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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549-1004
 
Form 10-K
 
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
    For the year ended December 31, 2006
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
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
(State or other jurisdiction of
Incorporation or Organization)
  38-0572515
(I.R.S. Employer
Identification No.)
     
300 Renaissance Center, Detroit, Michigan
(Address of Principal Executive Offices)
  48265-3000
(Zip Code)
 
Registrant’s telephone number, including area code
(313) 556-5000
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
    Name of Each Exchange on
Title of Each Class   which Registered
 
Common, $12/3 par value
  New York Stock Exchange, Inc.
 
Note:  The $1 2/3 par value common stock of the Registrant is also listed for trading on the following exchanges:
 
     
Bourse de Bruxelles
  Brussels, Belgium
Euronext Paris
  Paris, France
The London Stock Exchange
  London, England
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) 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 þ     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  Yes þ     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
As of June 30, 2006, the aggregate market value of GM $12/3 par value common stock held by nonaffiliates of GM was approximately $16.8 billion. The closing price on June 30, 2006 as reported on the New York Stock Exchange was $29.79 per share.
 
As of February 28, 2007, the number of shares outstanding of GM $12/3 par value common stock was 565,729,615 shares.
 
Documents incorporated by reference are as follows:
 
     
    Part and Item Number of Form 10-K
Document   into which Incorporated
General Motors Notice of Annual Meeting of Stockholders and Proxy Statement for the Annual Meeting of Stockholders to be held June 5, 2007
  Part III, Items 10 through 14
 


 

 
GENERAL MOTORS CORPORATION
 
INDEX
 
             
        Page
 
    Explanatory Note   3
  Business   5
  Risk Factors   19
  Unresolved Staff Comments   34
  Properties   34
  Legal Proceedings   34
  Submission of Matters to a Vote of Security Holders   41
  Executive Officers of the Registrant   42
 
  Market for the Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities   45
  Selected Financial Data   47
  Management’s Discussion and Analysis of Financial Condition and Results of Operations   49
  Quantitative and Qualitative Disclosures About Market Risk   94
  Financial Statements and Supplementary Data   99
    Consolidated Statements of Operations   99
    Consolidated Balance Sheets   100
    Consolidated Statements of Cash Flows   101
    Consolidated Statements of Stockholders’ Equity (Deficit)   102
    Notes to Consolidated Financial Statements   103
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   196
  Controls and Procedures   196
  Other Information   200
 
  Directors, Executive Officers and Corporate Governance   200
  Executive Compensation   200
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   200
  Certain Relationships and Related Transactions and Director Independence   200
  Principal Accountant Fees and Services   200
 
  Exhibits and Financial Statement Schedule   201
      261
 General Motors 2002 Annual Incentive Plan, as amended
 General Motors 2002 Stock Incentive Plan, as amended
 General Motors 2002 Long-term Incentive Plan, as amended
 Compensation Statement - Henderson
 General Motors Executive Retirement Plan
 Computation of Ratios of Earnings to Fixed Charges for the Years Ended December 31, 2006, 2005 and 2004
 Subsidiaries of the Registrant
 Consent of Independent Registered Public Accounting Firm
 Section 302 Certification of the Chief Executive Officer
 Section 302 Certification of the Chief Financial Officer
 Section 906 Certification of the Chief Executive Officer
 Section 906 Certification of the Chief Financial Officer


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
Explanatory Note — Restatement of Financial Information
 
As previously disclosed in its Forms 8-K filed on February 16, 2007 and January 26, 2007, General Motors Corporation (GM) has restated its consolidated financial statements and financial information for 2002 through the third quarter of 2006. As such, GM’s Annual Report on Form 10-K for the year ended December 31, 2006 reflects restatements of its historical consolidated financial statements for the quarters ended March 31, 2006, June 30, 2006 and September 30, 2006, the year ended December 31, 2005, including the quarters ended March 31, 2005, June 30, 2005, and September 30, 2005, the year ended December 31, 2004, and other selected financial data for the years ended December 31, 2003 and 2002. These restatements as outlined in Notes 2 and 30 to the Consolidated Financial Statements primarily relate to the following: (1) accounting for certain derivative contracts in accordance with Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended; (2) accounting for deferred income taxes in accordance with SFAS No. 109, Accounting for Income Taxes; and (3) other various accounting adjustments that, upon identification, were determined to be immaterial, individually and in the aggregate, and were recorded in the periods in which they were identified. Due to the adjustments, as discussed above, that required a restatement of our previously-filed consolidated financial statements, we are also correcting these out-of-period adjustments by recording them in the proper periods. The following table sets forth the effects of the restatements on net income (loss), earnings (loss) per share and retained earnings for the periods presented in the accompanying consolidated financial statements and financial information (dollars in millions, except per share amounts):
 
                                         
                            Retained Earnings
 
    Net Income (Loss)     at January 1,
 
    2005     2004     2003     2002     2002  
 
Previously reported
  $ (10,567 )   $ 2,804     $ 3,859     $ 1,574     $ 9,223  
Pre-tax adjustments:
                                       
Derivatives and hedge accounting
    89       (40 )     (213 )     545       (335 )
Other out-of-period
    118       (272 )     (263 )     (138 )     (339 )
                                         
Total pre-tax adjustments
    207       (312 )     (476 )     407       (674 )
Tax effects — provision/(benefit)
    22       (207 )     (202 )     168       (119 )
                                         
Total of above adjustments, net of tax
    185       (105 )     (274 )     239       (555 )
Deferred income taxes
    (35 )     2       (60 )     (78 )     1,280  
                                         
Net after-tax adjustments
    150       (103 )     (334 )     161       725  
                                         
As Restated
  $ (10,417 )   $ 2,701     $ 3,525     $ 1,735     $ 9,948  
                                         


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The following table sets forth a reconciliation of previously reported and restated earnings (loss) per share attributable to common stock, $12/3 par value, for the periods shown:
 
                                 
    2005     2004     2003     2002  
 
Basic earnings (loss) per share:
                               
Continuing operations, as reported
  $ (18.50 )   $ 4.97     $ 5.17     $ 3.24  
Adjustments
    0.27       (0.19 )     (.60 )     .28  
                                 
Continuing operations, as restated
    (18.23 )     4.78       4.57       3.52  
Discontinued operations
                2.14       (0.16 )
Cumulative effect of a change in accounting principle
    (0.19 )                  
                                 
Earnings (loss) per share, as restated
  $ (18.42 )   $ 4.78     $ 6.71     $ 3.36  
                                 
Diluted earnings (loss) per share:
                               
Continuing operations, as reported
  $ (18.50 )   $ 4.94     $ 5.09     $ 3.23  
Adjustments
    0.27       (0.18 )     (0.58 )     0.28  
                                 
Continuing operations, as restated
    (18.23 )     4.76       4.51       3.51  
Discontinued operations
                2.11       (0.16 )
Cumulative effect of a change in accounting principle
    (0.19 )                  
                                 
Earnings (loss) per share, as restated
  $ (18.42 )   $ 4.76     $ 6.62     $ 3.35  
                                 
 
For additional information relating to the effect of the restatement, reference is made to the following items:
 
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9A. Controls and Procedures
Item 15. Exhibits and Financial Statement Schedule
 
This Annual Report on Form 10-K restates all of the pertinent financial data for the affected periods, and we do not intend to amend our previously-filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for any prior periods. As a result, the reader should not rely on the prior filings but should rely upon the restated financial statements, reports of our independent registered public accounting firm, and related financial information for affected periods contained in this 2006 Annual Report on Form 10-K.


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PART I
 
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
 
General Motors Corporation, incorporated in 1916 under the laws of the State of Delaware, is sometimes referred to in this Annual Report on Form 10-K as “we,” the “Registrant,” the “Corporation,” “General Motors,” or “GM.” We are the world’s largest automaker in terms of volume.
 
Item 1.   Business
 
General
 
GM is primarily engaged in the worldwide development, production, and marketing of cars, trucks, and parts. GM develops, manufactures, and markets its vehicles worldwide through its four automotive regions: GM North America (GMNA), GM Europe (GME), GM Latin America/Africa/Mid-East (GMLAAM), and GM Asia Pacific (GMAP). Also, GM’s finance and insurance operations are primarily conducted through GMAC LLC, the successor to General Motors Acceptance Corporation (GMAC LLC and General Motors Acceptance Corporation are referred to in this Annual Report on Form 10-K as GMAC). GMAC was a wholly owned subsidiary until November 30, 2006, when GM sold a 51% controlling ownership interest in GMAC to a consortium of investors (the GMAC Transaction). Since the GMAC Transaction, GM has accounted for its 49% ownership interest in GMAC using the equity method. GMAC provides a broad range of financial services, including consumer vehicle financing, automotive dealership and other commercial financing, residential mortgage services, automobile service contracts, personal automobile insurance coverage, and selected commercial insurance coverage.
 
GM’s total worldwide car and truck deliveries were 9.1 million, 9.2 million, and 9 million, for 2006, 2005, and 2004, respectively. Substantially all of our cars, trucks, and parts are marketed through retail dealers in North America, and through distributors and dealers outside of North America, the substantial majority of which are independently owned. GMNA primarily meets the demands of customers in North America with vehicles developed, manufactured, and/or marketed under the following brands:
 
             
 • Chevrolet
   • Buick    • Saab  
 • GMC
 • Pontiac
   • Cadillac    • Hummer    • Saturn
 
The demands of customers outside North America are primarily met with vehicles developed, manufactured, and/or marketed under the following brands:
 
             
 • Opel
   • Saab    • GMC    • Hummer
 • Vauxhall
   • Buick    • Cadillac    • Isuzu
 • Holden
   • Chevrolet    • Daewoo    
 
As of December 31, 2006, GM also had equity ownership stakes directly or indirectly through various regional subsidiaries, including GM Daewoo Auto & Technology Company (GM Daewoo), New United Motor Manufacturing, Inc., Shanghai General Motors Co., Ltd., SAIC-GM-Wuling Automobile Company Ltd., and CAMI Automotive Inc. These companies design, manufacture, and market vehicles under the following brands:
 
             
 • Pontiac
   • Wuling    • Chevrolet  
 • Buick
 • Suzuki
   • Daewoo    • Cadillac  
 • Holden
 
In addition to the products we sell to our dealers for consumer retail sales, we also sell cars and trucks to our dealers that they sell to fleet customers, including daily rental car companies, commercial fleet customers, leasing companies, and governments.
 
GM’s retail and fleet customers can obtain a wide range of after-the-sale vehicle services and products through our dealer network, such as maintenance, light repairs, collision repairs, vehicle accessories, and extended service warranties.
 
In addition to the information about GM and its subsidiaries contained in this Annual Report on Form 10-K for the year ended December 31, 2006, extensive information about the Corporation can be found on our website


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

Item 1.   Business — (continued)
 
located at www.gm.com, including information about our management team, our brands and products, and our corporate governance principles.
 
The following information is incorporated herein by reference to the indicated pages:
 
     
Item
  Page(s)
 
Employment and Payrolls
  18-19
Production Volumes
  58-64
Segment Reporting (Note 27 to the Consolidated Financial Statements)
  178-182
 
Vehicle Unit Sales
 
Total industry sales of new motor vehicle units of domestic and foreign makes and GM’s competitive position during the years ended December 31, 2006, 2005, and 2004 were as follows:
 
                                                                         
    Vehicle Unit Sales(1)
 
    Years Ended December 31,  
    2006     2005     2004  
                GM as
                GM as
                GM as
 
                a % of
                a % of
                a % of
 
    Industry     GM     Industry     Industry     GM     Industry     Industry     GM     Industry  
    (Units in thousands)  
 
United States
                                                                       
Cars
                                                                       
Small
    2,506       426       17.0%       2,370       490       20.7%       2,256       456       20.2%  
Midsize
    3,706       946       25.5%       3,740       1,007       26.9%       3,714       1,190       32.0%  
Sport
    436       80       18.3%       424       58       13.6%       403       59       14.6%  
Luxury
    1,206       173       14.4%       1,208       197       16.3%       1,190       180       15.2%  
                                                                         
Total cars
    7,854       1,625       20.7%       7,742       1,752       22.6%       7,563       1,885       24.9%  
Trucks
                                                                       
Pickups
    2,874       1,022       35.6%       3,201       1,163       36.3%       3,198       1,133       35.4%  
Vans
    1,326       245       18.5%       1,468       328       22.4%       1,456       313       21.5%  
Utilities
    4,505       1,174       26.0%       4,586       1,212       26.4%       4,693       1,324       28.2%  
Medium Duty
    501       59       11.8%       459       63       13.8%       392       52       13.2%  
                                                                         
Total trucks
    9,206       2,500       27.1%       9,714       2,766       28.5%       9,739       2,822       29.0%  
                                                                         
Total United States
    17,060       4,125       24.2%       17,456       4,518       25.9%       17,302       4,707       27.2%  
Canada, Mexico, and Other
    3,131       682       21.8%       3,090       728       23.5%       2,977       700       23.5%  
                                                                         
Total GMNA
    20,191       4,807       23.8%       20,546       5,246       25.5%       20,279       5,407       26.7%  
GME
    21,763       2,003       9.2%       21,079       1,984       9.4%       20,778       1,956       9.4%  
GMLAAM
    6,076       1,035       17.0%       5,242       882       16.8%       4,605       740       16.1%  
GMAP
    19,485       1,253       6.4%       18,287       1,065       5.8%       17,160       887       5.2%  
                                                                         
Total Worldwide
    67,515       9,098       13.5%       65,154       9,177       14.1%       62,822       8,990       14.3%  
                                                                         
 
 
(1) GM’s vehicle unit sales primarily represent vehicles manufactured by GM, sold under a GM brand, or sold through a GM-owned distribution network. Consistent with industry practice, vehicle unit sales information includes estimates of sales in certain countries where public reporting is not legally required or otherwise available on a consistent basis.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

Item 1.   Business — (continued)
 
 
Fleet Sales and Deliveries
 
The sales and market share data provided above includes both retail and fleet vehicle unit sales. GM’s fleet sales are comprised of vehicle unit sales to daily rental car companies, as well as leasing companies and commercial fleet and government customers. Certain fleet transactions, particularly daily rental, are less profitable than average retail sales. In addition, in some sales to daily rental fleets GM guarantees to repurchase the vehicles at contractually agreed upon values.
 
The table below reflects our fleet unit sales and the amount of those unit sales as a percentage of our total vehicle unit sales for the last three years.
 
                         
    Years Ended December 31,  
    2006     2005     2004  
    (Units in thousands)  
 
GMNA
    1,270       1,334       1,315  
GME
    792       814       730  
GMLAAM
    289       259       206  
GMAP
    227       217       183  
                         
Total fleet units
    2,578       2,624       2,434  
                         
Daily rental units
    1,027       1,149       1,127  
Other fleet units
    1,551       1,475       1,307  
                         
Total fleet units
    2,578       2,624       2,434  
                         
Fleet unit sales as a percentage of total vehicle unit sales
                       
Cars
    33.9 %     35.2 %     33.7 %
Trucks
    20.5 %     19.6 %     17.9 %
Total
    28.3 %     28.6 %     27.1 %
 
Product Pricing
 
Historically, GM has used a number of methods to promote its products, including the use of dealer, retail, and fleet incentives such as rebates, finance incentives, and special lease programs. The level of incentives is dependent in large part upon the level of competition in the markets in which GM operates and the level of demand for GM’s products.
 
GM, through the “Total Value Promise,” announced in January 2006 that we intended to reduce the use and amount of retail incentives in our North America operations as a stimulant to sales and that we would instead reduce the manufacturer’s suggested retail price on many GM vehicles and emphasize the value GM offers to consumers. To carry out this strategy, GM repositioned prices on 80% of 2006 model year vehicles, added standard equipment to more than 50 models, and improved powertrain warranties beginning with 2007 model year vehicles. At the same time, GM reduced our reliance on incentives to promote retail business, improved residual value through improved quality and product execution, reduced daily rental sales, and reduced the average spending per vehicle for incentives. In 2007, GM will continue to price vehicles competitively, including offering strategic and tactical incentives as closing tools for dealers. GM believes this strategy builds the reputation of our brands and enhances residual value for our products while supporting improved pricing per transaction.
 
Seasonal Nature and Cyclical Nature of Business
 
In the automotive business, retail sales are seasonal and production varies from month to month. Certain changeovers occur throughout the year for reasons such as new market entries and vehicle model changeovers. Traditionally, the changeover period related to the annual new model introduction was concentrated in the third


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Item 1.   Business — (continued)
 
quarter of each year, although recently it has started to move into other periods of the year. Production is typically lower during the third quarter due to annual product changeovers and the fact that annual plant shutdowns are planned during this time to facilitate other product changes. These lower production rates in the third quarter cause operating results to be, in general, less favorable than those in the other three quarters of the year. The magnitude of the changeover needed to commence production of new models depends on, for example, design modifications related to improved fuel efficiency, stricter government standards for safety and emission controls, and consumer-oriented improvements in performance, comfort, convenience, and style.
 
The market for vehicles is cyclical and depends upon general economic conditions and consumer spending. If general economic conditions deteriorate, consumers may defer purchasing or leasing new vehicles or opt for used vehicles, which would decrease the total number of new cars and light trucks sold. Fluctuations in the price of fuel also affect consumer preferences and spending.
 
Relationship with Dealers
 
Globally we market our vehicles through a network of independent retail dealers and distributors. At December 31, 2006, there were approximately 7,000 GM vehicle dealers in the United States, 750 in Canada, and 300 in Mexico. Additionally, there was a total of approximately 15,800 distribution outlets throughout the rest of the world for vehicles manufactured by GM and its affiliates. These outlets include distributors, dealers, and authorized sales, service, and parts outlets.
 
GM dealers operated the following number of GM dealerships in the following regions:
 
                         
    As of December 31,  
    2006     2005     2004  
 
GMNA
    8,096       8,440       8,661  
GME
    10,459       10,200       9,522  
GMLAAM
    1,681       1,671       1,679  
GMAP
    3,649       3,329       2,788  
                         
Total Worldwide
    23,885       23,640       22,650  
                         
 
GM enters into a contract with each authorized dealer agreeing to sell the dealer one or more specified product lines at wholesale prices and granting the dealer the right to sell those vehicles to retail customers from a GM approved location. GM dealers often offer more than one GM brand of vehicle in a single dealership. In some instances, an authorized GM dealer may also be an authorized dealer for another manufacturer’s vehicles. Authorized GM dealers offer parts, accessories, service, and repairs for GM vehicles in the product lines that they sell, primarily using genuine GM vehicle accessories and service parts. GM dealers are authorized to service GM vehicles under GM’s limited warranty, and those repairs are to be made only with genuine GM parts. In addition, GM dealers generally provide their customers access to credit or lease financing, vehicle insurance, and extended service contracts provided by GMAC or its subsidiaries.
 
Because dealers maintain the primary sales and service interface with the ultimate consumer of GM products, the quality of GM dealerships and GM’s relationship with its dealers and distributors are significant to the success of the Corporation. In addition to the terms of its contracts with its dealers, GM is regulated by various country and state franchise laws that supersede those contractual terms and impose specific regulatory requirements and standards for initiating dealer network changes, pursuing terminations for cause, and other contractual matters.
 
Continuing Relationship and Agreements with GMAC
 
GMAC was formed in 1919 as a wholly owned subsidiary of GM. GMAC is a global diversified financial services company, with approximately $287 billion of assets and operations in approximately 40 countries. It primarily operates in three lines of business—automotive finance (dealer wholesale, retail, and fleet), residential


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Item 1.   Business — (continued)
 
mortgage and related financing and services, largely through its subsidiary Residential Capital LLC (ResCap), and insurance such as automotive and homeowners insurance and extended service and maintenance contracts. It also offers commercial financing services and owns an interest in Capmark Financial Group (Capmark), a commercial mortgage company that was formerly GMAC Commercial Holdings, a GMAC subsidiary.
 
On November 30, 2006, GM completed the GMAC Transaction, the sale of a 51% controlling interest in GMAC for a purchase price of $7.4 billion to FIM Holdings LLC (FIM Holdings). Subsequent to December 31, 2006, it was determined that GM would be required to make a capital contribution to GMAC of approximately $1 billion to restore its adjusted tangible equity balance to the contractually required amount of $14.4 billion, due to the decrease in the adjusted tangible equity balance of GMAC as of November 30, 2006. GMAC is a financial services company that provides a broad range of services including automotive finance, mortgage products and services, and insurance products. Many of these services are closely related to GM’s business, including consumer vehicle financing, inventory and real estate financing for automotive dealerships, automotive service contracts, and personal automotive insurance coverage. Prior to the GMAC Transaction, GMAC was wholly owned by GM. Beginning in 2001, as a part of certain transactions by GMAC or its subsidiaries, GM and GMAC had agreed that any loans by GMAC to GM or its subsidiaries would be on terms consistent with arms length transactions, and GM and GMAC subsequently put additional aspects of their relationship on terms consistent with arms length transactions.
 
As part of the GMAC Transaction, GM and GMAC entered into a number of agreements governing aspects of their relationship in the future, including agreements related to consumer and dealer financing by GMAC for the purchase and lease of GM products in the United States (GMAC Services Agreement). Under the GMAC Services Agreement, GMAC will continue to finance a broad spectrum of consumer credits, consistent with current and historical practice, and will receive a negotiated return. GMAC will also continue to provide full consideration to consumer credit applications received from GM-franchised dealers and purchase consumer financing contracts from GM dealers in accordance with GMAC’s usual standards for creditworthiness, consistent with current and historical practice.
 
The GMAC Services Agreement also provides that, subject to certain conditions and limitations, GM will offer vehicle financing and leasing incentives to U.S. customers (except for Saturn-brand products) exclusively through GMAC. GM sets the terms and conditions and eligibility of all such incentive programs. In consideration of GMAC’s exclusive relationship with GM for vehicle financing and leasing incentives for consumers, GMAC has agreed to certain targets, and if it does not meet these targets, GM could impose certain fees and other monetary consequences or even revoke GMAC’s exclusivity in whole or in part. As long as GMAC’s exclusivity remains in effect, GMAC will pay GM $75 million annually.
 
The GMAC Services Agreement also provides that GM will make certain upfront residual support payments to GMAC with respect to leased vehicles and vehicles sold pursuant to balloon retail installment sale contracts to increase the vehicle’s contract residual value above certain thresholds set by an independently published guide.
 
GM and GMAC have entered into agreements giving GMAC the right to use the GM name on certain insurance products. In exchange, GMAC will pay to GM a minimum guaranteed royalty fee of $15 million.
 
For further information about the business relationship between GM and GMAC, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Key Factors Affecting Future and Current Results — GMAC — Sale of 51% Controlling Interest” and Note 28 to the Consolidated Financial Statements, “Transactions with GMAC.”
 
Research, Development and Intellectual Property
 
In 2006, GM incurred $6.6 billion in costs for research, manufacturing engineering, product engineering, design, and development activities related primarily to developing new products or services or improving existing products or services, including activities related to vehicle emissions control, improved fuel economy, and the


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safety of drivers and passengers in GM vehicles. GM expended $6.7 billion and $6.5 billion on similar company-sponsored research and other product development activities in 2005 and 2004, respectively.
 
Research
 
GM’s priorities for research include improving the environmental performance of GM vehicles, diversifying energy sources for vehicles, and providing fuel economy and efficiency around the world. At the same time, GM is driving a transition to advanced propulsion by pursuing leadership in strategic technology such as active fuel management, variable valve timing, six-speed transmissions, advanced diesel engines, electronics and controls, advanced materials, hydrogen fuel cell technology, and hybrid vehicles.
 
The 2007 Saturn Vue Green Line was introduced in Fall 2006, and GM announced plans for additional hybrid vehicles that will debut in the next few years. GM will introduce four hybrids in 2007 — the Saturn Aura Green Line, Chevrolet Malibu Hybrid, and Chevrolet Tahoe and GMC Yukon 2-Mode Hybrids. These vehicles will be equipped with one of three different hybrid systems designed to meet different American driving patterns and needs. The systems vary in fuel economy savings and cost, providing an opportunity for more consumers to own a hybrid vehicle and to benefit from increased fuel economy savings.
 
In a November 2006 meeting with President George Bush, GM along with DaimlerChrysler AG (DaimlerChrysler) and Ford Motor Company (Ford), announced that these three domestic vehicle manufacturers intend to make at least half of the vehicles they produce capable of operating on biofuels by 2012, as part of an overall national energy strategy. Biofuels, like ethanol, are renewable fuels that are manufactured from biomass substances such as corn, sugar cane, manure, timber, and sewage. We are partnering with governmental agencies, fuel providers, and fuel retailers across the United States to help promote availability and distribution of E85 ethanol, an alternative fuel used in flex fuel vehicles that is a combination of 15% unleaded gasoline and 85% ethanol, including supporting an infrastructure of fueling stations.
 
GM is also developing biodiesel, a clean-burning alternative diesel fuel that is produced from renewable sources. In 2006, biodiesel technology is available on Chevrolet Silverado and GMC Sierra heavy-duty pickup trucks, Chevrolet Express and GMC Savanna fullsize vans, and the Chevrolet Kodiak and GMC Top Kick commercial vehicles.
 
GM’s research into flexible fuels is demonstrated in vehicles produced around the world. In Brazil, GM’s “FlexPower” flexible fuel engines, which accept a variety of fuels, account for 90 percent of the vehicles sold by GM do Brasil in 2006. In Sweden, Saab’s “BioPower” flexible fuel engine, which can run on E85 ethanol, petroleum, or any mixture of the two, accounted for 85 percent of 2006 sales of Saab’s 9-5 model.
 
In addition, GM is significantly expanding and accelerating its commitment to electrically driven vehicles, including those powered by fuel cells, which convert hydrogen into electricity. Beginning in Fall 2007, 100 Chevrolet Equinox Fuel Cell prototype vehicles will be placed with customers as part of “Project Driveway,” the first large-scale market test of fuel cell vehicles. The Equinox Fuel Cell vehicle is equipped with GM’s fourth-generation fuel cell propulsion system.
 
GM has also announced that we have begun work on a plug-in hybrid vehicle and a flexible electric architecture for future electrically driven vehicles, and we have entered into two agreements to develop advanced lithium-ion battery technology. In January 2007, GM announced production work on E-Flex, a family of electrically driven propulsion systems specifically engineered for future small and midsize GM vehicles. At the same time, the Chevy Volt concept vehicle was unveiled as an example of how E-Flex could be configured in an extended-range electric vehicle. Work is now underway to develop all the necessary technology for an extended-range electric vehicle.
 
GM generates and holds a significant number of patents in a number of countries in connection with the operation of GM’s business. While none of these patents by itself is material to GM’s business as a whole, these


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patents are very important to GM’s operations and continued technological development. In addition, GM holds a number of trademarks and service marks that are very important to GM’s identity and recognition in the marketplace.
 
See “Business — Environmental and Regulatory Matters” for a discussion of vehicle emissions requirements, vehicle noise requirements, fuel economy requirements, and safety requirements, which also affect our research and development.
 
Product Development
 
Over the past few years, GM has implemented the integration of our vehicle development activities into a single global organization. This strategy built on earlier efforts to consolidate and standardize our approach to vehicle development.
 
For example, during the 1990s GM merged 11 different engineering centers in the United States into a single organization. In 2005, GM Europe Engineering was created, following a similar consolidation from three separate engineering organizations. At the same time, we have grown our engineering operations in emerging markets in our GMAP and GMLAAM regions.
 
In this integrated process, product development activities are fully integrated on a global basis under one budget and one decision-making group. Similar approaches are now used in other key functions, such as powertrain, purchasing, and manufacturing organizations to take full advantage of our global capabilities and resources.
 
Under our global architecture strategy, future vehicles are developed by a network of global and regional development teams. GM generally defines architectures to include a specific range of performance characteristics and dimensions supporting a common set of major underbody components and subsystems with common interfaces.
 
Global architecture development teams are responsible for, in general, most of the non-visible parts of the vehicle (for example, steering, suspension, brake system, HVAC system, and electrical system). These global teams work very closely with regional development teams, who are responsible for components that are unique to each brand, such as fascias and interior design, tuning of the vehicle to meet the brand character requirements, and final validation to meet applicable government requirements.
 
GM has identified eight different global architectures to date that are managed by global leadership teams in global engineering centers.
 
The eight global architectures are:
 
     
• Mini Vehicles
  • Rear-Wheel-Drive (RWD) Vehicles
     
• Small Vehicles
  • Luxury RWD Vehicles
     
• Compact Vehicles
  • Compact Crossover Vehicles
     
• Midsize Vehicles
  • Midsize Trucks
 
GM believes that this integrated global product development process will result in faster global portfolio turnover with improved products developed by global experts at a lower cost.
 
Raw Materials, Services and Supplies
 
GM purchases a wide variety of raw materials, parts, supplies, energy, freight, transportation, and other services from numerous suppliers for use in the manufacture of its products. The raw materials primarily consist of steel, aluminum, resins, copper, lead, and platinum group metals. GM has not experienced any significant shortages of raw materials and normally does not carry substantial inventories of such raw materials in excess of levels reasonably required to meet our production requirements. Recently, the global automotive industry has experienced increases in commodity costs, most notably for raw materials such as aluminum, copper, and precious metals. These


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price increases have been driven by increased global demand for aluminum, copper, precious metals, and petroleum, in large part due to strong demand in Asia. GM attempts to manage fluctuations in commodity prices by using derivatives to economically hedge a portion of raw material purchases.
 
In many instances, GM purchases systems, components, and parts and supplies from a single source, and may be at an increased risk for supply disruptions. Furthermore, the inability or unwillingness of GM’s largest supplier, Delphi Corporation (Delphi), to supply GM with parts and supplies could adversely affect GM because GM’s production could be limited without those parts and supplies.
 
Based on our standard payment terms with our systems, components, and parts suppliers, we are generally required to pay most of these suppliers on the second day of the second month following delivery.
 
Competitive Position
 
The global automotive industry is growing, especially in developing economies such as China and India, and highly competitive. The principal factors that determine consumer vehicle preferences in the markets in which we operate include price, quality, style, safety, reliability, fuel economy, and functionality. GM’s estimated global market share was 13.5% for 2006 and 14.1% for 2005. As has been true for the prior 74 years, GM had the largest global market share for 2006; however, there is no assurance we will continue in that position since our share has declined in recent years while some of our competitors’ shares have increased. Some of our competitors have greater market shares than GM in individual countries in which we compete.
 
For decades, GM has had the largest market share in the United States. The table below sets forth GM and GM’s principal competitors in passenger cars and trucks in the United States and their respective U.S. market shares for 2006 and 2005:
 
                 
    2006     2005  
 
GM
    24.2 %     25.9 %
Ford
    17.1 %     18.2 %
DaimlerChrysler
    14.9 %     15.3 %
Toyota Corporation (Toyota)
    14.9 %     13.0 %
Honda Motor Company, Ltd. (Honda)
    8.8 %     8.4 %
Nissan Motor Corporation, Ltd. (Nissan)
    6.0 %     6.2 %
 
Environmental and Regulatory Matters
 
Automotive Emissions Control
 
The U.S. federal government imposes stringent emission control requirements on vehicles sold in the United States, and additional requirements are imposed by various state governments, most notably California. These requirements include pre-production testing of vehicles, testing of vehicles after assembly, the imposition of emission defect and performance warranties, and the obligation to recall and repair customer-owned vehicles that do not comply with emissions requirements.
 
GM must obtain certification that a demonstration of the vehicles will meet emission requirements from the U.S. Environmental Protection Agency (EPA) before it can sell vehicles in the United States and from the California Air Resources Board (CARB) before it can sell vehicles in states that have adopted the California requirements.
 
The EPA and the CARB both continue to emphasize testing customer-owned vehicles for compliance. We believe that our vehicles meet currently applicable EPA and CARB requirements. If our vehicles do not comply with the emission standards or if defective emission control systems or components are discovered during such testing, or as part of government-required defect reporting, GM could incur substantial costs related to emissions recalls. New CARB and federal requirements will increase the time and mileage periods over which manufacturers like GM are responsible for a vehicle’s emission performance.


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Both the EPA and the CARB emission requirements will become even more stringent in the future. In addition in 2002, California passed legislation regulating the emissions of greenhouse gases. Since GM believes this regulation is effectively a form of fuel economy requirement, it is discussed below under “Automotive Fuel Economy.” A new tier of exhaust emission standards for cars and light-duty trucks, the “Low-Emission Vehicles (LEV) II” standards, began phasing in for vehicles in states that have California requirements in the 2004 model year. Similar federal “Tier 2” standards began phasing in during 2004. In addition, both the CARB and the EPA have adopted more stringent standards applicable to heavy-duty trucks.
 
California requires that a specified percentage of cars and certain light-duty trucks be zero emission vehicles (ZEVs), such as electric vehicles or hydrogen fuel cell vehicles. This requirement started at 10% in model year 2005 and increases in subsequent years. Manufacturers have the option of meeting a portion of this requirement with partial ZEV credit for vehicles that meet very stringent exhaust and evaporative emission standards and have extended emission system warranties. An additional portion of the ZEV requirement can be met with vehicles that meet these partial ZEV requirements and incorporate advanced technology, such as a hybrid electric propulsion system meeting specified criteria. GM is complying with the ZEV requirements using a variety of means, including the introduction of GM products certified to the partial ZEV requirements beginning in the 2007 model year.
 
The Clean Air Act permits states that have areas with air quality compliance issues to adopt the California car and truck emission standards in lieu of the federal requirements, and four states — New York, Massachusetts, Maine, and Vermont — have these standards in effect now. Six additional states — Connecticut, New Jersey, Oregon, Pennsylvania, Rhode Island, and Washington — have adopted the California standards, which will become effective beginning in the 2008 and 2009 model years. Additional states could also adopt the California standards in the future.
 
In addition to the exhaust emission programs described above, advanced onboard diagnostic (OBD) systems, used to identify and diagnose problems with emission control systems, were required under federal and California law beginning in the 1996 model year. This system has the potential of increasing warranty costs and the chance for recall. OBD requirements become more challenging each year as vehicles must meet lower emission standards, and new diagnostics are required. Beginning with the 2004 model year, California adopted more stringent OBD requirements, including new design requirements and corresponding enforcement procedures, and GM has implemented hardware and software changes to comply with these more stringent requirements.
 
New evaporative emission control requirements for cars and trucks began phasing in with the 1995 model year in California and the 1996 model year federally. Systems are being further modified to accommodate onboard refueling vapor recovery (ORVR) control standards. ORVR was phased-in on passenger cars in the 1998 through 2000 model years, and phased-in on light-duty trucks in the 2001 through 2006 model years. Beginning with the 2004 model year, federal and California evaporative emission standards have become more stringent, and GM has implemented changes to comply with these more stringent requirements.
 
GM is subject to similar laws and regulations, including vehicle exhaust emission standards, vehicle evaporative emission standards, and OBD requirements, in other regions and countries throughout the world in which GM sells cars and trucks. Two different regulatory regimes apply in Europe: the European Union (EU) imposes stringent emission control requirements on vehicles sold in all 27 EU Member States, and regulations apply under the framework of the United Nations Economic Commission for Europe/Working Party 29 (UN ECE WP 29). In addition, EU Member States can give incentives to environmentally friendly vehicles through tax benefits. This could create specific market requirements rewarding different technical equipment in various markets, despite the fact there is only one European-wide emission requirement. The current EU requirements include type approval of pre-production testing of vehicles, testing of vehicles after assembly, and the obligation to recall and repair customer-owned vehicles that do not comply with emissions requirements. EU requirements and UN ECE requirements are equivalent in terms of stringency and implementation. GM must demonstrate that vehicles will meet emission requirements during witness tests and obtain type approval from an approval authority before it can sell vehicles in the EU.


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Emission requirements in Europe will become even more stringent in the future. A new step of exhaust emission standards for cars and light-duty trucks, “Euro 5”, will apply from September 2009, while “Euro 6” standards are expected to apply from 2014. In addition to the exhaust emission programs described above, advanced European OBD systems, have been required since 2000. This system has the potential of increasing warranty cost, and the requirements are expected to become more challenging in the future. With the introduction of the new European standards, additional technical challenges are expected to result from a new regulatory approach. While in the past emission standards were adopted at the same time as the related technical provisions, under the “split level approach” used for Euro 5 and Euro 6, only the emission limits and other key requirements have now been adopted. Technical provisions are now being developed and approved at the EU Commission level. This leads to a number of uncertainties regarding the content and timing of the requirements for different vehicles, because the EU Commission has been given authority to change fundamental regulatory items. These include test cycles, durability requirements, OBD, in-service conformity, and treatment of alternative fuels such as E85.
 
The new European emission standards focus particularly on reducing emissions from diesels. Diesel vehicles have become important in the European market place and achieved almost a 50% market share in 2006. The new requirements will require additional technologies and further increase the cost of diesel engines, which are already above those of gasoline engines. For Euro 6, it is expected that technologies need to be implemented which are similar to those being developed to meet US emission standards. The technologies available today are not cost-effective and would therefore not be suitable for the European market for small and midsize diesel vehicles, which typically are under high cost pressure.
 
All countries that belong to the European Free Trade Association (EFTA) apply EU emission standards. Countries that are not members of the EU have adopted standards defined under the UN ECE framework within their jurisdictions. A minority of countries in Eastern Europe, which currently do not require compliance with the latest limit standards, are considering convergence to those standards by the end of the decade.
 
Within the Asia Pacific region, GM vehicles are subject to a broad range of vehicle emission laws and regulations. Japan sets specific exhaust emission and durability standards, test methods, and driving cycles (OBD is required and evaporative emissions follow the EU). South Korea is transitioning to California style exhaust emission standards and considering adopting other aspects of the California emission program (OBD is required and evaporative emissions follow the EPA standard). All other countries in which GM conducts operations within the Asia Pacific region either require or allow some form of EPA, EU, or UN ECE style emission requirements (with or without OBD).
 
Within Latin America, Africa and the Mid-East regions, some countries follow the U.S. test procedure and some follow the EU test procedure, with different levels of requirements.
 
Industrial Environmental Control
 
GM’s operations are subject to a wide range of environmental protection laws including those laws regulating air emissions, water discharges, waste management, and environmental cleanup. GM is in various stages of investigation or remediation for sites where contamination has been alleged. GM is involved in a number of remediation actions to clean up hazardous wastes as required by federal and state laws. Such statutes require that responsible parties fund remediation actions regardless of fault, legality of original disposal, or ownership of a disposal site.
 
The future impact of environmental matters, including potential liabilities, is often difficult to estimate. We record an environmental reserve when it is probable that a liability has been incurred and the amount of the liability is reasonably estimable. This practice is followed whether the claims are asserted or unasserted. Management expects that the amounts reserved will be paid out over the periods of remediation for the applicable sites, which typically range from five to 30 years. Expenditures for site remediation actions, including ongoing operations and maintenance, amounted to $107 million and $127 million in 2006 and 2005, respectively. It is possible that such


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remediation actions could require average annual expenditures in the range of $90 million to $130 million over the next five years.
 
For many sites, the remediation costs and other damages for which we ultimately may be responsible are not reasonably estimable because of uncertainties with respect to factors such as our connection to the site or to materials located at the site, the involvement of other potentially responsible parties, the application of laws and other standards or regulations, site conditions, and the nature and scope of investigations, studies, and remediation to be undertaken (including the technologies to be required and the extent, duration, and success of remediation). As a result, we are unable to determine or reasonably estimate the amount of costs or other damages for which we are potentially responsible in connection with these sites, although that total could be substantial.
 
GM pays annual emission fees of approximately $2 million per year and annual costs of on-going testing ranging from $1 million to $2 million per year to comply with the Clean Air Act Amendments under the Title V Renewable Operating Permit Program. Additionally, under the Clean Air Act, complying with the Hazardous Air Pollutant standards is estimated to cost an aggregate of approximately $55 million in 2006 through 2007. GM also expends approximately $7 million per year to comply with regulatory reporting requirements.
 
GM is implementing and publicly reporting on various voluntary initiatives to reduce energy consumption and greenhouse gas emissions from its worldwide operations. GM surpassed its 2005 target of an 8% reduction in carbon dioxide (CO2) emissions from its worldwide facilities compared to 2000 emission levels. By 2005, GM had reduced CO2 emissions from its worldwide facilities by 16% compared to 2000 levels. Several GM facilities are included in the European emissions trading regime, which is being implemented to meet the European Community’s greenhouse gas reduction commitments under the Kyoto Protocol. GM has reported in accordance with the Global Reporting Initiative, the Carbon Disclosure Project, and the DOE 1605(b) since the inception of the programs. Global Environment and Energy goals and progress made on all voluntary programs are available in GM’s Corporate Responsibility Report at www.gmresponsibility.com.
 
Vehicular Noise Control
 
All vehicles manufactured and sold by GM may be subject to noise emission regulations.
 
In the United States, passenger cars and light-duty trucks are subject to state and local motor vehicle noise regulations. GM is committed to designing and developing its products to meet these noise requirements. Since addressing different vehicle noise regulations established in numerous state and local jurisdictions is not practical, GM attempts to identify the most stringent requirements and validate to those requirements. In the rare instances where a state or local noise regulation is not covered by the composite requirement, a waiver of the requirement is requested. Medium to heavy-duty trucks are regulated at the federal level. Federal truck regulations pre-empt all United States state or local noise regulations for trucks over 10,000 lbs. gross vehicle weight rating.
 
Outside the United States, noise regulations have been established by authorities at the national and supranational level (e.g., EU or UN ECE for Europe). GM believes that its vehicles meet all applicable noise regulations in the markets where they are sold.
 
Automotive Fuel Economy
 
The 1975 Energy Policy and Conservation Act provided for average fuel economy requirements for passenger cars built for the 1978 model year and thereafter, weighted by production volumes under a complex formula. Based on the EPA combined city-highway test data, GM’s 2006 model year domestic passenger car fleet achieved a Corporate Average Fuel Economy (CAFE) of 29.9 miles per gallon (mpg), which exceeded the requirement of 27.5 mpg. The estimated CAFE for GM’s 2007 model year domestic passenger cars is projected to be 29.5 mpg.


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For GM’s imported passenger cars, the 2006 model year CAFE was 29.0 mpg, which exceeded the requirement of 27.5 mpg. The CAFE estimate for 2007 model year GM imported passenger cars is 32.5 mpg, which would also exceed the applicable requirement.
 
Fuel economy standards for light-duty trucks became effective in 1979. GM’s light-duty truck CAFE for the 2006 model year was 22.8 mpg, which exceeds the requirement of 21.6 mpg. GM’s 2007 model year light-duty truck CAFE is projected to be 22.6 mpg, which would exceed the requirement of 22.2 mpg. The National Highway Traffic Safety Administration (NHTSA) has finalized new fuel economy standards for trucks for model years 2008 through 2011, which include substantial changes to the structure of the truck CAFE program. These final rules establish reformed standards based upon truck size. These reformed standards are optional through the 2010 model year, and mandatory in the 2011 and later model years. The rule sets the traditional (unreformed) truck CAFE standard at 22.5 mpg for 2008, 23.1 mpg for 2009, and 23.5 mpg for 2010.
 
Although it is not yet clear what specific changes will be adopted, it is likely that U.S. fuel economy requirements will be increased in the near future, which would pose additional challenges to GM’s ability to comply and to maintain a profitable operation. Some of the requirements that have been proposed would be beyond the current technical capacity of GM or any other manufacturer, and there can be no assurance that the necessary technological advances would be made or would be available on a timely and economically reasonable basis. Even less stringent requirements could affect GM’s ability to sell larger vehicles, which comprise a significant and disproportionately profitable segment of its portfolio of products.
 
In addition, in 2002 California passed legislation known as Assembly Bill 1493 (AB 1493) requiring the CARB to regulate greenhouse gas emissions from new motor vehicles sold in the state beginning in the 2009 model year. Since CO2 is the primary greenhouse gas emitted by automobiles, CO2 emissions are directly proportional to the amount of fuel consumed by motor vehicles, and as a result, CO2 emissions per mile are inextricably linked to fuel consumption per mile. GM believes that AB 1493 by attempting regulate CO2 emissions per mile is tantamount to establishing state level fuel economy standards, which is prohibited by the federal fuel economy law. Nonetheless, the CARB promulgated rules under AB 1493 (AB 1493 Rules) establishing standards that effectively require about a 40% increase in new vehicle fuel economy for passenger cars by 2016. These standards are now subject to legal challenges by the Alliance of Automobile Manufacturers and several dealers in federal court and by GM, DaimlerChrysler, and several dealers in California state court.
 
Since the CARB has characterized the AB 1493 Rules as an “emission” regulation, other states have adopted the California CO2 requirements pursuant to claimed authority under the federal Clean Air Act. As of December 2006, the following states have adopted the AB 1493 Rules imposing CO2 requirements on new motor vehicles beginning with the 2009 model year: Connecticut, Maine, Massachusetts, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Vermont, and Washington. Other states are also considering adopting the AB 1493 Rules.
 
As in California, the automotive industry has filed several lawsuits in federal court challenging the AB 1493 Rules in other states on the grounds that these attempts at state regulation of fuel economy are pre-empted by the federal fuel economy law. Lawsuits challenging the AB 1493 Rules in state courts in Vermont and Rhode Island have also been filed.
 
GM does not believe that it is technically possible for it to comply with the requirements of the AB 1493 Rules, given its current product portfolio and the technical improvements that it believes are likely in the near future. If these lawsuits do not succeed and if the AB 1493 Rules are applied to GM vehicles sold in certain states, GM could be forced to cease selling certain vehicles in those states, and depending upon how widely the AB 1493 Rules are applied, might curtail production of certain popular and profitable vehicles that do not comply with the rule.
 
In Europe, the European Auto Manufacturers’ Association and the EU established a voluntary agreement in 1999 with an emission target of 140 grams of CO2 per kilometer on average for new passenger cars sold in the EU by 2008. In February 2007, the EU Commission released a Communication stating an objective of achieving 120 grams


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of CO2 per kilometer by 2012. The proposal would allow 10 grams of this objective to be achieved through actions such as greater use of biofuels, making the new vehicle fuel economy target 130 grams CO2 per kilometer. Discussions are continuing concerning the framework for achieving this objective.
 
Potential Impact of Regulations
 
We continue to improve the fuel efficiency of our vehicles, even as we enhance utility and performance, address environmental aspects of our products, and add more safety features and customer convenience options, which since they add mass to a vehicle tend to lower its fuel economy. GM’s product lineup of 2007 models in the United States includes 23 models that get an EPA estimated 30 miles per gallon or better on the highway — more than any other vehicle manufacturer. Overall fuel economy and CO2 emissions from cars and light-duty trucks on the road are determined by a number of factors, including what products customers select and how they use them, traffic congestion, transit alternatives, fuel quality and availability, and land use patterns.
 
As described above under “Research, Development and Intellectual Property,” GM has established aggressive near-, mid- and long-term plans to develop and bring to market technologies designed to further improve fuel efficiency, reduce emissions, and provide additional value and benefits to our customers. These include enhancements to conventional internal combustion engine technology such as Active Fuel Management, variable valve timing systems, and six-speed automatic transmissions. In addition, GM currently offers hybrid-electric buses that are capable of improving the fuel efficiency of city buses by 25% to 50% and reducing some emissions by as much as 90%. GM currently has hybrid-electrical systems in fullsize pickup trucks available in the North America market and is bringing a range of additional hybrid products to market over the next several years. In 2006, GM launched the Saturn VUE Green Line with a GM Hybrid System, and in 2007 GM plans to launch a 2-Mode Hybrid system in the Chevrolet Tahoe and GMC Yukon, both large sport utility vehicles. In addition, for the 2007 model year GM offers 16 flex-fuel capable models that can run on E85 ethanol, gasoline, or any combination of the two fuels. In Europe, Saab offers the 9-5 BioPower FlexFuel model and plans to extend its BioPower model offerings, and Opel sells several models that operate on compressed natural gas. GM has extensive efforts underway to develop fuel cell vehicles designed to run on hydrogen and emit only water. GM believes that the development and global implementation of new, cost-effective energy technologies in all sectors, such as hydrogen fuel cells, is the most effective way to improve energy efficiency and reduce greenhouse gas emissions.
 
Despite these advanced technology efforts, GM’s ability to satisfy fuel economy/CO2 requirements in major markets such as the United States, Europe, and China is contingent on various future economic, consumer, legislative, and regulatory factors that GM cannot control and cannot predict with certainty. If GM is not able to comply with specific new fuel economy requirements, which include higher federal CAFE standards and state CO2 requirements such as those imposed by the AB 1493 Rules, then we could be subject to sizeable civil penalties or have to restrict product offerings drastically to remain in compliance. In turn, any such actions could have substantial adverse impacts on GM operations, including plant closings, reduced employment, and loss of sales revenue.
 
Safety
 
New vehicles and equipment sold by GM in the United States are required to meet certain safety standards promulgated by the NHTSA. The National Traffic and Motor Vehicle Safety Act of 1966 authorizes the NHTSA to determine these standards and the schedule for implementing them. In addition, in the case of a vehicle defect that creates an unreasonable risk to motor vehicle safety or a noncompliance with a safety standard, the act generally requires that the manufacturer notify owners and provide a remedy. The Transportation Recall Enhancement, Accountability and Documentation Act requires GM to report certain information relating to certain customer complaints, warranty claims, field reports, lawsuits, and fatalities and recalls outside the United States.
 
In addition to these U.S. rules, GM is subject to certain safety regulations in the non U.S. markets in which it operates. For the most part, these standards are similar to applicable U.S. standards. Nevertheless, from time to time, other countries pass regulations which are more stringent than U.S. standards.


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Item 1.   Business — (continued)
 
 
Pension Legislation
 
GM is subject to a variety of federal rules and regulations, including the Employee Retirement Income Security Act of 1974 (ERISA), which govern the manner in which GM administers its pensions for its retired employees and their spouses. On August 17, 2006, President Bush signed into law the Pension Protection Act of 2006 (PPA). The PPA is designed to, among other things, require companies to increase the amount of funding to their pension plans. GM’s U.S. hourly and salaried pension plans are overfunded under current rules and also under the PPA guidelines, many of which are not yet in effect. As a result, GM does not expect to make any contributions to its U.S. hourly and salaried pension plans for the foreseeable future, assuming there are no material changes in present market conditions.
 
Export Control
 
GM is subject to a number of domestic and international export control requirements. GM’s Office of Export Compliance (OEC) is responsible for addressing export compliance issues that are specified in regulations issued by the U.S. Department of State, the U.S. Department of Commerce, and the U.S. Department of Treasury, as well as issues relating to non U.S. export control laws. The OEC works with export compliance officers in GM business units who address export compliance issues on behalf of their business units. If GM fails to comply with applicable export compliance regulations, GM and its employees could be subject to criminal and civil penalties and, under certain circumstances, suspension and debarment from doing business with the government.
 
Employees
 
As of December 31, 2006, GM employed approximately 280,000 employees, of whom approximately 205,000 (73%) were hourly employees and approximately 75,000 (27%) were salaried employees. The following represents GM’s employment by regions at December 31 (in thousands):
 
                         
    2006     2005     2004  
 
GMNA
    152       173       181  
GME
    60       63       61  
GMLAAM
    32       31       29  
GMAP
    34       31       15  
GMAC(1)
          34       34  
Other
    2       3       4  
                         
Total
    280       335       324  
                         
 
 
(1) Amounts for 2006 exclude GMAC employees, who were removed from the consolidated payroll as a result of the GMAC Transaction in November 2006.
 
Approximately 89,000 of GM’s U.S. employees (73%) were represented by unions at December 31, 2006. The International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) represents the largest portion of our U.S. employees who are union members, representing approximately 86,000 employees. GM’s current collective bargaining agreement with the UAW expires in September 2007. In addition, many of our hourly employees outside the United States are represented by various unions. As of December 31, 2006, GM had approximately 357,000 U.S. hourly retirees and approximately 115,000 U.S. salaried retirees.


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Item 1.   Business — (concluded)
 
Employment and Payrolls
 
                         
    2006     2005     2004  
 
Worldwide payrolls (billions)
  $ 22.3     $ 21.5     $ 21.5  
U.S. hourly payrolls (in billions)(1)
  $ 8.5     $ 8.0     $ 8.7  
Average U.S. hourly labor cost per active hour worked(2)(3)
  $ 73.26     $ 81.18     $ 73.73  
 
 
(1) Includes employees “at work” (excludes laid-off employees receiving benefits).
 
(2) Includes U.S. hourly wages and benefits divided by the number of hours worked.
 
(3) Cost of an hour including all expenses associated with the national Special Attrition Program (SAP) is $110.33 in 2006.
 
Segment Reporting Data
 
Operating segment and principal geographic area data for 2006, 2005, and 2004 are summarized in Note 27 in GM’s Consolidated Financial Statements.
 
Website Access to GM’s Reports
 
GM’s internet website address is www.gm.com.
 
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act), are available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the U.S. Securities and Exchange Commission (SEC).
 
In addition to the information about GM and its subsidiaries contained in this Annual Report on Form 10-K for the year ended December 31, 2006, extensive information about the Corporation can be found on our website, including information about our management team, our brands and products, and our corporate governance principles.
 
Item 1A.   Risk Factors
 
We face a number of significant risks and uncertainties in connection with our operations. Our business, results of operations, and financial condition could be materially adversely affected by the factors described below.
 
While we describe each risk separately, some of these risks are interrelated and certain risks could trigger the applicability of other risks described below. Also, the risks and uncertainties described below are not the only ones that we may face. Additional risks and uncertainties not presently known to us, or that we currently do not consider significant, could also potentially impair our business, results of operations, and financial condition.
 
Risks related to GM and its automotive business
 
Our continued ability to achieve structural and material cost reductions and to realize production efficiencies for our automotive operations is critical to our ability to achieve our turnaround plan and return to profitability.
 
We are continuing to implement a number of structural and material cost reduction and productivity improvement initiatives in our automotive operations, including substantial restructuring initiatives for our unprofitable North American operations, as more fully discussed below in “Management’s Discussion and Analysis of Financial Condition and Result of Operations.” Our future competitiveness depends upon our continued success in implementing these restructuring initiatives throughout our automotive operations, especially in North America. In addition, while some of the elements of structural cost reduction are within our control, others such as interest rates or return on investments, which influence our expense for pension and postretirement health care and life


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insurance benefits (OPEB), depend more on external factors, and there can be no assurance that such external factors will not adversely affect our ability to reduce our structural costs.
 
Restrictions in our labor agreements could limit our ability to pursue or achieve cost savings through restructuring initiatives, and labor strikes, work stoppages, or similar difficulties could significantly disrupt our operations.
 
Substantially all of the hourly employees in our U.S., Canadian, and European automotive operations are represented by labor unions and are covered by collective bargaining agreements, which usually have a multi-year duration. Many of these agreements include provisions that limit our ability to realize cost savings from restructuring initiatives such as plant closings and reductions in workforce. Our current collective bargaining agreement with the UAW will expire in September 2007, and we intend to pursue our cost reduction goals vigorously in negotiating the new agreement. Any UAW strikes, threats of strikes, or other resistance in connection with the negotiation of a new agreement could materially adversely affect our business as well as impair our ability to implement further measures to reduce structural costs and improve production efficiencies in furtherance of our North American initiatives. A lengthy strike by the UAW that involves all or a significant portion of our manufacturing facilities in the United States would have a material adverse effect on our operations and financial condition, particularly our liquidity.
 
We must continue to make structural changes to reduce our U.S. health care cost burden, the source of our largest competitive cost disadvantage.
 
GM’s OPEB obligations for employees and retirees are significant, $68 billion at December 31, 2006, and have the capacity to grow even larger on a global basis. In recent years, we have paid our OPEB expenditures from operating cash flow, which reduces our liquidity and cash flow from operations. Our U.S. health-care cash spending in 2006 was $4.8 billion, and we expect that it will be $4.7 billion in 2007 (before the effect, if any, of any amounts incurred or paid on certain benefit guarantees related to Delphi discussed below and contributions to the independent Voluntary Employees Beneficiary Association (VEBA) trust associated with the UAW Mitigation Plan), principally due to amendments to our hourly and salaried health care plans made in 2006.
 
To address our rising costs we made modifications to health-care benefits for salaried workers and retirees in 2005, and in February 2006 announced a cap on salaried retiree health-care spending levels effective in January 2007. In 2005, we also entered into an agreement with the UAW increasing retiree health-care cost-sharing provisions, which received court approval in March 2006 (UAW Health Care Settlement Agreement). Under this agreement, our U.S. OPEB obligation was reduced by $17 billion. Continued progress in the reduction of health-care liabilities and expenses, particularly with respect to our hourly employees and retirees, is a critical element of our GMNA turnaround initiatives. However, our efforts to control these costs may not always be successful and will depend in part on our negotiations with the UAW in 2007. Failure to adequately control our health-care costs is likely to result in materially higher expenses and have a material adverse effect on our results of operations and financial condition.
 
Our extensive pension and OPEB obligations to retirees are a competitive disadvantage for us.
 
We believe that we are competitively disadvantaged because we provide pension benefits and OPEB, consisting of both retiree health care and life insurance, to more than 400,000 retirees and surviving spouses in the United States. As a result, we believe, our pension and OPEB payments as a percentage of revenues are significantly greater than our competitors, particularly those operating outside the United States. In addition to the large number of U.S. retirees, we have mature manufacturing operations in Western Europe, including Sweden and the United Kingdom, and Australia and as result have pension and similar obligations to significant numbers of current retirees and employees who will retire in the near future. Certain of our pension plans outside the United


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States are partially or fully unfunded. As a result of our worldwide pension and OPEB obligations, we have relatively less available cash to invest in product development and capital projects than some of our competitors.
 
Our pension and OPEB expenses are affected by factors outside our control, including the performance of plan assets, interest rates, actuarial data and experience, and changes in laws and regulations.
 
Our future funding obligations for our IRS-qualified U.S. defined benefit pension plans and our estimated liability related to OPEB plans depend upon changes in health-care inflation trend rates, the level of benefits provided for by the plans, the future performance of assets set aside in trusts for these plans, the level of interest rates used to determine funding levels, actuarial data and experience, and any changes in government laws and regulations. In addition, our employee benefit plans hold a significant amount of equity securities. If the market values of these securities decline, our pension and OPEB expenses would increase and, as a result, could materially adversely affect our business. Any decreases in interest rates, if and to the extent not offset by contributions and asset returns, could also increase our obligations under such plans. We may be legally required to make contributions to the pension plans in the future, and those contributions could be material.
 
Delphi may seek to reject or compromise its obligations to us through its Chapter 11 bankruptcy proceedings.
 
In connection with its Chapter 11 bankruptcy proceeding, Delphi has filed a motion seeking authority to reject certain supply contracts with GM, which is now indefinitely adjourned while negotiations are in progress. Although Delphi has not rejected any GM contracts as of this time and has assured GM that it does not intend to disrupt production at GM assembly facilities, if GM, Delphi, and the other parties cannot reach the agreements necessary to resolve all the matters involved in Delphi’s bankruptcy, there is a risk that Delphi or one or more of its affiliates may reject or threaten to reject individual contracts with GM, either to exit specific lines of business or to increase the price GM pays for certain parts and components. As a result, we could experience a material disruption in our supply of automotive systems, components, and parts that could force the suspension of production at GM assembly facilities, which could materially adversely affect our business, including key elements of our North America turnaround initiative. In addition, we would likely find it difficult to locate a different supplier for some of the systems, components, and parts we purchase from Delphi, particularly those that require extended lead times for validation and production.
 
GM is seeking to minimize its risks by protecting our right of setoff against the $1.15 billion we owed to Delphi as of the date of its Chapter 11 filing. However, our ability to benefit from a right to setoff may be subject to limitation by the Court or dispute by Delphi, the creditors’ committee, or Delphi’s other creditors, so that GM cannot provide any assurance that it will be able to setoff such amounts fully or partially. To date setoffs of approximately $53.6 million have been taken by GM, with Delphi’s agreement. The financial impact of a substantial compromise of our right of setoff could have a material adverse impact on our financial position. In addition, the basis, amounts, and priority of any claims against Delphi that GM currently has or may have in the future may be challenged by other parties in interest in Delphi’s bankruptcy proceeding. The scope and results of such challenges cannot be predicted with certainty.
 
We have guaranteed a significant amount of Delphi’s financial obligations to its unionized workers. If Delphi fails to satisfy these obligations, we would be obligated to pay some of these obligations.
 
In connection with the spin-off of Delphi from GM in 1999, we entered into separate agreements with the UAW, the International Union of Electrical Workers-Communication Workers of America (“IUE-CWA”), and the United Steel Workers unions. Under these agreements, we agreed to guarantee Delphi’s payment of certain levels of pension and OPEB to certain former GM U.S. hourly employees who were transferred to Delphi in connection with the spin-off. As a result, we are contractually responsible for such payments to the extent Delphi fails to pay these benefits at required levels.


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GM and Delphi entered into a separate agreement in 1999 that requires Delphi to indemnify GM if and to the extent GM makes payments under the benefit guarantees to the UAW employees or retirees. GM received a notice from Delphi, dated October 8, 2005, that it was more likely than not that GM would become obligated to provide benefits pursuant to the benefit guarantees to the UAW employees or retirees. The notice stated that Delphi was unable at that time to estimate the timing and scope of any benefits GM might be required to provide under those benefit guarantees. The amount of our ultimate liability for these contingent exposures may change, and will depend on the results of ongoing discussions among Delphi, its unions, GM, and other interested parties, as well as other factors. Any recovery by GM under indemnity claims against Delphi might be subject to partial or complete discharge in the Delphi reorganization proceeding. As a result, GM’s claims for indemnity may not be paid in full. We believe that it is probable that we have incurred a contingent liability under these benefit guarantees as a result of Delphi’s Chapter 11 filing. As a result, we have recorded a charge of $6.0 billion to date as an estimate of our contingent exposures. We believe that the range of these contingent exposures is between $6 billion and $7.5 billion, with amounts near the low end of the range considered more possible than amounts near the high end of the range assuming an agreement is reached among GM, Delphi, and Delphi’s unions. These views reflect GM’s current assessment that it is unlikely that a Chapter 11 process will result in both a termination of Delphi’s pension plan and complete elimination of its OPEB plans. Any increase in our contingent exposures, including under the benefit guarantees, could materially increase our expenses and adversely affect our results of operations.
 
Financial difficulties, labor stoppages, or work slowdowns at key suppliers, including Delphi, could result in a disruption in our operations and have a material adverse effect on our business.
 
We rely on many suppliers to provide us with the systems, components, and parts that we need to manufacture our automotive products and operate our business. Some of these suppliers have experienced severe financial difficulties and solvency problems. For example, our suppliers Dana Corporation, Tower Automotive, Inc., Dura Automotive Systems, and Collins & Aikman Corporation are all in the process of reorganizing under the U.S. Bankruptcy Code. Financial difficulties or solvency problems at these or other suppliers could materially adversely affect their ability to supply us with the systems, components, and parts that we need, which could disrupt our operations. Similarly, a substantial portion of many of these suppliers’ workforces are represented by labor unions. Workforce disputes that result in work stoppages or slowdowns at these suppliers could also have a material adverse effect on their ability to continue meeting our needs.
 
In particular, our largest supplier, Delphi, filed a Chapter 11 bankruptcy petition in October 2005. On March 31, 2006 Delphi filed motions under the U.S. Bankruptcy Code seeking authority to reject its U.S. labor agreements and modify retiree welfare benefits. Delphi’s unions and certain other parties have filed objections to these motions. Hearings on these motions have been adjourned indefinitely to allow Delphi, its unions, and GM additional time to fully focus on reaching comprehensive consensual agreements to resolve the issues resulting from Delphi’s bankruptcy filing. However, the Delphi employees represented by the UAW have given the UAW authorization to strike if Delphi voids its labor contracts pursuant to these motions. While Delphi has indicated to us that it expects no disruptions in its ability to continue supplying us with systems, components, and parts as Delphi pursues its bankruptcy restructuring plan, labor disruptions at Delphi resulting from Delphi’s pursuit of a restructuring plan could seriously disrupt our North American operations, prevent us from continuing to implement our turnaround initiatives, and materially adversely impact our business.
 
Increase in cost, disruption of supply or shortage of raw materials could harm our business.
 
We use various raw materials in our business including corrosion-resistant steel, non-ferrous metals such as aluminum and copper, and precious metals such as platinum and palladium. The prices for these raw materials fluctuate depending on market conditions. In recent years, we have experienced significant increases in freight charges and raw material costs such as aluminum and copper. Substantial increases in the prices for our raw materials increase our operating costs, and to the extent they cannot be recouped through increases in the prices of vehicles, could reduce our profitability. In addition, some of these raw materials, such as corrosion-resistant steel, are available


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from a limited number of suppliers. We cannot guarantee that we will be able to maintain favorable arrangements and relationships with these suppliers. An increase in the cost or a sustained interruption in the supply or shortage of some of these raw materials that may be caused by a deterioration of our relationships with suppliers or by events such as natural disasters, power outages, labor strikes, or the like could negatively impact our net revenues and profits.
 
A decline in consumer demand for our higher margin vehicles could result in diminished profitability.
 
Our results of operations depend not only on the number of vehicles we sell, but also the product mix of our vehicle sales. For example, in the United States sales of luxury and fullsize vehicles are generally more profitable for us than sales of our smaller and lower-priced vehicles. Our sales tend to be concentrated in a relatively small number of models. If customer preferences shift to product segments in which our competitors offer strong portfolios, our sales could be disproportionately affected. Moreover, shifts in demand away from higher margin sales could materially adversely affect our business. Similarly, retail sales of vehicles are generally more profitable to us than fleet sales.
 
Shortages and increases in the price of fuel can result in diminished profitability due to shifts in consumer vehicle demand.
 
High gasoline prices in 2006 contributed to weaker demand for certain of our higher margin vehicles, especially our fullsize sport utility vehicles, as consumer demand shifted to smaller, more fuel-efficient vehicles, which provide lower profit margins and generally represent a smaller proportion of our sales volume in North America. Any future increases in the price of gasoline in the United States or in our other markets or any sustained shortage of fuel could weaken further the demand for such vehicles. Such a result could lower profitability and have a material adverse effect on our business.
 
The pace of introduction and market acceptance of new vehicles is important to our success.
 
Customers have come to expect new and improved vehicle models to be introduced frequently. In order to meet these expectations, we must introduce on a regular basis new vehicle models as well as enhanced versions of existing vehicle models. Our competitors have introduced, and likely will continue to introduce, new and improved vehicle models designed to meet consumer expectations. Because product lifecycles do not all coincide, some competitive vehicles can be newer than some of our existing models in the same market segments. This has and will continue to put pricing and vehicle enhancement pressure on our vehicles and, in some vehicle segments, has resulted and will result in market share declines. In addition, consumer preferences for vehicles in certain market segments change over time. Vehicles in less popular segments may have to be discounted in order to be sold in similar volumes. Further, the pace of our development and introduction of new and improved vehicles is dependent on our ability to successfully implement improved technological innovations in design, engineering, and manufacturing. Our profit margins, sales volumes, and market shares may decrease if we are unable to produce models that compare favorably to competing models, particularly in our higher margin vehicle lines such as fullsize pickup trucks and sport utility vehicles. Vehicle lines that are particularly important to our future success include our new sport utility vehicles and pickup trucks, and although initial reaction to the utility vehicles and pickup trucks introduced in 2006 has been favorable, there can be no assurance of success related to market acceptance of these or any other products.
 
Decreases in the residual value of our vehicles could have a significant negative effect on our results of operations.
 
Retail customers could be deterred from selecting GM vehicles if they have weaker or less reliable residual values than our competitors’ products. In addition to providing a competitive disadvantage for our vehicles among retail customers, weakness in residual values could have a significant negative effect on our results of operations. To offset risks associated with declines in residual values, GM typically provides residual value support to GMAC with


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respect to vehicles subject to lease or retail balloon installment sales contracts. At the beginning of a lease or balloon contract, GM pays GMAC so that the vehicle’s residual value at the end of the contract will be more than the residual value as estimated by an independently published guide. After the lease or balloon contract expires and the vehicle is resold, GM also participates in a risk-sharing arrangement in which GM in certain circumstances reimburses GMAC for a portion of any shortfall between the independently estimated residual value and the resale proceeds. Moreover, in a significant portion of fleet sales to daily rental companies, GM agrees to repurchase the vehicles at a set price, thereby assuming the risk of declines in residual value. GM believes that improvements in the quality of its vehicles will sustain and improve residual values, but there can be no assurance that residual values will improve or even maintain their current levels.
 
GM’s significant investment in new technology may not result in successful vehicle applications.
 
GM intends to invest up to $9 billion per year in the next few years to support its products and to develop new technology. In some cases, such as hydrogen fuel cells, the technologies are not yet commercially practical and depend on future significant technological advances by GM and by suppliers, especially in the area of advanced battery technology. There can be no assurance that these advances will occur in a timely or feasible way, that the funds that GM has budgeted for these purposes will be adequate, or that GM will be able to establish its right to these technologies. Moreover, GM’s competitors and others are pursuing the same technologies and other competing technologies, in some cases with more money available, and there can be no assurance that they will not acquire similar or superior technologies, sooner than GM, or on an exclusive basis, or at a significant price advantage.
 
We operate in a highly competitive industry that has excess manufacturing capacity.
 
The automotive industry is highly competitive, and overall manufacturing capacity in the automotive industry exceeds current demand, although it is at a historically high level globally. We expect competition to increase over the next few years due primarily to aggressive investment by manufacturers in established markets in the United States and Western Europe and the presence of local manufacturers in key emerging markets like China and India. Many manufacturers including GM have relatively high fixed labor costs as well as significant limitations on their ability to close facilities and reduce fixed costs. Our competitors may respond to these relatively high fixed costs by attempting to sell more vehicles by adding vehicle enhancements, providing subsidized financing or leasing programs, offering option package discounts or other marketing incentives, or reducing vehicle prices in certain markets. These actions have had, and are expected to continue to have, a significant negative impact on our vehicle pricing, market share, and operating results, and present a significant risk to our ability to enhance our revenue per vehicle.
 
The financial distress, bankruptcy, or insolvency of a major competitor could have significant adverse consequences for us.
 
If a major automotive company experienced financial distress, it could pursue short-term strategies that would disrupt the market and force competitors like GM to consider actions that would be imprudent or even unsustainable in the long term. In addition, the financial distress, bankruptcy, or insolvency of a major manufacturer could lead to a disruption in our supply base, which could materially affect our business. Finally, a competitor that today has substantial pension and OPEB obligations to its retirees could gain a significant cost advantage over us if it succeeded in reducing or eliminating its contractual obligations to its unionized work force and other parties through a bankruptcy proceeding.
 
We could be materially adversely affected by changes or imbalances in currency exchange and other rates.
 
Because we sell products and buy materials globally over a substantial period, we are exposed to risks related to the effects of changes in foreign currency exchange rates, commodity prices, and interest rates. While we carefully watch and attempt to manage these exposures, these types of changes can have material adverse effects on our business. In recent years, the relative weakness of certain currencies has provided competitive advantages to


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certain of our competitors. Specifically, the weakness of the Japanese yen has provided pricing advantages for vehicles and parts imported from Japan to markets with more robust currencies like the United States and Western Europe. To the extent that the Japanese yen remains relatively weaker than the U.S. dollar and the currencies of Western Europe, whether as a result of foreign governments’ influence or otherwise, we are at a disadvantage that could have a material adverse effect on the results of our operations in the United States and Europe.
 
Our liquidity position could be negatively affected by a variety of factors, which in turn could have a material adverse effect on our business.
 
While we believe that we currently have sufficient liquidity to operate our business over the short and medium term, our ability to meet our capital requirements over the long term will require substantial liquidity and will depend on the continued successful execution of our four-point turnaround plan to return our North American operations to profitability and positive cash flow. We incurred a consolidated net loss of $2.0 billion in 2006 and $10.4 billion in 2005, due primarily to losses in our North American operations. We are subject to numerous risks and uncertainties that could negatively affect our cash flow and liquidity position in the future. These include, among other things, risk of labor disruptions (either at Delphi, our largest supplier, or at GM in connection with the renegotiation of our collective bargaining agreement with the UAW in 2007) or pressure from suppliers to agree to changed payment or other contract terms. The occurrence of one or more of these events could weaken our liquidity position and, under certain circumstances, materially adversely affect our business, for example by curtailing our ability to make important capital expenditures.
 
Continued failure to achieve profitability may cause some or all of our deferred tax assets to expire.
 
As of December 31, 2006, we had approximately $34.8 billion in U.S. net deferred tax assets (DTAs). These DTAs include approximately $5.7 billion net operating loss carryovers that can be used to offset taxable income in future periods and reduce our income taxes payable in those future periods. In December 2006 we increased our U.S. DTAs by $10.2 billion as a result of recognizing the funded status of our benefit plans on our 2006 consolidated balance sheet pursuant to the adoption of SFAS No. 158. Many of these DTAs will expire if they are not utilized within certain time periods. At this time, we consider it more likely than not that we will have U.S. taxable income in the future that will allow us to realize these DTAs. However, it is possible that some or all of these DTAs could ultimately expire unused, especially if our North America restructuring initiatives are not successful. While the closing of the GMAC Transaction in November 2006 did not directly affect GM’s ability to realize our DTAs, a significant portion of GMAC’s U.S. pre-tax income will no longer be available to GM. Therefore, unless we are able to generate sufficient U.S. taxable income from our automotive operations, a substantial valuation allowance to reduce our U.S. DTAs may be required, which would materially increase our expenses in the period it is taken and materially adversely affect our results of operations and statement of financial condition.
 
Further reduction of our credit ratings, or failure to restore our credit ratings to higher levels, could have a material adverse effect on our business.
 
Our credit ratings have been downgraded to historically low levels. GM’s unsecured debt is currently assigned a non-investment grade rating by each of the four nationally recognized statistical rating organizations. The decline in our credit ratings reflects the agencies’ concerns over our competitive and financial strength, including whether we will experience a labor interruption and how we will fund our health-care liabilities. Our current credit ratings have substantially reduced our access to the unsecured debt markets and have unfavorably impacted our overall cost of borrowing. The financing arrangements we entered into in 2006 included collateral in some cases because of our current credit ratings.
 
Further downgrades of our current credit ratings or significant worsening of our financial condition could also result in increased demands by our suppliers for accelerated payment terms or other more onerous supply terms.


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Item 1A.   Risk Factors — (continued)
 
 
The federal government is currently investigating certain of our accounting practices. The final outcome of these investigations could require us to restate prior financial results.
 
We have received subpoenas from the SEC in connection with some of its investigations related to various matters including our financial reporting concerning pension and OPEB, certain transactions between us and Delphi, supplier price reductions or credits, any obligation we may have to fund pension and OPEB costs in connection with Delphi’s Chapter 11 proceedings, and certain transactions in precious metal raw materials used in our automotive manufacturing operations. In addition, a federal grand jury issued a subpoena to us in connection with supplier credits. GM has produced documents and provided testimony in response to the SEC and federal grand jury subpoenas. We are continuing to cooperate with the government in connection with all these investigations. A negative outcome of one or more of these investigations could require us to restate prior financial results and could result in fines, penalties, or other remedies being imposed on GM, which under certain circumstances could have a material adverse effect on our business.
 
We have determined that our internal controls over financial reporting are currently ineffective. The lack of effective internal controls could adversely affect our financial condition and ability to carry out our strategic business plan.
 
As discussed in Item 9A, Controls and Procedures, our management team for financial reporting, under the supervision and with the participation of our chief executive officer and chief financial officer, conducted an evaluation of the effectiveness of the design and operation of our internal controls. As of December 31, 2006, they concluded that GM’s disclosure controls and procedures and GM’s internal control over financial reporting were not effective. Although we have made and are continuing to make improvements in our internal controls, if we are unsuccessful in our focused effort to permanently and effectively remediate the weaknesses in our internal control over financial reporting over time, it may adversely impact our ability to report our financial condition and results of operations in the future accurately and in a timely manner, and may potentially adversely impact our reputation with stakeholders.
 
Our indebtedness and other obligations of our automotive operations are significant and could materially adversely affect our business.
 
We have a significant amount of indebtedness. As of December 31, 2006, we had approximately $38.7 billion in loans payable and long-term debt outstanding for our automotive operations. Our significant indebtedness may have several important consequences. For example, it could:
 
  •  Require us to dedicate a significant portion of our cash flow from operations to the payment of principal of, and interest on, our indebtedness, which will reduce the funds available for other purposes such as product development;
 
  •  Make us more vulnerable to adverse economic and industry conditions;
 
  •  Limit our ability to withstand competitive pressures; and
 
  •  Reduce our flexibility in responding to changing business and economic conditions.
 
Any one or more of these consequences could have a material adverse effect on our business.
 
Economic and industry conditions constantly change and could have a material adverse effect on our business and results of operations.
 
Our business and results of operations are tied to general economic and industry conditions. The number of cars and trucks sold industry-wide can vary from year to year. Demand for our vehicles depends largely on general economic conditions, including the strength of the global and local market economies, unemployment levels, consumer confidence levels, the availability of credit, and the availability and cost of fuel. Cars and trucks are


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durable items, and consumers can choose to defer their acquisition or replacement significantly. Difficult economic conditions may also cause consumers to shift to new models that are less expensive and yield lower margins or to used vehicles. While we may attempt to limit the effect of these trends through pricing or other marketing measures, these trends can have a material adverse effect on our business. Because we have relatively high fixed costs, relatively small changes in the number of vehicles sold can have a significant effect on our business. Consequently, if industry demand decreases due to, among other things, slowing or negative economic growth, our business, results of operations, and financial condition may be materially adversely affected. There can be no assurance that current industry vehicle sales levels will continue.
 
Our businesses outside the United States expose us to additional risks that may cause our revenues and profitability to decline.
 
Approximately 55% of our automotive unit sales in 2006 were generated outside the United States. We intend to continue to pursue growth opportunities for our business in a variety of business environments outside the United States, which could expose us to greater risks. The risks associated with our operations outside the United States include:
 
  •  Multiple foreign regulatory requirements that are subject to change, including foreign regulations restricting our ability to sell our products in those countries;
 
  •  Differing local product preferences and product requirements;
 
  •  Difficulty in establishing and maintaining robust oversight over foreign operations;
 
  •  Differing labor regulations;
 
  •  Consequences from changes in tax laws;
 
  •  Foreign state takeovers of our manufacturing facilities in those countries; and
 
  •  Political and economic instability, natural calamities, war and terrorism.
 
The effects of these risks may, individually or in the aggregate, materially adversely affect our business.
 
Changes in existing, or the adoption of new, laws, regulations or policies of governmental organizations, particularly environmental or fuel economy regulations, may have a significant negative impact on how we do business.
 
We are affected significantly by a substantial amount of governmental regulations, which are expensive to comply with and anticipated to increase. In the United States and Europe, for example, governmental regulation is primarily driven by concerns about the environment, vehicle safety, and fuel economy. These government regulatory requirements complicate our plans for global product development and can result in substantial costs, which can be difficult to pass through to our customers.
 
The CAFE requirements mandated by the U.S. government pose special concerns. There have been a number of recent proposals by the President and various members of Congress to increase these standards significantly. Some of these proposals might require us to alter our capital spending and research and development plans, curtail sales of our higher margin vehicles, cease production of certain models, or even exit certain segments of the vehicle market. Proposals that would result in dramatically higher standards could disrupt our future product plans in ways that would significantly and adversely affect our sales volume, revenue, and profitability in the United States and could result in plant closures and job losses. Similarly, a growing number of states have adopted regulations that establish CO2 emission standards that effectively impose similarly heightened fuel economy standards for new vehicles sold in those states. Although the automotive industry is challenging certain of these state regulations in court, no assurance can be given that these challenges will be successful.


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Similarly, meeting or exceeding government-mandated safety standards is difficult and costly, because crashworthiness standards tend to conflict with the need to reduce vehicle weight in order to meet emissions and fuel economy standards. While GM is managing its product development and production operations on a global basis to reduce costs and lead times, unique national or regional standards or vehicle rating programs can result in additional costs for product development, testing, and manufacturing. Governments often require the implementation of new requirements during the middle of a product cycle, which can be substantially more expensive than accommodating these requirements during the design of a new product.
 
We are subject to significant risks of litigation.
 
We are currently subject to numerous matters in litigation, including a number of stockholder and bondholder class actions and derivative lawsuits. We cannot provide assurance that we will be successful in defending any of these matters, and adverse judgments could, under certain circumstances, materially adversely affect our business. We are also routinely named a defendant in purported class actions alleging a variety of vehicle defects, in product liability cases seeking damages for personal injury, and in suits alleging GM responsibility for claims of asbestos related illnesses. Some of these matters are described in greater detail in our Legal Proceedings section below. Since the outcomes of such pending or future litigation are not predictable, we cannot provide assurance that, under certain circumstances, such litigation will not materially adversely affect our business, results of operations, or cash flows.
 
Risks related to GM’s 49% ownership interest in GMAC
 
General business, economic, and market conditions may significantly affect the operating results of GMAC’s earnings.
 
Following the GMAC Transaction in November 2006, we have a 49% ownership interest in GMAC which is accounted for in our consolidated financial statements using the equity method. GMAC’s business and earnings are sensitive to general business and economic conditions in the United States. These conditions include short-term and long-term interest rates, inflation, fluctuations in both debt and equity capital markets, and the strength of the U.S. economy, as well as the local economies in which they conduct business. If any of these conditions worsen, GMAC’s business and earnings could be adversely affected and significantly affect our equity investment. For example, a rising interest rate environment could decrease the demand for loans or business, and economic conditions that negatively impact household incomes could decrease the demand for loans and increase the number of customers who become delinquent or default on their loans. The risk of borrower default becomes more important as GMAC’s portfolio of loans held for investment continues to grow. A significant proportion of GMAC’s revenues and profits in recent years came from originating, servicing, and securitizing residential mortgages; as the housing market in the United States has slowed, GMAC’s revenues and profits have been adversely affected, and we believe that this market is not likely to return to its peak level in the near future.
 
GMAC requires substantial capital, and if GMAC is unable to maintain adequate financing sources, its profitability and financial condition will suffer and jeopardize its ability to continue operations.
 
GMAC’s liquidity and ongoing profitability are, in large part, dependent upon its timely access to capital and the costs associated with raising funds in different segments of the capital markets. Currently, GMAC’s primary sources of financing include public and private securitizations and whole loan sales. To a lesser extent, GMAC also uses institutional unsecured term debt, commercial paper, and retail debt offerings. Reliance on any one source can change going forward.
 
GMAC depends and will continue to depend on its ability to access diversified funding alternatives to meet future cash flow requirements and to continue to fund its operations. Negative credit events specific to GMAC or GM, or other events affecting the overall debt markets have adversely impacted its funding sources, and continued or additional negative events could further adversely impact its funding sources, especially over the long term. If


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GMAC is unable to maintain adequate financing or if other sources of capital are not available, GMAC could be forced to suspend, curtail, or reduce certain aspects of its operations, which could harm its revenues, profitability, financial condition, and business prospects.
 
Furthermore, GMAC utilizes asset and mortgage securitizations and sales as a critical component of its diversified funding strategy. Several factors could affect its ability to complete securitizations and sales, including conditions in the securities markets generally, conditions in the asset-backed or mortgage-backed securities markets, the credit quality and performance of its contracts and loans, its ability to service its contracts and loans, and a decline in the ratings given to securities previously issued in its securitizations. Any of these factors could negatively affect the pricing of its securitizations and sales, resulting in lower proceeds from these activities.
 
In its 2006 Annual Report on Form 10-K, GMAC has restated prior period financial information to eliminate hedge accounting treatment that had been applied to certain callable debt hedged with derivatives. As a result, it is possible that some of GMAC’s lenders under certain of its liquidity facilities could claim that they are not obligated to honor their lending commitments. While such a claim would not be entirely unreasonable, GMAC believes that it would not be sustainable, GMAC believes that this matter is not likely to be tested because it has no current need or intention to draw on any of the more significant existing facilities, and renewal and revision of them is imminent, which likely will eliminate the issue. There can be no assurance that GMAC is correct in these assessments. If GMAC is not correct and multiple claims were asserted and substantiated, available funding in certain of its liquidity facilities could be adversely impacted, but GMAC believes this impact is manageable because of its current substantial liquidity position.
 
GMAC’s indebtedness and other obligations are significant and could materially adversely affect its business.
 
GMAC has a significant amount of indebtedness. As of December 31, 2006, GMAC had approximately $237 billion in principal amount of indebtedness outstanding. Interest expense on its indebtedness constitutes approximately 67% of its total financing revenues. In addition, under the terms of its current indebtedness, GMAC has the ability to create additional unsecured indebtedness. If its debt payments increase, whether due to the increased cost of existing indebtedness or the incurrence of additional indebtedness, GMAC may be required to dedicate a significant portion of its cash flow from operations to the payment of principal of, and interest on, its indebtedness, which would reduce the funds available for other purposes. Its indebtedness also could limit its ability to withstand competitive pressures and reduce its flexibility in responding to changing business and economic conditions.
 
GMAC’s earnings may decrease because of increases or decreases in interest rates.
 
GMAC’s profitability is directly affected by changes in interest rates. The following are some of the risks GMAC faces relating to an increase in interest rates:
 
  •  Rising interest rates will increase its cost of funds.
 
  •  Rising interest rates may reduce its consumer automotive financing volume by influencing consumers to pay cash for vehicle purchases, instead of financing them.
 
  •  Rising interest rates generally reduce GMAC’s residential mortgage loan production as borrowers become less likely to refinance and the costs associated with acquiring a new home become more expensive.
 
  •  Rising interest rates will generally reduce the value of mortgage and automotive financing loans and contracts and retained interests and fixed income securities held in GMAC’s investment portfolio.
 
GMAC is also subject to risks from decreasing interest rates. For example, a significant decrease in interest rates could increase the rate at which mortgages are prepaid, which could require GMAC to write down the value of its retained interests. Moreover, if prepayments are greater than expected, the cash GMAC receives over the life of its mortgage loans held for investment and its retained interests would be reduced. Higher-than-expected prepayments could also reduce the value of its mortgage servicing rights and, to the extent the borrower does


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not refinance with GMAC, the size of its servicing portfolio. Therefore, any such changes in interest rates could harm GMAC’s revenues, profitability and financial condition.
 
GMAC’s hedging strategies may not be successful in mitigating its risks associated with changes in interest rates and could affect its profitability and financial condition.
 
GMAC employs various economic hedging strategies to mitigate the interest rate and prepayment risk inherent in many of its assets. Its hedging strategies rely on assumptions and projections regarding its assets, liabilities, and general market factors. If these assumptions and projections prove to be incorrect or its hedges do not adequately mitigate the impact of changes in interest rates or prepayment speeds, GMAC may incur losses that could adversely affect its profitability and financial condition.
 
GMAC’s residential mortgage subsidiary’s ability to pay dividends to GMAC is restricted by contractual arrangements.
 
On June 24, 2005, GMAC entered into an operating agreement with GM and ResCap, the holding company for GMAC’s residential mortgage business, to create separation between GM and GMAC, on the one hand, and ResCap, on the other. The operating agreement restricts ResCap’s ability to declare dividends or prepay subordinated indebtedness to GMAC. As a result of these arrangements, ResCap has obtained investment grade credit ratings for its unsecured indebtedness that are separate from GMAC’s ratings and the ratings of GM. This operating agreement was amended on November 27, 2006 and on November 30, 2006, in conjunction with the GMAC Transaction. Among other things, these amendments removed GM as a party to the agreement.
 
The restrictions contained in the ResCap operating agreement include the requirements that ResCap’s members’ equity be at least $6.5 billion in order for dividends to be paid to GMAC or GMAC’s other affiliates and that the cumulative amount of any such dividends may not exceed 50% of ResCap’s cumulative consolidated net income excluding amounts for taxes relating to the conversion of GMAC to a limited liability company (LLC), measured from July 1, 2005, through the time such dividend is paid, minus the cumulative amount of certain prepayments of its subordinated debt by ResCap if such prepayments exceed 50% of ResCap’s cumulative consolidated net income at the time a dividend is paid. At December 31, 2006, ResCap had consolidated equity of approximately $7.7 billion.
 
GMAC uses estimates and assumptions in determining the fair value of certain of its assets, in determining its allowance for credit losses, in determining lease residual values, and in determining its reserves for insurance losses and loss adjustment expenses. If its estimates or assumptions prove to be incorrect, its cash flow, profitability, financial condition, and business prospects could be materially adversely affected.
 
GMAC uses estimates and various assumptions in determining the fair value of many of its assets, including retained interests and securitizations of loans and contracts, mortgage servicing rights, and other investments, which do not have an established market value or are not publicly traded. GMAC also uses estimates and assumptions in determining its allowance for credit losses on its loan and contract portfolios, in determining the residual values of leased vehicles, and in determining its reserves for insurance losses and loss adjustment expenses. It is difficult to determine the accuracy of its estimates and assumptions, and its actual experience may differ materially from these estimates and assumptions. As an example, the continued decline of the domestic housing market, especially with regard to the nonprime sector, has resulted in increases of the allowance for loan losses at ResCap for 2006. A material difference between GMAC’s estimates and assumptions and GMAC’s actual experience may adversely affect its cash flow, profitability, financial condition, and business prospects.
 
GMAC is exposed to credit risk which could affect its profitability and financial condition.
 
GMAC is subject to credit risk resulting from defaults in payment or performance by customers for its contracts and loans, as well as contracts and loans that are securitized and in which GMAC retains a residual


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interest. For example, the continued decline in the domestic housing market has resulted in an increase in delinquency rates related to mortgage loans that ResCap either holds or in which it retains an interest. There can be no assurances that GMAC’s monitoring of its credit risk as it impacts the value of these assets and its efforts to mitigate credit risk through its risk-based pricing, appropriate underwriting policies, and loss mitigation strategies are or will be sufficient to prevent an adverse effect on its profitability and financial condition. As part of the underwriting process, GMAC relies heavily upon information supplied by third parties. If any of this information is intentionally or negligently misrepresented and the misrepresentation is not detected prior to completing the transaction, the credit risk associated with the transaction may be increased.
 
Recent developments in the residential mortgage market, especially in the nonprime sector, may adversely affect GMAC’s revenues, profitability, and financial condition
 
Recently, the residential mortgage market in the United States, and especially the nonprime sector, has experienced a variety of difficulties and changed economic conditions that adversely affected GMAC’s earnings and financial condition in the fourth quarter of 2006. Delinquencies and losses with respect to ResCap’s nonprime mortgage loans increased significantly and may continue to increase. Housing prices in many states have also declined or stopped appreciating, after extended periods of significant appreciation. In addition, the liquidity provided to the nonprime sector has recently been significantly reduced, which will likely cause ResCap’s nonprime mortgage production to decline. These trends have resulted in significant writedowns to ResCap’s mortgage loans held for sale portfolio and additions to allowance for loan losses for its mortgage loans held for investment and warehouse lending receivables portfolios. The lack of liquidity may also have the effect of reducing the margin available to ResCap in its sales and securitizations of nonprime mortgage loans.
 
Another factor that may result in higher delinquency rates on mortgage loans is the scheduled increase in monthly payments on adjustable rate mortgage loans. This increase in borrowers’ monthly payments, together with any increase in prevailing market interest rates, may result in significantly increased monthly payments for borrowers with adjustable rate mortgage loans. Borrowers seeking to avoid these increased monthly payments by refinancing their mortgage loans may no longer be able to fund available replacement loans at comparably low interest rates. A decline in housing prices may also leave borrowers with insufficient equity in their homes to permit them to refinance their loans or sell their homes. In addition, these mortgage loans may have prepayment premiums that inhibit refinancing.
 
Certain government regulators have observed these issues involving nonprime mortgages and have indicated an intention to review the mortgage loan programs. To the extent that regulators restrict the volume, terms and/or type of nonprime mortgage loan, the liquidity of GMAC’s nonprime mortgage loan production and profitability from nonprime mortgage loans could be negatively impacted.
 
Changes in existing U.S. government-sponsored mortgage programs, or disruptions in the secondary markets in the United States or in other countries in which GMAC’s mortgage subsidiaries operate, could adversely affect the profitability and financial condition of GMAC’s mortgage business.
 
The ability of GMAC’s mortgage subsidiaries to generate revenue through mortgage loan sales to institutional investors in the United States depends to a significant degree on programs administered by government-sponsored enterprises such as Fannie Mae, Freddie Mac, Ginnie Mae, and others that facilitate the issuance of mortgage-backed securities in the secondary market. These government-sponsored enterprises play a powerful role in the residential mortgage industry, and GMAC’s mortgage subsidiaries have significant business relationships with them. Proposals are being considered in the U.S. Congress and by various regulatory authorities that would affect the manner in which these government-sponsored enterprises conduct their business, including proposals to establish a new independent agency to regulate the government-sponsored enterprises, to require them to register their stock with the SEC, to reduce or limit certain business benefits they receive from the U.S. government, and to limit the size of the mortgage loan portfolios they may hold. Any discontinuation of, or significant reduction in, the


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operation of these government-sponsored enterprises could adversely affect GMAC’s revenues and profitability. Also, any significant adverse change in the level of activity in the secondary market, including declines in institutional investors’ desire to invest in our mortgage products, could adversely affect GMAC’s business.
 
GMAC may be required to repurchase contracts and provide indemnification if it breaches representations and warranties in its securitization and whole loan transactions, which could harm GMAC’s profitability and financial condition.
 
When GMAC sells retail contracts or leases through whole loan sales or securitizes retail contracts, leases, or wholesale loans to dealers, GMAC is required to make customary representations and warranties about the contracts, leases, or loans to the purchaser or securitization trust. GMAC’s whole loan sale agreements generally require GMAC to repurchase retail contracts or provide indemnification if it breaches a representation or warranty given to the purchaser. Likewise, GMAC is required to repurchase retail contracts, leases, or loans and may be required to provide indemnification if GMAC breaches a representation or warranty in connection with its securitizations.
 
Similarly, sales by GMAC’s mortgage subsidiaries of mortgage loans through whole loan sales or securitizations require GMAC to make customary representations and warranties about the mortgage loans to the purchaser or securitization trust. GMAC’s whole loan sale agreements generally require GMAC to repurchase or substitute loans if it breaches a representation or warranty given to the purchaser. In addition, GMAC’s mortgage subsidiaries may be required to repurchase mortgage loans as a result of borrower fraud or if a payment default occurs on a mortgage loan shortly after its origination. Likewise, GMAC is required to repurchase or substitute mortgage loans if it breaches a representation or warranty in connection with its securitizations. The remedies available to a purchaser of mortgage loans may be broader than those available to GMAC’s mortgage subsidiaries against the original seller of the mortgage loan. If a mortgage loan purchaser enforces its remedies against GMAC’s mortgage subsidiaries, GMAC may not be able to enforce the remedies it has against the seller of the loan or the borrower.
 
Significant indemnification payments or contract, lease, or loan repurchase activity of retail contracts or leases or mortgage loans could harm GMAC’s profitability and financial condition.
 
GMAC and its mortgage subsidiaries have repurchase obligations in their respective capacities as servicers in securitizations and whole loan sales. If a servicer breaches a representation, warranty, or servicing covenant with respect to an automotive receivable or mortgage loan, then the servicer may be required by the servicing provisions to repurchase that asset from the purchaser. If the frequency at which repurchases of assets occurs increases substantially from its present rate, the result could be a material adverse effect on the financial condition, liquidity, and results of operations of GMAC or its mortgage subsidiaries.
 
A loss of contractual servicing rights could have a material adverse effect on GMAC’s financial condition, liquidity, and results of operations.
 
GMAC is the servicer for all of the receivables it has originated and transferred to other parties in securitizations and whole loan sales of automotive receivables. GMAC’s mortgage subsidiaries service the mortgage loans GMAC has securitized, and GMAC services the majority of the mortgage loans GMAC has sold in whole loan sales. In each case, GMAC is paid a fee for its services, which in the aggregate constitute a substantial revenue stream for GMAC. In each case, GMAC is subject to the risk of termination under the circumstances specified in the applicable servicing provisions.
 
In most securitizations and whole loan sales, the owner of the receivables or mortgage loans will be entitled to declare a servicer default and terminate the servicer upon the occurrence of specified events. These events typically include a bankruptcy of the servicer, a material failure by the servicer to perform its obligations, and a failure by the servicer to turn over funds on the required basis. The termination of these servicing rights, were it to occur, could have a material adverse effect on GMAC’s financial condition, liquidity, and results of operations and those of


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GMAC’s mortgage subsidiaries. For the year ended December 31, 2006, GMAC’s consolidated mortgage servicing fee income was approximately $1.6 billion.
 
The regulatory environment in which GMAC operates could have a material adverse effect on its business and earnings.
 
GMAC’s domestic operations are subject to various laws and judicial and administrative decisions imposing various requirements and restrictions relating to supervision and regulation by state and federal authorities. Such regulation and supervision are primarily for the benefit and protection of GMAC’s customers, not for the benefit of investors in its securities, and could limit its discretion in operating its business. Noncompliance with applicable statutes or regulations could result in the suspension or revocation of any license or registration at issue, as well as the imposition of civil fines and criminal penalties. In addition, changes in the accounting rules or their interpretation could have an adverse effect on GMAC’s business and earnings.
 
GMAC’s operations are also heavily regulated in many jurisdictions outside the United States. For example, certain of GMAC’s foreign subsidiaries operate either as a bank or a regulated finance company, and GMAC’s insurance operations are subject to various requirements in the foreign markets in which GMAC operates. The varying requirements of these jurisdictions may be inconsistent with U.S. rules and may materially adversely affect GMAC’s business or limit necessary regulatory approvals, or if approvals are obtained, GMAC may not be able to continue to comply with the terms of the approvals or applicable regulations. In addition, in many countries the regulations applicable to the financial services industry are uncertain and evolving, and it may be difficult for GMAC to determine the exact regulatory requirements.
 
GMAC’s inability to remain in compliance with regulatory requirements in a particular jurisdiction could have a material adverse effect on its operations in that market with regard to the affected product and on its reputation generally. No assurance can be given that applicable laws or regulations will not be amended or construed differently, that new laws and regulations will not be adopted, or that GMAC will not be prohibited by local laws from raising interest rates above certain desired levels, any of which could materially adversely affect GMAC’s business, financial condition, or results of operations.
 
The worldwide financial services industry is highly competitive. If GMAC is unable to compete successfully or if there is increased competition in the automotive financing, mortgage, and/or insurance markets or generally in the markets for securitizations or asset sales, GMAC’s margins could be materially adversely affected.
 
The markets for automotive and mortgage financing, insurance, and reinsurance are highly competitive. The market for automotive financing has grown more competitive as more consumers are financing their vehicle purchases, primarily in North America and Europe. GMAC’s mortgage business faces significant competition from commercial banks, savings institutions, mortgage companies, and other financial institutions. GMAC’s insurance business faces significant competition from insurance carriers, reinsurers, third-party administrators, brokers, and other insurance-related companies. Many of GMAC’s competitors have substantial positions nationally or in the markets in which they operate. Some of GMAC’s competitors have lower cost structures and lower cost of capital and are less reliant on securitization and sale activities. GMAC faces significant competition in various areas, including product offerings, rates, pricing and fees, and customer service. If GMAC is unable to compete effectively in the markets in which it operates, GMAC’s profitability and financial condition could be negatively affected.
 
The markets for asset and mortgage securitizations and whole loan sales are competitive, and other issuers and originators could increase the amount of their issuances and sales. In addition, lenders and other investors within those markets often establish limits on their credit exposure to particular issuers, originators, and asset classes, or they may require higher returns to increase the amount of their exposure. Increased issuance by other participants in the market or decisions by investors to limit their credit exposure to — or to require a higher yield for — GMAC or to automotive or mortgage securitizations or whole loans, could negatively affect GMAC’s ability and that of


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GMAC’s subsidiaries to price its securitizations and whole loan sales at attractive rates. The result would be lower proceeds from these activities and lower profits for GMAC’s subsidiaries and GMAC.
 
* * * * * *
 
Item 1B.   Unresolved Staff Comments
 
None.
 
* * * * * *
 
Item 2.   Properties
 
GM has approximately 300 locations operating in approximately 35 states and approximately 175 cities in the United States. Of these, approximately 20 are engaged in the final assembly of GM cars and trucks, approximately 30 are service parts operations responsible for distribution or warehousing, and the remainder are offices or facilities involved primarily in testing vehicles or manufacturing automotive components and power products. In addition, the Corporation has approximately 25 locations in Canada, and assembly, manufacturing, distribution, or warehousing operations in approximately 50 other countries, including equity interests in associated companies which conduct assembly, manufacturing, or distribution operations. The major facilities outside the United States and Canada, which are principally vehicle manufacturing and assembly operations, are located in:
 
             
• Germany
   • Australia    • China    • South Korea
• United Kingdom
   • Sweden    • Thailand    • South Africa
• Brazil
   • Belgium    • Argentina    • India
• Mexico
   • Spain    • Poland    
 
Most facilities are owned by the Corporation or its subsidiaries. Leased properties consist primarily of warehouses and administration, engineering, and sales offices. The leases for warehouses generally provide for an initial period of five years and contain renewal options. Leases for sales offices are generally for shorter periods.
 
Properties of GM and its subsidiaries include facilities which, in the opinion of management, are suitable and adequate for the manufacture, assembly, and distribution of their products.
 
Item 3.   Legal Proceedings
 
The following section summarizes material pending legal proceedings to which the Corporation became, or was, a party during the year ended December 31, 2006, or after that date but before the filing of this report, other than ordinary routine litigation incidental to the business. GM and the other defendants affiliated with GM intend to defend all of the following actions vigorously.
 
Canadian Export Antitrust Class Actions
 
Seventy-nine purported class actions on behalf of all purchasers of new motor vehicles in the United States since January 1, 2001, have been filed in various state and federal courts against General Motors Corporation, General Motors of Canada Limited (GM Canada) and Ford, Daimler Chrysler, Toyota, Honda, Nissan, and BMW and their Canadian affiliates, the National Automobile Dealers Association, and the Canadian Automobile Dealers Association. The federal court actions have been consolidated for coordinated pretrial proceedings in federal court under the caption In re New Market Vehicle Canadian Export Antitrust Litigation Cases in the U.S. District Court for the District of Maine, and the more than 30 California cases have been consolidated in the California Superior Court in San Francisco County under the case captions Belch v. Toyota Corporation, et al. and Bell v. General Motors Corporation.
 
The nearly identical complaints alleged that the defendant manufacturers, aided by the association defendants, conspired among themselves and with their dealers to prevent the sale to U.S. citizens of vehicles produced for the


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Canadian market and sold by dealers in Canada. The complaints alleged that new vehicle prices in Canada are 10% to 30% lower than those in the United States, and that preventing the sale of these vehicles to U.S. citizens resulted in the payment of supracompetitive prices by U.S. consumers. The complaints, as amended, sought injunctive relief under federal antitrust law and treble damages under federal and state antitrust laws, but did not specify damages. The complaints further alleged unjust enrichment and violations of state unfair trade practices act. On March 5, 2004, the U.S. District Court for the District of Maine issued a decision holding that the purported indirect purchaser classes failed to state a claim for damages but allowed a separate claim seeking to enjoin future alleged violations to continue. On March 10, 2006, the U.S. District Court for the District of Maine certified a nationwide class of buyers and lessees under Federal Rule 23(b)(2) solely for injunctive relief. General Motors and Nissan filed a motion to the United States Court of Appeals for the First Circuit to appeal this decision. The district court ruled that it will likely certify a class action for damages under various state law theories for six exemplar states under Federal Rule 23(b)(3) after further discovery to determine the proper scope of the classes. Plaintiffs subsequently moved for certification of damages classes for 17 additional states and have asked the court to certify the damages classes for the period from January 1, 2001 through April 30, 2003. General Motors intends to appeal any damages classes certified as class actions and anticipates that its appeal will be consolidated with the pending appeal of the class certification for injunctive relief described above.
 
* * * * * * *
 
Health Care Litigation
 
On October 18, 2005, the UAW and two hourly retirees filed UAW, et al. v. General Motors Corporation, a putative class action in the U.S. District Court for the Eastern District of Michigan on behalf of hourly retirees, spouses, and dependents, seeking to enjoin unilateral modifications by GM to hourly retiree health-care benefits, which was amended on October 31, 2005 to name additional putative class representatives. GM and the UAW announced a memorandum of understanding on October 29, 2005 that provided for a number of changes to health care coverage for both UAW represented active employees and UAW retirees. On December 22, 2005, the District Court certified the class and preliminarily approved the UAW Health Care Settlement Agreement, among GM, the UAW, and the putative class representatives. The court’s March 31, 2006 order approving the UAW Health Care Settlement Agreement, on a class-wide basis has been appealed to the U.S. Court of Appeals for the Sixth Circuit by a small number of individual objectors. The appeal has been fully briefed and is awaiting oral argument and final decision.
 
* * * * * * *
 
General Motors Securities Litigation
 
On September 19, 2005, Folksam Asset Management filed a purported class action complaint in the U.S. District Court for the Southern District of New York naming as defendants GM, GMAC, and GM’s Chairman and Chief Executive Officer G. Richard Wagoner, Jr., former Vice Chairman and Chief Financial Officer John Devine, Treasurer Walter Borst, and former Chief Accounting Officer Peter Bible, Folksam Asset Management, et al. v. General Motors Corporation, et al. Plaintiffs purported to bring the claim on behalf of purchasers of GM debt and/or equity securities during the period February 25, 2002 through March 16, 2005. The complaint alleges that defendants violated Section 10(b) and, with respect to the individual defendants, Section 20(a) of the Exchange Act. The complaint also alleged violations of Section 11, Section 12(a) and, with respect to the individual defendants, Section 15 of the Securities Act of 1933, as amended (Securities Act), in connection with certain registered debt offerings during the class period. In particular, the complaint alleged that GM’s cash flows during the class period were overstated based on the “reclassification” of certain cash items described in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2004. The reclassification involved cash flows relating to the financing of GMAC wholesale receivables from dealers that resulted in no net cash receipts and GM’s decision to revise Consolidated Statements of Net Cash for the years ended December 31, 2002 and 2003. The complaint also alleged misrepresentations relating to forward-looking statements of the Corporation’s 2005


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Item 3.   Legal Proceedings — (continued)
 
earnings forecast that were later revised significantly downward. In October 2005, a similar suit, asserting claims under the Exchange Act based on substantially the same factual allegations, was filed and subsequently consolidated with the Folksam case, Galliani, et al. v. General Motor Corporation, et al. The consolidated suit was recaptioned as In re General Motors Corporation Securities Litigation. Under the terms of the GMAC Transaction, GM is indemnifying GMAC in connection with these cases.
 
On November 18, 2005, plaintiffs in the Folksam case filed an amended complaint, which added several additional investors as plaintiffs, extended the end of the class period to November 9, 2005, and named as additional defendants three current and one former member of GM’s audit committee, as well as GM’s independent registered public accountants, Deloitte & Touche LLP. In addition to the claims asserted in the original complaint, the amended complaint added a claim against defendants Wagoner and Devine for rescission of their bonuses and incentive compensation during the class period. It also included further allegations regarding GM’s accounting for pension obligations, restatement of income for 2001, and financial results for the first and second quarters of 2005. Neither the original complaint nor the amended complaint specified the amount of damages sought, and defendants have no means to estimate damages the plaintiffs will seek based upon the limited information available in the complaint. The court’s provisional designations of lead plaintiff and lead counsel on January 17, 2006 were made final on February 6, 2006. Plaintiffs subsequently filed a second amended complaint, which added various underwriters as defendants.
 
Plaintiffs filed a third amended securities complaint in In re General Motors Corporation Securities and Derivative Litigation on August 15, 2006. (As explained below, certain shareholder derivative cases were consolidated with In re General Motors Corporation Securities Litigation for coordinated or consolidated pretrial proceedings and the caption was modified). The amended complaint in the GM securities litigation did not include claims against the underwriters previously named as defendants, alleged a proposed class period of April 13, 2000 through March 20, 2006, did not include the previously asserted claim for the rescission of incentive compensation against Mr. Wagoner and Mr. Devine, and contained additional factual allegations regarding GM’s restatements of financial information filed with its reports to the SEC for the years 2000 through 2005. On October 13, 2006, the GM defendants filed a motion to dismiss the amended complaint in the GM securities litigation. This motion remains pending before the Court. On December 14, 2006, plaintiffs filed a motion for leave to file a fourth amended complaint in the event the Court grants the GM defendants’ motion to dismiss. The GM defendants have opposed the motion for leave to file a fourth amended complaint.
 
Shareholder Derivative Suits
 
On November 10, 2005, Albert Stein filed a purported shareholder derivative action in the U.S. District Court for the Eastern District of Michigan, ostensibly on behalf of GM, against the members of the GM board of directors at that time, Stein v. Bowles, et al. The complaint alleged that defendants breached their fiduciary duties of due care, loyalty, and good faith by, among other things, causing GM to overstate its income (as reflected in the Corporation’s restatement of 2001 earnings and second quarter 2005 earnings) and exposing the Corporation to potential damages in SEC investigations and investor lawsuits. The suit sought damages based on defendants’ alleged breaches and an order requiring defendants to indemnify the Corporation for any future litigation losses. Plaintiffs claimed that demand on the GM board to bring suit itself (ordinarily a prerequisite to suit under Delaware law) was excused because it would be “futile.” The complaint did not specify the amount of damages sought, and defendants have no means to estimate damages the plaintiffs will seek based upon the limited information available in the complaint.
 
On December 15, 2005, Henry Gluckstern filed a purported shareholder derivative action in the U.S. District Court for the Eastern District of Michigan, ostensibly on behalf of GM, against the GM board of directors, Gluckstern v. Wagoner, et al. This suit was substantially identical to Stein v. Bowles, et al. Also on December 15, 2005, John Orr filed a substantially identical purported shareholder derivative action in the U.S. District Court for the Eastern District of Michigan, ostensibly on behalf of GM, against the GM board of directors, Orr v. Wagoner, et al.
 
On December 2, 2005, Sharon Bouth filed a similar purported shareholder derivative action in the Circuit Court of Wayne County, Michigan, ostensibly on behalf of GM, against the members of the GM board of directors and a GM officer not on the board, Bouth v. Barnevik, et al. The complaint alleged that defendants breached their


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fiduciary duties of due care, loyalty, and good faith by, among other things, causing GM to overstate its earnings and cash flow and improperly account for certain transactions and exposing GM to potential damages in SEC investigations and investor lawsuits. The suit sought damages based on defendants’ alleged breaches and an order requiring defendants to indemnify the Corporation for any future litigation losses. Plaintiffs claimed that demand on the GM board was excused because it would be “futile.” The complaint did not specify the amount of damages sought, and defendants have no means to estimate damages the plaintiffs will seek based upon the limited information available in the complaint.
 
On December 16, 2005, Robin Salisbury filed an action in the Circuit Court of Wayne County, Michigan substantially identical to the Bouth case described above, Salisbury v. Barnevik, et al. The Salisbury and Bouth cases have been consolidated and plaintiffs have stated they intend to file an amended consolidated complaint. The directors and the non-director officer named in these cases have not yet filed their responses to the Bouth and Salisbury complaints. On July 21, 2006, the Court stayed the proceedings in Bouth and Salisbury. In January 2007, the Court continued the stay until July 2007.
 
Plaintiffs filed an amended shareholder derivative complaint in In re General Motors Corporation Securities and Derivative Litigation on August 15, 2006. The amended complaint in the shareholder derivative litigation alleged that the board breached its fiduciary obligations by failing to oversee GM’s operations properly and prevent alleged improprieties in connection with GM’s accounting with regard to cash flows, pension-related liabilities and supplier credits. The defendants filed a motion to dismiss the amended complaint. On November 9, 2006, the Court granted the plaintiffs leave to file a second consolidated and amended derivative complaint, which adds allegations concerning recent changes to the GM bylaws and the resignation of Jerome B. York from the GM board of directors. The defendants have filed a motion to dismiss plaintiffs’ second consolidated and amended derivative complaint.
 
Consolidation of Securities and Shareholder Derivative Actions in the Eastern District of Michigan
 
On December 13, 2005, defendants in In re General Motors Corporation Securities Litigation (previously Folksam Asset Management v. General Motors Corporation, et al. and Galliani v. General Motors Corporation, et al.) and Stein v. Bowles, et al. filed a Motion with the Judicial Panel on Multidistrict Litigation to transfer and consolidate these cases for pretrial proceedings in the U.S. District Court for the Eastern District of Michigan.
 
On January 5, 2006, defendants submitted to the Judicial Panel on Multidistrict Litigation an Amended Motion seeking to add to their original Motion the Rosen, Gluckstern, and Orr cases for consolidated pretrial proceedings in the U.S. District Court for the Eastern District of Michigan. On April 17, 2006, the Judicial Panel on Multidistrict Litigation entered an order transferring In re General Motors Corporation Securities Litigation to the U.S. District Court for the Eastern District of Michigan for coordinated or consolidated pretrial proceedings with Stein v. Bowles, et al.; Rosen, et al. v. General Motors Corp., et al.; Gluckstern v. Wagoner, et al.; and Orr v. Wagoner, et al. (While the motion was pending, plaintiffs voluntarily dismissed Rosen.) The case is now captioned as In re General Motors Corporation Securities and Derivative Litigation.
 
The securities and shareholder derivative cases described above are in preliminary phases. No determination has been made that the securities cases can be maintained as class actions or that the shareholder derivative actions can proceed without making a demand in accordance with Delaware law that the GM board bring the actions. As a result, the scope of the actions and whether they will be permitted to proceed is uncertain.
 
* * * * * * *
 
GMAC Bondholder Class Actions
 
On November 29, 2005, Stanley Zielezienski filed a purported class action, Zielezienski, et al. v. General Motors Corporation, et al. The action was filed in the Circuit Court for Palm Beach County, Florida, against GM, GMAC, GM’s Chairman and Chief Executive Officer G. Richard Wagoner, Jr., GMAC’s Chairman Eric A. Feldstein, and certain GM and GMAC officers, namely, William F. Muir, Linda K. Zukauckas, Richard J.S. Clout, John E. Gibson, W. Allen Reed, Walter G. Borst, John M. Devine, and Gary L. Cowger. The action also named


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Item 3.   Legal Proceedings — (continued)
 
certain underwriters of GMAC debt securities as defendants. The complaint alleged that defendants violated Section 11 of the Securities Act, and with respect to all defendants except GM, Section 12(a)(2) of the Securities Act. The complaint also alleges that GM violated Section 15 of the Securities Act. In particular, the complaint alleged material misrepresentations in certain GMAC financial statements incorporated by reference with GMAC’s Registration Statement on Form S-3 and Prospectus filed in 2003. More specifically, the complaint alleged material misrepresentations in connection with the offering for sale of GMAC SmartNotes in certain GMAC financial statements contained in GMAC’s Forms 10-Q for the quarterly periods ended in March 31, 2004 and June 30, 2004 and the Form 8-K which disclosed financial results for the quarterly period ended in September 30, 2004, were materially false and misleading as evidenced by GMAC’s 2005 restatement of these quarterly results. In December 2005, plaintiff filed an amended complaint making substantially the same allegations as were in the previous filing with respect to additional debt securities issued by GMAC during the period from April 23, 2004 to March 14, 2005 and adding approximately 60 additional underwriters as defendants. The complaint did not specify the amount of damages sought, and defendants have no means to estimate damages the plaintiffs will seek based upon the limited information available in the complaint. On January 6, 2006, the defendants named in the original complaint removed this case to the U.S. District Court for the Southern District of Florida, and on April 3, 2006, that court transferred the case to the U.S. District Court for the Eastern District of Michigan.
 
On December 28, 2005, J&R Marketing, SEP, filed a purported class action, J&R Marketing, et al. v. General Motors Corporation, et al. The action was filed in the Circuit Court for Wayne County, Michigan, against GM, GMAC, Eric Feldstein, William F. Muir, Linda K. Zukauckas, Richard J.S. Clout, John E. Gibson, W. Allen Reed, Walter G. Borst, John M. Devine, Gary L. Cowger, G. Richard Wagoner, Jr., and several underwriters of GMAC debt securities. Similar to the original complaint filed in the Zielezienski case described above, the complaint alleged claims under Sections 11, 12(a), and 15 of the Securities Act based on alleged material misrepresentations or omissions in the registration statements for GMAC SmartNotes purchased between September 30, 2003 and March 16, 2005. The complaint alleged inadequate disclosure of GM’s financial condition and performance as well as issues arising from GMAC’s 2005 restatement of quarterly results for the three quarters ended September 30, 2005. The complaint did not specify the amount of damages sought, and defendants have no means to estimate damages the plaintiffs will seek based upon the limited information available in the complaint. On January 13, 2006, defendants removed this case to the U.S. District Court for the Eastern District of Michigan.
 
On February 17, 2006, Alex Mager filed a purported class action, Mager v. General Motors Corporation, et al.  The action was filed in the U.S. District Court for the Eastern District of Michigan and was substantively identical to the J&R Marketing case described above. On February 24, 2006, J&R Marketing filed a motion to consolidate the Mager case with its case (discussed above) and for appointment as lead plaintiff and the appointment of lead counsel. On March 8, 2006, the court entered an order consolidating the two cases and subsequently consolidated those cases with the Zielezienski case described above. Lead plaintiffs’ counsel has been appointed, and on July 28, 2006, plaintiffs filed a Consolidated Amended Complaint, differing mainly from the initial complaints by asserting claims for GMAC debt securities purchased during a different time period, of July 28, 2003 through November 9, 2005, and adding additional underwriter defendants. On August 28, 2006, the underwriter defendants were dismissed without prejudice. The GM and GMAC defendants filed a motion to dismiss the amended complaint. No determination has been made that the case may be maintained as a class action.
 
On February 27, 2007, the district court in the consolidated case captioned J&R Marketing issued an opinion granting defendants’ motion to dismiss, and dismissing plaintiffs’ complaint. Under the terms of the GMAC Transaction, GM is indemnifying GMAC in connection with these cases.
 
* * * * * * *


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Item 3.   Legal Proceedings — (continued)
 
ERISA Class Actions
 
In May 2005, the U.S. District Court for the Eastern District of Michigan consolidated three related purported class actions brought under ERISA against GM and other named defendants who are alleged to be fiduciaries of the GM stock purchase programs and personal savings plans for salaried and hourly employees, under the case caption In re General Motors Corporation ERISA Litigation. In June 2005, plaintiffs filed a consolidated class action complaint against GM, the Investment Funds Committee of the GM board, its individual members, GM’s Chairman and Chief Executive Officer, members of GM’s Employee Benefits Committee during the putative class period, GM’s wholly owned subsidiary General Motors Investment Management Corporation (GMIMCo), and State Street Bank (State Street). The complaint alleged that the GM defendants breached their fiduciary duties to plan participants by, among other things, investing their assets, or offering them the option of investing, in GM stock on the ground that it was not a prudent investment. Plaintiffs purported to bring these claims on behalf of all persons who were participants in or beneficiaries of the plans from March 18, 1999 to the present, and sought to recover losses allegedly suffered by the plans. The complaint did not specify the amount of damages sought, and defendants have no means at this time to estimate damages the plaintiffs will seek based upon the limited information available in the complaint. On July 17, 2006, plaintiffs filed a First Amended Consolidated Class Action Complaint, which principally added allegations about GM’s restated earnings and reclassification of cash flows, but which did not name any additional defendants or assert any new claims. On August 24, 2006, the GM defendants filed a motion to dismiss the amended complaint. No determination has been made that the case may be maintained as a class action.
 
In addition, GMIMCo is one of numerous defendants in several purported class action lawsuits filed in March and April 2005 in the U.S. District Court for the Eastern District of Michigan, alleging violations of ERISA with respect to the Delphi company stock plans for salaried and hourly employees. The cases have been consolidated under the case caption In re Delphi ERISA Litigation in the Eastern District of Michigan for coordinated pretrial proceedings with other Delphi stockholder lawsuits in which GMIMCo is not named as a defendant. On March 3, 2006, the lead plaintiffs appointed by the court filed a consolidated amended class action complaint alleging that from May 28, 1999 to November 1, 2005, GMIMCo, a named fiduciary of the Delphi plans, breached its fiduciary duties to plan participants by allowing them to invest in the Delphi Common Stock Fund when it was imprudent to do so, failing to monitor State Street, the entity appointed by GMIMCo to serve as investment manager for the Delphi Common Stock Fund, and by knowingly participating in, enabling, or failing to remedy breaches of fiduciary duty by other defendants. GMIMCo filed a motion to dismiss the consolidated amended complaint on April 4, 2006. No determination has been made that a class action can be maintained against GMIMCo, and there have been no decisions on the merits of the claims.
 
On March 8, 2007, a purported class action lawsuit was filed in the U.S. District Court for the Southern District of New York captioned Young, et al. v. General Motors Investment Management Corporation, et al. The case, brought by four plaintiffs who are alleged to be participants in the General Motors Savings-Stock Purchase Program for Salaried Employees and the General Motors Personal Savings Plan for Hourly-Rate Employees, purports to bring claims on behalf of all participants in these two plans as well as participants in the General Motors Income Security Plan for Hourly-Rate Employees and the Saturn Individual Savings Plan for Represented Members against GMIMCo and State Street. The complaint alleges that GMIMCo and State Street breached their fiduciary duties to plan participants by allowing participants to invest in five different funds that held primarily the equity of a single company: the EDS Fund, the DIRECTV Fund, the News Corp. Fund, the Raytheon Fund, and the Delphi Fund, all of which plaintiffs allege were imprudent investments because of their inherent risk and poor performance relative to more prudent investment alternatives. The complaint also alleges that GMIMCo breached its fiduciary duties to plan participants by allowing participants to invest in mutual funds offered by FMR Corp. under the Fidelity brand name. Plaintiffs allege that by investing in these funds, participants paid excessive fees and costs that they would not have incurred had they invested in more prudent investment alternatives. The complaint seeks a declaration that defendants have breached their fiduciary duties, an order requiring defendants to compensate the plans for their losses resulting from their breaches of fiduciary duties, the removal of defendants as fiduciaries, an injunction


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against further breaches of fiduciary duties, other unspecified equitable and monetary relief, and attorneys fees and costs. No determination has been made that the case may be maintained as a class action.
 
* * * * * * *
 
Hughes Split-Off Class Actions
 
On April 11 and 15, 2003, two purported class actions, Matcovsky, et al., v. Hughes Electronics Corporation, et al. and Brody v. Hughes Electronics Corporation, et al., were filed in Superior Court in Los Angeles, California, against Hughes, GM and the directors of Hughes Electronics Corporation (Hughes) and GM. These cases were consolidated in state court in Los Angeles, and plaintiffs in both cases have filed consolidated complaints.
 
The cases, which seek unspecified damages, alleged that the transactions involving News Corp.’s acquisition of a 34% interest in Hughes provided benefits to GM not available to all holders of the former class of GM Class H common stock, in violation of fiduciary duties. The Superior Court has dismissed all claims against directors without any connection to California for lack of personal jurisdiction and stayed the consolidated case pending a ruling on the motion to dismiss a similar complaint filed in Delaware Chancery Court. In March 2006, the Delaware Supreme Court affirmed the dismissal of the Delaware complaint.
 
* * * * * * *
 
Asbestos Litigation
 
Like most automobile manufacturers, GM has been subject in recent years to asbestos-related claims. GM has used some products which incorporated small amounts of encapsulated asbestos. These products, generally brake linings, are known as asbestos-containing friction products. There is a significant body of scientific data demonstrating that these asbestos-containing friction products are not unsafe and do not create an increased risk of asbestos-related disease. GM believes that the use of asbestos in these products was appropriate. A number of the claims are filed against GM by automotive mechanics and their relatives seeking recovery based on their alleged exposure to the small amount of asbestos used in brake components. These claims generally identify numerous other potential sources for the claimant’s alleged exposure to asbestos that do not involve GM or asbestos-containing friction products, and many of these other potential sources would place users at much greater risk. Most of these claimants do not have an asbestos-related illness and may never develop one. This is consistent with the experience reported by other automotive manufacturers and other end users of asbestos.
 
Two other types of claims related to alleged asbestos exposure that are asserted against GM — locomotive and premises — represent a significantly lower exposure to liability than the automotive friction product claims. GM sold its locomotive manufacturing business in 2005. Like other locomotive manufacturers, GM used a limited amount of asbestos in locomotive brakes and in the insulation used in some locomotives. These uses have been the basis of lawsuits filed against GM by railroad workers seeking relief based on their alleged exposure to asbestos. These claims generally identify numerous other potential sources for the claimant’s alleged exposure to asbestos that do not involve GM or locomotives. Many of these claimants do not have an asbestos-related illness and may never develop one. Moreover, the West Virginia and Ohio supreme courts have ruled that Federal law preempts asbestos tort claims asserted on behalf of railroad workers. Such preemption means that Federal law eliminates the possibility that railroad workers could maintain state law claims against GM. In addition, a relatively small number of claims are brought by contractors who are seeking recovery based on alleged exposure to asbestos-containing products while working on premises owned by GM. These claims generally identify numerous other potential sources for the claimant’s alleged exposure to asbestos that do not involve GM.
 
While GM has resolved many of its asbestos claims and continues to do so for strategic litigation reasons, such as avoiding defense costs and possible exposure to excessive verdicts, management believes that only a small portion of these claimants have or will ever develop an asbestos-related impairment.


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The amount expended in defense of asbestos claims in any year depends on the number of claims filed, the amount of pretrial proceedings, and the number of trials and settlements during the period. GM’s expenditures related to asbestos claims, including both defense costs and payments to claimants, have declined over the past several years.
 
* * * * * * *
 
John Evans and Evans Cooling System v. General Motors
 
Plaintiffs John Evans and Evans Cooling Systems, Inc. commenced litigation in Connecticut state court against GM in January 1994 by filing separate suits for patent infringement and trade secret misappropriation. In the patent case, summary judgment for GM was affirmed on appeal. In 2003, the presiding judge ruled in favor of GM in the trade secret case, and plaintiffs appealed. On March 15, 2006, the Connecticut Supreme Court reversed and remanded to the trial court for a jury trial. The plaintiffs have expanded their claims for the new trial to include a subsequent generation of engines, used in a wide variety of GM vehicles. Plaintiffs seek relief in excess of $12 billion.
 
* * * * * * *
 
Coolant System Class Action Litigation
 
GM has been named as the defendant in 21 putative class actions in various federal and state courts in the United States alleging defects in the engine cooling systems in GM vehicles; 14 cases are still pending in U.S. courts including six cases that have been consolidated, either finally or conditionally, for pre-trial proceedings in a multi-district proceeding in the United States District Court for the Southern District of Illinois. State courts in California and Michigan have denied motions to certify cases for class treatment. Most recently, in an opinion dated February 16, 2007, certification of a multi-state class was denied in the Federal multi-district proceeding on the grounds that individual issues predominate over common questions. However, in Gutzler v. General Motors Corporation, the Circuit Court of Jackson County, Missouri certified an “issues” class in January 2006 comprised of “all consumers who purchased or leased a GM vehicle in Missouri that was factory-equipped with “Dex-Cool” coolant, which was included as original equipment in GM vehicles manufactured since 1995. The Court also certified two sub-classes comprised of i) class members who purchased or leased a vehicle with a 4.3-liter engine, and ii) class members who purchased or leased a vehicle with a 3.1, 3.4, or 3.8-liter engine. The Gutzler court’s order provided for addressing specific issues on a class basis, including the extent of GM’s warranty on coolant and whether GM’s coolant is incompatible with other vehicle components. Trial on these issues is now scheduled for November 2007.
 
Kenneth Stewart v. General Motors of Canada Limited and General Motors Corporation, a complaint filed in the Superior Court of Ontario dated April 24, 2006, alleged a class action covering Canadian residents, except residents of British Columbia and Quebec, who purchased 1995 to 2003 GM vehicles with 3.1, 3.4, 3.8, and 4.3 liter engines. Plaintiff alleged that defects in the engine cooling systems allow coolant to leak into the engine and cause engine damage. The complaint alleged violation of the Business Practices and Competition Acts and sought alleged benefits received as a result of failure to warn and negligence, compensatory damages, punitive damages, fees, and costs. Similar complaints (some involving 2004 vehicles as well) have been filed in 17 putative class actions against GM and GM Canada, in ten provinces. Class certification has not been approved in any of these cases, and all have been stayed on the agreement of counsel pending the outcome of the class certification hearing in Stewart, which is scheduled for December 2007.
 
* * * * * * *
 
Item 4.   Submission of Matters to a Vote of Security Holders
 
None
 
* * * * * * *


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Item 4A.  Executive Officers of the Registrant
 
The names and ages, as of March 1, 2007, of all executive officers of GM and their positions and offices with GM are as follows:
 
     
Name and (Age)
  Positions and Offices
 
G. Richard Wagoner, Jr. (54)
  Chairman and Chief Executive Officer
Frederick A. Henderson (48)
  Vice Chairman and Chief Financial Officer
Robert A. Lutz (75)
  Vice Chairman, Global Product Development
Thomas A. Gottschalk (64)
  Executive Vice President, Law and Public Policy
Bo I. Andersson (51)
  Vice President, Global Purchasing and Supply Chain
Kathleen S. Barclay (51)
  Vice President, Global Human Resources
Walter G. Borst (45)
  Treasurer
Lawrence D. Burns (55)
  Vice President, Research & Development and Strategic Planning
Troy A. Clarke (51)
  Group Vice President and President, North America
Gary L. Cowger (59)
  Group Vice President, Global Manufacturing and Labor Relations
Nicholas S. Cyprus (53)
  Controller and Chief Accounting Officer
Carl-Peter Forster (52)
  Group Vice President and President, GM Europe
Steven J. Harris (61)
  Vice President, Global Communications
Maureen Kempston-Darkes (58)
  Group Vice President and President, GM Latin America, Africa and Middle East
Robert S. Osborne (52)
  Group Vice President and General Counsel
David N. Reilly (57)
  Group Vice President and President, GM Asia Pacific
Thomas G. Stephens (58)
  Group Vice President, GM Powertrain
Ralph J. Szygenda (58)
  Group Vice President and Chief Information Officer
 
There are no family relationships, as defined in Item 401 of Regulation S-K, between any of the officers named above, and there is no arrangement or understanding between any of the officers named above and any other person pursuant to which he or she was selected as an officer. Each of the officers named above was elected by the board of directors or a committee of the board to hold office until the next annual election of officers and until his or her successor is elected and qualified or until his or her earlier resignation or removal. The board of directors elects the officers immediately following each annual meeting of the stockholders and may appoint other officers between annual meetings.
 
G. Richard Wagoner, Jr. has been associated with General Motors since 1977. In October 1998, he was elected a director and President and Chief Operating Officer of General Motors. On June 1, 2000, Mr. Wagoner was named Chief Executive Officer and became Chairman of the Board of Directors on May 1, 2003. He is currently a director of GMAC.
 
Frederick A. Henderson became Vice Chairman and Chief Financial Officer for General Motors on January 1, 2006. Prior to his promotion, Mr. Henderson was a GM Group Vice President and Chairman of GME. Mr. Henderson has been associated with General Motors since 1984. He was named GM Group Vice President and President of GMAP effective January 1, 2002. Effective June 1, 2004, he was appointed Group Vice President and Chairman of GME. He is currently a director of GMAC.
 
Robert A. Lutz was named Vice Chairman, Product Development of General Motors, effective September 1, 2001. He was named Chairman of GMNA on November 13, 2001, and served in that capacity until April 4, 2005, when he assumed responsibility for Global Product Development. He also served as president of GME on an interim basis from March to June 2004.


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Item 4A.  Executive Officers of the Registrant — (continued)
 
Thomas A. Gottschalk is Executive Vice President, Law and Public Policy. He has been associated with General Motors since 1994. He previously held the position of Senior Vice President and General Counsel. He was elected to the position of Executive Vice President of General Motors with primary responsibility for Law and Public Policy on May 25, 2001 and served as General Counsel until September 1, 2006.
 
Bo I. Andersson began his career with GM in 1987. He was appointed GM Vice President, Worldwide Purchasing, Production Control and Logistics on December 1, 2001 and GM Vice President, Global Purchasing and Supply Chain on March 1, 2005.
 
Kathleen S. Barclay has been associated with General Motors since 1985 and has been Vice President in charge of Global Human Resources since 1998.
 
Walter G. Borst has been associated with General Motors since 1980. He was named Treasurer in February 2003. Prior to that, Mr. Borst was Executive Director of Finance and Chief Financial Officer for GM’s German subsidiary, Adam Opel AG, since October 2000. He is currently a director of GMAC.
 
Lawrence D. Burns has been associated with General Motors since 1969 and has been Vice President of Research & Development and Strategic Planning since 1998.
 
Troy A. Clarke joined General Motors in 1973. He was appointed Group Vice President and President, GMNA in July 2006. He was named Group Vice President and Executive Vice President, GMAP on February 4, 2004, and President of GMAP, effective June 1, 2004. Mr. Clarke was named GM Group Vice President of Manufacturing and Labor Relations in June 2002, and had been Vice President of Labor Relations since January 2001.
 
Gary L. Cowger was appointed Group Vice President, Global Manufacturing and Labor Relations in April 2005 and had previously been GM Group Vice President and President, GMNA since November 13, 2001. He has been associated with General Motors since 1965. Mr. Cowger became Group Vice President in charge of GM Manufacturing and Labor Relations on January 1, 2001.
 
Nicholas S. Cyprus joined General Motors as Controller and Chief Accounting Officer in December 2006. Mr. Cyprus was Senior Vice President, Controller and Chief Accounting Officer for the Interpublic Group of Companies from May 2004 to March 2006. Prior to that, he was Vice President, Controller and Chief Accounting Officer from 1999 to 2004 at AT&T Corporation.
 
Carl-Peter Forster has been GM Vice President and President, GME since June 2004 and was appointed GM Group Vice President and President, GME effective January 1, 2006. He has been chairman of the Opel Supervisory Board since June 2004 and chairman of Saab since April 2005. Mr. Forster was Chairman and Managing Director of Adam Opel AG from April 2001, and before that date he was responsible for vehicle development projects for BMW AG.
 
Steven J. Harris was elected General Motors Vice President, Global Communications February 1, 2006, when he returned to the Corporation from retirement. He previously served as Vice President of GM Communications from 1999 until his retirement on January 1, 2004.
 
Maureen Kempston-Darkes has been associated with General Motors since 1975. She was named GM Group Vice President and President, GMLAAM effective January 1, 2002. She was president and general manager of GM Canada and Vice President of General Motors Corporation, from 1994 to 2001. She is a member of the board of directors of Thomson Corporation and the Canadian National Railway.
 
Robert S. Osborne joined General Motors as Group Vice President and General Counsel in September 2006. Prior to joining GM, he had been a senior partner in the law firm of Jenner & Block since 2002. He is also responsible for the Office of the Secretary and the Office of Export Compliance.
 
David N. Reilly was appointed Group Vice President and President, GMAP in July 2006 and had previously been President and Chief Executive Officer of GM Daewoo after leading GM’s transition team in the formation of


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Item 4A.   Executive Officers of the Registrant — (concluded)
 
GM Daewoo beginning in January 2002. Mr. Reilly joined General Motors in 1975 and served as Vice President — GM Europe for Sales, Marketing, and Aftersales beginning in 2001.
 
In December 2006, Mr. Reilly was charged with regard to certain alleged violations of South Korean labor laws. The criminal charges are based on the alleged illegal engagement of certain workers employed by an outsourcing agency in production activities at GM Daewoo, in which GM owns a majority interest. The charges were filed against Mr. Reilly in his capacity as the most senior GM executive in South Korea and the company’s Representative Director, who under South Korean law is the most senior member of management of a stock corporation, and is the person typically named as the individual respondent or defendant in any legal action brought against such company. These charges constitute a criminal offense under the laws of South Korea but would not constitute a criminal offense in the United States. Mr. Reilly has filed a formal request for trial to defend against the charges.
 
Thomas G. Stephens is the Group Vice President responsible for GM Powertrain. He joined General Motors in 1969 and was named Group Vice President for GM Powertrain in 2001.
 
Ralph J. Szygenda was named Group Vice President and Chief Information Officer on January 7, 2000. Mr. Szygenda is a member of the board of directors of the Handleman Company. He has been associated with GM since 1996.
 
* * * * * * *


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PART II

GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
Item 5.   Market for the Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
 
General Motors lists its common stock on the stock exchanges specified on the cover page of this Annual Report on Form 10-K under the trading symbol “GM”.
 
As of December 31, 2006, there were 364,408 holders of record of GM’s $12/3 par value common stock. As of December 31, 2005, there were 384,375 holders of record of GM’s $12/3 par value common stock. The following table sets forth the high and low sale prices of GM’s $12/3 par value common stock and the quarterly dividends declared for the last two years.
 
                                     
        2006 Quarters  
        1st     2nd     3rd     4th  
 
Cash dividends per share of common stock $12/3 par value
  $ 0.25     $ 0.25     $ 0.25     $ 0.25  
Price range of common stock $12/3 par value(1):
  High   $ 24.60     $ 30.56     $ 33.64     $ 36.56  
    Low   $ 18.47     $ 19.00     $ 27.12     $ 28.49  
 
                                     
        2005 Quarters  
        1st     2nd     3rd     4th  
 
Cash dividends per share of common stock $12/3 par value
  $ 0.50     $ 0.50     $ 0.50     $ 0.50  
Price range of common stock $12/3 par value(1):
  High   $ 40.80     $ 36.65     $ 37.70     $ 31.50  
    Low   $ 27.98     $ 24.67     $ 30.21     $ 18.33  
 
 
(1) New York Stock Exchange composite interday prices as listed in the price history database available at www.NYSEnet.com.
 
On February 6, 2007, GM’s board of directors declared a quarterly cash dividend of $0.25 per share for the first quarter of 2007. GM’s dividend policy is described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7.
 
The table below contains information about securities authorized for issuance under equity compensation plans. The features of these plans are described further in Note 25 to the Consolidated Financial Statements in Part II.
 
                         
    Number of Securities
          Number of Securities
 
    to be Issued Upon
    Weighted Average
    Remaining Available for
 
    Exercise of
    Exercise Price of
    Future Issuance Under
 
    Outstanding Options,
    Outstanding Options,
    Equity Compensation
 
Plan Category
  Warrants and Rights     Warrants and Rights     Plans(1)  
 
Equity compensation plans approved by security holders:
                       
General Motors Amended Stock Incentive Plan (GMSIP)
    81,655,178     $ 52.41       4,885,385  
Equity compensation plans not approved by security holders(2):
                       
General Motors 1998 Salaried Stock Option Plan (GMSSOP)
    26,583,895     $ 55.23        
                         
Total
    108,239,073     $ 53.10       4,885,385  
                         
 
 
(1) Excludes securities reflected in the first column, “Number of securities to be issued upon exercise of outstanding options, warrants and rights.”


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Item 5.   Market for the Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities — (concluded)
 
(2) All equity compensation plans except the GMSSOP were approved by the stockholders. The GMSSOP was adopted by the board of directors in 1998 and expires December 31, 2007. The purpose of the plans is to recognize the importance and contribution of GM employees in the creation of stockholder value, to further align compensation with business success, and to provide employees with the opportunity for long-term capital accumulation through the grant of options to acquire shares of GM’s common stock.
 
Purchases of Equity Securities
 
GM made no purchases of GM $12/3 par value common stock during the three months ended December 31, 2006.
 
* * * * * * *


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Item 6.   Selected Financial Data
 
                                                                         
    Years Ended December 31,  
    2006     2005     2004     2003     2002  
          Previously
          Previously
          Previously
          Previously
       
    Reported     Reported     Restated(1)     Reported     Restated(1)     Reported     Restated(1)     Reported     Restated(1)  
    (Dollars in millions except per share amounts)  
 
Total net sales and revenues(2)
  $ 207,349     $ 191,184     $ 194,655     $ 191,909     $ 195,351     $ 183,255     $ 186,065     $ 176,723     $ 179,292  
                                                                         
Income (loss) from continuing operations
  $ (1,978 )   $ (10,458 )   $ (10,308 )   $ 2,804     $ 2,701     $ 2,899     $ 2,565     $ 1,813     $ 1,974  
(Loss) from discontinued operations(3)
                                  (219 )     (219 )     (239 )     (239 )
Gain from sale of discontinued operations(3)
                                  1,179       1,179        —        
Cumulative effect of a change in accounting principle(4)
          (109 )     (109 )                              —        
                                                                         
Net income (loss)(5)
  $ (1,978 )   $ (10,567 )   $ (10,417 )   $ 2,804     $ 2,701     $ 3,859     $ 3,525     $ 1,574     $ 1,735  
                                                                         
$12/3 par value common stock
                                                                       
Basic earnings (loss) per share from continuing operations before cumulative effect of accounting change
  $ (3.50 )   $ (18.50 )   $ (18.23 )   $ 4.97     $ 4.78     $ 5.17     $ 4.57     $ 3.24     $ 3.52  
Basic earnings (loss) per share from discontinued operations(3)
                                  2.14       2.14       (0.16 )     (0.16 )
Basic (loss) per share from cumulative effect of a change in accounting principle(4)
          (0.19 )     (0.19 )                              —        
                                                                         
Basic earnings per share
  $ (3.50 )   $ (18.69 )   $ (18.42 )   $ 4.97     $ 4.78     $ 7.31     $ 6.71     $ 3.08     $ 3.36  
                                                                         
Diluted earnings (loss) per share from continuing operations before cumulative effect of accounting change
  $ (3.50 )   $ (18.50 )   $ (18.23 )   $ 4.94     $ 4.76     $ 5.09     $ 4.51     $ 3.23     $ 3.51  
Diluted earnings (loss) per share from discontinued operations(3)
                                  2.11       2.11       (0.16 )     (0.16 )
Diluted (loss) per share from cumulative effect of accounting change(4)
          (0.19 )     (0.19 )                              —        
                                                                         
Diluted earnings per share
  $ (3.50 )   $ (18.69 )   $ (18.42 )   $ 4.94     $ 4.76     $ 7.20     $ 6.62     $ 3.07     $ 3.35  
                                                                         
GM’s Class H common stock(3)
                                                                       
Basic earnings (loss) per share from discontinued operations
                                $ (0.22 )   $ (0.22 )   $ (0.21 )   $ (0.21 )
Diluted earnings (loss) per share from discontinued operations
                                $ (0.22 )   $ (0.22 )   $ (0.21 )   $ (0.21 )
Cash dividends declared per share(6)
  $ 1.00     $ 2.00     $ 2.00     $ 2.00     $ 2.00     $ 2.00     $ 2.00     $ 2.00     $ 2.00  
Total assets(7)
  $ 186,192     $ 476,078     $ 474,156     $ 479,921     $ 480,660     $ 448,819     $ 448,813     $ 369,346     $ 369,531  
Notes and loans payable(7)
  $ 48,171     $ 285,750     $ 287,715     $ 300,279     $ 301,965     $ 271,756     $ 273,250     $ 200,168     $ 201,093  
Stockholders’ equity (deficit)(8)
  $ (5,441 )   $ 14,597     $ 14,653     $ 27,360     $ 27,880     $ 24,903     $ 24,876     $ 6,412     $ 6,637  
 
 
Certain prior period amounts have been reclassified in the consolidated statements of operations to conform to the current year presentation.
 
(1) As previously disclosed in Current Reports on Forms 8-K filed February 16, 2007 and January 26, 2007, GM has restated its consolidated financial statements and financial information to correct its accounting for certain derivative instruments and deferred income taxes. In addition, GM has recorded other accounting adjustments that were previously not recorded in the proper period. Refer to Note 2 to the Consolidated Financial Statements


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Item 6.   Selected Financial Data (concluded)
 
for further information relating to the restatement. The following table sets forth a reconciliation of previously reported and restated net income (loss) and retained earnings as of the dates and for the periods shown.
 
                                         
    Net Income (Loss)     Retained Earnings
 
    2005     2004     2003     2002     at January 1, 2002  
 
Previously reported
  $ (10,567 )   $ 2,804     $ 3,859     $ 1,574     $ 9,223  
Pre-tax adjustments:
                                       
Derivatives and hedge accounting
    89       (40 )     (213 )     545       (335 )
Other out-of-period
    118       (272 )     (263 )     (138 )     (339 )
                                         
Total pre-tax adjustments
    207       (312 )     (476 )     407       (674 )
Tax effects — provision/(benefit)
    22       (207 )     (202 )     168       (119 )
                                         
Total of above adjustments, net of tax
    185       (105 )     (274 )     239       (555 )
                                         
Deferred income taxes adjustments
    (35 )     2       (60 )     (78 )     1,280  
                                         
Net after-tax adjustments
    150       (103 )     (334 )     161       725  
                                         
Restated
  $ (10,417 )   $ 2,701     $ 3,525     $ 1,735     $ 9,948  
                                         
 
(2) To comply with EITF 00-10, Accounting for Shipping and Handling Fees and Costs, in 2006 GM reclassified shipping and handling costs incurred to transport product to its customers. This reclassification increased Automotive sales and Automotive cost of sales for the 2005, 2004, 2003, and 2002 years in the amount of $3.6 billion, $3.6 billion, $3.1 billion, and $2.8 billion, respectively. The reclassification did not impact net income (loss), or earnings (loss) per share.
 
(3) Effective December 22, 2003, GM split off Hughes by distributing Hughes common stock to the holders of GM Class H common stock in exchange for all outstanding shares of GM Class H common stock. Simultaneously, GM sold its 19.8% retained economic interest in Hughes to News Corporation in exchange for cash and News Corporation Preferred American Depository Shares. All shares of GM Class H common stock were then cancelled. GM recorded a net gain of $1.2 billion from the sale in 2003, and net losses from discontinued operations of Hughes were $219 million and $239 million in 2003 and 2002, respectively.
 
(4) As of December 31, 2005, GM recorded an asset retirement obligation of $181 million in accordance with the requirements of FASB Interpretation No. (FIN) 47, “Accounting for Conditional Asset Retirement Obligations.” The cumulative effect on net loss, net of related income tax effects, of recording the asset retirement obligations was $109 million or $0.19 per share on a diluted basis.
 
(5) Effective January 1, 2003, GM began expensing the fair market value of newly granted stock options and other stock-based compensation awards issued to employees to conform to SFAS No. 123, “Accounting for Stock-Based Compensation.” Effective July 1, 2003, GM began consolidating certain variable interest entities to conform to FIN 46(R), “Consolidation of Variable Interest Entities.”
 
(6) In February 2006, GM’s board of directors reduced the quarterly dividend on common stock from $0.50 per share to $0.25 per share.
 
(7) In November 2006, GM sold a 51% controlling ownership interest in GMAC, resulting in a significant decrease in total consolidated assets and notes and loans payable.
 
(8) As of December 31, 2006, GM recognized the funded status of its benefit plans on its consolidated balance sheet with an offsetting adjustment to accumulated other comprehensive income (loss) in stockholders’ equity (deficit) of $16.9 billion in accordance with the adoption of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.”
 
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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Overview
 
GM is primarily engaged in the worldwide development, production, and marketing of automobiles, consisting of cars and trucks. GM develops, manufactures, and markets vehicles worldwide through four automotive regions: GM North America (GMNA), GM Europe (GME), GM Latin America/Africa/Mid-East (GMLAAM), and GM Asia Pacific (GMAP) (collectively Automotive business). Also, GM’s finance and insurance operations are primarily conducted through GMAC, the successor to General Motors Acceptance Corporation, a wholly owned subsidiary until the GMAC Transaction at the end of November 2006 when GM sold a 51% controlling ownership interest in GMAC to a consortium of investors. After the GMAC Transaction, GM has accounted for its 49% ownership interest in GMAC using the equity method. GMAC provides a broad range of financial services, including consumer vehicle financing, automotive dealership and other commercial financing, residential mortgage services, automobile service contracts, personal automobile insurance coverage, and selected commercial insurance coverage.
 
From time to time, GM discusses issues of shared interest such as possible transactions with other parties, including other vehicle manufacturers. Frequently these proposals do not come to fruition. We do not confirm or comment on any potential transactions or other matters unless and until we determine that disclosure is appropriate.
 
Automotive Industry
 
In 2006, the global automotive industry continued to show strong sales and revenue growth. Global industry vehicle sales to retail and fleet customers were 67.5 million units in 2006, representing a 4% increase over 2005. We expect industry sales to be approximately 69 million units in 2007. Over the past five years, the global automotive industry has experienced consistent year-to-year increases, growing approximately 17.7% from 2001 to 2006. Overall revenue growth for the industry has averaged approximately 6% per year over the last decade. Much of this growth is attributable to demand in emerging markets, such as China, where industry vehicle unit sales increased 25.8% to 7.4 million units in 2006, from 5.9 million units in 2005.
 
GM’s worldwide vehicle sales for 2006 were 9.1 million units compared to 9.2 million units in 2005. Vehicle unit sales increased for GME, GMLAAM, and GMAP and declined for GMNA. GM’s global market share in 2006 was 13.5% compared to 14.1% in 2005. Market share increased in 2006 compared to 2005 from 16.8% to 17% for GMLAAM and from 5.8% to 6.4% for GMAP, and declined over the same period from 25.5% to 23.8% for GMNA and from 9.4% to 9.2% for GME.
 
Competition and factors such as commodity and energy prices and currency exchange continued to exert pricing pressure in the global automotive market in 2006. We expect competition to increase over the next few years due primarily to aggressive investment by manufacturers in established markets in the United States and Western Europe and the presence of local manufacturers in key emerging markets such as China and India.
 
Commodity price increases, particularly for aluminum, copper, precious metals, and resins, have contributed to substantial cost pressures in the industry for vehicle manufacturers as well as suppliers. In addition, the historically low value of the yen against the U.S. dollar has benefited Japanese manufacturers exporting vehicles or components to the United States. Due in part to these pressures, industry pricing for comparably equipped products has continued to decline in most major markets. In the United States, actual prices for vehicles with similar content have declined at an accelerating pace over the last decade. We expect that this challenging pricing environment will continue for the foreseeable future.
 
Financial Results
 
GM’s consolidated net sales and revenues grew to $207.3 billion in 2006 from $194.7 billion in 2005. GM incurred a consolidated net loss of $2.0 billion, compared to a net loss of $10.4 billion in 2005. The improvement in revenues and reduction in net loss was a result of improved automotive business performance primarily driven by higher revenues and a reduced loss at GMNA due to the favorable impact of the GMNA turnaround plan. GMAC net income on a GM consolidated basis was $2.2 billion in 2006 and $2.3 billion in 2005.


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Financial Results (concluded)
 
GM’s results of operations in 2006 were most significantly affected by the following strategy, trends, and significant events:
 
Strategy
 
As in 2006, our top priorities continue to be improving our business in North America and achieving global competitiveness in an increasingly global environment, thus positioning GM for sustained profitability and growth in the long term, while at the same time maintaining strong liquidity.
 
Our growth and profitability priorities for 2007 are straightforward:
 
  •  Continue to execute the North America turnaround plan;
 
  •  Grow aggressively in emerging markets;
 
  •  Continue to drive the benefits of managing the business globally;
 
  •  Continue development and implementation of GM’s advanced propulsion strategy; and
 
  •  Improve business results.
 
Continue to execute the North America turnaround plan
 
Our first priority in 2007 is improving our earnings and cash flow, particularly in GMNA, the traditional core of our operations and financial results. We are systematically and aggressively implementing our turnaround plan for GMNA to return these vital operations to profitability and positive cash flow as soon as possible. This plan is built on four elements, described more fully below in “Key Factors Affecting Future and Current Results — Turnaround Plan”:
 
  •  Product Excellence
 
  •  Revitalize Sales and Marketing Strategy
 
  •  Accelerate Cost Reductions and Quality Improvements; and
 
  •  Address Health Care/Legacy Cost Burden
 
The 2006 year-end results show that we are continuing to make progress toward stabilizing our business in North America, although additional work will be required to fully implement our turnaround plan. We believe that continued success in our turnaround efforts would not only return GM to profitability, but structure GM for sustained profitability, positive cash flow, and growth so we can be competitive in the long term by effectively managing our business’ cost, revenue, and liquidity.
 
Our primary revenue related goals for 2007 include selling a profitable product mix and improving contribution margin in North America. We are pursuing these goals by emphasizing the quality and value of our vehicles, reducing reliance on sales marketing incentives, and focusing on our newly launched products. We are gaining momentum in the North American marketplace and realizing benefits associated with the “Total Value Promise” initiative announced in January 2006, which has contributed to approximately $875 average reduction per vehicle incentive levels. In 2007 we intend to continue steps such as reducing daily rental car sales in order to increase residual values, while improving customer service, in order to increase repeat business from our current customers. In September 2006, we announced a five year or 100,000 mile extended powertrain warranty policy, which we believe offers more extensive warranty coverage than any other full-line auto manufacturer and will provide a significant competitive advantage for us with consumers focused on reliability and total cost of ownership. We plan to introduce an array of new vehicles in 2007, including the GMC Acadia, Saturn Outlook, and Buick Enclave, and the all-new Cadillac CTS and Chevrolet Malibu, which we believe will contribute to continued revenue growth. In addition, we will introduce heavy-duty versions of our all new pickup trucks launched in the fourth quarter of 2006.


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Strategy — (continued)
 
Our primary cost related goals for 2007 in North America remain addressing our legacy cost burden and reducing our structural costs in line with current levels of revenue. Legacy costs are primarily related to the cost of benefits provided to retired employees and their dependents, and costs associated with employees of businesses divested by GM and their dependents. Structural costs, such as compensation for unionized and salaried employees, are those costs that do not vary with production and include all costs other than material, freight, and policy and warranty costs. Some of these costs are within our control, while others such as our pension and OPEB expenses (which are influenced by interest rates and our return on investments) are more dependent on outside factors. As discussed below under “Key Factors Affecting Future and Current Results,” GM has taken action in a number of areas to reduce legacy and structural costs. In North America, we realized structural cost savings of $6.8 billion in 2006 compared to 2005 levels. These major cost reduction actions contributed substantially to our significantly improved results in our automotive business, which in the second quarter 2006 showed a profit for the first time since 2004. Going forward, we intend to reduce our structural costs in North America by an average of $9 billion per year on a running rate basis in 2007 compared to 2005, and we remain focused on repositioning our business for long-term competitiveness, including a successful resolution to the Delphi situation and a new collective bargaining agreement with the UAW in 2007 that benefits both GM and its hourly employees.
 
Grow Aggressively in Emerging Markets
 
Our second key priority is to focus on emerging markets and capitalize on the growth in areas such as China, India, and the ASEAN region, as well as Russia, Brazil, the Middle East, and the Andean region. Vehicle sales and revenues continue to grow globally, with the strongest growth in these emerging markets. In response, we are planning to expand capacity in China, Russia, and India, and to pursue additional growth opportunities through our relationships with Shanghai Automotive and GM Daewoo. In many cases, such as our operations in China, these businesses become profitable in a short time and are able to fund their own expansion. Fifty-five percent of our unit sales in 2006 were made outside of the United States and, because we expect that unit sales in these key emerging markets will continue to grow at a faster pace than the U.S. market, we anticipate that this percentage will continue to grow. In addition to this growth in sales and revenues, we expect that these emerging markets will become increasingly profitable. In 2006, we experienced growth in revenue in each of our geographic regions and improved profitability in all four of our regions, a continuation of progress made in the first half of the year.
 
Continue to Drive the Benefits of Managing the Business Globally
 
Our third key priority is to continue to integrate our operations around the world to manage our business on a global basis. GM has been focusing on restructuring its operations and has already taken a number of steps to globalize our principal business functions such as product development, manufacturing, powertrain, and purchasing, to improve our performance in an ever-more competitive environment.
 
Through global product development initiatives, we are seeking to leverage our global capabilities in design and engineering to bring products to market faster and at lower cost. We have identified and developed centers of technical expertise throughout the world, each dedicated to planning, designing, and engineering specific vehicles or technologies for GM globally — for example, GMNA for crossover and sport utility vehicles and rear wheel drive high-performance cars, GME for front wheel drive midsize sedans, and GMAP for small and mini-class cars. These design centers are supported by global manufacturing and purchasing organizations. For many years we have leveraged our scale to capitalize on global purchasing synergies, which has yielded significant cost savings. GM intends to build on this strategy by making its sourcing decisions on a global basis to purchase from the most capable and cost-effective suppliers, wherever they are located.
 
Continue to Develop and Implement GM’s Advanced Propulsion Strategy
 
Our fourth key priority is to continue to develop and advance our alternative propulsion strategy, focused on fuel and other technologies, making energy diversity and environmental leadership a critical element of our ongoing


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Strategy — (concluded)
 
strategy. In addition to continuing to improve the efficiency of our internal combustion engines, we are focused on the introduction of propulsion technologies which utilize alternative fuels. By the end of 2006, we sold over two million vehicles that run on E85 ethanol-gasoline blend. We have also continued our development of electrically driven vehicles, hybrid vehicles, and hydrogen fuel cell vehicles. For example, in November 2006 we announced that we had begun work on our first plug-in hybrid, and in January 2007 we introduced the Chevrolet Volt concept vehicle, an extended range electrically driven vehicle based on E-Flex technology with a pure electric vehicle range of 40 city miles, E85 ethanol/gasoline fuel economy of 150 miles per gallon, and gasoline fuel economy of 50 miles per gallon. The large lithium-ion battery necessary to power the Volt could be ready for production beginning between 2010 and 2012. We continue to increase our spending on alternative technologies and have intensified our efforts to displace traditional petroleum-based fuels. A portion of the increased capital expenditures discussed below under “Liquidity and Capital Resources” will be devoted to these new technologies.
 
Improve Business Results — Earnings and Cash Flow
 
We anticipate improved automotive earnings and cash flow in 2007, resulting from further structural cost reductions, material cost reductions, and increased unit sales, particularly of newly introduced models. In addition to our other priorities outlined above, we are focused on the continued improvement of our balance sheet and liquidity position. In 2006 we materially strengthened our liquidity and financial flexibility, which should allow us to meet our short and medium-term liquidity needs, including the funding of our projected increase in capital spending from $7.5 billion in 2006 to $8.5 billion to $9 billion in 2007 and in 2008. Over the long term, we believe our ability to meet our capital requirements will primarily depend on the execution of our turnaround plan and the return of our North American operations to profitability and positive cash flow.
 
Basis of Presentation
 
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) gives effect to the restatement discussed in “Item 8. Financial Statements and Supplemental Data, Note 2 — Restatement of Previously Issued Financial Statements,” and should be read in conjunction with the accompanying consolidated financial statements. In addition, this MD&A should be read in conjunction with the GMAC Annual Report on Form 10-K for the year ended December 31, 2006, filed separately with the SEC, Part I, Item 1 (Business) and Part II, Item 6 (Selected Financial Data), Item 7 (MD&A) and Item 8 (Financial Statements and Supplementary Data), all of which are incorporated into this document by reference. All earnings per share amounts included in the MD&A are reported on a fully diluted basis.
 
GM operates in two businesses, consisting of Automotive (Auto) and Financing and Insurance Operations (FIO).
 
GM’s Auto business consists of GM’s four automotive regions: GMNA, GME, GMLAAM, and GMAP, which together constitute GM Automotive (GMA).
 
GM’s FIO business consists of the operating results of GMAC for 2004, 2005, and the eleven months ended November 30, 2006 on a consolidated basis and includes GM’s 49% share of GMAC’s operating results for the month of December 2006 on an equity method basis. FIO also includes Other Financing, which includes financing entities that are not consolidated by GMAC.
 
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 purpose of assisting in making internal operating decisions. In this regard, certain common expenses were allocated among regions. These allocations may have been different than would be required for stand-alone financial information prepared in accordance with accounting principles generally accepted in the United States (GAAP). The financial results represent the historical information used by management for internal decision-making purposes;


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Basis of Presentation — (concluded)
 
therefore, other data prepared to represent the way in which the business will operate in the future, or data prepared in accordance with GAAP, may be materially different.
 
Consistent with industry practice, our market share information includes estimates of sales in certain countries where public reporting is not legally required or otherwise available on a consistent basis.
 
Consolidated Results of Operations
 
                         
    Years Ended December 31,  
    2006     2005     2004  
    (Dollars in millions)  
 
Total net sales and revenues
  $ 207,349     $ 194,655     $ 195,351  
Income (loss) before income tax (expense) benefit
    (4,947 )     (16,740 )     855  
Income tax (expense) benefit
    2,785       5,870       1,126  
Equity income (loss) and minority interests
    184       562       720  
                         
Income (loss) before cumulative effect of a change in accounting principle
  $ (1,978 )   $ (10,308 )   $ 2,701  
Cumulative effect of a change in accounting principle
          (109 )      
                         
Net income (loss)
  $ (1,978 )   $ (10,417 )   $ 2,701  
 
GM’s consolidated net sales and revenues grew to $207.3 billion in 2006 from $194.7 billion in 2005. GM incurred a consolidated net loss of $2.0 billion, compared to a net loss of $10.4 billion in 2005. The improvement in revenues and reduction in net loss was a result of improved automotive business performance primarily driven by higher revenues and a reduced loss at GMNA due to the favorable impact of the GMNA turnaround plan. Revenues and net income in 2006 for GM’s FIO business reflect GMAC on a fully consolidated basis for 11 months and one month on an equity basis. GMAC net income on a GM consolidated basis was $2.2 billion in 2006 and $2.3 billion in 2005. GM’s consolidated net sales and revenues were $195.4 billion in 2004 and net income was $2.7 billion. Further information on each of GM’s businesses and geographic regions are discussed below.
 
GM Automotive Operations Financial Review
 
                         
    Years Ended December 31,  
    2006     2005     2004  
    (Dollars in millions)  
 
Total Automotive net sales and revenues
  $ 173,089     $ 160,197     $ 162,369  
Automotive cost of sales
    (164,839 )     (158,164 )     (150,360 )
Selling, general & administrative expenses
    (13,218 )     (12,758 )     (11,486 )
Income (loss), before income tax expense (benefit)
    (5,665 )     (13,223 )     (551 )
Income tax (expense) benefit
    2,310       2,775       1,177  
Equity income (loss) and minority interests
    187       484       744  
                         
Net income (loss) before cumulative effect of a change in accounting principle
    (3,168 )     (9,964 )     1,370  
Cumulative effect of a change in accounting principle
          (109 )      
                         
Net income (loss)
  $ (3,168 )   $ (10,073 )   $ 1,370  
    (Volume in thousands)
GM production volume
    9,181       9,051       9,098  
Vehicle unit sales industry
    67,515       65,154       62,822  
GM global automotive market share
    13.5 %     14.1 %     14.3 %


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GM Automotive Operations Financial Review — (concluded)
 
GM management evaluates its automotive business and makes certain decisions using supplemental measures for variable expenses and non-variable expenses. GM believes that because these measures provide it with useful information, investors would find it beneficial to have the opportunity to view the business in a similar manner. See “Explanation of contribution costs, structural costs and impairment and restructuring charges” below.
 
                         
    Years Ended December 31,  
    2006     2005     2004  
    (Dollars in billions)  
 
Automotive net sales and revenues
  $ 173     $ 160     $ 162  
Contribution costs(a)
  $ (119 )   $ (110 )   $ (108 )
Structural costs(b)
  $ (52 )   $ (55 )   $ (52 )
Impairment and restructuring charges(c)
  $ (7 )   $ (5 )   $ (1 )
 
 
(a) Contribution costs are expenses that are considered by GM to be variable with production. The amount of contribution costs included in cost of sales is $118 billion, $109 billion, and $107 billion in 2006, 2005, and 2004, respectively, and those costs are comprised of material cost, freight, and policy and warranty expenses. The amount of contribution costs included in selling, general, and administrative expenses is $1 billion in each of 2006, 2005, and 2004, and those costs are related to advertising expense.
 
(b) Structural costs are expenses that do not generally vary with production and are recorded in both cost of sales and selling, general, and administrative expenses, such as costs of manufacturing labor, pension/OPEB, engineering expense, and marketing related costs. Certain costs related to restructuring and impairments that are included in cost of sales are also excluded from structural costs. The amount of structural costs included in cost of sales is $40 billion, $44 billion, and $42 billion in 2006, 2005, and 2004, respectively, and the amount of structural costs included in selling, general and administrative expenses is approximately $12 billion, $11 billion, and $10 billion in 2006, 2005, and 2004, respectively,
 
(c) The amount of impairment and restructuring charges included in cost of sales is $7 billion, $5 billion, and $1 billion in 2006, 2005, and 2004, respectively.
 
Industry Global Vehicle Sales
 
Worldwide industry vehicle unit sales increased approximately 2.4 million units in 2006, to about 67.5 million units, compared to about 65.2 million units in 2005. Industry sales decreased in North America by approximately 350 thousand units, to 20.2 million units, compared to about 20.5 million units in 2005. All other regions experienced growth in industry unit volume compared to 2005, particularly the Latin America/Africa/Mid-East region, up about 830 thousand units to about 6.1 million units in 2006, and the Asia Pacific region, up approximately 1.2 million units to about 19.5 million units in 2006.
 
GM Global Vehicle Sales
 
Worldwide GM vehicle unit sales were 9.1 million units, a decline of approximately 79 thousand units, compared to about 9.2 million units in 2005. GME, GMLAAM, and GMAP all reported sales unit increases, while a sales decline was reported in GMNA. Global market share for GM was 13.5% compared to 14.1% in 2005. GM market share increased in GMLAAM and GMAP, with a share loss at GMNA and a slight reduction at GME contributing to the overall drop in global market share.
 
GM global production volume for 2006 was 9.2 million units, an increase of approximately 130 thousand units from 2005. Production increased year-over-year in GMLAAM and GMAP, with a slight decrease in GME and an approximately 210 thousand unit reduction in GMNA.
 
In 2004, GM achieved a global market share of 14.3%, with vehicle unit sales of 9.0 million units and global production of 9.1 million units.


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Automotive Revenues
 
GM automotive revenues were $173 billion in 2006, an increase of approximately $13 billion from 2005, as GM sold a mix of products with greater content and higher prices. Pricing improvements in GMNA, GME, and GMLAAM also contributed to the revenue increase as sales allowances were reduced and prices increased on new model introductions. Strategic unit sales volume reductions to less profitable daily rental fleets in GMNA and GME contributed to improved overall mix and vehicle revenue per unit. Key factors in the increase in total revenue over 2005 include:
 
  •  Approximately $7 billion due to vehicle mix and pricing, resulting from changes to GM’s vehicle portfolio including new fullsize utilities in North America.
 
  •  Approximately $2 billion due to increased production volume globally
 
  •  Approximately $2 billion due to the consolidation of GM Daewoo on June 30, 2005, providing a full year of revenue reported in 2006 as compared to a half year reported in 2005.
 
  •  Approximately $2 billion due to the impact of foreign exchange rates, primarily the Canadian Dollar, Euro, U.K. Pound, Swedish Krona, Brazilian Real, and Korean Won versus the U.S. Dollar.
 
GM automotive revenues were $162 billion in 2004. The decrease from 2004 to 2005 was due to lower production and mix declines as a result of sales reductions of fullsize utility, pickup, midsize utility, and medium car segments at GMNA. Revenues increased at GMLAAM and GMAP.
 
Contribution Costs
 
Contribution costs in 2006 totaled $119 billion, an increase of $9 billion from 2005. The increase is a result of increased material costs from higher production volume and higher levels of vehicle content and product mix, as well as higher freight cost. Material performance is slightly favorable year-over-year as improvements realized from global architecture sourcing and optimizing manufacturing and supplier footprints offset higher raw material costs. Increased global demand for aluminum, copper, precious metals, petroleum, and resins increased contribution costs by $0.6 billion in 2006 versus 2005. Contribution costs as a percentage of revenue were unchanged in 2006 from 2005.
 
Contribution costs were $110 billion in 2005 compared to $108 billion in 2004. Contribution costs increased from 2004 to 2005 in total and as a percentage of revenue. The increase was primarily due to unfavorable mix at the total automotive level as production declined at GMNA along with fewer fullsize utilities and pickups, offset by production increases at GME, GMLAAM, and GMAP. Higher steel and non-ferrous metal prices resulted in an increase in material costs of $0.7 billion in 2005.
 
Structural Costs
 
Automotive structural cost were $52 billion in 2006, a decrease of approximately $3 billion from 2005. Cost reductions in GMNA of over $6 billion were the primary reason for this reduction, partially offset by structural cost increases in GMLAAM and GMAP as GM continued to invest in infrastructure to support the higher unit production and sales volumes in those regions. Consolidation of GM Daewoo also increased 2006 structural cost in GMAP by over $1 billion as compared to 2005 since GM Daewoo was consolidated on June 30, 2005.
 
The majority of structural cost reductions in North America were driven by turnaround actions implemented throughout 2006, largely related to changes to pension, OPEB, and the hourly workforce level:
 
  •  GMNA pension and OPEB costs were reduced by $2.8 billion largely as a result of the UAW Health Care Settlement Agreement, the hourly accelerated attrition program, and changes to salaried pension and health care benefit plans.
 
  •  GMNA manufacturing costs were reduced by $1.0 billion as total labor costs were lowered as employees retired or left GM under the accelerated attrition program offered to hourly employees represented by the


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  Structural Costs — (concluded)
 
  UAW and IUE/CWA. Approximately 34,400 GM hourly employees agreed to participate in the program and have retired or left the company as of January 1, 2007.
 
  •  Other Automotive costs were lower due to reduction in various administrative costs and in global engineering, where costs were lower as GM increasingly leveraged global vehicle development and architectures.
 
Automotive structural costs were $52 billion in 2004 and increased by $3 billion in 2005. Health-care expense increased primarily due to escalating health-care cost trends and falling discount rates in the United States. Global consumer influence expense increased due to efforts to increase product awareness. Other costs increased outside of North America as GM invested in emerging markets.
 
Impairment and Restructuring Charges
 
GM incurred certain expenses primarily related to restructuring and asset impairments, which are included in Automotive cost of sales. Such costs totaled approximately $7 billion, $5 billion, and $1 billion in 2006, 2005, and 2004, respectively.
 
                         
    Years Ended December 31,  
    2006     2005     2004  
    (Dollars in billions)  
 
UAW Attrition Agreement
  $ 6.4     $     $  
Vehicle impairments
    0.5       1.2       0.6  
Facility impairments
    0.2       0.9       0.2  
Restructuring initiatives
    (0.4 )     3.1        
Other
    0.2              
                         
Total
  $ 6.9     $ 5.2     $ 0.8  
                         
 
The 2006 amounts are related to the following:
 
  •  $6.4 billion net charge related to the program under the UAW Attrition Agreement (UAW Attrition Program), primarily for payments to employees (approximately $2.1 billion) and for the curtailment charges associated with GM’s U.S. hourly pension, OPEB, and extended disability plans as a result of the UAW Attrition Program (approximately $4.3 billion).
 
  •  Approximately $0.4 billion of impairment charges related to the write-down of product-specific assets, primarily at GMNA.
 
  •  Approximately $0.1 billion of impairment charges related to the write-down of plant facilities at GME.
 
  •  Approximately $0.6 billion for various restructuring and other matters. Of this total, approximately $0.4 billion was incurred at GME, with additional charges recorded at the other regions. A favorable revision to the reserve recorded in the fourth quarter of 2005 related to North American plant capacity actions (approximately $1.0 billion), primarily attributable to the impact of the UAW Attrition Program. This is more fully discussed below in “GM-UAW-Delphi Special Attrition Program Agreement”.
 
  •  Approximately $0.2 billion taken in conjunction with cessation of production at a previously divested business.
 
The 2005 amounts are related to the following:
 
  •  Approximately $1.2 billion for impairment charges related to the write-down of product-specific assets, of which $0.7 billion was at GMNA, $0.3 billion was at GME, with additional charges taken at GMLAAM and GMAP.
 
  •  Approximately $0.8 billion of impairment charges related to the write-down of plant facilities at GMNA.


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Impairments and Restructuring Charges — (concluded)
 
 
  •  Approximately $3.1 billion associated with restructuring initiatives. Of this, approximately $2.0 billion was incurred at GMNA, including $1.8 billion for employee related costs in connection with the restructuring initiatives announced in the fourth quarter of 2005, and approximately $0.2 billion associated with a voluntary early retirement program and other separation programs related to the U.S. salaried workforce. GME recognized separation and contract cancellation charges of $1.1 billion, mainly related to the restructuring plan announced in the fourth quarter of 2004. In addition, GMAP recognized separation costs related to restructuring activities at GM Holden Australia.
 
In 2004, charges were recognized for asset impairments totaling approximately $0.8 billion. Vehicle tooling impairments were $0.6 billion, and plant and facilities impairments were $0.2 billion.
 
Interest Expense, Other Expense, Interest Income and Other Non-Operating Income, Equity Income and Minority Interest, and Tax Benefit
 
Automotive interest expense in 2006 was $4.3 billion, an increase of $0.3 billion from 2005, resulting primarily from intercompany transactions between Automotive and Other Operations. In total, Automotive and Other Operations interest expense was $2.6 billion in 2006, $100 million higher than 2005. Automotive interest expense was $3.2 billion in 2004, $2.3 billion at Automotive and Other Operations after intercompany elimination.
 
Other expense was zero in 2006, an improvement from the $0.8 billion expense recorded in 2005 due to the write-down to fair value of GM’s investment in approximately 20% of the common stock of Fuji Heavy Industries (FHI) in 2005.
 
Interest income and other non-operating income was $3.6 billion in 2006, an increase of $1.3 billion from 2005. The $1.3 billion increase was a result of gains associated with the sale of Mesa, Arizona Proving Grounds, and part of our interest in Suzuki Motor Corporation (Suzuki), and Isuzu Motors Limited (Isuzu). Interest income and other non-operating income was $2.2 billion in 2004.
 
Automotive equity income and minority interest was $200 million in 2006, $300 million lower than 2005 due to the sale of the majority of GM’s investment in Suzuki and an increase in minority interest associated with the consolidation of GM Daewoo in June 2005. Equity income and minority interest was $700 million in 2004, $200 million higher than in 2005, primarily due to consolidation of GM Daewoo in 2005.
 
Automotive tax was a net benefit of $2.3 billion in 2006 and $2.8 billion in 2005. Tax benefit was $1.2 billion in 2004, reflecting primarily tax benefits in GMNA.
 
Net Income/Loss
 
As a result of the above factors, GM’s Automotive business incurred net losses from continuing operations of $3.2 billion and $10.1 billion in 2006 and 2005, respectively. 2005 net loss of $10.1 billion included $100 million cumulative effect of a change in accounting principle related to implementation of FIN 47 “Accounting for Conditional Asset Retirement Obligations”. Automotive net income was $1.4 billion in 2004.
 
Explanation of contribution costs, structural costs, and impairment and restructuring charges
 
Management believes that contribution costs, structural costs, and impairment and restructuring charges provide meaningful supplemental information regarding our expenses because they place Automotive expenses into categories that allow GM management to assess the cost performance of GMA and the geographic regions. GM management uses these categories to evaluate GM’s expenses and believes these measures allow GM management to readily view operating trends, perform analytical comparisons, benchmark expenses among geographic regions, and assess whether the turnaround and globalization strategy for cutting costs are on target. GM management uses these categories for forecasting purposes, evaluating management, and determining its future capital investment


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Explanation of contribution costs, structural costs, and impairment and restructuring
charges — (concluded)
 
allocations. Accordingly, GM believes these categories are useful to investors in allowing for greater transparency of supplemental information used by management in its financial and operational decision-making.
 
While GM believes that contribution costs, structural costs, and impairment and restructuring charges provide useful information, there are limitations associated with the use of these categories. Contribution costs, structural costs, and impairment and restructuring charges may not be completely comparable to similarly titled measures of other companies due to potential differences in the exact method of calculation between companies. As a result, these categories have limitations and should not be considered in isolation from, or as a substitute for, other measures such as cost of sales and selling, general, and administrative expenses. GM compensates for these limitations by using these categories as supplements to cost of sales and selling, general, and administrative expenses.
 
GM Automotive Regional Results
 
GM North America
 
                         
    Years Ended December 31,  
    2006     2005     2004  
    (Dollars in millions)  
 
GMNA:
                       
Total net sales and revenues
  $ 109,779     $ 105,640     $ 115,321  
Income (loss) before income tax expense (benefit)
  $ (6,903 )   $ (10,583 )   $ 725  
Income tax (expense) benefit
    2,243       2,480       600  
Equity income (loss) and minority interest
    41       (47 )     32  
                         
Net income (loss) before cumulative effect of a change in accounting principle
    (4,619 )     (8,150 )     1,357  
Cumulative effect of a change in accounting principle
          (83 )      
                         
Net income (loss)
  $ (4,619 )   $ (8,233 )   $ 1,357  
Net margin
    (4.2 )%     (7.8 )%     1.2 %
    (Volume in thousands)
Production volume
                       
Cars
    1,822       1,834       1,997  
Trucks
    2,827       3,022       3,223  
Total GMNA
    4,649       4,856       5,220  
Vehicle unit sales
                       
Industry — North America
    20,191       20,546       20,279  
GM as a percentage of industry
    23.8 %     25.5 %     26.7 %
Industry — U.S. 
    17,060       17,456       17,302  
GM as a percentage of industry
    24.2 %     25.9 %     27.2 %
GM cars
    20.7 %     22.6 %     24.9 %
GM trucks
    27.1 %     28.5 %     29.0 %
 
North American industry vehicle unit sales declined 1.7% to 20.2 million units during 2006, and we expect unit sales to be relatively flat in 2007. While industry volume declined 1.7%, GMNA’s production declined 4.3% to 4.6 million units. GMNA ended the year with a market share of 23.8% for 2006, compared to 25.5% for 2005.
 
During 2006, industry vehicle unit sales in the United States decreased to 17.1 million units, while GM’s U.S. market share decreased by 1.7 percentage points due in part to a strategic decision to reduce sales to daily rental


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GM North America — (continued)
 
customers by approximately 75,000 units, because of the comparatively low profits from such sales, and due to a consumer shift to passenger cars where GM traditionally has lower penetration. Dealer inventories in the U.S. totaled approximately 1.050 million units as of December 31, 2006, consistent with management’s expectations as well as in-line with year ago levels. Despite the decline in volume, revenue in North America increased in 2006 over 2005 by $4.1 billion or 3.9%, driven primarily by a favorable mix of higher end products. In 2005 revenue declined by $9.7 billion or 8.4% compared to 2004, driven primarily by unfavorable product mix and a decline in sales volume.
 
2006 vs. 2005 Earnings
 
Pre-tax earnings at GMNA improved by $3.7 billion in 2006, from a loss of $10.6 billion in 2005 to a loss of $6.9 billion in 2006. Major factors contributing to the improvement included:
 
  •  Pension and OPEB costs decreased by $2.8 billion largely as a result of the UAW Health Care Settlement Agreement which reduced hourly OPEB costs, the impact of the UAW Attrition Program, and the effects of the changes in salaried retiree benefits plans announced in the first quarter of 2006.
 
  •  Other costs decreased by approximately $2.5 billion due to a reduction in advertising and sales promotion expenses, more efficient engineering spending, and lower product warranty and recall costs as a result of improved vehicle quality. In addition, GMNA’s product liability reserve decreased by approximately $0.1 billion, after including a charge for “incurred but not reported” asbestos liabilities of approximately $0.1 billion.
 
  •  Manufacturing related structural costs decreased by $1.0 billion, as a result of the UAW Attrition Program under which approximately 34,400 GM hourly employees have retired or left GM by January 1, 2007.
 
  •  Favorable product mix resulted in increased earnings of approximately $0.4 billion due primarily to the launch of the new full-size utilities.
 
  •  The sale of the Mesa, Arizona Proving Grounds resulted in a $270 million gain in 2006.
 
  •  In connection with the GMAC Transaction in the fourth quarter of 2006, GM reduced its lease residual and risk sharing support expense by approximately $0.2 billion because negotiated payments for lease residual and risk sharing support were lower than the previously recorded liabilities.
 
  •  Production volume decreases of 4.3% attributable to GMNA’s market share decline and the reduction in sales to daily rental businesses by approximately 75,000 units, resulted in a decrease in earnings of approximately $1.0 billion.
 
In addition to the above factors, there were restructuring and impairment charges of approximately $6.2 billion in 2006, as compared to $3.6 billion in 2005. The table below provides further information regarding these charges.
 
                 
GMNA Restructuring and Impairment Charges  
    2006     2005  
    ($ billions)  
 
UAW Attrition Agreement
  $ 6.4     $  
Vehicle Impairments
    0.5       0.7  
Facility Impairments
          0.8  
Adjustment to 2005 Capacity Reserve and Other Restructuring Initiatives
    (0.9 )     2.0  
Other
    0.2        
                 
Total
  $ 6.2     $ 3.5  
                 
 
GMNA’s net loss improved by $3.6 billion, from a net loss of $8.2 billion in 2005 to a net loss of $4.6 billion in 2006. The improvement was driven by matters discussed above and their related tax effects.


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GM North America — (concluded)
 
 
2005 vs. 2004 Earnings
 
Pre-tax earnings at GMNA declined by $11.3 billion in 2005, from pre-tax earnings of $0.7 billion in 2004 to a loss of $10.6 billion in 2005. Major factors contributing to the decline included:
 
  •  Unfavorable product mix adversely affected earnings by approximately $2.7 billion due primarily to reduced demand for GMNA’s large utility vehicles which were reaching the end of their product life cycle, as well as declines in sales of higher margin large cars.
 
  •  Production volume decreases of 7% attributable to GMNA market share decline and a significant reduction in dealer inventories accounted for a decrease in earnings of approximately $2.5 billion.
 
  •  Unfavorable material costs after factoring in the cost of government mandated product improvements accounted for a decrease in earnings of approximately $0.9 billion.
 
  •  Increased health care expenses primarily due to the recognition of OPEB net actuarial losses, caused by escalating health-care cost trends and falling discount rates in the United States, accounted for a decrease in income of approximately $0.7 billion. These 2005 health-care cost increases do not reflect new health-care initiatives with the UAW and salaried employees and retirees, which will benefit subsequent years.
 
  •  Other factors resulted in a decrease in earnings of approximately $0.9 billion. The largest of these relates to increased advertising and sales promotion costs resulting from further efforts to increase product awareness.
 
  •  In 2004 GMNA recognized a gain on sale of XM Satellite Radio Holdings stock of approximately $200 million.
 
  •  In addition to the above, there were restructuring and impairment charges of approximately $3.6 billion in 2005, as compared to $0.3 billion in 2004. The table below provides further information regarding these charges.
 
                 
GMNA Restructuring and Impairment Charges  
    2005     2004  
    ($ billions)  
 
Vehicle Impairments
  $ 0.7     $ 0.1  
Facility Impairments
    0.8       0.2  
Restructuring Initiatives
    2.0        
                 
Total
  $ 3.5     $ 0.3  
                 


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GM Europe
 
                         
    Years Ended December 31,  
    2006     2005     2004  
    (Dollars in millions)  
 
Total net sales and revenues
  $ 33,193     $ 31,892     $ 31,196  
(Loss) before income tax expense (benefit)
  $ (312 )   $ (1,794 )   $ (1,424 )
Income tax (expense) benefit
    72       734       599  
Equity income (loss) and minority interests
    15       53       57  
                         
Net (loss) before cumulative effect of a change in accounting principle
    (225 )     (1,007 )     (768 )
Cumulative effect of a change in accounting principle
          (21 )      
                         
Net income (loss)
  $ (225 )   $ (1,028 )   $ (768 )
Net margin
    (0.7 )%     (3.2 )%     (2.5 )%
    (Volume in thousands)
Production volume
    1,806       1,858       1,829  
Vehicle unit sales
                       
Industry
    21,763       21,079       20,778  
GM as a percentage of industry
    9.2 %     9.4 %     9.4 %
GM market share — Germany
    10.1 %     10.8 %     10.6 %
GM market share — United Kingdom
    14.3 %     14.7 %     13.9 %
 
Industry vehicle unit sales in Europe increased to 21.8 million units in 2006, or 3.2% over 2005 and 4.7% over 2004. GME’s 2006 total market share decreased slightly to 9.2% from 9.4%. European industry vehicle unit sales are expected to be relatively flat in 2007. In the two largest markets in Europe, GM market share decreased: market share was 10.1% in Germany, a 0.7 percentage point decrease versus 2005 and a 0.5 percentage point decrease versus 2004; and in the United Kingdom market share was 14.3%, a decrease of 0.4 percentage point versus 2005 and an increase of 0.4 percentage point versus 2004. Revenues in 2006 increased $1.3 billion or 4.1% over 2005, primarily due to the impact of full consolidation of the European powertrain organization and improved pricing. Revenue in 2005 increased $0.7 billion over 2004 driven primarily by favorable mix partly offset by volume declines and negative pricing.
 
2006 vs. 2005 Earnings
 
The GME restructuring plan announced in the fourth quarter of 2004 gained further traction in 2006 and, together with continued progress on pricing and material cost, delivered improved results in 2006 compared to previous periods. Loss before taxes from GME totaled $312 million, $1.8 billion and $1.4 billion in 2006, 2005, and 2004, respectively. The improvement of $1.5 billion in loss before taxes in 2006 versus 2005 was primarily due to the following factors:
 
  •  Improvement in operating performance of $0.8 billion — Material cost performance and structural cost performance resulting from the implementation of the restructuring plan, along with improved pricing, which more than offset volume declines and additional cost related to product upgrades.
 
  •  Lower restructuring and impairment charges of $0.7 billion — Restructuring and impairment charges for 2006 totaled $586 million compared to $1,330 million in 2005. The 2006 charges included impairment charges of $149 million, of which $89 million related to the closure of GM’s Portugal assembly plant and $60 million related to product specific assets. Separations and contract cancellations totaled $437 million, mostly related to the closure of GM’s Portugal assembly plant, a shift reduction in GM’s Ellesmere Port assembly plant, and the restructuring plan announced in the fourth quarter of 2004. The charges for 2005 comprehended separations and contract cancellation costs of $1.1 billion, mainly related to the restructuring plan announced in the fourth quarter of 2004, but also included costs related to the dissolution of the


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  GM Europe — (concluded)
 
  Powertrain joint venture with Fiat S.p.A. (Fiat) and other contract cancellations of $59 million, and a charge for product specific asset impairments of $262 million.
 
GME’s 2006 net loss of $225 million declined by $803 million from the loss of $1.0 billion in the prior year. This is largely comprised of the operating improvements and the lower restructuring and impairment charges discussed above, plus the related tax effect on these items. In addition, 2005 included a charge of $21 million in connection with the adoption of FIN 47, “Accounting for Conditional Asset Retirement Obligations”, and favorable equity income related to the effects of changes in the Polish tax law.
 
2005 vs. 2004 Earnings
 
The increase in GME’s loss before tax in 2005 versus 2004 of approximately $0.4 billion resulted mainly from the following factors:
 
  •  Higher restructuring and impairment charges of $1.0 billion — Restructuring and impairment charges for 2005 of $1.3 billion compared to $372 million in 2004. The charges for 2005 comprehended separations and contract cancellation costs of $1.1 billion, mainly related to the restructuring plan announced in the fourth quarter of 2004, but also included costs related to the dissolution of the Powertrain joint venture with Fiat, and other contract cancellation costs of $59 million, and a charge for product specific asset impairments of $262 million. The charges for 2004 consisted of product specific asset impairments.
 
  •  Improvement in operating performance of $0.6 billion — Primarily favorable mix together with material cost performance and structural cost performance resulting from the implementation of the above-mentioned restructuring plan, more than compensated for volume declines and negative pricing.
 
The GME turnaround plan remains on track, and we expect to see more progress in 2007. In addition to the continued implementation of our significant cost reduction initiatives, we expect to benefit from the introduction of new products such as the Opel Corsa and the Opel Antara and will continue to focus on the rollout of our multi-brand strategy.
 
GM Latin America/Africa/Mid-East
 
                         
    Years Ended December 31,  
    2006     2005     2004  
    (Dollars in millions)  
 
Total net sales and revenues
  $ 14,618     $ 11,844     $ 8,877  
Income before income tax expense
  $ 527     $ 43     $ 94  
Income tax (expense) benefit
    (28 )     (611 )     (33 )
Equity income (loss) and minority interests
    (9 )     4       (11 )
                         
Net income (loss) before cumulative effect of a change in accounting principle
    490       (564 )     50  
Cumulative effect of a change in accounting principle
          (2 )      
                         
Net income (loss)
  $ 490     $ (566 )   $ 50  
Net margin
    3.4 %     (4.8 )%     0.6 %
    (Volume in thousands)
Production volume
    830       775       716  
Vehicle unit sales
    1,035       882       740  
Industry
    6,076       5,242       4,605  
GM as a percentage of industry
    17.0 %     16.8 %     16.1 %
GM market share — Brazil
    21.3 %     21.3 %     23.1 %


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GM Latin America/Africa/Mid-East — (concluded)
 
The industry in Latin America, Africa and Mid-East increased to 6.1 million units in 2006, up 15.9% versus 2005. GMLAAM’s vehicle unit sales increased by 17.3% over 2005 and 39.9% over 2004. The calendar year 2006 was a record breaking year for GMLAAM. The region achieved a sales volume record of 1.03 million units, the first time in history where GMLAAM exceeded more than 1 million units in annual sales. This growth led to a 17.0% market share in GMLAAM, a 0.2 percentage point increase compared to 2005 and a 0.9 percentage point increase over 2004. This overall market share gain was primarily attributable to increases in Colombia, Africa, and the Middle East, while Brazil’s market share remained flat in 2006.
 
The year-end consumer price inflation dropped from 2005 to 2006 in Brazil (GMLAAM’s largest market) from 5.7% to 3.3%, in Argentina from 12.1% to 9.7%, in Chile from 3.7% to 2.6%, in Colombia from 4.8% to 4.5%, and in Ecuador from 3.1% to 2.9%. The consumer price inflation at year-end increased from 2005 to 2006 in Venezuela from 14.6% to 17.3% and in South Africa from 3.6% to 5.8%. An overall decrease in inflation for the region improved the affordability of GM’s products and contributed to the increased net sales and income. Inflation in Brazil, Venezuela, and Colombia in 2005 decreased as compared to 2004 while inflation increased in Argentina, Chile, Ecuador, and South Africa.
 
2006 vs. 2005 Earnings
 
In 2006, GMLAAM achieved record revenue of $14.6 billion, an increase of $2.8 billion or 23% over the prior year, driven by strong volume. Pre-tax income of $527 million increased $484 million versus 2005 income of $43 million. This improvement of approximately $0.5 billion was due to various factors, including:
 
  •  Higher production volumes and improved product mix contributed approximately $0.4 billion
 
  •  Favorable pricing contributed approximately $0.3 billion
 
  •  A reduction from 2005 to 2006 of approximately $0.1 billion in restructuring and impairment charges
 
  •  Unfavorable foreign exchange of approximately $0.2 billion
 
  •  Other unfavorable factors totaling about $0.1 billion
 
GMLAAM reported net income of $490 million in 2006, an approximately $1.1 billion improvement over 2005’s reported net loss of $566 million. This increase is largely comprised of the operational improvement and the favorable impact on restructuring and impairment charges previously discussed, and a tax valuation allowance which was established in 2005 at GM do Brasil for $617 million associated with DTAs that could no longer be realized.
 
2005 vs. 2004 Earnings
 
GMLAAM reported 2005 net revenues of $11.8 billion, which was an increase of $3.0 billion from 2004. Income before tax decreased from $94 million in 2004 to $43 million in 2005. The deterioration of $51 million was due in part to an impairment charge of $150 million for assets still in service (related to GMLAAM’s export business) in 2005, partly offset by favorable volume, product mix, and pricing improvements.
 
For 2007, the industry is expected to continue to grow, but at a more moderate rate. Consumer price inflation is expected to remain under control in Brazil, Colombia, Chile, Ecuador, and South Africa with increases expected in Argentina and Venezuela for 2007. GMLAAM expects to launch four new products including the Chevrolet Captiva across many Latin American countries, the Chevrolet Epica in Venezuela and Africa, the Cadillac BLS and SRX in South Africa, and the GMC Acadia in the Middle East. This is in addition to the launch of the Hummer H3G in South Africa at the end of 2006. GMLAAM is also planning to grow its aftermarket sales business in 2007. The region will also continue a strong focus on reducing structural costs across the region to offset volume related cost increases.


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GM Asia Pacific
 
                         
    Years Ended December 31,  
    2006     2005     2004  
    (Dollars in millions)  
 
Total net sales and revenues
  $ 15,499     $ 10,821     $ 6,975  
Income (loss) before income tax expense (benefit)
  $ 1,023     $ (889 )   $ 54  
Income tax (expense) benefit
    23       172       11  
Equity income (loss) and minority interests
    140       474       666  
                         
Net income (loss) before cumulative effect of a change in accounting principle
    1,186       (243 )     731  
Cumulative effect of a change in accounting principle
        $ (3 )      
                         
GMAP net income (loss)
  $ 1,186     $ (246 )   $ 731  
GMAP net margin
    7.7 %     (2.3 )%     10.5 %
    (Volume in thousands)
Production volume(1)
    1,896       1,562       1,333  
Vehicle unit sales(2)(3)
    1,253       1,065       887  
Industry
    19,485       18,287       17,160  
GM as a percentage of industry
    6.4 %     5.8 %     5.2 %
GM market share — Australia
    15.4 %     17.8 %     19.4 %
GM market share — China(3)
    11.8 %     11.2 %     9.4 %
 
 
(1) 2006, 2005 and 2004 calendar years include GM Daewoo and Wuling joint venture production
 
(2) Includes GM Daewoo and Wuling joint venture sales for 2006, 2005, and 2004.
 
(3) Includes Wuling joint venture sales due to GM equity position and local ownership requirements.
 
Industry vehicle unit sales in the Asia Pacific region increased approximately 6.6% in 2006, to 19.5 million units from 18.3 million units in 2005. This result reflects strong growth in China, where industry vehicle unit sales increased 25.8% to 7.4 million units in 2006, from 5.9 million units in 2005. GMAP increased its vehicle unit sales in the Asia Pacific region by almost 18% in 2006, to 1.3 million units from 1.1 million in 2005. GMAP’s 2006 market share was 6.4%, a 0.6 percentage point increase over 2005 and a 1.2 percentage point increase over 2004. Market share in China increased 0.6 percentage points to 11.8% in 2006, and market share in Australia fell 2.4 percentage points to 15.4% in 2006. As a result of increased vehicle unit sales and the June 30, 2005 consolidation of GM Daewoo, GMAP revenue rose 43% to $15.5 billion in 2006 compared to $10.8 billion in 2005. In 2005 revenue grew $3.8 billion, or 55% over 2004.
 
2006 vs. 2005 Earnings
 
Income (loss) before tax benefit for GMAP was $1.0 billion and $(889) million in 2006 and 2005, respectively. Income before tax benefit improved by $1.9 billion in 2006 versus 2005, principally due to the following:
 
  •  The write-down to fair market value of GM’s investment in FHI resulted in a loss of $735 million in 2005.
 
  •  In 2006, GM sold approximately 85% of its investment in Suzuki, resulting in a gain of $666 million.
 
  •  GM also sold its remaining interest in Isuzu for a gain of $311 million in 2006.
 
  •  Improved performance of approximately $200 million at GM Daewoo on a fully consolidated basis, resulting from increased volume and improved material cost performance, partially offset by unfavorable foreign exchange and interest.
 
  •  In addition, restructuring and impairment charges were $42 million less in 2006 versus 2005.


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  GM Asia Pacific — (concluded)
 
The reduction in equity income and minority interests from 2005 to 2006 resulted from the sale of the majority of GM’s equity investment in Suzuki and decreased equity income associated with the consolidation of GM Daewoo beginning June 30, 2005.
 
GMAP’s net income improved by $1.4 billion, from a net loss of $246 million in 2005 to a net income of $1.2 billion in 2006. This improvement was driven by the matters previously discussed, as well as their related tax effects, and the reversal of a deferred tax asset valuation allowance in 2006 at GM Daewoo for $215 million, as management now believes these deferred tax assets will be utilized.
 
2005 vs. 2004 Earnings
 
Income before tax in GMAP decreased by $0.9 billion in 2005 versus 2004, mainly the result of charges in 2005 related to the $735 million write-down to fair market value of GM’s investment in FHI and a charge related to product specific asset impairments of $64 million and separation costs of $54 million at GM Holden in Australia. Unfavorable volume and product mix at GM Holden in Australia was offset by favorable results from GM Daewoo.
 
In 2007, Asia Pacific regional industry volume is expected to continue to expand, with continued strong growth in China and India. GMAP expects to take advantage of the strong industry and grow revenue in 2007 by continuing to implement the multi-brand strategy in China as well as leverage the product development capabilities of GM Daewoo. Overall, GM’s broad operational footprint in the Asia Pacific region well positions it to meet regional market demand. GMAP also expects to improve its material cost performance through increased supplier localization and increase its structural cost in 2007 to take advantage of the continuing robust growth in the region.
 
Corporate and Other Operations
 
                         
    Years Ended December 31,  
    2006     2005     2004  
    (Dollars in millions)  
 
Total net sales, revenues and eliminations
  $ (162 )   $ 31     $ 972  
(Loss) before income tax expense (benefit)
  $ (1,152 )   $ (6,916 )   $ (2,821 )
Income tax (expense) benefit
    1,310       4,288       1,292  
Equity income (loss) and minority interests
    3       27       (16 )
                         
Net income (loss) before cumulative effect of a change in accounting principle
    161       (2,601 )     (1,545 )
Cumulative effect of a change in accounting principle
                 
                         
Net income (loss)
  $ 161     $ (2,601 )   $ (1,545 )
 
Total Corporate and Other revenue consists primarily of corporate eliminations.
 
2006 vs. 2005 Earnings
 
Corporate and Other Operations loss before income tax benefit was $1.2 billion in 2006 compared to $6.9 billion in 2005. The year-over-year improvement in 2006 was primarily due to the 2005 charge of $5.5 billion related to the Delphi benefit guarantee charge pertaining to the contingent exposures relating to Delphi’s Chapter 11 filing. During 2006 an additional charge of $0.5 billion was recorded related to the Delphi benefit guarantee (refer to Note 20 to the Consolidated Financial Statements for further background). Results for 2006 also included the benefit of approximately $1.0 billion lower OPEB expense resulting from the UAW Health Care Settlement Agreement that reduced legacy costs related to employee benefits of divested businesses for which GM has retained responsibility and the OPEB curtailment related to the GMAC Transaction. Other costs also increased by


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Corporate and Other Operations — (concluded)
 
approximately $0.5 billion in 2006, primarily related to increased administrative expenses and the elimination of hedge accounting in connection with the restatement of our prior financial statements for SFAS No. 133.
 
2005 vs. 2004 Earnings
 
Other Operations loss before income tax expense was $2.8 billion in 2004 and included a charge of $1.6 billion related to the settlement agreement reached between GM and Fiat to terminate the Master Agreement (including the Put Option) and settle various disputes between the two companies. Other Operations also included OPEB legacy costs of approximately $0.7 billion and administration expense of $0.4 billion in 2004.
 
Tax benefit in 2006 was $1.3 billion compared to $4.3 billion in 2005, the reduced benefit primarily related to the larger pre-tax loss in 2005. Tax contingencies were reduced by $0.5 billion in 2006. Tax benefit was $1.3 billion in 2004.
 
Net income was $0.2 billion in 2006 compared to a net loss of $2.6 billion in 2005. Net loss was $1.5 billion in 2004.
 
FIO Financial Review
 
                                 
    Years Ended December 31,  
FIO Results of Operations
  2006     2005     2004  
    (Dollars in millions)  
    FIO           FIO     FIO  
 
GMAC:
    GMAC(a)       GMAC(c)                  
Automotive Finance Operations
  $ 1,151     $ 1,174     $ 880     $ 1,341  
ResCap
    827       705       1,021       904  
Insurance Operations
    1,079       1,127       417       329  
Other/eliminations
    (882 )     (881 )     (38 )     320  
                                 
Net Income
  $ 2,175     $ 2,125     $ 2,280     $ 2,894  
                                 
Equity loss for GMAC(b)
    (5 )                        
Preferred Dividends
    9                          
Other Financing
    (1,150 )             (23 )     (18 )
                                 
Total FIO Net Income
  $ 1,029     $ 2,125     $ 2,257     $ 2,876  
                                 
 
 
(a) GMAC segment data as reported by GM line of business are GMAC’s results of operations for 11 months ended November 30, 2006.
 
(b) This represents GM’s share of GMAC’s loss for one month (December) following the sale of GMAC using the equity method.
 
(c) This represents GMAC’s reported results for the year ended December 31, 2006.
 
GM’s FIO business consists of the results of GMAC’s lines of business: Automotive Finance Operations, ResCap; Insurance, and Other, which includes its Commercial Finance business and GMAC’s equity investment in Capmark. Also included in FIO is Other Financing, which includes financing entities that are not consolidated by GMAC as well as two special purpose entities holding automotive leases previously owned by GMAC and its affiliates that were transferred to GM as part of the GMAC Transaction.
 
FIO net income was $1.0 billion, $2.3 billion and $2.9 billion for the years ended December 31, 2006, 2005 and 2004, respectively. This decrease of 54% or 1.2 billion from 2005 to 2006, was primarily due to the GMAC transaction as discussed in more detail below. In 2006, FIO net income of $1.0 billion includes 12 months of activity for GMAC comprised of 11 months of operations as a wholly-owned subsidiary of General Motors Corporation


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FIO Financial Review — (concluded)
 
totaling $2.2 billion of income and one month of equity loss of $5 million as a result of the sale of a controlling interest in GMAC to FIM Holdings LLC. All comparisons for the GMAC activity below are on a 12 months basis.
 
Automotive Finance Operations net income for 2006 increased 33% when compared to 2005. Net income was positively impacted by $383 million related to the write-off of certain net deferred tax liabilities as part of the conversion of GMAC to an LLC during November 2006. These net deferred tax liabilities have been simultaneously recorded in GM’s parent company financial statements through income tax expense. Results for 2006 include an unfavorable after-tax earnings impact of $135 million from a $1 billion debt tender offer to repurchase certain deferred interest debentures. The decrease in 2005 net income from 2004 reflects lower net interest margins as a result of increased borrowing costs due to widening spreads and higher market interest rates.
 
ResCap net income for 2006 declined 31% when compared to 2005. The 2006 operating results were adversely affected by domestic economic conditions especially during the fourth quarter. These developments were offset by the conversion to an LLC for income tax purposes, which resulted in the elimination of a $523 million net deferred tax liability. Excluding the LLC benefit, ResCap’s net income was $182 million. The increase in 2005 net income over 2004 reflects improvements in earnings from increased loan production, favorable credit experience, improved mortgage servicing results, and gains on sales of mortgages.
 
Insurance Operations net income totaled a record $1.1 billion in 2006 compared to $417 million in 2005. The increase in income is mainly a result of higher realized capital gains of approximately $1.0 billion in 2006 as compared to $108 million in 2005. Underwriting results were favorable primarily due to increased insurance premiums and service revenue earned and improved loss and loss adjustment expense experience partially offset by higher expenses. The increase in 2005 net income over 2004 reflects a combination of strong results achieved through increased premium revenue, higher realized capital gains, and improved investment portfolio performance.
 
GMAC’s Other segment had a net loss of $881 million in 2006 compared to a loss of $38 million in 2005. The increased loss was mainly due to the decline in income from Capmark (GMAC’s former commercial mortgage operations) of $237 million due to the sale of 79% interest of the business on March 23, 2006, additional non-cash goodwill charges of $695 million, higher loss provisions, and the tax impact related to GMAC’s LLC conversion. Other segment net income decreased 111% in 2005 compared with 2004 primarily due to $439 million of after-tax goodwill impairment charges in 2005.
 
FIO Other Financing net loss increased $1.1 billion to $1.2 billion in 2006, mainly due to the $2.9 billion pre-tax loss on the GMAC Transaction. This loss was offset by an increase in income of $2.5 billion related to the ceasing of depreciation on GMAC’s long lived assets classified as held for sale. In addition, a $786 million income tax expense arose due to GMAC’s LLC conversion, and $351 million of incremental tax arose due to the GMAC sale. These were offset by the reversal of State/Local tax contingencies and income related to the automotive leases transferred to GM as part of the GMAC Transaction. FIO Other net loss increased by $5 million in 2005 in comparison with 2004.
 
Key Factors Affecting Future and Current Results
 
The following discussion identifies the key factors, known events, and trends that could affect our future results:
 
Turnaround Plan
 
Over the past year, one of our top priorities has been improving our business in North America to position GM for sustained profitability and growth in the long-term and to achieve competitiveness on a global basis in an increasingly global environment. GM has been systematically and aggressively implementing its turnaround plan for GMNA’s business to return the operations to profitability and positive cash flow as soon as possible. This plan is built on four elements:


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Turnaround Plan — (continued)
 
 
  •  Product Excellence
 
  •  Revitalize Sales and Marketing Strategy
 
  •  Accelerate Cost Reductions and Quality Improvements; and
 
  •  Address Health Care/Legacy Cost Burden
 
The following update describes what we have done so far to achieve these elements:
 
Product Excellence
 
GM continues to focus significant attention on maintaining consistent product freshness by introducing new vehicles and reducing the average vehicle lifecycle. In 2006 approximately 30% of GMNA’s retail sales volume came from cars and trucks launched within the past 18 months. These launches included the next generation of large utility trucks (Chevrolet Tahoe and Suburban, GMC Yukon and Yukon XL, and Cadillac Escalade), Saturn Aura, Chevy HHR, Saturn Sky, Pontiac G-6 convertible, Buick Lucerne, Saab 9-3 SportCombi, Hummer H3, and Cadillac DTS. While all these launch vehicles contributed favorably to improved profitability, sales of the newly launched large utility trucks had the most significant impact on profitability, despite the negative effect of higher fuel prices and overall lower industry demand.
 
In 2007 we expect that approximately 36% of GMNA’s retail sales will come from vehicles launched within 18 months. These launches will include the new Chevrolet Silverado, GMC Sierra, Chevrolet Malibu, Cadillac CTS, and entries in the large crossover segment (GMC Acadia, Saturn Outlook, and Buick Enclave). In support of new car and truck programs, GM’s total capital spending in 2006 was $7.5 billion, of which $5.0 billion was devoted to GMNA. GM expects to increase this commitment going forward spending between $8.5 billion and $9 billion in each of 2007 and 2008, of which approximately $5.7 billion in 2007 and approximately $5.5 billion to $5.7 billion in 2008 will be devoted to GMNA.
 
GMNA is also allocating capital and engineering to support more fuel-efficient vehicles, including hybrid vehicles in the United States, and is increasing production of active fuel management engines and six-speed transmissions. GM recently announced its intention to build its first plug-in hybrid and unveiled the Chevy Volt extended range electric concept vehicle, while at the same time announcing two partnerships to accelerate development of advanced lithium-ion batteries. In addition, GM is undertaking a major initiative in alternate fuels through sustainable technologies such as E85 Flex Fuel vehicles. GM has sold two million E85 vehicles and plans to build over two million more in the next five years. GM is also adding five more E85-capable models to its lineup for 2007, raising GM’s total flex-fuel offerings to 14 vehicles.
 
In addition to offering its flex-fuel vehicles, GM responded to the strong market demand for fuel economy by selling more than one million 2006 model year vehicles that achieve 30 mpg or better on the highway (as estimated by the EPA). In the 2007 model year, GM will increase the number of vehicle models that it sells in the United States that achieve 30 mpg or more to 23 vehicles.
 
Revitalize Sales and Marketing Strategy
 
GM is pursuing a revised sales and marketing strategy by focusing on clearly differentiating our brands, optimizing our distribution network, growing in key metropolitan markets, and re-focusing our marketing efforts on the strength and value of our products. GM continues to support a more orderly and consistent alignment of its dealers, particularly among Buick, Pontiac, and GMC dealers, which we believe will strengthen those brands.
 
In January 2006, GM significantly lowered manufacturer’s suggested retail prices on vehicles that accounted for about 80% of its 2006 model year automotive sales volume. GM’s promotion strategy now emphasizes its brands and vehicles, rather than price incentives. In addition, GM intends to increase advertising in support of new products and specific marketing initiatives to improve GM’s sales performance in certain metropolitan markets.


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Turnaround Plan — (continued)
 
 
In September 2006, GM extended its powertrain warranty policy to five years or 100,000 miles, applicable to all 2007 models in the United States and Canada. GM believes that with its expanded warranty it now offers more extensive warranty coverage in the United States and Canada than any other full-line vehicle manufacturer. We anticipate that this expanded warranty will enhance consumer confidence in the quality and durability of our vehicles in the United States and Canada.
 
GM’s pricing strategy, improved quality, and product execution, reduced sales to daily rental fleets, as well as a strong market for used vehicles, resulted in higher residual values on GM’s cars and trucks.
 
For 2007, GM plans to continue to focus on consistent alignment of its dealers, particularly among Buick, Pontiac, and GMC dealers, improved retail performance in key metropolitan markets, and further reductions in sales to daily rental companies.
 
Accelerate Cost Reductions and Quality Improvements
 
Following our November 2005 announcement of our strategy to reduce structural costs in the manufacturing area, GM has introduced a variety of initiatives to accomplish that strategy. In 2007, we expect to realize the $9 billion structural-cost savings target versus 2005 in our GMNA and Corporate and Other segments on a running rate basis. Running rate basis refers to the average annualized cost savings into the foreseeable future anticipated to result from cost savings actions when fully implemented. GM realized $6.8 billion in structural cost reductions in North America during 2006, exceeding the $4 billion of structural cost reductions estimated for 2006 in GM’s 2005 Annual Report on Form 10-K. This improvement is due largely to the success of the attrition programs, including the effect of the pension remeasurement. The expected total annual cash savings from structural cost reductions is approximately $5 billion on an average running rate basis. In addition, GM is focusing on our long-term goal of reducing our global automotive structural costs to 25% of global revenue. For 2006, global automotive structural costs were less than 30% of revenue, down from about 35% in 2005.
 
In November 2005, GM announced that it would cease operations at 12 manufacturing facilities by 2008, and reduce manufacturing employment levels by approximately 30,000 employees by the end of 2008. In fact, GM reached the reduced employment levels as of January 2, 2007. To support its structural cost initiatives, in March 2006 GM, the UAW, and Delphi entered into the UAW Attrition Agreement designed to reduce the number of hourly employees at GM and at Delphi through the UAW Attrition Program in which approximately 34,400 GM employees participated. Beginning in 2007, GMNA will benefit from the full year impact of the UAW Attrition Program since the remainder of the participants in the program either retired or otherwise left as of January 1, 2007. See “GM-UAW-Delphi Special Attrition Program Agreement” below for a further description of the UAW Attrition Agreement. GM believes these actions collectively will reduce our excess capacity by one million units, in addition to the one million unit capacity we eliminated between 2002 and 2005, and reduce structural costs to assist in closing the cost gap with other vehicle manufacturers. To achieve further cost reductions, GM’s management is putting a high priority on negotiating a more competitive collective bargaining agreement with the UAW in 2007.
 
In the first quarter of 2006, GM announced plans to substantially alter pension benefits for current U.S. salaried employees by freezing accrued benefits in the current plan and implementing a new benefit structure for future accruals, which include a reduced defined benefit plan for some salaried employees and a new defined contribution plan for the other salaried employees. These pension plan changes will not affect retirees or surviving spouses who are currently drawing benefits from the Salaried Retirement Program.
 
Reducing material costs remains a critical part of GMNA’s overall long-term cost reduction plans, although improved performance in purchasing has been offset by higher commodity prices for aluminum and copper and troubled supplier support. GM continues its aggressive pursuit of material cost reductions via improvements in its global processes for product development, which will enable further commonization and application of parts among vehicle architectures, as well as through the continued use of the most competitive supply sources globally and the extensive use of benchmarking and supplier footprint optimization. By leveraging its global reach to take advantage


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Turnaround Plan — (continued)
 
of economies of scale in purchasing, engineering, advertising, salaried employment levels, and indirect material costs, GM seeks to continue to achieve cost reductions. GM also anticipates that a resolution of the Delphi bankruptcy reorganization, discussed below, will include an opportunity for GM to mitigate the cost penalty it now pays Delphi for certain parts.
 
GM has seen significant improvements in both warranty and other quality related costs over the past several years, which has enabled the implementation of the extended powertrain warranty described above. In 2007, we will continue to focus on reducing these costs.
 
Address Health Care/Legacy Cost Burden
 
Addressing the legacy cost burden of health care for employees and retirees in the United States is one of the critical challenges facing GM.
 
In October 2005, we announced an agreement with the UAW that will reduce GM’s hourly retiree health-care obligations. GM began recognizing the benefit from the UAW Health Care Settlement Agreement in the third quarter of 2006. The remeasurement of the U.S. hourly OPEB plans as of March 31, 2006 generated a $1.3 billion reduction in OPEB expense and an approximate $17 billion reduction in the OPEB obligation. This reduction in expense was partially offset by the recognition of expense associated with the approximate $3 billion related to capped benefits expected to be paid from GM contributions to the new UAW Mitigation Plan. Refer to Note 19 to the Consolidated Financial Statements for further discussion of the financial impacts of the UAW Settlement Agreement.
 
The UAW Health Care Settlement Agreement will remain in effect until at least September 2011, after which either GM or the UAW may cancel the agreement upon 90 days written notice. Similarly, GM’s contractual obligations to provide health-care benefits to UAW hourly retirees extends to at least September 2011 and will continue thereafter until terminated by either GM or the UAW. As a result, the provisions of the UAW Health Care Settlement Agreement will continue in effect for the UAW retirees beyond the expiration of the current collective bargaining agreement between GM and the UAW in September 2007, regardless of what other changes to the contract GM and the UAW may negotiate.
 
In April 2006, GM and the IUE-CWA also reached a tentative agreement to reduce health-care costs that is similar to the UAW Health Care Settlement Agreement. The agreement was ratified by the IUE-CWA membership in April 2006 and received court approval in November 2006. Because the effect was not material and did not require remeasurement in 2006, the estimated $0.6 billion reduction in our OPEB obligation will be recognized in the January 1, 2007 measurement of U.S. OPEB plans and reflected as part of our OPEB expense for 2007.
 
GM is also increasing the U.S. salaried workforce’s participation in the cost of health care. In February 2006, GM announced that beginning in January 2007, it would cap its contributions to salaried retiree health care at the level of its 2006 expenditures. This change affects employees and retirees who are eligible for the salaried postretirement health-care benefit and their spouses. Salaried employees who were hired after January 1, 1993 are not eligible for retiree health-care benefits, so they are not affected by these changes. After 2006, when average costs exceed established limits, GM will make additional plan changes that affect cost-sharing features of program coverage, effective with the start of the next calendar year. Program changes may include, but are not limited to, higher monthly contributions, deductibles, coinsurance, out-of-pocket maximums, and prescription drug payments. Plan changes may be implemented in medical, dental, vision, and prescription drug plans. The remeasurement of the U.S. salaried OPEB health care plan as of February 9, 2006 resulted in a $4.7 billion reduction in the OPEB obligation and $0.5 billion in OPEB expense commencing in the second quarter.
 
In October 2006, the GM board of directors approved a reduction in the levels of coverage for corporate-paid life insurance for salaried retirees. For eligible salaried employees who retire on or after May 1, 2007, coverage will reduce by 50% on the tenth anniversary of their retirement date, and salaried employees who retire before May 1,


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Turnaround Plan — (concluded)
 
2007 will have their coverage reduced by 50% on January 1, 2017. This change reduced GM’s year-end OPEB obligation by approximately $0.5 billion.
 
In 2007, GM will benefit from the full year impact of the changes in health care discussed above. In addition, GM will continue to work with its employees, health-care providers, and the U.S. government to find solutions to the critical issues posed by the rising cost of health care.
 
Labor Negotiations
 
GM’s current collective bargaining agreement with the UAW expires in September 2007. The negotiations present both risks and an opportunity to address cost competitiveness issues relative to competitors in the industry. GM recognizes the impact that any resulting labor stoppages could have on GM, its suppliers, and its dealers, and has begun contingency planning with these groups. If the collective bargaining agreement expires before a new agreement is reached, GM anticipates that it would attempt to persuade the UAW to support continuing its operations while negotiations continue. It is possible, however, that the expiration of the collective bargaining agreement could result in labor disruptions affecting some or all GM facilities in the United States, or the operations of some of its suppliers that employ workers represented by the UAW. A lengthy strike by the UAW that involves all or a significant portion of our manufacturing facilities in the United States would have a material adverse effect on our operations and financial condition, particularly our liquidity.
 
Delphi Bankruptcy
 
General.  In October 2005, Delphi filed a petition for Chapter 11 proceedings under the U.S. Bankruptcy Code for itself and many of its U.S. subsidiaries. Delphi is GM’s largest supplier of automotive systems, components, and parts, and GM is Delphi’s largest customer.
 
GM has worked and will continue to work constructively in the court proceedings with Delphi, Delphi’s unions, and other participants in Delphi’s Chapter 11 restructuring process. Delphi continues to assure GM that it expects no disruption in its ability to supply GM with the systems, components, and parts it needs as Delphi pursues a restructuring plan under the Chapter 11 process. Although the challenges faced by Delphi during its restructuring process could create operating and financial risks for GM, that process is also expected to present opportunities for GM. These opportunities include reducing, over the long term, the significant cost penalty GM incurs in obtaining parts from Delphi, as well as improving the quality of systems, components, and parts GM procures from Delphi. However, there can be no assurance that GM will be able to realize any benefits as a result of Delphi’s restructuring process.
 
Framework Support Agreement.  On December 18, 2006, to facilitate the consensual resolution of Delphi’s bankruptcy, GM entered into a Plan Framework Support Agreement (Framework Agreement) with Delphi and a consortium of potential investors in Delphi (Plan Investors), which outlines certain material terms of a proposed restructuring plan for Delphi (Proposed Plan). The Proposed Plan is conditioned both on the implementation of an overall transformation strategy that would include the settlement of certain issues and disputes between GM and Delphi (Designated Issues) and on proposed equity investments by the Plan Investors in Delphi. The Designated Issues include (a) legacy obligations related to Delphi employees who formerly were GM hourly employees, including responsibility for various pension and other OPEB obligations, (b) costs associated with the transformation of Delphi’s business, (c) Delphi’s support for GM’s efforts to resource certain products purchased by GM, (d) the restructuring of on-going contractual relationships between GM and Delphi, and (e) the amount and treatment of GM’s claims against Delphi in the Chapter 11 proceedings. Under the Framework Agreement, GM has agreed to, among other things, negotiate these matters in good faith but is not obligated to enter into any agreements. If GM and Delphi reach any commercial, business, and labor-related agreements, those agreements will be evidenced in definitive documentation.


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Delphi Bankruptcy — (continued)
 
Under the Framework Agreement, the Proposed Plan would provide that GM’s claims against Delphi (other than ordinary course of business and environmental claims, which would flow through the bankruptcy) would be satisfied by the payment of $2.63 billion in cash and seven million shares of common stock in Delphi as reorganized (out of a total of 135 million fully diluted shares).
 
GM expects that the obligations and costs that it would assume to resolve the Designated Issues together with its recoveries contemplated under the Proposed Plan would be consistent with the $6 billion to $7.5 billion estimated range of contingent exposures (as discussed below) associated with Delphi’s Chapter 11 proceedings.
 
Pursuant to the Framework Agreement, Delphi intends to, among other things, negotiate and finalize the Proposed Plan and other related documents, seek Bankruptcy Court approval of the Proposed Plan and payment of related expenses, prepare and distribute a draft disclosure statement with respect to the Proposed Plan to the Plan Investors and GM, and seek Bankruptcy Court approval of such disclosure statement (the “Disclosure Statement Order”). Provided that GM and Delphi reach agreement on all the issues and documents affecting GM that are negotiated under the Proposed Plan, GM will support the Disclosure Statement Order and not object to confirmation of the Proposed Plan by the Bankruptcy Court. The Framework Agreement can be terminated by any party to the Agreement at any time after April 1, 2007 or upon termination of the investment agreement between Delphi and the Plan Investors, which can be terminated at any time.
 
In addition, the Framework Agreement provides that until April 1, 2007 GM and the Plan Investors will not pursue, negotiate, or facilitate any transaction inconsistent with the proposed investment of the Plan Investors in Delphi. This commitment could be extended beyond that date by the consent of GM and the Plan Investors, which may not be withheld unreasonably. If GM and Delphi reach a comprehensive resolution of the issues affecting them, which is the goal of current negotiations under the Framework Agreement, the matters described in the remainder of this section will be handled as the parties agree. Since negotiations are still underway, however, and there can be no assurance that GM and Delphi will succeed in agreeing upon a comprehensive resolution, the following matters continue to pose significant risks to GM.
 
Delphi Motions Seeking Authority to Reject Various Contracts.  Delphi has consented, in consideration of the progress made toward a consensual resolution of the Chapter 11 process, to an indefinite adjournment of hearings on its motions filed in March 2006 under the U.S. Bankruptcy Code seeking authority to reject its U.S. labor agreements and modify retiree welfare benefits and to reject certain supply contracts with GM. If Delphi, its unions, the Plan Investors, and GM are unable to negotiate comprehensive agreements to resolve the issues involved in Delphi’s bankruptcy, Delphi or one or more of its affiliates could be subject to labor disruptions or could reject or threaten to reject individual contracts with GM, either for the purpose of exiting specific lines of business or in an attempt to increase the price GM pays for certain parts and components. Any of these events could materially adversely affect GM by disrupting the supply of automotive systems, components, and parts, and could even force the suspension of production at GM assembly facilities.
 
While GM believes that it is likely that GM and Delphi will reach a consensual resolution pursuant to the Framework Agreement, we are seeking to minimize our risks by protecting our right of setoff against the $1.15 billion we owed to Delphi as of the date of its Chapter 11 filing. However, the extent to which these obligations are covered by our right to setoff may be subject to dispute by Delphi, the creditors’ committee, or Delphi’s other creditors, and limitation by the court. GM cannot provide any assurance that it will be able to setoff such amounts fully or partially. To date, GM has taken setoffs of approximately $53.6 million, with Delphi’s agreement.
 
Benefit Guarantee Agreements.  As described above, the Designated Issues between Delphi and GM include legacy obligations and responsibility for various pension and other OPEB obligations related to certain U.S. hourly employees who formerly were GM employees and became Delphi employees in GM’s spin-off of Delphi in 1999 (Transferred Employees). In connection with that spin-off, GM entered into separate agreements with the UAW, the IUE-CWA, and the United Steel Workers (Benefit Guarantee Agreements), providing contingent benefit guarantees


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Delphi Bankruptcy — (continued)
 
to make payments for limited pension and OPEB to certain Transferred Employees who meet the applicable eligibility requirements for such payments (Covered Employees).
 
Each Benefit Guarantee Agreement contains separate benefit guarantees relating to pension and OPEB obligations, with different triggering events under which GM could be liable if Delphi fails to provide the corresponding benefit at the required level. Therefore, GM could incur liability under one of the guarantees (e.g., OPEB) without triggering the other guarantees (e.g., pension). In addition, with respect to pension benefits, GM’s guarantee of pension benefits arises only to the extent that pension benefits provided both by Delphi (or an applicable successor) and by the Pension Benefit Guaranty Corporation fall short of the guaranteed amounts.
 
GM’s obligations under the Benefit Guarantee Agreements have not been triggered by Delphi’s Chapter 11 filing, Delphi’s motions in Bankruptcy Court to reject its U.S. labor agreements and modify retiree welfare benefits, or any other actions to date. The benefit guarantees will expire on October 18, 2007 unless they are triggered before that date.
 
The Benefit Guarantee Agreements do not obligate GM to guarantee any benefits for Delphi retirees in excess of the corresponding benefits GM provides at the time to its own hourly retirees. Accordingly, any reduction of the benefits GM provides to its hourly retirees would reduce GM’s obligations under the corresponding benefit guarantee.
 
A separate agreement between GM and Delphi, which also expires on October 18, 2007, requires Delphi to indemnify GM for any payments under the benefit guarantees to the UAW employees or retirees. Any recovery by GM under indemnity claims against Delphi might be subject to partial or complete discharge in the Delphi reorganization proceeding. As a result, GM’s claims for indemnity may not be paid fully or partially.
 
As part of GM’s discussions in 2005 with the UAW that led to a settlement with the UAW changing health-care benefits for hourly retirees, GM provided the Covered Employees represented by the UAW the potential to earn up to seven years of credited service for purposes of eligibility for certain health-care benefits under the GM/UAW benefit guarantee agreement.
 
UAW Attrition Agreement.  In the first half of 2006, GM, Delphi, and the UAW implemented the UAW Attrition Agreement, which provided a combination of early retirement programs and other incentives to reduce hourly employment levels at both GM and Delphi. As of December 31, 2006, approximately 12,400 UAW-represented Delphi employees elected one of the retirement options available under the UAW Attrition Program.
 
Under the UAW Attrition Agreement, GM agreed to assume certain costs regarding UAW-represented Delphi employees. Specifically, GM agreed to: (1) pay lump sums of $35,000 to certain employees who participate in the UAW Attrition Program; (2) assume all OPEB obligations to Transferred Employees who agree to retire under the UAW Attrition Program via a return to GM; (3) subsidize health-care costs for Delphi employees participating in a special voluntary pre-retirement program for an interim period, if Delphi reduces or eliminates its health care and/or life insurance coverage provided to active UAW employees; and (4) accept back 5,000 active Transferred Employees.
 
GM will have a pre-petition, general unsecured claim assertable against Delphi in the amount of approximately $2.9 billion, related to certain of GM’s costs under the UAW Attrition Agreement, subject to objections on any grounds other than that the claim did not arise under the terms of certain pre-existing contractual agreements between GM and Delphi.
 
Additional Attrition Programs.  As of December 31, 2006 approximately 6,200 Transferred Employees represented by the IUE-CWA and approximately 1,400 Transferred Employees represented by the UAW elected to participate in additional attrition and buyout programs offered in the second half of 2006, which were similar to the program under the UAW Attrition Agreement described above. GM will have a pre-petition, general unsecured claim assertable against Delphi in the amount of approximately $0.6 billion, related to certain of GM’s costs under the IUE-CWA attrition program, subject to objections on any grounds other than that the claim did not arise under the terms of a certain preexisting contractual agreement between GM and Delphi. GM will also have an allowed


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Delphi Bankruptcy — (concluded)
 
pre-petition general unsecured claim against Delphi in the amount of approximately $0.3 billion for GM’s portion of buyout payments made under these additional IUE-CWA and UAW programs.
 
GM Claims Against Delphi.  In July 2006, GM filed a Consolidated Proof of Claim, in accordance with the Bankruptcy Court’s procedures order, setting forth GM claims (including the claims of various GM subsidiaries) against Delphi and the other debtor entities. The exact amount of GM’s claims cannot be established because of the contingent nature of many of the claims involved and the fact that the validity and amount of the claims may be subject to objections from Delphi and other stakeholders, but, based on currently available data, the amount of GM’s claims could be as much as $13 billion. Although the Proof of Claim preserves GM’s right to pursue recovery of its claims from Delphi, these claims may be subject to compromise in the bankruptcy process or as part of a negotiated settlement, and GM may receive only a portion, if any, of these claims.
 
GM Contingent Liability.  Depending on the outcome of the current negotiations and other factors, GM believes that it is probable that it has incurred a contingent liability due to Delphi’s Chapter 11 filing. Based on currently available data and ongoing discussions with Delphi and other stakeholders, GM believes that the range of the contingent exposures is between $6 billion and $7.5 billion, with amounts near the low end of the range considered more possible than amounts near the high end of the range. Initially, GM established a liability of $5.5 billion ($3.6 billion after tax) for this contingent exposure in the fourth quarter of 2005, and recorded an additional charge of $0.5 billion ($0.3 billion after tax) in the third quarter of 2006 to reflect GM’s potential exposure for OPEB costs associated with previously divested Delphi business units and certain labor restructuring costs, including but not limited to expenditures related to the attrition plans discussed above. At December 31, 2006 and 2005, GM’s contingent liability related to the Delphi matters was $1.5 billion and $5.5 billion, respectively. During 2006, amounts previously recorded under the benefit guarantee were reclassified to GM’s OPEB liability as GM has assumed the OPEB obligation for approximately 17,800 Delphi employees who have returned back to GM to continue working or retire from GM. These views reflect GM’s current assessment that it is unlikely that a Chapter 11 process will result in both a termination of Delphi’s pension plan and complete elimination of its OPEB plans. In addition to theses charges, GM may agree to reimburse Delphi for certain labor expenses to be incurred upon and after Delphi’s emergence from bankruptcy. GM’s current estimate of these expenses involves an initial payment in 2007, not expected to exceed approximately $400 million, and ongoing expenses of limited duration and estimated to average less than $100 million annually. GM will recognize these expenses as incurred in the future. GM expects these payments to be far exceeded by anticipated reductions in the price of systems, components, and parts it purchases from Delphi. Because negotiations are ongoing, the actual impact of the resolution of issues related to Delphi cannot be determined until the Bankruptcy Court’s approval of a comprehensive resolution, and there can be no assurance that the parties will reach a comprehensive resolution or that the Bankruptcy Court will approve such a resolution, or that any resolution will include the terms described above.
 
If GM is required to make OPEB payments to current Delphi retirees under the Benefit Guarantee Agreements, GM would expect to make such payments from ongoing operating cash flow and financings. Such payments, if any, are not expected to have a material effect on GM’s cash flows in the short term. However, if required, these payments would be likely to increase over time and could have a material effect on GM’s liquidity in coming years. (For reference, Delphi’s 2006 Annual Report on Form 10-K reported that in 2006 it paid benefits of $229 million to hourly and salaried retirees; salaried retirees are not covered under the Benefit Guarantee Agreements).
 
GMAC — Sale of 51% Controlling Interest
 
On November 30, 2006, GM completed the GMAC Transaction, which was the sale of a 51% controlling interest in GMAC for a purchase price of $7.4 billion to FIM Holdings. FIM Holdings is a consortium of investors including Cerberus FIM Investors LLC, Citigroup Inc., Aozora Bank Limited, and a subsidiary of The PNC Financial Services Group, Inc. GM has retained a 49% interest in GMAC’s Common Membership Interests. In addition, FIM Holdings purchased 555,000 of GMAC’s Preferred Membership Interests for a cash purchase price of $500 million and GM purchased 1,555,000 Preferred Membership Interests for a cash purchase price of $1.4 billion.


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GMAC — Sale of 51% Controlling Interest — (continued)
 
The total value of the cash proceeds and distributions to GM after payment of certain intercompany obligations, and before it purchased the preferred membership interests of GMAC was expected to be approximately $14 billion over three years, comprised of the $7.4 billion purchase price and $2.7 billion cash dividend at closing, and other transaction related cash flows including the monetization of certain retained assets. Subsequent to December 31, 2006, it was determined that GM would be required to make a capital contribution to GMAC of approximately $1.0 billion to restore its adjusted tangible equity balance to the contractually required amount of $14.4 billion, due to the decrease in the adjusted tangible equity balance of GMAC as of November 30, 2006.
 
GMAC is required to make certain quarterly distributions to holders of the Preferred Membership Interests in cash on a pro rata basis. The Preferred Membership Interests are issued in units of $1,000 and accrue a yield at a rate of 10% per annum. GMAC’s Board of Managers (GMAC Board) may reduce any distribution to the extent required to avoid a reduction of the equity capital of GMAC below a minimum amount of equity capital equal to the net book value of GMAC at November 30, 2006. In addition, the GMAC Board may suspend the payment of Preferred Membership Interest distributions with the consent of the holders of a majority of the Preferred Membership Interest. If distributions are not made with respect to any fiscal quarter, the distributions would not be cumulative. If the accrued yield of GMAC’s Preferred Membership Interests for any fiscal quarter is fully paid to the preferred holders, then a portion of the excess of the net financial book income of GMAC in any fiscal quarter over the amount of yield distributed to the holders of the Preferred Membership Interests in such quarter will be distributed to the holders of the Common Membership Interests as follows: at least 40% of the excess will be paid for fiscal quarters ending prior to December 31, 2008 and at least 70% of the excess will be paid for fiscal quarters ending after December 31, 2008.
 
Prior to consummation of the GMAC Transaction, (i) certain assets with respect to automotive leases owned by GMAC and its affiliates having a net book value of approximately $4 billion and related deferred tax liabilities of $1.8 billion were transferred to GM, (ii) GM assumed or retained certain of GMAC’s OPEB obligations of $842 million, and related deferred tax assets of $302 million. (iii) GMAC transferred entities that hold certain real properties to GM, (iv) GMAC paid cash dividends to GM based on GMAC’s anticipated net income for the period September 30, 2005 to November 30, 2006 totaling $1.9 billion, (v) GM repaid certain indebtedness and specified intercompany unsecured obligations owing to GMAC, and (vi) GMAC made a one-time distribution to GM of $2.7 billion of cash to reflect the increase in GMAC’s equity resulting from the transfer of a portion of GMAC’s net deferred tax liabilities arising from the conversion of GMAC and certain of its subsidiaries to LLCs.
 
As part of the agreement, GM retained an option, for 10 years after the closing date, to repurchase from GMAC certain assets related to the automotive finance business of the North American Operations and International Operations of GMAC. GM’s exercise of the option is conditional on GM’s credit rating being investment grade or higher than GMAC’s credit rating. The call option price is calculated as the higher of (i) fair market value or (ii) 9.5 times the consolidated net income of GMAC’s automotive finance business in either the calendar year the call option is exercised or the calendar year immediately following the year the call option is exercised.
 
The GMAC Transaction, an important element in GM’s turnaround efforts, provided the following:
 
  •  Strong long-term services agreement between GM and GMAC — As part of the transaction, GM and GMAC entered into a number of agreements that were intended to continue the mutually-beneficial global relationship between GM and GMAC. These agreements, in substance, were consistent with the existing and historical practices between GM and GMAC, including requiring GMAC to continue to allocate capital to automotive financing, thereby continuing to provide critical financing support to a significant share of GM’s global sales. While GMAC retains the right to make individual credit decisions, GMAC has committed to fund a broad spectrum of customers and dealers consistent with historical practice in the relevant jurisdictions. Subject to GMAC’s fulfillment of certain conditions, GM has granted GMAC exclusivity for GM products in specified markets around the world for U.S., Canadian, and international GM-sponsored retail, lease and dealer marketing incentives, with the exception of Saturn branded products.


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GMAC — Sale of 51% Controlling Interest — (concluded)
 
 
  •  Improved Liquidity — GM received significant cash proceeds at the closing to bolster GM’s liquidity, strengthening GM’s balance sheet and funding the turnaround plan.
 
  •  Enhanced stockholder value through a stronger GMAC — GM retained a 49% Common Membership Interest in GMAC, and will be able to continue to participate in GMAC’s strong profitability levels.
 
  •  Delinkage of GMAC’s credit rating from GM — In pursuing the sale of a majority interest in GMAC, GM expected that the introduction of a new controlling investor for GMAC, new capital at GMAC, and significantly reduced intercompany exposures to GM would provide GMAC with a solid foundation to improve its current credit rating, and de-link the GMAC credit ratings from GM. Following the sale, in December 2006 Fitch Ratings (Fitch) and Standard & Poor’s (S&P) both raised GMAC’s credit rating one notch, although it remains below investment grade.
 
Investigations
 
As previously reported, GM is cooperating with federal governmental agencies in connection with a number of investigations.
 
The SEC has issued subpoenas to GM in connection with various matters including GM’s financial reporting concerning pension and OPEB, certain transactions between GM and Delphi, supplier price reductions or credits, and any obligation GM may have to fund pension and OPEB costs in connection with Delphi’s proceedings under Chapter 11 of the Bankruptcy Code. In addition, the SEC has issued a subpoena in connection with an investigation of our transactions in precious metal raw materials used in our automotive manufacturing operation, and a federal grand jury issued a subpoena in connection with supplier credits.
 
GM has produced documents and provided testimony in response to the SEC and federal grand jury subpoenas. GM will continue to cooperate with the SEC and federal grand jury with respect to these matters.
 
In addition, SEC and federal grand jury subpoenas have been served on GMAC entities in connection with industry-wide investigations into practices in the insurance industry relating to loss mitigation insurance products such as finite risk insurance. Following the GMAC Transaction, GMAC retained responsibility for this matter.
 
Liquidity and Capital Resources
 
Investors or potential investors in GM securities consider cash flows of the Automotive and FIO businesses to be a relevant measure in the analysis of GM’s various securities that trade in public markets. Accordingly, GM provides supplemental statements of cash flows to aid users of GM’s consolidated financial statements in the analysis of performance and liquidity and capital resources.


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Liquidity and Capital Resources — (continued)
 
This information reconciles to the Consolidated Statements of Cash Flows after the elimination of “Net investing activity with Financing and Insurance Operations” and “Net financing activity with Automotive and Other Operations” line items shown in the table below. Following are such statements for the years ended December 31, 2006, 2005, and 2004:
 
                                                 
    Automotive and Other     Financing and Insurance  
    Years Ended December 31,  
    2006     2005     2004     2006     2005     2004  
          (As restated)           (As restated)  
    (Dollars in millions)  
 
Cash flows from operating activities
                                               
Net income (loss)
  $ (3,007 )   $ (12,674 )   $ (175 )   $ 1,029     $ 2,257     $ 2,876  
Cumulative effect of a change in accounting principle
          109                          
Adjustments to reconcile net income (loss) before cumulative effect of a change in accounting principle to net cash provided by operating activities:
                                               
Depreciation, impairments and amortization expense
    8,159       10,101       8,679       2,791       5,696       5,523  
Mortgage servicing rights and premium amortization
                      1,021       1,142       1,675  
Goodwill impairment - GMAC
                      828       712        
Delphi Benefit Guarantee
    500       5,500                          
Loss on sale of 51% interest in GMAC
                      2,910              
Provision for credit losses
                      1,799       1,074       1,944  
Net gains on sale of finance receivables
                      (1,256 )     (1,741 )     (1,332 )
Net gains on investment securities
                      (1,006 )     (104 )     (52 )
Postretirement benefits other than pensions, net of payments and VEBA contributions/withdrawals
    2,840       4,717       (8,048 )     1       38       14  
Pension expense, net of contributions
    3,611       1,408       1,174       23       14       34  
Net change in mortgage loans
                      (21,578 )     (29,119 )     (2,312 )
Net change in mortgage securities
                      427       (1,155 )     614  
Change in other investments and miscellaneous assets
    588       141       (1 )     (1,058 )     (826 )     105  
Change in other operating assets and liabilities, net of acquisitions and disposals
    (8,499 )     (10,986 )     (316 )     (4,109 )     4,188       (1,438 )
Other
    1,365       1,720       (95 )     862       932       487  
                                                 
Net cash provided by (used in) operating activities
  $ 5,557     $ 36     $ 1,218     $ (17,316 )   $ (16,892 )   $ 8,138  


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    Automotive and Other     Financing and Insurance  
    Years Ended December 31,  
    2006     2005     2004     2006     2005     2004  
          (As restated)           (As restated)  
    (Dollars in millions)  
 
Liquidity and Capital Resources — (concluded)
                                               
Cash flows from investing activities
                                               
Expenditures for property
  $ (7,531 )   $ (7,896 )   $ (7,284 )   $ (402 )   $ (283 )   $ (469 )
Investments in marketable securities, acquisitions
    (149 )     (2,616 )     (2,209 )     (25,381 )     (19,184 )     (13,069 )
Investments in marketable securities, liquidations
    1,727       7,663       4,609       26,822       14,874       11,302  
Net change in mortgage servicing rights
                      (61 )     (267 )     (326 )
Increase in finance receivables
                      (1,160 )     (6,582 )     (38,673 )
Proceeds from sale of finance receivables
                      18,374       31,652       23,385  
Proceeds from the sale of 51% interest in GMAC LLC
    7,353                                
Proceeds from sale of business units/equity investments
    1,968       846             8,538              
Operating leases, acquisitions
                      (17,070 )     (15,496 )     (14,324 )
Operating leases, liquidations
                      7,039       5,362       7,696  
Net investing activity with Financing and Insurance Operations
    3,354       2,500       1,500                    
Investments in companies, net of cash acquired
    (20 )     1,357       (48 )     (337 )     (2 )     (12 )
Other
    (353 )     640       882       338       (1,503 )     477  
                                                 
Net cash provided by (used in) investing activities
    6,349       2,494       (2,550 )     16,700       8,571       (24,013 )
Cash flows from financing activities
                                               
Net increase (decrease) in loans payable