revenues for the first six months of 1999 were $572.0
million compared with $406.4 million for the same period last year, an increase
of 40.7%. This increase in revenues was primarily due to higher sales of DIRECTV
receiver equipment.
Costs and Expenses. Selling, general and administrative expenses increased to
$953.3 million for the first six months of 1999 from $661.8 million for the same
period of 1998. The increase resulted primarily from higher marketing and
subscriber acquisition costs in the Direct-To-Home Broadcast segment, added
costs for the PRIMESTAR and USSB businesses, and the consolidation of GGM and
SurFin. The increase in depreciation and amortization expense to $282.8 million
for the first six months of 1999 from $197.9 million for the same period of 1998
resulted primarily from higher depreciation due to additions to PanAmSat's
satellite fleet, increased goodwill amortization related to the 1998 purchase of
an additional 9.5% interest in PanAmSat and amortization of goodwill and
depreciation for PRIMESTAR, USSB and GGM.
Operating Profit (Loss). Hughes incurred an operating loss of $133.4 million
for the first six months of 1999 compared with operating profit, on the same
basis, of $161.8 million for the first six months of 1998. The operating loss
for the first six months of 1999 was principally a result of the $125.0 million
pre-tax charge at the Satellite Systems segment, $84.9 million of higher
depreciation and amortization expense discussed above and a one-time pre-tax
charge of $92.0 million resulting from the termination of the Asia-Pacific
Mobile Telecommunications Satellite Pte. Ltd. ("APMT") contract due to export
licenses not being issued.
The operating loss in the Direct-To-Home Broadcast segment for the first six
months of 1999 was $91.8 million compared with an operating loss of $71.8
million for the first six months of 1998. The increase in operating loss in 1999
was principally due to increased programming, marketing and subscriber
acquisition costs and increased depreciation and amortization costs that
resulted from the acquisition of PRIMESTAR and USSB, partially offset by
increased subscriber revenues discussed above.
The Satellite Services segment operating profit for the first six months of
1999 was $162.3 million compared to $160.1 million for the same period of 1998.
The slight improvement in operating profit was primarily due to the increase in
revenues discussed above, offset by higher depreciation due to additions to the
satellite fleet. Also affecting the comparison was a second quarter 1998
provision for losses related to the May 1998 failure of PanAmSat's Galaxy IV
satellite.
The Satellite Systems segment reported an operating loss for the first six
months of 1999 of $147.4 million compared to operating profit of $115.1 million
and operating profit margin of 8.9% for the first six months of 1998. The
operating loss for the first six months of 1999 resulted from a pre-tax charge,
before intercompany eliminations, of $178.0 million that resulted from increased
development costs and schedule delays on several new product lines and a
one-time pre-tax charge of $81.0 million resulting from the termination of the
APMT contract.
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HUGHES ELECTRONICS CORPORATION
The Network Systems segment's operating loss for the first six months of 1999
was $6.5 million compared with an operating loss of $37.1 million for the first
six months of 1998. The lower operating loss was primarily due to higher sales
of DIRECTV receiver equipment and satellite-based mobile telephony systems and a
second quarter 1998 provision of $26.0 million associated with the bankruptcy
filing by a customer, partially offset by a one-time pre-tax charge in 1999 of
$11.0 million resulting from the termination of the APMT contract.
EBITDA. For the first six months of 1999, EBITDA was $149.4 million versus
$359.7 million for the same period in 1998. EBITDA margin on the same basis was
4.6% for the first six months of 1999 compared to 13.5% for the first six months
of 1998.
The Direct-To-Home Broadcast segment had a negative EBITDA for the first six
months of 1999 of $2.9 million compared with negative EBITDA of $25.8 million
for the first six months of 1998. This improvement in EBITDA for the first six
months of 1999 was primarily due to continued strong subscriber growth in the
domestic DIRECTV business, the contributions from PRIMESTAR and USSB from their
dates of acquisition and the consolidation of SurFin.
The Satellite Services segment's EBITDA for the first six months of 1999 was
$296.9 million compared with $273.3 million for the same period of last year.
EBITDA margin increased to 75.4% versus 71.2% for last year's first six months.
The increases in EBITDA and EBITDA margin were principally due to higher
revenues discussed above, and lower satellite leaseback expenses resulting from
the 1999 exercise of certain early buy-out options under sale-leaseback
agreements. Also affecting the comparison was a second quarter 1998 provision
for losses related to the May 1998 failure of PanAmSat's Galaxy IV satellite.
The Satellite Systems segment had a negative EBITDA of $121.0 million for the
first six months of 1999, compared with EBITDA and EBITDA margin of $137.3
million and 10.6% for the first six months of 1998. The decrease in EBITDA for
the first six months of 1999 was due to the second quarter 1999 $178.0 million
pre-tax charge, before intercompany eliminations, discussed above and the first
quarter 1999 pre-tax charge of $81.0 million that resulted from the termination
of the APMT contract.
Network Systems segment EBITDA increased to $19.1 million for the first six
months of 1999, compared to a negative EBITDA of $18.7 million for the first six
months of 1998. EBITDA margin for the first six months of 1999 was 3.3%. The
increase in EBITDA and EBITDA margin for the first six months of 1999 was
primarily due to the higher sales discussed above, partially offset by the first
quarter 1999 pre-tax charge of $11.0 million related to the termination of the
APMT contract under which HNS was providing ground network equipment and
handsets. The second quarter of 1998 included a $26.0 million provision
associated with the bankruptcy filing by a customer.
Interest Income and Expense. Interest income decreased to $18.5 million for
the first six months of 1999 compared with $68.1 million for the first six
months of 1998. The decrease in interest income was due to lower cash balances
for the first six months of 1999 compared to 1998. Interest expense increased
$13.4 million for the first six months of 1999 from the same period in 1998 due
to the increase of $184.2 million in borrowings.
Other, net. Other, net for the first six months of 1999 reflects a $154.6
million pre-tax gain that resulted from the settlement of the Williams Patent
infringement case offset by losses from unconsolidated subsidiaries of $64.7
million attributable principally to equity investments in DIRECTV Japan and
AMSC. The first six months of 1998 includes losses from unconsolidated
subsidiaries of $50.9 million, primarily related to DIRECTV Japan and AMSC and
$17.5 million of losses associated with bankruptcy filings by two unaffiliated
customers.
Income Taxes. For the first six months of 1999, Hughes recorded an income
tax benefit at an effective income tax rate of 19.7%, while Hughes recorded an
income tax provision at an effective income tax rate of 35.4% for the first six
months of 1998. The effective income tax rates in each period benefited from the
favorable resolution of tax contingencies; however, the lower effective income
tax rate for 1999 resulted from the effect of the benefits on lower expected
pre-tax earnings for the year compared to 1998.
Earnings (Loss). Loss and loss per share, including the effect of preferred
stock dividends, for the first six months ended June 30, 1999 were $14.0 million
and $0.04, respectively, compared to earnings and earnings per share of $100.6
million and $0.25, respectively, for the comparable period in 1998.
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HUGHES ELECTRONICS CORPORATION
Liquidity and Capital Resources
Cash and Cash Equivalents. Cash and cash equivalents were $858.7 million at
June 30, 1999 compared to $1,342.1 million at December 31, 1998. The $483.4
million decrease was due to increased investments in companies, net of cash
acquired, which included the acquisition of PRIMESTAR and Tempo Satellite assets
(see "Acquisitions"), the early buy-out of a satellite sale-leaseback by
PanAmSat, additional capital expenditures for satellites and property and
equipment and general working capital requirements, partially funded by GM's
$1.5 billion investment in Hughes as part of the alliance with AOL and the
$154.6 million received related to the settlement of the Williams Patent
infringement case.
Cash used in operating activities for the first six months of 1999 was
$15.3 million, compared to cash provided by operating activities of $157.1
million in the same period of 1998. This decrease was due primarily to the
decrease in net income for the first six months of 1999 and an increase in
prepaid dealer commissions and prepaid marketing expenditures of the DIRECTV
businesses.
Net cash used in investing activities was $2,476.2 million for the six months
ended June 30, 1999 and $1,393.7 million for the same period in 1998. The
substantial increase in 1999 compared to 1998 resulted from increased
investments in companies, net of cash acquired, which included the acquisition
of PRIMESTAR and the Tempo Satellite assets (see "Acquisitions"), and an
increase in capital expenditures for satellites and property and equipment.
Net cash provided by financing activities was $2,008.1 million for the first
six months of 1999, compared with $45.6 million for the same period in 1998. The
substantial increase was primarily due to an increase in net borrowings compared
to 1998 and proceeds received in 1999 from the issuance of preferred stock to GM
related to the AOL transaction.
Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of
current assets to current liabilities) at June 30, 1999 and December 31, 1998
was 1.37 and 1.91, respectively. Working capital decreased by $717.0 million to
$1,119.9 million at June 30, 1999 from $1,836.9 million at December 31, 1998.
Common Stock Dividend Policy and Use of Cash. Since the completion of the
recapitalization of Hughes in late 1997, the GM Board has not paid, and does not
currently intend to pay in the foreseeable future, cash dividends on its GM
Class H common stock. Similarly, since such time, Hughes has not paid dividends
on its common stock to GM and does not currently intend to do so in the
foreseeable future. Future Hughes earnings, if any, are expected to be retained
for the development of the businesses of Hughes. Expected cash requirements for
the remainder of 1999 relate to capital expenditures for property and equipment
and expenditures for additional satellites of approximately $1.0 billion, the
early buy-out of satellite sale-leasebacks, the funding of business
acquisitions, payment of preferred stock dividends, additional equity
investments and increases in working capital. These cash requirements are
expected to be funded from a combination of existing cash balances, amounts
available under existing credit facilities and debt offerings, as needed. Also,
although Hughes may be required to make a cash payment to or receive a cash
payment from Raytheon, the amount of a cash payment to or from Raytheon, if any,
is not determinable at this time. Additionally, DIRECTV Japan is in the process
of seeking shareholder approval of its funding needs through March 2000. At this
time, not all shareholders have agreed to fund their pro rata share of the
capital call. In the event that all shareholders do not all elect to continue
funding the business, remaining shareholders, including Hughes, could face
increased future cash requirements.
Debt and Credit Facilities. At June 30, 1999, Hughes' 59.1% owned subsidiary,
SurFin, had a total of $184.2 million outstanding under a $400.0 million
unsecured revolving credit facility expiring in June 2002.
In January 1998, PanAmSat issued five, seven, ten and thirty-year notes
totaling $750.0 million. The proceeds received were used by PanAmSat to repay
$600.0 million of outstanding borrowings.
PanAmSat maintains a $500.0 million multi-year revolving credit facility and
a $500.0 million commercial paper program. The multi-year revolving credit
facility provides for a commitment through December 24, 2002. Borrowings under
the credit facility and commercial paper program are limited to $500.0 million
in the aggregate and are expected to be used to fund PanAmSat's satellite
expansion program. No amounts were outstanding under the credit facility at June
30, 1999. $85.0 million was outstanding under the commercial paper program at
June 30, 1999.
At June 30, 1999, other long-term debt of $21.6 million was outstanding.
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HUGHES ELECTRONICS CORPORATION
Hughes has $1.0 billion of unused credit available under two unsecured
revolving credit facilities, consisting of a $750.0 million multi-year facility
and a $250.0 million 364-day facility. The multi-year credit facility provides
for a commitment of $750.0 million through December 5, 2002 and the 364-day
credit facility provides for a commitment of $250.0 million through December 1,
1999. No amounts were outstanding under either facility at March 31, 1999. These
facilities provide backup capacity for Hughes' $1.0 billion commercial paper
program. $383.0 million was outstanding under the commercial paper program at
June 30, 1999.
Hughes has filed a shelf registration statement with the Securities and
Exchange Commission with respect to an issuance of up to $2.0 billion of debt
securities from time to time. Subject to market conditions, Hughes expects to
issue up to $1.0 billion of these securities in the third quarter of 1999.
Hughes will use these funds principally to repay commercial paper borrowings
incurred in connection with recent acquisitions and to fund short-term working
capital requirements.
Acquisitions. On July 28, 1999, GLA, Hughes' 70% owned subsidiary, acquired
Galaxy Brasil, Ltda., the exclusive distributor of DIRECTV services in Brazil,
from Tevecap S.A. for approximately $114.0 million plus the assumption of debt.
In connection with the transaction, Tevecap sold its 10% equity interest in GLA
to Hughes and Cisneros Group, the remaining GLA partners. Hughes' share of the
purchase amounted to approximately $101.1 million and increased Hughes'
ownership of GLA to 77.8%.
On January 22, 1999, Hughes agreed to acquire PRIMESTAR's 2.3 million
subscriber medium-power direct-to-home satellite business and the high-power
satellite assets and direct-broadcast satellite orbital frequencies of Tempo
Satellite, a wholly-owned subsidiary of TCI Satellite Entertainment, Inc. On
April 28, 1999, the acquisition of PRIMESTAR's direct-to-home business was
completed. The purchase price consisted of $1.1 billion in cash and 4.9 million
shares of GM Class H common stock, for a total purchase price of $1.3 billion,
based on the average market price of $47.87 per share of Class H common stock at
the time the acquisition agreement was signed. The purchase price will be
adjusted based upon the final adjusted net working capital of PRIMESTAR at the
date of closing. The purchase price for the Tempo Satellite assets consisted of
$500 million in cash. Of this purchase price, $150 million was paid on March 10,
1999 for a satellite that has not yet been launched and the remaining $350
million was paid on June 4, 1999 for an in-orbit satellite and 11 related
satellite orbital frequencies.
In December 1998, Hughes agreed to acquire all of the outstanding capital
stock of USSB. USSB provided direct-to-home premium satellite programming in
conjunction with DIRECTV's basic programming service. The purchase price,
consisting of cash and GM Class H common stock, was approximately $1.6 billion,
consisting of approximately $360 million in cash and 22.6 million shares of
Class H common stock. The USSB acquisition was closed on May 20, 1999 with the
payment of cash and delivery of shares made to the former USSB shareholders in
July 1999.
The number of shares issued as part of the PRIMESTAR acquisition and the
number of shares issued in July 1999 as part of the USSB merger have been
included in the calculation of both the numerator and denominator of the
fraction used to calculate the Available Separate Consolidated Net Income (Loss)
("ASCNI") of Hughes. See further discussion of ASCNI in Note 4 to the financial
statements.
New Accounting Standards. In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133 requires all derivatives to be recorded as either
assets or liabilities and the instruments to be measured at fair value.
Gains or losses resulting from changes in the values of those derivatives are
to be recognized immediately or deferred depending on the use of the
derivative and whether or not it qualifies as a hedge. Hughes plans to adopt
SFAS No. 133 by January 1, 2001, as required. Management is currently
assessing the impact of this statement on Hughes' results of operations and
financial position.
- 61 -
<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 is substantially complete. All
critical systems have been identified in this phase and are the primary
focus of the project teams. Critical systems identified requiring
remediation include satellite control and communication software,
broadcast systems and systems utilized in customer service/billing,
engineering and manufacturing operations. Hughes has also identified the
need to upgrade network control software for customers who have
maintenance agreements with Hughes. Hughes' in-orbit satellites do not
have date-dependent processing.
(4)Remediation - modify, repair or replace categorized systems. Remediation
tasks have been completed on many systems, with the exception of the
following: satellite control and communication software, the customer
service call center purchased in April 1999 from Tele-Communications,
Inc., upgrades of software used in the broadcast control system, including
the uplinking and encoding systems, customer service systems and
laboratory system and upgrades of network and telecommunication
equipments, which are expected to be completed in the fourth quarter of
1999. The remediation tasks for the satellite ground control software and
ground stations delivered by Hughes are being coordinated with Raytheon,
the supplier.
(5)Testing - test remediated systems to assure normal function when placed
in their original operating environment and further test for Year 2000
compliance. Overall testing is completed at approximately the same time as
remediation due to the overlap of the remediation and testing phases.
Testing is currently underway and is expected to be a primary focus of the
project teams over the next six months. Hughes expects to complete this
phase shortly after the remediation phase, with on-going review and
follow-up.
(6)Implementation - once a remediated system and its interfaces have been
successfully tested, the system will be put into its operating
environment. A large number of remediated systems have already been put
back into operations. The remaining remediated systems will be put into
operations during 1999.
(7)Contingency Planning - development and execution of plans that narrow the
focus on specific areas of significant concern and concentrate resources
to address them. All Year 2000 critical systems are expected to be Year
2000 compliant by the end of 1999. However, Hughes is in the process of
developing contingency plans to address the risk of any system not being
Year 2000 compliant and expects to complete such plans in the third
quarter of 1999. Hughes currently believes that the most reasonably likely
worst case scenario is a temporary loss of functionality in satellite
control and communication software for the HSC built satellites. The loss
of real-time satellite control software functionality for these satellites
would be addressed through the use of back-dated processors or through
manual procedures. These alternative procedures would restore any loss in
functionality but could result in slightly higher operating costs until
the Year 2000 problems are corrected.
- 62 -
<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 $11.0 million during the first six
months of 1999 and approximately $7.0 million during 1998, related to the
assessment of, and on-going efforts in connection with, its Year 2000 program.
Future spending for system remediation and testing, including estimated Year
2000 remediation costs related to PRIMESTAR, are currently estimated to be from
$15 million to $17 million, with the majority of the expense expected to be
incurred early in the fourth quarter of 1999. Each Hughes operating company is
funding its respective Year 2000 efforts with current and future operating cash
flows.
Hughes has mailed Year 2000 verification request letters to its suppliers and
other third parties and is coordinating efforts to assess and reduce the risk
that Hughes' operations could be adversely affected by the failure of these
third parties to adequately address the Year 2000 issue. A high percentage of
the third parties have replied and a large number of Hughes' third parties'
systems are Year 2000 compliant or are expected to be Year 2000 compliant in a
timely manner. For those third party systems that are not yet Year 2000
compliant, Hughes will continue to identify action plans or alternatives to meet
Hughes' requirements.
In view of the foregoing, Hughes does not currently anticipate that it will
experience a significant disruption of its business as a result of the Year 2000
issue. However, there is still uncertainty about the broader scope of the Year
2000 issue as it may affect Hughes and third parties that are critical to
Hughes' operations. For example, lack of readiness by electrical and water
utilities, financial institutions, governmental agencies or other providers of
general infrastructure could pose significant impediments to Hughes' ability to
carry on its normal operations. If the modifications and conversions required to
make Hughes Year 2000 ready are not made or are not completed on a timely basis
and in the event that Hughes is unable to implement adequate contingency plans
in the event that problems are encountered internally or externally by third
parties, the resulting problems could have a material adverse effect on Hughes'
results of operations and financial condition.
Security Ratings
In June 1999, Standard and Poor's Rating Services ("S&P") affirmed Hughes'
long-term debt rating of BBB. The S&P BBB credit rating indicates the issuer has
adequate capacity to pay interest and repay principal. Additionally, S&P
affirmed its A-2 rating on Hughes' commercial paper. The A-2 commercial paper
rating is the third highest category available and indicates a strong degree of
safety regarding timely payment. S&P's ratings outlook for Hughes remains
developing.
In April 1999, Moody's Investors Service ("Moody's") lowered Hughes'
long-term credit rating from Baa1 to Baa2, which was subsequently affirmed in
June 1999. The Baa2 rating for senior debt indicates medium-grade obligations
with adequate likelihood of interest and principal payment and principal
security. Moody's ratings for Hughes' commercial paper remained unchanged at
P-2. The rating is the second highest rating available and indicates that the
issuer has a strong ability for repayment relative to other issuers.
Debt ratings by the various rating agencies reflect each agency's opinion of
the ability of issuers to repay debt obligations punctually. The lowered rating
reflects increased financial leverage at Hughes resulting from a significant
acceleration of its growth initiatives, including the PRIMESTAR, Tempo Satellite
and USSB transactions, PanAmSat's satellite deployment and restoration plan, the
previously announced increased development costs and schedule delays experienced
by HSC and the investment in Spaceway. Lower ratings generally result in higher
borrowing costs. A security rating is not a recommendation to buy, sell, or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each rating should be evaluated independently of
any other rating.
- 63 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
Supplemental Data
The financial statements reflect the application of purchase accounting
adjustments as previously discussed. However, as provided in GM's Restated
Certificate of Incorporation, the earnings attributable to GM Class H common
stock for purposes of determining the amount available for the payment of
dividends on GM Class H common stock specifically excludes such adjustments.
More specifically, amortization of the intangible assets associated with GM's
purchase of Hughes amounted to $10.6 million for the first six months of 1999
and 1998. Such amounts are excluded from the earnings available for the payment
of dividends on GM Class H common stock and are charged against earnings
available for the payment of dividends on GM's $1-2/3 par value common stock.
Unamortized purchase accounting adjustments associated with GM's purchase of
Hughes were $416.0 million at June 30, 1999 and $426.6 million at December 31,
1998.
In order to provide additional analytical data to the users of Hughes'
financial information, supplemental data in the form of unaudited summary pro
forma financial data are provided. Consistent with the basis on which earnings
of Hughes available for the payment of dividends on the GM Class H common stock
is determined, the pro forma data exclude purchase accounting adjustments
related to GM's acquisition of Hughes. Included in the supplemental data are
certain financial ratios which provide measures of financial returns excluding
the impact of purchase accounting adjustments. The pro forma data are not
presented as a measure of GM's total return on its investment in Hughes.
- 64 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
Unaudited Summary Pro Forma Financial Data*
Pro Forma Condensed Statement of Income (Loss)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in Millions Except Per Share Amounts)
Total revenues $1,776.0 $1,369.0 $3,227.8 $2,660.0
Total operating costs and expenses 1,872.6 1,290.8 3,361.2 2,498.2
------- ------- ------- -------
Operating profit (loss) (96.6) 78.2 (133.4) 161.8
Non-operating income (loss) (45.0) (7.4) 99.4 (7.2)
Income tax provision (benefit) (42.5) 23.3 (6.7) 54.7
Minority interests in net losses
of subsidiaries 6.8 8.6 13.3 9.9
Cumulative effect of accounting change,
net of taxes - - - (9.2)
Preferred stock dividends (1.6) - (1.6) -
------- ----- ------- -------
Earnings (Loss) Used for Computation of
Available Separate Consolidated Net
Income (Loss) (1) $(93.9) $56.1 $(15.6) $100.6
====== ==== ====== =====
Earnings (Loss) Attributable to
General Motors Class H Common
Stock on a Per Share Basis-
Basic and Diluted $(0.23) $0.14 $(0.04) $0.25
====== ==== ====== ====
Pro Forma Condensed Balance Sheet
June 30, December 31,
Assets 1999 1998
---- ----
(Dollars in Millions)
Total Current Assets $4,139.6 $3,846.4
Satellites, net 3,515.8 3,197.5
Property, net 1,303.0 1,059.2
Net Investment in Sales-type Leases 162.0 173.4
Intangible Assets, Investments and Other Assets, net 8,736.6 4,731.9
-------- --------
Total Assets $17,857.0 $13,008.4
======== ========
Liabilities and Stockholder's Equity
Total Current Liabilities $3,019.7 $2,009.5
Long-Term Debt 1,239.6 778.7
Postretirement Benefits Other Than Pensions,
Other Liabilities and Deferred Credits 2,155.8 1,783.2
Minority Interests 502.2 481.7
Total Stockholder's Equity (2) 10,939.7 7,955.3
-------- ---------
Total Liabilities and Stockholder's Equity (2) $17,857.0 $13,008.4
======== ========
* The summary excludes purchase accounting adjustments related to GM's
acquisition of Hughes.
(1)Includes accrued preferred stock dividends of $1.6 million in 1999.
(2)General Motors' equity in its wholly-owned subsidiary, Hughes. Holders
of GM Class H common stock have no direct rights in the equity or assets of
Hughes, but rather have rights in the equity and assets of GM (which includes
100% of the stock of Hughes).
- 65 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
Unaudited Summary Pro Forma Financial Data* - Continued
Pro Forma Selected Segment Data
Direct-To- Elimin-
Home Satellite Satellite Network ations
Broadcast Services Systems Systems and Other Total
- --------------------------------------------------------------------------------
(Dollars in Millions)
For the Three Months Ended:
June 30, 1999
Total Revenues $870.2 $200.4 $553.8 $341.1 $(189.5) $1,776.0
- --------------------------------------------------------------------------------
Operating Profit
(Loss) $(68.4) $83.2 $(133.0) $11.3 $10.3 $(96.6)
Operating Profit
Margin - 41.5% - 3.3% - -
EBITDA (3) $(6.8) $151.0 $(119.6) $25.0 $13.6 $63.2
EBITDA Margin(3) - 75.3% - 7.3% - 3.6%
- --------------------------------------------------------------------------------
Depreciation and
Amortization $61.6 $67.8 $13.4 $13.7 $3.3 $159.8
Capital
Expenditures $78.2(1)$135.4(2) $22.8 $15.5 $36.7 $288.6
- --------------------------------------------------------------------------------
June 30, 1998
Total Revenues $401.5 $191.1 $674.8 $221.7 $(120.1) $1,369.0
- --------------------------------------------------------------------------------
Operating Profit
(Loss) $(40.2) $74.4 $60.0 $(25.2) $9.2 $78.2
Operating Profit
Margin - 38.9% 8.9% - - 5.7%
EBITDA(3) $(16.7) $133.1 $71.5 $(15.3) $5.8 $178.4
EBITDA Margin(3) - 69.6% 10.6% - - 13.0%
- --------------------------------------------------------------------------------
Depreciation and
Amortization $23.5 $58.7 $11.5 $9.9 $(3.4) $100.2
Capital
Expenditures $34.4 $164.7(2) $21.6 $10.9 $10.0 $241.6
- --------------------------------------------------------------------------------
For the Six Months Ended:
June 30, 1999
Total Revenues $1,426.8 $393.9 $1,184.1 $572.0 $(349.0) $3,227.8
- --------------------------------------------------------------------------------
Operating Profit
(Loss) $(91.8) $162.3 $(147.4) $(6.5) $(50.0) $(133.4)
Operating Profit
Margin - 41.2% - - - -
EBITDA(3) $(2.9) $296.9 $(121.0) $19.1 $(42.7) $149.4
EBITDA Margin(3) - 75.4% - 3.3% - 4.6%
- --------------------------------------------------------------------------------
Depreciation and
Amortization $88.9 $134.6 $26.4 $25.6 $7.3 $282.8
Capital
Expenditures $155.8(1)$475.2(2) $35.1 $17.7 $4.5 $688.3
- --------------------------------------------------------------------------------
June 30, 1998
Total Revenues $789.4 $384.1 $1,299.1 $406.4 $(219.0) $2,660.0
- --------------------------------------------------------------------------------
Operating Profit
(Loss) $(71.8) $160.1 $115.1 $(37.1) $(4.5) $161.8
Operating Profit
Margin - 41.7% 8.9% - - 6.1%
EBITDA(3) $(25.8) $273.3 $137.3 $(18.7) $(6.4) $359.7
EBITDA Margin(3) - 71.2% 10.6% - - 13.5%
- --------------------------------------------------------------------------------
Depreciation and
Amortization $46.0 $113.2 $22.2 $18.4 $(1.9) $197.9
Capital
Expenditures $48.1 $414.3(2) $32.3 $15.7 $135.9 $646.3
* The Financial Statements reflect the application of purchase accounting
adjustments related to GM's acquisition of Hughes. However, as provided in the
General Motors' Restated Certificate of Incorporation, the earnings
attributable to GM Class H common stock for purposes of determining the amount
available for the payment of dividends on GM Class H common stock specifically
excludes such adjustments. In order to provide additional analytical data, the
above unaudited pro forma selected segment data, which exclude the purchase
accounting adjustments related to GM's acquisition of Hughes, are presented.
(1)Includes satellite expenditures amounting to $22.5 million and $75.5 million
in the second quarter and first six months of 1999, respectively.
(2)Includes satellite expenditures amounting to $125.9 million, $94.4 million,
$315.6 million and $240.0 million, respectively. Also included are
expenditures related to the early buy-out of satellite sale-leasebacks
totaling $58.9 million for the second quarter of 1998 and $141.3 million and
$155.5 million for the first six months of 1999 and 1998, respectively.
(3)EBITDA is defined as operating profit (loss), plus depreciation and
amortization. EBITDA is not presented as an alternative measure of
operating results or cash flow from operations, as determined in
accordance with generally accepted accounting principles. EBITDA margin is
calculated by dividing EBITDA by total revenues. See discussion in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
- 66 -
<PAGE>
HUGHES ELECTRONICS CORPORATION
Unaudited Summary Pro Forma Financial Data* - Concluded
Pro Forma Selected Financial Data
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in Millions Except Per Share Amounts)
Operating profit (loss) $(97) $78 $(133) $162
EBITDA (1) $63 $178 $149 $360
EBITDA margin (2) 3.6% 13.0% 4.6% 13.5%
Income (Loss) before income taxes,
minority interests and cumulative
effect of accounting change $(142) $71 $(34) $155
Earnings (Loss) used for computation
of available separate consolidated
net income (loss) (3) $(94) $56 $(16) $101
Average number of GM Class H
dividend base shares (4) 414.9 399.9 407.5 399.9
Stockholder's equity $10,940 $7,783 $10,940 $7,783
Working capital $1,120 $2,324 $1,120 $2,324
Operating profit as a percent of
revenues N/A 5.7% N/A 6.1%
Income before income taxes,
minority interests and
cumulative effect of accounting
change as a percent of revenues N/A 5.2% N/A 5.8%
Net income as a percent of revenues N/A 4.1% N/A 3.8%
* The summary excludes purchase accounting adjustments related to GM's
acquisition of Hughes.
(1)EBITDA is defined as operating profit (loss), plus depreciation and
amortization. EBITDA is not presented as an alternative measure of operating
results or cash flow from operations, as determined in accordance with
generally accepted accounting principles. See discussion in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
(2)EBITDA margin is calculated by dividing EBITDA by total revenues.
(3)Includes accrued preferred stock dividends of $1.6 million in 1999.
(4)Average Class H dividend base shares is used in calculating earnings
attributable to GM Class H common stock on a per share basis. This is not the
same as the average number of GM Class H shares outstanding, which was 121.0
million and 105.2 million for the second quarter of 1999 and 1998,
respectively, and 113.6 million and 104.7 million for the six months ended
June 30, 1999 and 1998, respectively.
* * * * *
- 67 -
<TABLE> <S> <C>
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<LEGEND>
This schedule contains summary financial information extracted from
General Motors Corporation June 30, 1998 Consolidated Financial Statements and
is qualified in its entirety by reference to Second Quarter 1999 Form 10-Q
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<NAME> General Motors Corporation
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<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Jun-30-1998
<EXCHANGE-RATE> 1
<CASH> 7,733
<SECURITIES> 8,395
<RECEIVABLES> 63,720
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<CURRENT-ASSETS> 34,148
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222
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<COMMON> 1,103
<OTHER-SE> 14,675
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<SALES> 66,738
<TOTAL-REVENUES> 77,296
<CGS> 57,329
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<EPS-BASIC> 2.88
<EPS-DILUTED> 2.82
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
General Motors Corporation June 30, 1999 Consolidated Financial Statements and
is qualified in its entirety by reference to Second Quarter 1999 Form 10-Q
</LEGEND>
<CIK> 0000040730
<NAME> General Motors Corporation
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. Dollars
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220
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<COMMON> 1,086
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<EPS-BASIC> 6.09
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