e10vq
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549-1004
 
Form 10-Q
 
     
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended September 30, 2007
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
  38-0572515
(State or other jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification No.)
     
300 Renaissance Center, Detroit, Michigan   48265-3000
(Address of Principal Executive Offices)   (Zip Code)
 
(313) 556-5000
Registrant’s telephone number, including area code
 
NA
(former name, former address and former fiscal year, if changed since last report)
 
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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  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 October 31, 2007, the number of shares outstanding of the Registrant’s common stock was 565,993,943 shares.
 
Website Access to Company’s Reports
 
General Motors Corporation’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 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 Securities and Exchange Commission.
 


 

 
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
INDEX
 
             
        Page No.
 
  Condensed Consolidated Financial Statements (Unaudited)     3  
    Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2007 and 2006 (As restated)     3  
    Condensed Consolidated Balance Sheets as of September 30, 2007, December 31, 2006, and September 30, 2006 (As restated)     4  
    Condensed Consolidated Statement of Stockholders’ Equity (Deficit) for the Nine Months Ended September 30, 2007 and 2006 (As restated)     5  
    Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006     6  
    Notes to Condensed Consolidated Financial Statements     7  
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     53  
  Quantitative and Qualitative Disclosures About Market Risk     99  
  Controls and Procedures     99  
 
  Legal Proceedings     101  
  Risk Factors     103  
  Purchases of Equity Securities     110  
  Exhibits     111  
    112  
 First Amendment dated August 7, 2007 to the Asset Purchase Agreement dated as of June 28, 2007
 Second Amendment dated October 1, 2007 to the Asset Purchase Agreement dated as of June 28, 2007
 Global Settlement Agreement dated September 6, 2007
 First Amendment to the Global Settlement Agreement dated as of October 29, 2007
 Master Restructuring Agreement dated September 6, 2007
 First Amendment to the Master Restructuring Agreement dated as of October 29, 2007
 Section 302 Certification of the Chief Executive Officer
 Section 302 Certification of the Chief Financial Officer
 Certification of the Chief Executive Officer Pursuant to Section 906
 Certification of the Chief Financial Officer Pursuant to Section 906


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Table of Contents

 
PART I
 
Item 1.   Condensed Consolidated Financial Statements
 
GENERAL MOTORS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share amounts)
(Unaudited)
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30,     September 30,  
    2007     2006     2007     2006  
          (As restated,
          (As restated,
 
          Note 16)           Note 16)  
 
Net sales and revenue
                               
Automotive sales
  $ 43,134     $ 39,612     $ 131,695     $ 127,657  
Financial services and insurance revenue
    700       9,280       2,530       27,214  
                                 
Total net sales and revenue
    43,834       48,892       134,225       154,871  
                                 
Costs and expenses
                               
Automotive cost of sales
    41,540       37,184       122,210       124,598  
Selling, general and administrative expense
    3,601       3,155       10,205       9,740  
Financial services and insurance expense
    640       7,596       2,334       23,608  
Other expenses
    350       1,943       925       3,151  
                                 
Total costs and expenses
    46,131       49,878       135,674       161,097  
                                 
Operating loss
    (2,297 )     (986 )     (1,449 )     (6,226 )
Equity in loss of GMAC LLC
    (809 )           (874 )      
Automotive and other interest expense
    (776 )     (529 )     (2,256 )     (1,861 )
Automotive interest income and other non-operating income
    544       310       1,535       2,093  
                                 
Loss from continuing operations before income taxes, other equity income and minority interests
    (3,338 )     (1,205 )     (3,044 )     (5,994 )
Income tax expense (benefit) (Note 11)
    39,186       (977 )     38,805       (2,523 )
Equity income (loss) and minority interests, net of tax
    12       (49 )     79       193  
                                 
Loss from continuing operations
    (42,512 )     (277 )     (41,770 )     (3,278 )
Discontinued Operations (Note 3)
                               
Income from discontinued operations, net of tax
    45       130       256       350  
Gain on sale of discontinued operations, net of tax
    3,504             3,504        
                                 
Income from discontinued operations
    3,549       130       3,760       350  
                                 
Net loss
  $ (38,963 )   $ (147 )   $ (38,010 )   $ (2,928 )
                                 
Basic earnings (loss) per share:
                               
Continuing operations
  $ (75.12 )   $ (.49 )   $ (73.82 )   $ (5.80 )
Discontinued operations
    6.27       .23       6.64       .62  
                                 
Total
  $ (68.85 )   $ (.26 )   $ (67.18 )   $ (5.18 )
                                 
Weighted average common shares outstanding, basic (millions)
    566       566       566       566  
                                 
Diluted earnings (loss) per share:
                               
Continuing operations
  $ (75.12 )   $ (.49 )   $ (73.82 )   $ (5.80 )
Discontinued operations
    6.27       .23       6.64       .62  
                                 
Total
  $ (68.85 )   $ (.26 )   $ (67.18 )   $ (5.18 )
                                 
Weighted average common shares outstanding, diluted (millions)
    566       566       566       566  
                                 
Cash dividends per share
  $ .25     $ .25     $ .75     $ .75  
                                 
 
Reference should be made to the notes to the condensed consolidated financial statements.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
(Unaudited)
 
                         
    September 30,
    December 31,
    September 30,
 
    2007     2006     2006  
          (As restated,
    (As restated,
 
          Note 16)     Note 16)  
 
ASSETS
Current Assets
                       
Cash and cash equivalents
  $ 24,402     $ 23,774     $ 17,802  
Marketable securities
    1,978       138       107  
                         
Total cash and marketable securities
    26,380       23,912       17,909  
Accounts and notes receivable, net
    10,728       8,216       6,855  
Inventories
    15,530       13,921       14,822  
Equipment on operating leases, net
    5,572       6,125       6,569  
Deferred income taxes and other current assets
    2,204       11,957       10,813  
                         
Total current assets
    60,414       64,131       56,968  
Financing and Insurance Operations Assets
                       
Cash and cash equivalents
    328       349       3,089  
Assets held for sale
                282,847  
Equipment on operating leases, net
    7,856       11,794       13,325  
Investment in GMAC LLC
    6,852       7,523        
Other assets
    4,119       2,457       1,827  
                         
Total Financing and Insurance Operations Assets
    19,155       22,123       301,088  
Non-Current Assets
                       
Property, net
    42,264       41,934       38,959  
Deferred income taxes (Note 11)
    975       33,079       24,972  
Prepaid pension
    18,920       17,366       37,691  
Other assets
    7,772       7,671       8,357  
                         
Total non-current assets
    69,931       100,050       109,979  
                         
Total Assets
  $ 149,500     $ 186,304     $ 468,035  
                         
 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities
                       
Accounts payable (principally trade)
  $ 30,514     $ 26,931     $ 27,318  
Short-term borrowings and current portion of long-term debt
    5,263       5,666       1,436  
Accrued expenses
    34,619       35,225       40,235  
                         
Total current liabilities
    70,396       67,822       68,989  
Financing and Insurance Operations Liabilities
                       
Liabilities related to assets held for sale
                272,869  
Debt
    5,962       9,438       10,073  
Other liabilities and deferred income taxes
    1,666       2,139       2,243  
                         
Total Financing and Insurance Operations Liabilities
    7,628       11,577       285,185  
Non-Current Liabilities
                       
Long-term debt
    34,670       33,067       33,118  
Postretirement benefits other than pensions
    48,336       50,409       34,534  
Pensions
    12,214       11,934       15,937  
Other liabilities and deferred income taxes
    16,327       15,957       17,714  
                         
Total non-current liabilities
    111,547       111,367       101,303  
                         
Total liabilities
    189,571       190,766       455,477  
Minority interests
    1,700       1,190       1,210  
Stockholders’ Equity (Deficit)
                       
Preferred stock, no par value, 6,000,000 shares authorized, no shares issued and outstanding
                 
Common stock, $12/3 par value (2,000,000,000 shares authorized, 756,637,541 and 565,877,391 shares issued and outstanding at September 30, 2007, respectively, 756,637,541 and 565,670,254 shares issued and outstanding at December 31, 2006, respectively, and 756,637,541 and 565,611,157 shares issued and outstanding at September 30, 2006, respectively)
    943       943       943  
Capital surplus (principally additional paid-in capital)
    15,264       15,336       15,316  
Retained earnings (deficit)
    (38,528 )     195       (616 )
Accumulated other comprehensive loss
    (19,450 )     (22,126 )     (4,295 )
                         
Total stockholders’ equity (deficit)
    (41,771 )     (5,652 )     11,348  
                         
Total Liabilities, Minority Interests and Stockholders’ Equity (Deficit)
  $ 149,500     $ 186,304     $ 468,035  
                         
 
Reference should be made to the notes to the condensed consolidated financial statements.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
(Dollars and shares in millions)
(Unaudited)
 
                                                         
                                  Accumulated
       
                                  Other
    Total
 
    Shares of
                Comprehensive
    Retained
    Comprehensive
    Stockholders’
 
    Common
    Common
    Capital
    Income
    Earnings
    Income
    Equity
 
    Stock     Stock     Surplus     (Loss)     (Deficit)     (Loss)     (Deficit)  
Balance December 31, 2005, as previously reported
    566     $ 943     $ 15,285             $ 2,960     $ (4,535 )   $ 14,653  
Prior period adjustments (Note 16)
                              (211 )           (211 )
                                                         
Balance December 31, 2005, as restated
    566       943       15,285               2,749       (4,535 )     14,442  
Net loss, as restated (Note 16)
                    $ (2,928 )     (2,928 )           (2,928 )
Cumulative effect of a change in accounting principle — adoption of SFAS No. 156, net of tax
                            (13 )           (13 )
Other comprehensive income:
                                                       
Foreign currency translation adjustments
                      526                    
Unrealized loss on derivatives
                      (207 )                  
Unrealized gain on securities
                      3                    
Minimum pension liability adjustment
                      (82 )                  
                                                         
Other comprehensive income
                      240             240       240  
                                                         
Comprehensive loss
                          $ (2,688 )                        
                                                         
Stock options
                31                           31  
Cash dividends paid
                              (424 )           (424 )
                                                         
Balance September 30, 2006, as restated (Note 16)
    566     $ 943     $ 15,316             $ (616 )   $ (4,295 )   $ 11,348  
                                                         
Balance December 31, 2006, as restated (Note 16)
    566     $ 943     $ 15,336             $ 195     $ (22,126 )   $ (5,652 )
Net loss
                    $ (38,010 )     (38,010 )           (38,010 )
Effects of accounting change regarding pension plan and OPEB measurement-dates pursuant to SFAS No. 158, net of tax
                            (425 )     1,153       728  
Cumulative effect of a change in accounting principle — adoption
of FIN 48, net of tax
                            137             137  
Other comprehensive income:
                                                       
Foreign currency translation adjustments
                      563                    
Unrealized gain on derivatives
                      73                    
Unrealized loss on securities
                      (2 )                  
Defined benefit plans:
                                                       
Net prior service cost
                      212                    
Net actuarial gain
                      673                    
Net transition asset/obligation
                      4                    
                                                         
Other comprehensive income
                      1,523             1,523       1,523  
                                                         
Comprehensive loss
                          $ (36,487 )                        
                                                         
Stock options
                27                           27  
Cash dividends paid
          ——                     (425 )           (425 )
Purchase of convertible note hedge (Note 8)
                (99 )                         (99 )
                                                         
Balance September 30, 2007
    566     $ 943     $ 15,264             $ (38,528 )   $ (19,450 )   $ (41,771 )
                                                         
 
Reference should be made to the notes to the condensed consolidated financial statements.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
 
                 
    Nine Months Ended
 
    September 30,  
    2007     2006  
 
Cash provided by (used in) continuing operating activities
  $ 3,641     $ (5,835 )
Cash provided by discontinued operating activities
    221       495  
                 
Net cash provided by (used in) operating activities
    3,862       (5,340 )
Cash flows from investing activities
               
Expenditures for property
    (4,939 )     (5,356 )
Investments in marketable securities, acquisitions
    (1,984 )     (10,627 )
Investments in marketable securities, liquidations
    113       11,591  
Net change in mortgage servicing rights
          (65 )
Increase in finance receivables
          (55,603 )
Proceeds from sale of finance receivables
          66,859  
Proceeds from sale of business units/equity investments
    5,354       10,524  
Operating leases, acquisitions
          (13,772 )
Operating leases, liquidations
    2,463       5,266  
Capital contribution to GMAC LLC
    (1,022 )      
Investments in companies, net of cash acquired
    (42 )     (351 )
Other
    19       (634 )
                 
Cash provided by (used in) continuing investing activities
    (38 )     7,832  
Cash used in discontinued investing activities
    (22 )     (20 )
                 
Net cash provided by (used in) investing activities
    (60 )     7,812  
Cash flows from financing activities
               
Net increase (decrease) in short-term borrowings
    (3,732 )     1,267  
Borrowings of long-term debt
    1,919       66,430  
Payments made on long-term debt
    (1,244 )     (76,384 )
Cash dividends paid to stockholders
    (425 )     (424 )
Other
          2,931  
                 
Cash used in continuing financing activities
    (3,482 )     (6,180 )
Cash used in discontinued financing activities
    (5 )      
                 
Net cash used in financing activities
    (3,487 )     (6,180 )
Effect of exchange rate changes on cash and cash equivalents
    292       176  
                 
Net increase (decrease) in cash and cash equivalents
    607       (3,532 )
Cash and cash equivalents reclassified to assets held for sale
          (6,303 )
Cash and cash equivalents at beginning of the period
    24,123       30,726  
                 
Cash and cash equivalents at end of the period
  $ 24,730     $ 20,891  
                 
 
Reference should be made to the notes to the condensed consolidated financial statements.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 1.   Nature of Operations
 
General Motors Corporation (GM) is primarily engaged in the worldwide production and marketing of cars and trucks. We develop, manufacture and market vehicles worldwide through our four automotive regions: GM North America (GMNA), GM Europe (GME), GM Latin America/Africa/Mid-East (GMLAAM) and GM Asia Pacific (GMAP). Also, our finance and insurance operations are primarily conducted through GMAC LLC, the successor to General Motors Acceptance Corporation (together with GMAC LLC, GMAC), a wholly-owned subsidiary through November 2006. On November 30, 2006, we sold a 51% controlling ownership interest in GMAC to a consortium of investors. After the sale, we have accounted for our 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. We operate in two businesses, consisting of Automotive (GM Automotive or GMA) and Financing and Insurance Operations (FIO).
 
Note 2.   Basis of Presentation
 
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (SEC) for interim financial information. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles (GAAP) for complete financial statements. In the opinion of management, these Condensed Consolidated Financial Statements include all adjustments, consisting of only normal recurring items, considered necessary for a fair presentation of the financial position and results of operations of GM. The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2006 as filed with the SEC.
 
The Condensed Consolidated Financial Statements include the accounts of GM and our subsidiaries that are controlled by us due to ownership of a majority voting interest. In addition, we consolidate variable interest entities (VIEs) for which we are the primary beneficiary. Our share of earnings or losses of investees are included in the consolidated operating results using the equity method of accounting, when we are able to exercise significant influence over the operating and financial decisions of the investee. If we are not able to exercise significant influence over the operating and financial decisions of the investee, the cost method of accounting is used. All intercompany balances and transactions have been eliminated in consolidation.
 
Change in Presentation of Financial Statements
 
In 2007, we changed our income statement presentation to present costs and expenses of our FIO operations as a separate line. In so doing, we reclassified FIO’s portion of Selling, general and administrative expense and Interest expense to Financial services and insurance expense. Also, Automotive and other interest expense has been presented within non-operating income and expenses. Additionally, prior period results have been reclassified for the retroactive effect of discontinued operations. Refer to Note 3. Certain reclassifications have been made to the comparable 2006 restated financial information to conform to the current period presentation.
 
Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans
 
As previously reported in our 2006 Annual Report on Form 10-K, we recognized the funded status of our benefit plans at December 31, 2006 in accordance with the recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (SFAS No. 158). Additionally, we elected to adopt early the measurement date provisions of


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
SFAS No. 158 at January 1, 2007. Those provisions require the measurement date for plan assets and liabilities to coincide with the sponsor’s year end. Refer to Note 14.
 
In conjunction with entering into the 2007 labor contract with the International Union, United Automotive, Aerospace and Agricultural Implement Workers of America (UAW) (2007 National Agreement), we granted incremental basic pension benefits and lump sum pension payments to current and future retirees which resulted in plan amendments to our hourly pension plan. These plan amendments will be amortized over the term of the 2007 National Agreement, which is four years. Previously, prior service costs related to basic pension benefit increases were amortized over the average remaining service period for active employees at the time of the amendment, currently approximately 10.1 years, and lump sum payments were expensed in the period of contract approval. During the third quarter of 2007, we re-evaluated the period of economic benefit for basic pension benefit increases and lump sum payments. Due to the nature of the change in OPEB benefits under the 2007 National Agreement (refer to Note 19), coupled with our bargaining history of granting pension benefit increases, we now believe that the term of the contract is more representative of the period of future economic benefit for both basic pension benefit increases and lump sum payments. This change, reported as a change in estimate, resulted in $1.6 billion of additional expense in the third quarter of 2007 related to the accelerated recognition of unamortized prior service costs in our U.S. hourly plans associated with pension benefit increases from prior labor contracts due to our determination that there is no period of future economic benefit remaining. This change resulted in an increase in the third quarter basic and diluted loss per share of $2.76. (Refer to Note 14.)
 
Accounting for Uncertainty in Income Taxes
 
During the first quarter of 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), which supplements SFAS No. 109, “Accounting for Income Taxes”, by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. FIN 48 requires that the tax effect(s) of a position be recognized only if it is “more-likely-than-not” to be sustained based solely on its technical merits as of the reporting date. The more-likely-than-not threshold represents a positive assertion by management that a company is entitled to the economic benefits of a tax position. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the tax position are to be recognized. The more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit. With the adoption of FIN 48, companies are required to adjust their financial statements to reflect only those tax positions that are more-likely-than-not to be sustained. Any necessary adjustment would be recorded directly to retained earnings and reported as a change in accounting principle. We adopted FIN 48 as of January 1, 2007, and recorded an increase to Retained earnings of $137 million as a cumulative effect of a change in accounting principle with a corresponding decrease to the liability for uncertain tax positions. Refer to Note 11 for more information regarding the impact of adopting FIN 48.
 
Accounting for Early Retirement or Postemployment Programs with Specific Features
 
On January 1, 2006, we adopted Emerging Issues Task Force Issue No. 05-5, “Accounting for Early Retirement or Postemployment Programs with Specific Features” (EITF 05-5), which states that the bonus and contributions made into the German government pension program should be accounted for under the guidance in SFAS No. 112, “Employers’ Accounting for Postemployment Benefit Costs”, and the government subsidy should be recognized when a company meets the necessary conditions to be entitled to the subsidy. As clarified in EITF 05-5, beginning in 2006, we recognized the bonus and additional contribution, collectively, additional compensation, into the German government pension plan over the period from which the employee signed the program contract until the end of the active service period. Prior to 2006, we recognized the full additional compensation one year before the employee entered the active service period. The change, reported as a change in accounting estimate effected by a change in accounting principle, resulted in additional compensation expense of $68 million for the nine months ended September 30, 2006.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
Accounting for Servicing of Financial Assets
 
On January 1, 2006, we adopted SFAS No. 156, “Accounting for Servicing of Financial Assets” (SFAS No. 156), which: (1) provides revised guidance on when a servicing asset and servicing liability should be recognized; (2) requires all separately recognized servicing assets and liabilities to be initially measured at fair value, if practicable; (3) permits an entity to elect to measure servicing assets and liabilities at fair value each reporting date and report changes in fair value in earnings in the period in which the changes occur; (4) provides that upon initial adoption a one-time reclassification of available-for-sale securities to trading securities for securities that are identified as offsetting an entity’s exposure to changes in the fair value of servicing assets or liabilities that a servicer elects to subsequently measure at fair value; and (5) requires separate presentation of servicing assets and liabilities subsequently measured at fair value in the balance sheet and additional disclosures. We recorded a reduction to Retained earnings as of January 1, 2006 of $13 million as a cumulative effect of a change in accounting principle for the adoption of SFAS No. 156.
 
Accounting Standards Not Yet Adopted
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157), which provides a definition of fair value, establishes a framework for measuring fair value, and requires expanded disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The provisions of SFAS No. 157 are to be applied prospectively. Management is currently assessing the potential impact of the standard on our financial condition and results of operations.
 
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of SFAS No. 115” (SFAS No. 159), which permits an entity to measure certain financial assets and financial liabilities at fair value that are not currently required to be measured at fair value. Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option may be elected on an instrument-by-instrument basis, with a few exceptions. SFAS No. 159 amends previous guidance to extend the use of the fair value option to available-for-sale and held-to-maturity securities. The statement also establishes presentation and disclosure requirements to help financial statement users understand the effect of the election. SFAS No. 159 is effective as of the beginning of the first fiscal year beginning after November 15, 2007. Management is currently assessing the potential impact of the standard on our financial condition and results of operations.
 
In June 2007, the FASB ratified EITF Issue No. 07-3, “Accounting for Nonrefundable Payments for Goods or Services to Be Used in Future Research and Development Activities” (EITF 07-3), requiring that nonrefundable advance payments for future research and development activities be deferred and capitalized. Such amounts should be expensed as the related goods are delivered or the related services are performed. The statement is effective for fiscal years beginning after December 15, 2007. Management is currently assessing the potential impact of the standard on our financial condition and results of operations.
 
In June 2007, the FASB ratified EITF Issue No. 06-11 “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (EITF 06-11), which requires entities to record tax benefits on dividends or dividend equivalents that are charged to retained earnings for certain share-based awards to additional paid-in capital. In a share-based payment arrangement, employees may receive dividends or dividend equivalents on awards of nonvested equity shares, nonvested equity share units during the vesting period, and share options until the exercise date. Generally, the payment of such dividends can be treated as deductible compensation for tax purposes. The amount of tax benefits recognized in additional paid-in capital should be included in the pool of excess tax benefits available to absorb tax deficiencies on share-based payment awards. EITF 06-11 is effective for fiscal years beginning after December 15, 2007, and interim periods within those years. Management does not expect this guidance to have a material effect on our financial condition and results of operations.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
Note 3.   Divestitures of Businesses
 
Sale of Allison Transmission Business
 
In August 2007, we completed the sale of the commercial and military operations of our Allison Transmission (Allison) business. The negotiated purchase price of $5.6 billion in cash plus assumed liabilities was paid on closing. The purchase price was subject to adjustment based on the amount of Allison’s net working capital and debt on the closing date. Subsequently, we advanced $200 million to the buyer as a preliminary purchase price adjustment resulting in an adjusted purchase price of $5.4 billion. We currently anticipate that the final purchase price adjustment will be made in the fourth quarter of 2007. A gain on the sale of Allison in the amount of $5.3 billion, $3.5 billion after-tax, inclusive of the preliminary purchase price adjustments, was recognized in the three and nine months ended September 30, 2007. Allison, formerly a division of GM’s Powertrain Operations, is a global leader in the design and manufacture of commercial and military automatic transmissions and a premier global provider of commercial vehicle automatic transmissions for on-highway, including trucks, specialty vehicles, buses and recreational vehicles, off-highway and military vehicles, as well as hybrid propulsion systems for transit buses. We retained the GM Powertrain Operations’ facility near Baltimore, which manufactures automatic transmissions primarily for GM trucks and hybrid propulsion systems, was retained by GM.
 
The results of operations and cash flows of Allison have been reported in the Condensed Consolidated Financial Statements as discontinued operations for all periods presented. Historically, Allison was reported within North America Operations in the Automotive business.
 
The following table summarizes the results of discontinued operations (dollars in millions):
 
                                 
    Three Months
    Nine Months
 
    Ended
    Ended
 
    September 30,     September 30,  
    2007     2006     2007     2006  
 
Net sales
  $ 164     $ 521     $ 1,225     $ 1,631  
Operating income from discontinued operations
    73       205       409       552  
Income tax provision
    25       77       148       204  
Income from discontinued operations, net of tax
    45       130       256       350  
Gain on sale of discontinued operations, net of tax
    3,504             3,504        
 
As part of the transaction, GM and the buyers of Allison entered into an agreement whereby we may provide the new parent company of Allison with contingent financing of up to $100 million. Such financing would be made available if, during a defined period of time, Allison was not in compliance with its financial maintenance covenant under a separate credit agreement. Such GM financing would be contingent on the stockholders of the new parent company of Allison committing to provide an equivalent amount of funding to Allison, either in the form of equity or a loan, and, if a loan, such loan would be granted on the same terms as the GM loan. This commitment expires on December 31, 2010. Additionally, both parties have entered into non-compete arrangements for a term of 10 years in the United States and for a term of five years in Europe.
 
Sale of 51% Controlling Interest in GMAC
 
In April 2006, GM and its wholly owned subsidiaries, GMAC and GM Finance Co. Holdings Inc., entered into a definitive agreement pursuant to which we agreed to sell a 51% controlling interest in GMAC for a purchase price of $7.4 billion to FIM Holdings LLC (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. The sale was completed on November 30, 2006. We have retained a 49% interest in GMAC’s Common Membership Interests. The total value of the cash proceeds and distributions to us after repayment of certain intercompany obligations, and before we purchased the preferred membership interests of GMAC, was expected to


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
be $14 billion over three years, comprised of the $7.4 billion purchase price and a $2.7 billion cash dividend at closing, and other transaction related cash flows including the monetization of certain retained assets. In March 2007, we made a capital contribution to GMAC of $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.
 
For the three and nine months ended September 30, 2006, GMAC’s earnings and cash flows are fully consolidated in our Condensed Consolidated Statements of Operations and Statements of Cash Flows. However, as a result of the agreement to sell the 51% equity interest, certain assets and liabilities of GMAC were classified as held for sale in our Condensed Consolidated Balance Sheet as of September 30, 2006. Pursuant to SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144), we ceased depreciation on GMAC’s long-lived assets classified as held for sale. The following table presents GMAC’s major classes of assets and liabilities classified as held for sale as of September 30, 2006 (dollars in millions):
 
         
Cash and cash equivalents
  $ 6,303  
Marketable securities
    19,261  
Finance receivables, net
    181,243  
Loans held for sale
    24,996  
Account and notes receivable
    7,651  
Inventories, net
    554  
Net equipment on operating leases, net
    24,347  
Other assets
    20,315  
Allowance to reflect assets held for sale at fair value less cost to sell
    (1,823 )
         
Total assets held for sale
  $ 282,847  
         
Accounts payable
  $ 4,215  
Notes and loans payable
    237,900  
Deferred income taxes
    1,502  
Accrued expenses and other liabilities
    29,252  
         
Total liabilities related to assets held for sale
  $ 272,869  
         
 
The table above represents 100% of the respective assets and liabilities of GMAC that were held for sale as of September 30, 2006.
 
We recognized a non-cash impairment charge of $2.9 billion during 2006, of which $615 million and $1.8 billion was recorded in Other expenses in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2006, respectively, to reflect GMAC’s assets that were classified as held for sale at the lower of carrying value or fair value less costs to sell. The total charge is comprised of the write-down of the carrying value of GMAC assets that were sold on November 30, 2006, partially offset by the realization of 51% of the unrecognized net gains reflected in GMAC’s Accumulated other comprehensive income.
 
Refer to Notes 1, 5, and 18 for additional information regarding the sale of, investment in, and transactions with GMAC.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
Sale of GMAC Commercial Mortgage
 
In March 2006, GM, through GMAC, sold 79% of our equity in GMAC Commercial Mortgage for $1.5 billion in cash. At the closing, GMAC Commercial Mortgage also repaid to us $7.3 billion of intercompany loans for total cash proceeds of $8.8 billion. Subsequent to the sale, the remaining interest in GMAC Commercial Mortgage was reported using the equity method.
 
Note 4.  Inventories
 
Inventories are comprised of the following:
 
                         
    September 30,
    December 31,
    September 30,
 
    2007     2006     2006  
    (Dollars in millions)  
 
Productive material, work in process, and supplies
  $ 6,434     $ 5,810     $ 7,119  
Finished product, including service parts, etc. 
    10,550       9,619       9,228  
                         
Total inventories at FIFO
    16,984       15,429       16,347  
Less LIFO allowance
    (1,454 )     (1,508 )     (1,525 )
                         
Total automotive inventories
    15,530       13,921       14,822  
FIO off-lease vehicles, included in FIO Other assets
    237       185        
                         
Total inventories
  $ 15,767     $ 14,106     $ 14,822  
                         
 
At September 30, 2006, FIO off-lease vehicles totaling $554 million are presented as held for sale as disclosed in Note 3.
 
Note 5.  Investment in Nonconsolidated Affiliates
 
Nonconsolidated affiliates of GM identified herein are those entities in which we own an equity interest and for which we use the equity method of accounting, because we have the ability to exert significant influence over decisions relating to their operating and financial affairs. Our significant affiliates and the percent of our current equity ownership or voting interest in them are as follows:
 
United States — GMAC (49% at September 30, 2007 and 100% at September 30, 2006)
 
China — Shanghai General Motors Co., Ltd (50% at September 30, 2007 and 2006) and SAIC-GM-Wuling Automobile Co., Ltd (34% at September 30, 2007 and 2006)
 
GMAC was a wholly-owned subsidiary during the three and nine months ended September 30, 2006. In November 2006, we sold a 51% controlling ownership interest in GMAC. The remaining 49% interest, in the form of GMAC Common Membership Interests, is accounted for using the equity method. In addition, we acquired 1,555,000 Preferred Membership Interests representing approximately 74% of the Preferred Membership Interests for a cash price of $1.4 billion. The investment in GMAC Preferred Membership Interests, a cost method investment, was initially recorded at its fair value of $1.6 billion on the date of its acquisition. The excess of fair value over the cash exchanged for the Preferred Membership Interests reduced our investment in GMAC Common Membership Interests. Our investment in GMAC Preferred Membership Interests was $1.6 billion at September 30, 2007 and December 31, 2006. As discussed in our 2006 10-K, GMAC may be 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. We accrued dividends of $39 million and $116 million for the three and nine months ended September 30, 2007, respectively. Refer to Note 18 for a description of the related party transactions with GMAC and to Note 19 for


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
details concerning the partial conversion of the Preferred Membership Interests into GMAC Common Membership Interests.
 
As a result of deteriorating conditions in the residential and home building markets, recent credit downgrades of its unsecured debt obligations and significant year-to-date losses of its residential mortgage business, GMAC conducted an interim goodwill impairment test during the third quarter of 2007. GMAC concluded that the carrying amount of the reporting unit, including goodwill, exceeded its fair value and recorded an impairment loss of $455 million. We reduced our investment in GMAC by $223 million at September 30, 2007. Equity in loss of GMAC LLC for the three and nine months ended September 30, 2007 includes GM’s share of GMAC’s impairment charge.
 
Information regarding our share of net income (loss) for the nonconsolidated affiliates is included in the table below:
 
                                 
    Three Months
    Nine Months
 
    Ended
    Ended
 
    September 30,     September 30,  
    2007     2006     2007     2006  
    (Dollars in millions)  
 
GMAC
  $ (809 )   $     $ (874 )   $  
Shanghai General Motors Co., Ltd and SAIC-GM-Wuling Automobile Co., Ltd. 
    73       76       306       233  
Other
    42       26       134       198  
                                 
Total
  $ (694 )   $ 102     $ (434 )   $ 431  
                                 
 
Summarized financial information of GMAC is as follows:
 
                 
    Three Months Ended
  Nine Months Ended
    September 30, 2007   September 30, 2007
    (Dollars in millions)
 
Condensed Consolidated Statement of Operations:
               
Total net sales and revenue
  $ 5,381     $ 15,994  
Depreciation expense on operating lease assets
    1,276       3,530  
Interest expense
    3,715       11,122  
Operating loss
    (1,664 )     (1,367 )
Income tax expense (benefit)
    (68 )     241  
Net loss
    (1,596 )     (1,608 )
Net loss available to members
    (1,649 )     (1,765 )
 


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
                 
    September 30, 2007   December 31, 2006
    (Dollars in millions)
 
Condensed Consolidated Balance Sheet:
               
Loans held for sale
  $ 23,992     $ 27,718  
Finance receivables and loans, net
    143,612       170,870  
Investment in operating leases, net
    31,300       24,184  
Other assets
    27,570       23,496  
Total assets
    278,778       287,439  
Total debt
    221,100       236,985  
Accrued expenses
    29,971       22,659  
Total liabilities
    262,514       270,875  
Preferred interests
    2,226       2,195  
Total stockholders’ equity
    14,038       14,369  
 
Refer to Note 18 for a description of the related party transactions with GMAC and to Note 19 for details concerning the conversion of the Preferred Membership Interests into GMAC Common Membership Interests.
 
In March 2006, we sold 92.4 million shares of our investment in Suzuki Motor Corporation (Suzuki), reducing our equity stake in Suzuki from 20.4% to 3.7%, or 16.3 million shares. The sale of our interest generated cash proceeds of $2 billion and resulted in a gain on the sale of $666 million, which was recorded in Automotive interest income and other non-operating income in the Condensed Consolidated Statement of Operations for the nine months ended September 30, 2006. Effective with completion of the sale, our remaining investment in Suzuki is accounted for as an available-for-sale equity security.
 
In April 2006, GMAC recognized a gain of $415 million on the sale of its equity interest in a regional home builder, which was recorded in Automotive interest income and other non-operating income in the Condensed Consolidated Statement of Operations. Under the equity method of accounting, GMAC’s share of income recorded from this investment was $42.4 million for the nine months ended September 30, 2006.
 
Note 6.  Product Warranty Liability
 
Activity for policy, product warranty, recall campaigns and certified used vehicle warranty liabilities is as follows:
 
                         
    Nine Months
    Year
    Nine Months
 
    Ended
    Ended
    Ended
 
    September 30,
    December 31,
    September 30,
 
    2007     2006     2006  
    (Dollars in millions)  
 
Beginning balance
  $ 9,064     $ 9,135     $ 9,135  
Increase in liability (warranties issued during period)
    3,742       4,517       3,525  
Payments
    (3,395 )     (4,463 )     (3,304 )
Adjustments to liability (pre-existing warranties)
    (97 )     (570 )     (425 )
Effect of foreign currency translation
    301       445       157  
Liabilities transferred in the sale of Allison (Note 3)
    (103 )            
                         
Ending balance
  $ 9,512     $ 9,064     $ 9,088  
                         
 
Management reviews and adjusts these estimates on a regular basis based on the differences between actual experience and historical estimates or other available information.

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
Note 7.  GMNA Postemployment Benefit Costs
 
Historically, costs to idle, consolidate or close facilities and provide postemployment benefits to employees idled on an other than temporary basis were accrued based on management’s best estimate of the wage and benefit costs to be incurred for qualified employees under the Job Opportunity Bank security program (JOBS Bank) provisions of the current labor agreement through the date of its expiration in September 2007, plus estimated costs expected to be paid thereafter taking into account policy changes that GM had intended to negotiate in the JOBS program after the expiration of the current collective bargaining agreement. In the third quarter of 2007, GM revised its estimate to take into account the new JOBS Bank provisions negotiated in its 2007 UAW-GM National Labor Agreement. Such revisions did not result in a significant change from the previous estimates being used to develop the accrual for wage and benefit costs. Refer to Note 19 for further discussion of the provisions of the 2007 GM-UAW National Labor Agreement. Costs related to the idling of employees that are expected to be temporary are expensed as incurred. We review the adequacy and continuing need for these liabilities on a quarterly basis in conjunction with our quarterly production and labor forecasts.
 
In March 2006, GM, Delphi Corporation (Delphi) and the UAW reached an agreement (the UAW Attrition Agreement) intended to reduce the number of U.S. hourly employees through an accelerated attrition program (the Attrition Program). Under the Attrition Program, we provided certain UAW-represented employees at GM with: (1) a lump sum payment of $35,000 for normal or early voluntary retirements retroactive to October 1, 2005; (2) a mutually satisfactory retirement for employees with at least 10 years of credited service and 50 years of age or older; (3) payment of gross monthly wages ranging from $2,750 to $2,900 to those employees who participate in a special voluntary pre-retirement program depending on years of credited service and plant work location; and (4) a buyout of $140,000 for employees with 10 or more years of seniority, or $70,000 for employees with less than 10 years seniority, provided such employees severed all ties with us except for any vested pension benefits. Approximately 34,400 GM hourly employees agreed to the terms of the Attrition Program. We recorded a charge of $2.1 billion in 2006 to recognize the wage and benefit cost of those accepting normal and voluntary retirements, buyouts or pre-retirement leaves. As a result of the Attrition Program, the JOBS Bank was substantially reduced as employees from the JOBS Bank retired, accepted a buyout or filled openings created by the Attrition Program. Certain employees who chose to leave GM retired or left by January 1, 2007 but will continue to receive payments until 2010.
 
In 2005, we recognized a charge of $1.8 billion for postemployment benefits related to the restructuring of our North American operations. Approximately 17,500 employees were included in the 2005 charge for locations included in this action, with some leaving GM through attrition and the remainder transferring to other sites. Throughout 2006, we recorded favorable adjustments totaling $1 billion to the postemployment benefits reserve primarily as a result of: (1) the transfer of employees from idled plants to other plant sites to replace those positions previously held by employees who accepted retirements, buyouts, or pre-retirement leaves; (2) a higher than anticipated level of Attrition Program participation by employees at idled facilities and facilities to be idled that were previously accrued for under the JOBS Bank provisions; and, (3) higher than anticipated headcount reductions associated with the GMNA plant idling activities announced in 2005.
 
The liability for postemployment benefit costs of $920 million at September 30, 2007 reflects estimated future wages and benefits for 8,200 employees primarily located at idled facilities and facilities to be idled, and 4,400 employees subject to the terms of the Attrition Program. At December 31, 2006, the postemployment benefit costs liability reflects estimated future wages and benefits of $1.3 billion related to 8,500 employees primarily located at idled facilities and facilities to be idled as a result of previous GMNA plant idling activities and 10,900 employees subject to the terms of the Attrition Program. The liability for postemployment benefit costs as of September 30, 2006 reflects estimated future wages and benefits of $1.7 billion related to 9,300 employees primarily at idled facilities and facilities to be idled as a result of previous announcements and 15,400 employees under the terms of the Attrition Program.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
Activity for postemployment benefit costs is as follows:
 
                         
    Nine Months
    Year
    Nine Months
 
    Ended
    Ended
    Ended
 
    September 30,
    December 31,
    September 30,
 
    2007     2006     2006  
    (Dollars in millions)  
 
Beginning balance
  $ 1,269     $ 2,012     $ 2,012  
Additions
    294       2,212       2,213  
Interest accretion
    14       31       24  
Payments
    (655 )     (1,834 )     (1,490 )
Adjustments
    (2 )     (1,152 )     (1,107 )
                         
Ending balance
  $ 920     $ 1,269     $ 1,652  
                         
 
Note 8.  Short-Term Borrowings and Long-Term Debt
 
Revolving Credit Facilities
 
In May 2007, we entered into an unsecured revolving credit agreement expiring in June 2008, with a lender that provides for borrowings of up to $500 million. Borrowings under the facility bear interest based on LIBOR. The borrowings are to be used for general corporate purposes, including working capital needs. No borrowings were outstanding under this agreement at September 30, 2007.
 
In June 2007, we entered into a short-term revolving credit agreement with a syndicate of third-party lenders that provides for borrowings of up to $4.1 billion and matures in June 2008. Borrowings under the facility bear a variable interest rate based on either the prime rate or LIBOR, at our option. The credit facility is collateralized by our common equity interest in GMAC. The total commitment available under the agreement will be reduced or eliminated if our interest held in the common equity of GMAC is either disposed of or diluted beyond specified thresholds as a result of a common stock issuance by GMAC. The borrowings are to be used for general corporate purposes, including working capital needs. No borrowings were outstanding under this agreement at September 30, 2007.
 
In August 2007, we entered into a revolving credit agreement expiring in August 2009, with a lender that provides for borrowings of up to $1.3 billion. Borrowings under this facility bear interest based on either the commercial paper rate or LIBOR. The borrowings are to be used for general corporate purposes, including working capital needs. Under the facility, borrowings are limited to an amount based on the value of underlying collateral, which consists of residual interests in trusts that own leased vehicles and issue asset-backed securities collateralized by the vehicles and the associated leases. The underlying collateral was previously owned by GMAC and was transferred to us as part of the GMAC transaction in November 2006. The underlying collateral is held by bankruptcy-remote subsidiaries and pledged to a trustee for the benefit of the lender. We consolidate the bankruptcy-remote subsidiaries and trusts for financial reporting purposes. No borrowings were outstanding under this agreement at September 30, 2007.
 
We pay commitment fees on revolving credit facilities at rates negotiated in each agreement. Amounts paid and expensed for these commitments fees are not significant to any period.
 
We also have an additional $1.5 billion in undrawn committed facilities (including certain off-balance sheet securitization programs) with various maturities and $900 million in undrawn uncommitted lines of credit. In addition, our consolidated affiliates with non-GM minority shareholders, primarily GM Daewoo, have a combined $1.6 billion in undrawn committed facilities.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
Contingent Convertible Debt
 
In May 2007, we issued $1.5 billion of 1.5% Series D convertible debentures due in 2009, with interest payable semiannually. The debentures are senior unsecured obligations ranking equally with all other unsecured and unsubordinated debt. The Series D debentures may be converted at the option of the holder into common stock based on an initial conversion rate of .6837 shares per $25.00 principal amount of debentures, which represents an initial conversion price of approximately $36.57 per share. The Series D debentures become convertible upon the occurrence of one of the following events:
 
  •  closing price of our common stock exceeds 120% of the conversion price for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding calendar quarter; or
 
  •  during the five business day period after any nine consecutive trading day period in which the trading price of the debentures for each day of such period was less than 95% of the product of the closing sale price of our common stock on such day and the applicable conversion rate; or
 
  •  upon the occurrence of specified corporate events, as defined, including but not limited to, merger, consolidation, binding share exchange or transfer or lease of all or substantially all of our assets, pursuant to which our common stock would be converted into cash, securities, or other assets; or,
 
  •  at any time from March 1, 2009 to the second business day immediately preceding the maturity date. The Series D debentures mature June 1, 2009.
 
We have committed to use cash to settle the principal amount of the debentures if: (1) holders choose to convert the debentures; or (2) we are required by the holders to repurchase the debentures. Upon conversion, we retain the right to use cash, stock or a combination thereof, to settle any amount that may become due to debt holders in excess of the principal amount. The conversion price of $36.57 is subject to adjustment upon certain events, including but not limited to, the occurrence of stock dividends, the issuance of rights and warrants, and the distribution of assets or debt securities to all holders of shares of common stock. In addition, in the event of a make-whole fundamental change, as defined in the underlying prospectus supplement, the conversion rate will be increased based on: (1) the date on which such make-whole fundamental change becomes effective; and (2) our common stock price paid in the make-whole fundamental change or average common stock price. In any event, the conversion rate shall not exceed .8205 per $25.00 principal amount of Series D debentures, subject to adjustment for events previously mentioned. If a fundamental change occurs prior to maturity, the debenture holders may require us to repurchase all or a portion of the debentures for cash at a price equal to the principal amount plus accrued and unpaid interest, if any, up to but not including, the date of repurchase. We may not elect to redeem the Series D debentures prior to the maturity date.
 
In connection with the issuance of the Series D debentures, we purchased a convertible note hedge for the Series D debentures in a private transaction. The convertible note hedge is expected to reduce the potential dilution with respect to our common stock upon conversion of the Series D debentures to the extent that the market value per share of our common stock does not exceed a specified cap, resulting in an effective conversion price of $45.71 per share. This transaction will terminate at the earlier of the maturity date of the Series D debentures or when the Series D debentures are no longer outstanding due to conversion or otherwise.
 
We received net proceeds from the issuance of the Series D debentures, net of issue costs and the purchase of the convertible note hedge, of $1.4 billion. Debt issue costs of $32 million were incurred and are being amortized using the effective interest method over the term of the Series D debentures. In accordance with EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” we recorded the cost of the convertible note hedge of $99 million as a reduction of Additional paid-in capital. Any subsequent changes in fair value of the convertible note hedge are not recognized. The net proceeds will be used for general corporate purposes, including working capital needs.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
In March 2007, Series A convertible debentures in the amount of $1.1 billion were put to us and settled entirely in cash. At September 30, 2007, the amount of the Series A convertible debentures outstanding was $39 million.
 
Note 9.  Finance Receivables and Securitizations
 
We generate receivables from sales of vehicles to our dealer network domestically, as well as from service parts and powertrain sales. Certain of these receivables are sold to a wholly-owned bankruptcy-remote Special Purpose Entity (SPE). The SPE is a separate legal entity that assumes risks and rewards of ownership of the receivables. In turn, the SPE participates in a trade accounts receivable securitization program whereby it enters into an agreement to sell undivided interests in an eligible pool of trade receivables. As part of this program, on September 19, 2007, we renewed an agreement to sell undivided interests in eligible trade receivables up to $600 million directly to banks and to a bank conduit which funds its purchases through issuance of commercial paper. The receivables sold under this program are sold at fair market value and removed from the Condensed Consolidated Balance Sheets at the time of sale. The loss on trade receivables sold included in Automotive cost of sales was $.2 million and $2.4 million for the three and nine months ended September 2007, respectively, and $5.6 million and $20.6 million for the three and nine months ended September 30, 2006, respectively. We do not have a retained interest in the receivables sold, but perform collection and administrative functions. The gross amount of proceeds received from the sale of receivables under this program was $16 million and $600 million, and $1.5 billion and $7.4 billion for the three and nine months ended September 30, 2007 and 2006, respectively.
 
Note 10.  Commitments and Contingent Matters
 
Commitments
 
We have provided guarantees in relation to the residual value of certain operating leases, primarily related to the lease of our corporate headquarters. At September 30, 2007, the maximum potential amount of future undiscounted payments that could be required to be made under these guarantees amount to $592 million. These guarantees terminate during years ranging from 2008 to 2018. Certain leases contain renewal options. No liabilities were recorded with respect to such guarantees as the amounts were determined to be insignificant.
 
We have agreements with third parties that guarantee the fulfillment of certain suppliers’ commitments and related obligations. At September 30, 2007, the maximum potential future undiscounted payments that could be required to be made under these guarantees amount to $108 million. Years of expiration related to these guarantees range from 2007 to 2035. In connection with such guarantees, we have recorded liabilities totaling $16 million.
 
In addition, in some instances, certain assets of the party whose debt or performance is guaranteed may offset, to some degree, the effect of the triggering of the guarantee. The offset of certain payables of GM may also apply to certain guarantees. No liabilities were recorded with respect to such guarantees as the amounts were determined to be insignificant.
 
We also provide payment guarantees on commercial loans made by GMAC and outstanding with certain third-parties. As of September 30, 2007, the maximum commercial obligations we guaranteed related to these loans was $126 million. Years of expiration related to these guarantees range from 2007 to 2012. Based on the creditworthiness of these third parties, the value ascribed to the guarantees we provided was determined to be insignificant.
 
In addition, we have entered into agreements with GMAC and FIM Holdings related to the disposal of our 51% interest in GMAC that incorporate indemnification provisions. The maximum potential future undiscounted payments to which we may be exposed in terms of these indemnification provisions amount to $2.5 billion. No amounts have been recorded for such indemnities as the fair value of these indemnifications is immaterial.
 
We have entered into agreements indemnifying certain parties with respect to environmental conditions related to existing or sold GM properties. Due to the nature of the indemnifications, our maximum exposure under these


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
guarantees cannot be estimated. No amounts have been recorded for such indemnities as our obligations are not probable or estimable at this time.
 
In addition to the guarantees and indemnifying agreements mentioned above, our periodically enter into agreements that incorporate indemnification provisions in the normal course of business. Due to the nature of these agreements, the maximum potential amount of future undiscounted payments to which we may be exposed cannot be estimated. No amounts have been recorded for such indemnities as our obligations under them are not probable and estimable at this time.
 
Environmental
 
Our operations, like operations of other companies engaged in similar businesses, are subject to a wide range of environmental protection laws, including laws regulating air emissions, water discharges, waste management and environmental cleanup. We are in various stages of investigation or remediation for sites where contamination has been alleged. We are 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 can be reasonably estimated. This practice is followed whether the claims are asserted or unasserted. Management expects that the amounts reserved will be paid over the periods of remediation for the applicable sites, which typically range from five to 30 years.
 
For many sites, the remediation costs and other damages for which we ultimately may be responsible cannot be reasonably estimated because of uncertainties with respect to factors such as our connection to the site or to materials there, 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.
 
While the final outcome of environmental matters cannot be predicted with certainty, it is the opinion of management that none of these items, when finally resolved, is expected to have a material adverse effect on our financial position or liquidity. However, should a number of these items occur in the same period, it could have a material adverse effect on the results of operations in a particular quarter or fiscal year.
 
Asbestos Claims
 
Like most automobile manufacturers, we have been subject to asbestos-related claims in recent years. We have seen these claims primarily arise from three circumstances: (1) majority of these claims seek damages for illnesses alleged to have resulted from asbestos used in brake components; (2) limited numbers of claims have arisen from asbestos contained in the insulation and brakes used in the manufacturing of locomotives; and (3) claims brought by contractors who allege exposure to asbestos-containing products while working on premises owned by GM.
 
While we have resolved many of the asbestos-related cases over the years and continue to do so for strategic litigation reasons such as avoiding defense costs and possible exposure to excessive verdicts, management believes that only a small proportion of the claimants has or will ever develop any asbestos-related impairment. Only a small percentage of the claims pending against us allege causation of a malignant disease associated with asbestos exposure. The amount expended on asbestos-related matters 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.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
We record an estimated liability associated with reported asbestos claims when we believe that the expected loss is both probable and can be reasonably estimated. Prior to 2006, with respect to incurred but not yet reported claims, we concluded that a range of probable losses could not be reasonably estimated. Over the last several years, we have continued to accumulate data associated with asbestos claims. Based on review of this data during the fourth quarter of 2006, management determined that we had sufficient information to determine a reasonable estimate of its projected incurred, but not yet reported, claims that could be asserted over the next two years. Based on this analysis, we recorded a $127 million charge for unasserted asbestos claims in 2006. We believe our liability for asbestos claims recorded at September 30, 2007 is adequate.
 
The amounts recorded for asbestos-related claims was based upon currently known information. Future events, such as the number of new claims to be filed each year and the average cost of disposing of claims, as well as the numerous uncertainties surrounding asbestos litigation in the United States, could cause the actual costs to be significantly different from those projected. Due to the uncertainty inherent in factors used to determine our asbestos-related liabilities, it is reasonably possible that future costs to resolve asbestos claims may be greater than the estimate; however, we do not believe that we can reasonably estimate how much greater it could be.
 
The final outcome of asbestos-related matters cannot be predicted with certainty. After discussion with counsel and considering the liabilities that have been recorded, among other things, it is the opinion of management that none of these items is expected to have a material adverse effect on our financial position or liquidity when finally resolved. However, should many of these items occur in the same period, they could have a material adverse effect on the results of operations in a particular quarter or fiscal year.
 
Contingent Matters
 
During the third quarter of 2007, GMLAAM settled and paid fines totaling $45 million related to improper information submitted to the tax authorities related to material included in consignment contracts at one of its facilities. We had previously accrued $43 million for this contingency representing the low end of the range of potential additional taxes and fines that may be assessed during the third quarter. This amount recorded represents the probable loss as of September 30, 2007.
 
Litigation is subject to uncertainties and the outcome of individual litigated matters is not predictable with assurance. Various legal actions, governmental investigations, claims and proceedings are pending against us, including a number of shareholder class actions, bondholder class actions, shareholder derivative suits and class actions under the U.S. Employee Retirement Income Security Act of 1974, as amended, and other matters arising out of alleged product defects, including asbestos-related claims; employment-related matters; governmental regulations relating to safety, emissions, and fuel economy; product warranties; financial services; dealer, supplier, and other contractual relationships; and environmental matters.
 
With regard to the matters discussed in the previous paragraph, we have established reserves for matters in which we believe that losses are probable and can be reasonably estimated. Some of the matters may involve compensatory, punitive, or other treble damage claims, or demands for recall campaigns, incurred but not reported asbestos-related claims, environmental remediation programs, or sanctions, that if granted, could require us to pay damages or make other expenditures in amounts that could not be reasonably estimated at September 30, 2007. The ultimate outcome of these contingencies can not be determined at this time, and we cannot provide assurance that, under certain circumstances, such contingencies will not materially adversely affect our business, results of operations or cash flows.
 
Delphi Corporation
 
In connection with our spin-off of Delphi Corporation (Delphi) in 1999, we entered into separate agreements with the UAW, the IUE-CWA and the United Steel Workers (Benefit Guarantee Agreements) providing contingent


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
benefit guarantees to make payments for limited pension and postretirement health care and life insurance (OPEB) expenses to certain former GM U.S. hourly employees who transferred to Delphi and meet the 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 we could be liable if Delphi fails to provide the corresponding benefit at the required level. Therefore, we 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, our guarantee of pension benefits arises only to the extent that the pension benefits provided by Delphi and the Pension Benefit Guaranty Corporation fall short of the guaranteed amount. The original benefit guarantees were scheduled to expire on October 18, 2007 unless Delphi triggered the benefit guarantees before that date by failing to provide the specified benefits. In a separate agreement between us and Delphi, Delphi has indemnified us for any payments under the Benefit Guarantee Agreements to the UAW employees and retirees (Indemnification Agreement). Our rights under this Indemnification Agreement were originally scheduled to expire on October 18, 2007, or on the expiration of our obligations to provide benefits under the Benefit Guarantees. In June 2007, we agreed to extend the expiration date of the Benefit Guarantee Agreement with the UAW and Delphi agreed to extend the expiration date of the Indemnification Agreement, under certain circumstances and within certain time periods.
 
Although our obligations under the Benefit Guarantee Agreements have not been triggered by Delphi’s Chapter 11 filing in October 2005 or its motion in Bankruptcy Court to reject its U.S. labor agreements and modify retiree welfare benefits, we believe it is probable that we have incurred a liability under the Benefit Guarantee Agreements and have recorded charges of $5.5 billion and $500 million in 2005 and 2006, respectively, and $350 million and $925 million for the three and nine months ended September 30, 2007, respectively, in connection with the Delphi reorganization plan. The Benefit Guarantee Agreements do not obligate us to guarantee any benefits for Delphi retirees in excess of the corresponding benefits we provide at the time to our own hourly retirees. Accordingly, any reduction in the benefits we provide our hourly retirees reduces our obligation under the corresponding benefit guarantee.
 
On June 22, 2007, GM, Delphi, and the UAW entered into a Memorandum of Understanding (UAW MOU) which included terms relating to the consensual triggering of the Benefit Guarantee Agreement with the UAW as well as additional terms relating to Delphi’s restructuring. The UAW MOU was ratified by the UAW membership on June 28, 2007 and became effective upon receipt of Bankruptcy Court approval on July 19, 2007. The more significant items covered in the UAW MOU include; (1) the extension of the GM-UAW benefit guarantee and the related Delphi indemnity; (2) an additional attrition program offered by Delphi to Delphi UAW employees; (3) the settlement by GM of a UAW claim against Delphi; (4) our support for future operations at certain Delphi sites, and (5) our agreement to provide additional benefits for certain healthcare costs related to the covered employees with the UAW. These items are described as follows:
 
(1) We agreed to extend the expiration date of the Benefit Guarantee Agreement with the UAW from October 18, 2007 to December 31, 2007. If Delphi has commenced solicitation of acceptance of its plan of reorganization prior to December 31, 2007, but the plan has not been confirmed and substantially consummated by then, the Benefit Guarantee Agreement with the UAW would be further extended to March 31, 2008. Delphi agreed through the UAW MOU to extend its agreement to indemnify us for payments made under the Benefit Guarantee Agreement with the UAW on the same basis and for the same time period. We also agreed that if Delphi terminates its pension plan, ceases to provide on-going service, or fails or refuses to provide post-retirement medical benefits for certain UAW employees at any time before both; (i) GM and Delphi execute a comprehensive settlement agreement resolving the financial, commercial and other matters between them (GM-Delphi Settlement Agreements); and (ii) the U.S. Bankruptcy Court substantially confirms a Delphi plan of reorganization that incorporates, approves and is consistent with the GM-Delphi Settlement Agreements, the applicable provisions of the Benefit Guarantee Agreement will be triggered for those UAW employees.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
(2) Delphi and the UAW agreed to the terms of an additional attrition program with terms substantially similar to one previously offered to GM and Delphi employees as described in Note 7. Our financial commitments related to this additional program are set forth in the GM-Delphi Settlement Agreements as more fully described below.
 
(3) We committed to pay $450 million to settle a UAW claim asserted against Delphi, which the UAW has directed us to pay directly to the GM UAW VEBA trust. We expect to make this payment upon execution of the GM-Delphi Settlement Agreements and substantial consummation of Delphi’s reorganization plan, confirmed by the Bankruptcy Court, which incorporates the GM-Delphi Settlement Agreements.
 
(4) Delphi and the UAW agreed to plans to close certain Delphi sites and divest others. We have agreed to assist Delphi with such closures and divestitures which, under certain circumstances, may require us to facilitate the transfer of operations to third parties or to us by specified dates. Our obligations around such closures and divestitures were further expanded and described in the GM-Delphi Settlement Agreements. In addition, Delphi and the UAW agreed to continue operating certain Delphi sites at which we will provide future product programs. Our financial commitments related to these sites are set forth in the GM-Delphi Settlement Agreements which are more fully described below.
 
(5) We agreed to pay for certain healthcare costs of Delphi retirees and their beneficiaries in order to provide a level of benefits that is consistent with that being provided to GM retirees and their beneficiaries from the Mitigation Plan VEBA. The actuarially determined cost to GM of providing these benefits is estimated to be approximately $360 million.
 
On July 31, 2007 and August 1, 2007, GM and Delphi entered into a Memorandum of Understanding with each of the International Union of Operating Engineers, International Association of Machinists and International Brotherhood of Electrical Workers (collectively the Splinter MOUs) which offer an attrition program and provide for OPEB for certain hourly retirees and eligible hourly employees. The Splinter MOUs were each ratified by the respective union memberships and were approved by the Bankruptcy Court in August 2007.
 
On August 5, 2007, GM, Delphi, and the IUE-CWA entered into a Memorandum of Understanding (IUE-CWA MOU) which provide terms that are similar to those of the UAW MOU with regard to establishing terms related to the consensual triggering of the Benefit Guarantee Agreement, offering an additional attrition program, and continuing operations at certain Delphi sites for which we committed to certain product programs. The IUE-CWA MOU was ratified by the IUE-CWA membership and approved by the Bankruptcy Court in August 2007. The more significant items covered in the IUE-CWA MOU include: (1) an additional attrition program offered to Delphi IUE-CWA employees; and (2) GM provision of future product programs at certain Delphi sites.
 
On August 16, 2007, GM, Delphi and the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers (USW) entered into two separate Memoranda of Understanding (collectively the USW MOUs) which provide terms that are similar to the UAW MOU with regard to the consensual triggering of the Benefit Guarantee Agreement and offering an attrition program. Delphi and the USW agreed to an attrition program with terms substantially consistent with those previously offered to the UAW and IUE-CWA. Our financial commitments related to this program are set forth in the GM-Delphi Settlement Agreements as more fully described below. The USW MOUs were ratified by the USW membership and approved by the Bankruptcy Court in August 2007.
 
On September 6, 2007, GM and Delphi entered into the Global Settlement Agreement and the Master Restructuring Agreement (together the “GM-Delphi Settlement Agreements”), which were filed with the Bankruptcy Court as part of Delphi’s plan of reorganization on that same day. The Global Settlement Agreement is intended to resolve all outstanding issues between GM and Delphi that have arisen or may arise prior to the effective date of the Global Settlement Agreement and Delphi’s plan of reorganization. The more significant items contained in the Global Settlement Agreement include; (1) commitments regarding OPEB and pension obligations; (2) treatment of Delphi’s hourly pension plans; (3) other GM contributions related to Delphi’s labor matters; (4) releases and


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
claims treatment; (5) withdrawal of Delphi’s March 2006 motion seeking authority to reject certain supply contracts with GM; and (6) conditions to effectiveness of the Global Settlement Agreement. On October 29, 2007, GM and Delphi agreed to amendments to the GM-Delphi Settlement Agreement, which have also been filed with the Bankruptcy Court. These provisions, as amended, are described more fully as follows:
 
(1) We agreed to reimburse Delphi for its costs to provide OPEB to certain of Delphi’s hourly retirees from and after January 1, 2007 through the date that Delphi ceases to provide such benefits. Also, Delphi agreed to make payments to us for certain portions of the OPEB that we have agreed to assume with respect to active and retired IAM, IBEW, IUOE and non-represented hourly employees. Further, we agreed that Delphi has no obligation to make any additional OPEB payments for or in relation to hourly employees at business units divested from Delphi prior to the 1999 spin-off, or for Delphi employees that returned to GM.
 
(2) We agreed to reimburse Delphi for the “normal cost” of credited service in Delphi’s pension plan between January 1, 2007 and the date its pension plans are frozen. Also, we will assume $1.5 billion of net pension obligations of Delphi, and we will receive a note payable for the amount of the obligations assumed, which will be payable in cash by Delphi within 10 days after the plan of reorganization becomes effective.
 
(3) We agreed to reimburse Delphi for all retirement incentives and half of the buy-out payments made pursuant to the attrition program provisions of the UAW MOU, the IUE-CWA MOU and the USW MOUs. We additionally agreed to reimburse or fund Delphi for certain of the buy-down payments made to its hourly employees or to be made pursuant to the UAW MOU and the IUE-CWA MOU. GM agreed to make certain payments, totaling $35 million, as part of settlement of claims by the IUE-CWA and the USW against the bankruptcy estate. We further agreed to pay Delphi $25 million to provide for costs and expenses incurred by Delphi in connection with the execution and performance of the IUE-CWA MOU.
 
(4) GM and Delphi agreed to resolve all claims in existence as of the effective date of the plan of reorganization that either party has or may have against the other. Further, the agreement requires that the Delphi plan of reorganization provide that the other stakeholders in the Delphi bankruptcy proceedings, including, but not limited to, creditors of Delphi, current and former equity holders of Delphi, Delphi’s statutory committees, Delphi’s Debtor-In-Possession lenders, and Delphi’s labor unions and all of their current and formerly represented members be released. However, this release will not govern any claims arising in connection with ordinary course relationship, certain continuing agreements, or deriving pursuant to any of the labor MOUs or the GM-Delphi Settlement Agreements.
 
(5) Delphi originally agreed to pay us the $1.5 billion note discussed above and $2.7 billion in cash on the effective date of the plan of reorganization. This provision was subsequently amended to provide that on the effective date we would receive $1.5 billion in a combination of at least $750 million in cash and a second lien note for the remaining amount and junior convertible preferred stock of Delphi with a bankruptcy plan of reorganization value of $1.1 billion. The ultimate value of the junior convertible preferred stock is subject to adjustment based on the fair market value of Delphi’s common stock upon emergence from bankruptcy.
 
(6) Delphi agreed to withdraw, within 10 days following the approval of the Disclosure Statement, its motion seeking authority to reject certain supply contracts with us.
 
(7) The Global Settlement Agreement provides that it shall become effective after; (i) Bankruptcy Court approval of the GM-Delphi Settlement Agreements; (ii) we have consented to any provisions of the Confirmation Order that would materially affect us; and (iii) we have received our consideration provided for in the plan.
 
The Master Restructuring Agreement contains agreements between GM and Delphi which require implementation over time and outline the ongoing relationship between GM and Delphi. The more significant items contained in the Master Restructuring Agreement include; (1) a revenue support plan; (2) reimbursement for certain U.S. hourly labor costs; (3) reimbursement for cash losses for certain of Delphi’s U.S. facilities; (4) a Delphi


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
Corporation guaranty of performance of obligations by certain of its subsidiaries; (5) guaranteed minimum recovery of the net working capital that Delphi has invested in certain businesses held for sale; (6) treatment of unsold Delphi businesses and transfer of certain Delphi hourly employees; and (7) treatment of legacy agreements and ordinary course matters. These items are described more fully below. The Master Restructuring Agreement shall become effective when the Global Settlement Agreement becomes effective, as described above.
 
(1) We agreed to award certain product programs to Delphi, as well as to provide Delphi with a preferential sourcing process for certain other product programs. We also agreed to certain limitations on our ability to transfer production from Delphi to another supplier. Delphi agreed to certain re-pricing of existing or awarded business (together the “Revenue Plan”).
 
(2) We agreed to reimburse a certain portion of Delphi’s U.S. hourly labor costs incurred to produce systems, components, and parts for us from October 1, 2006 through September 14, 2015 (the “Labor Cost Subsidy”) and to offer similar reimbursement to prospective buyers of certain of Delphi’s to be divested U.S. facilities which also produce systems, components and parts for us.
 
(3) We agreed to reimburse Delphi to the extent that it incurs cash flow deficiency attributable to production at certain of Delphi’s U.S. facilities for continuing to produce systems, components and parts for us until the facilities are either closed or sold (the “Production Cash Burn Support”).
 
(4) Delphi agreed to guarantee payment and performance by certain of its subsidiaries of their obligations under GM-Delphi agreements through September 14, 2015.
 
(5) We agreed to make advance deposits against our accounts payable to Delphi in an amount equivalent to a certain percentage of the net working capital invested in specified businesses that Delphi plans to sell. As each business is then sold, Delphi will refund the related deposit to us. We agreed to fund a certain portion of any shortfall if Delphi does not fully recover the net working capital invested in each such business, and if sales proceeds exceed net working capital, we will receive a certain portion of such excess.
 
(6) Delphi agreed to provide us or our designee with an option to purchase certain businesses for $1.00 in the event that a sale of such businesses does not occur by specified dates. In the event that the businesses have not sold, and neither us nor our designee have exercised our purchase option by a future date, Delphi may effect a “deemed transfer” of the business, including substantially all assets and liabilities, to us or an affiliate of ours. Further, we have agreed that if any transfer of employee responsibility at certain Delphi facilities has not occurred, pursuant to the UAW MOU, by specified dates, that the applicable employees will transfer to us or an affiliate.
 
(7) Delphi agreed to assume or reinstate, as applicable, certain agreements with us, including certain agreements related to the 1999 spin-off of Delphi from GM, certain subsequent agreements, and all ordinary course agreements. Most contracts between GM and Delphi that originated before Delphi’s Chapter 11 filing, including contracts related to the 1999 spin-off of Delphi from GM, were terminated.
 
We expect that funding under the Labor Cost Subsidy to Delphi and to buyers of certain of Delphi’s divested U.S. facilities could result in future annual cash payments of between $300 million and $400 million through 2015. We expect to receive price reductions on certain products that we will continue to purchase from Delphi, as defined in the Revenue Plan. Any such funding above, and any such price reductions, will commence upon emergence of Delphi from Bankruptcy. Price reductions could extend for periods up to approximately five years.
 
In March 2006, Delphi also filed a motion under the U.S. Bankruptcy Code seeking authority to reject certain supply contracts with us. A hearing on this motion was adjourned indefinitely by the court pending further developments related to Delphi’s U.S. labor agreements and retiree welfare benefits. Delphi has not rejected any GM contracts as of this time and has assured us that it does not intend to disrupt production at our assembly facilities however, until the Bankruptcy Court approves a comprehensive resolution and plan of reorganization, there is a risk that Delphi or one or more of its affiliates may reject or threaten to reject individual contracts with us, either for the


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
purpose of exiting specific lines of business or in an attempt to increase the price we pay for certain parts and components. As a result, we could be materially adversely affected by disruption in the supply of automotive systems, components and parts that could force the suspension of production at our assembly facilities.
 
While the final outcome cannot be predicted with certainty, we expect to reach a comprehensive resolution and plan of reorganization related to Delphi with the parties. Even if the parties reach agreement, the Bankruptcy Court must approve the resolution of the issues and plan. As a result the final effect of the matters related to Delphi cannot be determined until receipt of the Bankruptcy Court approval.
 
Benefit Guarantees Related to Divested Plants
 
We have entered into various guarantees regarding benefits for former GM employees at two previously divested plants that manufacture component parts whose results continue to be included in our financial statements in accordance with FIN 46(R), “Consolidation of Variable Interest Entities” (FIN 46(R)). For these divested plants, we entered into agreements with both of the purchasers to indemnify, defend and hold each purchaser harmless for any liabilities arising out of the divested plants and with the UAW guaranteeing certain postretirement health care benefits and payment of postemployment benefits.
 
During the fourth quarter of 2006, we recorded a charge of $206 million related to the closure of two plants and the permanent idling of 2,000 employees. The components of the charge were as follows: (1) a $214 million charge to recognize wage and benefit costs associated with employees accepting retirement packages, buyouts, or supplemental unemployment benefit costs in connection with the plant closure; (2) a curtailment loss of $3 million related to pension benefits; and (3) a curtailment gain of $11 million with respect to other postretirement benefits. During the nine months ended September 30, 2007, we recognized favorable adjustments of $15 million related to the postemployment benefit liability in connection with the plant closures. Additionally, during the nine months ended September 30, 2007, we recognized a $38 million curtailment gain with respect to OPEB.
 
Note 11.   Income Taxes
 
Under Accounting Principles Board Opinion No. 28, “Interim Financial Reporting,” we are required to adjust our effective tax rate each quarter to be consistent with the estimated annual effective tax rate. We are also required to record the tax impact of certain discrete items, unusual or infrequently occurring, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur. In addition, jurisdictions with a projected loss for the year or a year-to-date loss where no tax benefit can be recognized are excluded from the estimated annual effective tax rate. The impact of such an exclusion could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings versus annual projections.
 
In the third quarter of 2007, we recorded a charge of $39 billion related to establishing full valuation allowances against our deferred tax assets in the U.S., Canada and Germany. In accordance with SFAS No. 109, “Accounting for Income Taxes” (SFAS No. 109), we evaluate our deferred income taxes quarterly to determine if valuation allowances are required. SFAS No. 109 requires that companies assess whether valuation allowances should be established against their deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. In making such judgments, significant weight is given to evidence that can be objectively verified. As previously disclosed in our 2006 Form 10-K, we had determined in prior periods that valuation allowances were not necessary for our deferred tax assets in the U.S., Canada and Germany based on several factors including: (1) the degree to which our three-year historical cumulative losses were attributable to unusual items or charges, several of which were incurred as a result of actions to improve future profitability; (2) the long duration of our deferred tax assets; and (3) the expectation of continued strong earnings at GMAC and improved earnings in GMNA.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
We believe that a valuation allowance is now required due to events and developments that occurred during the third quarter of 2007. In conducting our third quarter 2007 analysis, we utilized a consistent approach which considers our three-year historical cumulative income (loss) including an assessment of the degree to which any losses were driven by items that are unusual in nature and incurred in order to improve future profitability. In addition, we reviewed changes in near-term market conditions and any other factors arising during the period which may impact our future operating results. We consider both positive and negative evidence in our analysis. Our analysis for the third quarter of 2007 showed that we have a three-year historical cumulative loss in the U.S., Canada and Germany. This loss continued to exist even after adjusting our results to remove unusual items and charges, which is considered a significant factor in our analysis as it is objectively verifiable and therefore, significant negative evidence. This was coupled with other significant factors which all occurred in the third quarter of 2007. The ongoing weakness at GMAC related to its Residential Capital, LLC (ResCap) mortgage business resulting in substantial U.S. losses incurred in the third quarter of 2007. Further, the outlook for ResCap and the mortgage industry in general became highly uncertain, with significantly reduced near-term forecast profitability. In addition, in both the U.S. and Germany near-term automotive market conditions were more challenging than we believed in the second quarter of 2007. This, when combined with the pressures of the residential mortgage business, resulted in lower projected earnings in the near-term than we previously anticipated. We also noted that in the near-term a greater percentage of our deferred tax assets were going to be subject to expiration (e.g. 20 years) than in prior periods primarily due to changes associated with the Retiree MOU, which accelerates our tax deductions for OPEB liabilities when compared to our previously expected timing for these deductions. Accordingly, based on a three year historical cumulative loss, combined with significant and inherent uncertainty as to the timing of when we would be able to generate the necessary level of earnings to recover our deferred tax assets in the U.S., Canada and Germany, we concluded that a full valuation allowance was required.
 
Excluding the charge related to the valuation allowance discussed above, for the three and nine months ended September 30, 2007, we recorded net unfavorable adjustments to income tax expense. These adjustments included: (1) foreign income taxed at rates lower than 35%, which is the U.S. federal statutory tax rate; (2) various permanent book-tax differences; (3) discrete items such as the reversal of valuation allowances and the reversal of previously required tax liabilities in accordance with FIN 48 for uncertain tax positions now deemed more-likely-than-not to be realized; and, (4) enactment of new income tax legislation.
 
Upon adoption of FIN 48 as of January 1, 2007, we had $2.7 billion of total gross unrecognized tax benefits, of which $2.1 billion represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. At September 30, 2007 the amount of gross unrecognized tax benefits before valuation allowances and the amount that would favorably affect the effective income tax rate in future periods after valuation allowances were $2.5 billion and $.1 billion, respectively. These amounts consider the guidance in FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48”. At September 30, 2007, $2 billion of the liability for uncertain tax positions is netted against deferred tax assets relating to the same tax jurisdictions. The remainder of the liability for uncertain tax positions is classified as a non-current liability.
 
We file income tax returns in multiple jurisdictions and are subject to examination by taxing authorities throughout the world. In the U.S., our federal income tax returns for 2001 through 2003 are currently under review by the Internal Revenue Service, and except for one transfer pricing matter, it is likely that this examination will conclude in 2007. A pre-filing meeting was held with the Internal Revenue Service on the transfer pricing matter in preparation for bilateral negotiations. The Internal Revenue Service will begin its review of the 2004 through 2006 federal income tax returns in the fourth quarter. Our Mexican subsidiary has recently received an income tax assessment related to the 2001 tax year covering warranty, tooling costs, and withholding taxes. In addition, our previously filed tax returns are currently under review in Argentina, Australia, Belgium, China, France, Greece, Indonesia, India, Italy, Korea, Portugal, New Zealand, Thailand, and Turkey, Taiwan, United Kingdom, Venezuela and Vietnam and we have received notices that tax audits will commence in Germany and Spain. As of


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
September 30, 2007 it is not possible to reasonably estimate the expected change to the total amount of unrecognized tax benefits over the next twelve months.
 
We have open tax years from primarily 1999 to 2006 with various significant taxing jurisdictions including the U.S., Australia, Canada, Mexico, Germany, the United Kingdom, Korea and Brazil. These open years contain matters that could be subject to differing interpretations of applicable tax laws and regulations as they relate to the amount, timing or inclusion of revenue and expenses or the sustainability of income tax credits for a given audit cycle. We have recorded a tax benefit only for those positions that meet the more-likely-than-not standard.
 
Our continuing practice is to recognize interest on uncertain tax positions in Automotive and other interest expense and penalties in Selling, general, and administrative expense. For the three and nine months ended September 30, 2007, we increased accrued interest expense by $10 million and reduced accrued interest expense by $170 million and increased accrued penalties of $27 million and $16 million, respectively. Accrued interest and penalties as of January 1, 2007 were $210 million and $76 million, respectively, and as of September 30, 2007 accrued interest and penalties were $44 million and $96 million, respectively.
 
In July 2007, the German Parliament passed legislation to lower its statutory corporate tax rate. The President signed the legislation into law on August 14, 2007. This new law reduces by approximately 9%, effective as of January 1, 2008, the combined German business tax rate, which consists of the corporate tax rate, the local trade tax rate, and the solidarity levy tax rate. The impact of this change was a reduction in the carrying amount of our German deferred tax assets of $475 million, which is included in the charge related to the valuation allowance discussed above.
 
In October 2007, Mexico enacted major tax reform legislation that, among other reforms, eliminated the Asset Tax law and replaced it with a new tax, the Single or Flat Business Tax, effective January 1, 2008. We are still evaluating the impact the change will have on our results of operations and financial condition.
 
Note 12.   Loss Per Share
 
Basic loss per share has been computed by dividing Loss from continuing operations by the weighted average number of shares outstanding during the period. Diluted loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, such as stock options and contingently convertible securities.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
The reconciliation of the amounts used in the basic and diluted loss per share computations is as follows (in millions, except per share amounts):
 
                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2007     2006     2007     2006  
 
Loss from continuing operations, net of tax
  $ (42,512 )   $ (277 )   $ (41,770 )   $ (3,278 )
Weighted average number of shares outstanding
    566       566       566       566  
Incremental effect of shares from exercise of stock options and vesting of restricted stock units
                       
                                 
Weighted average number of dilutive shares outstanding
    566       566       566       566  
                                 
Basic loss per share from continuing operations
  $ (75.12 )   $ (.49 )   $ (73.82 )   $ (5.80 )
Incremental effect of exercise of stock options and vesting of restricted stock units
                       
                                 
Diluted loss per share from continuing operations
  $ (75.12 )   $ (.49 )   $ (73.82 )   $ (5.80 )
                                 
 
Due to net losses from continuing operations for all periods presented, the assumed exercise of certain stock options had an antidilutive effect and therefore were excluded from the computation of diluted loss per share. The number of such options not included in the computation of diluted loss per share was 107 million at both September 30, 2007 and 2006.
 
We have contingently convertible debentures of $2.6 billion principal amount of 5.25% Series B due in 2032, $4.3 billion principal amount of 6.25% Series C due in 2033 and $1.5 billion principal amount of 1.50% Series D due in 2009 outstanding that, if converted in the future, would have a potentially dilutive effect on our common stock. We have unilaterally and irrevocably waived and relinquished our right to settle the principal amount in stock for our Series B and C debentures, and has committed to use cash to settle the principal amount of the Series B and C debentures if holders choose to convert the debentures or we are required by holders to repurchase the debentures. The principal amount of the Series D debentures must be settled in cash. For all outstanding debentures, we retain the right to use either cash or stock to settle any amount that may become due to debt holders in excess of the principal amount for all outstanding convertible debentures. As of September 30, 2007 and 2006, shares potentially issuable under these debentures, including those shares issuable pursuant to the convertible note hedge related to the Series D convertible debentures, were excluded from the computation of diluted loss per share as the effect is antidilutive under the treasury stock method.
 
On March 6, 2007, Series A convertible debentures in the amount of $1.1 billion were put to us and settled entirely in cash. At September 30, 2007, the amount outstanding on the Series A convertible debentures was $39 million.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
Note 13.   Depreciation and Amortization
 
Depreciation and amortization, including asset impairment charges, included in Automotive cost of sales, Selling, general and administrative expense, and Financial services and insurance expense was as follows:
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30,     September 30,  
    2007     2006     2007     2006  
    (Dollars in millions)  
 
Automotive
                               
Depreciation
  $ 1,237     $ 1,060     $ 3,725     $ 3,220  
Amortization of special tools
    744       869       2,327       2,712  
Amortization of intangible assets
    16       17       51       52  
                                 
Total
    1,997       1,946       6,103       5,984  
                                 
Financing and Insurance Operations
                               
Depreciation and amortization of intangible assets
    297       561       1,010       2,709  
                                 
Total consolidated depreciation and amortization
  $ 2,294     $ 2,507     $ 7,113     $ 8,693  
                                 
 
Note 14.   Pensions and Other Postretirement Benefits
 
We recognized the funded status of our benefit plans at December 31, 2006 in accordance with the recognition provisions of SFAS No. 158. Additionally, we elected to early adopt the measurement date provisions of SFAS No. 158 at January 1, 2007. Those provisions require the measurement date for plan assets and liabilities to coincide with the sponsor’s year end. Using the “two-measurement” approach for those defined benefit plans where the measurement date was not historically consistent with our year-end, we recorded a decrease to Retained earnings of $.7 billion, $.4 billion after-tax, representing the net periodic benefit cost for the period between the measurement date utilized in 2006 and the beginning of 2007, which previously would have been recorded during the three months ended March 31, 2007 on a delayed basis. We also performed a measurement at January 1, 2007 for those benefit plans whose previous measurement dates were not historically consistent with our year-end. As a result of the January 1, 2007 measurement, we recorded an increase to Accumulated other comprehensive income of $2.3 billion, $1.5 billion after-tax, representing other changes in the fair value of the plan assets and the benefit obligations for the period between the measurement date utilized in 2006 and January 1, 2007. These amounts are offset partially by an immaterial adjustment of $400 million, $250 million after-tax, to correct certain demographic information used in determining the amount of the cumulative effect of a change in accounting principle reported at December 31, 2006 to adopt the recognition provisions of SFAS No. 158.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
The components of pension and OPEB expense are as follows:
 
                                                                 
    U.S. Plans
    Non-U.S. Plans
    U.S. Other
    Non-U.S.
 
    Pension Benefits     Pension Benefits     Benefits     Other Benefits  
    Three Months Ended
    Three Months Ended
    Three Months Ended
    Three Months Ended
 
    September 30,     September 30,     September 30,     September 30,  
    2007     2006     2007     2006     2007     2006     2007     2006  
    (Dollars in millions)  
Components of (income) expense
                                                               
Service cost
  $ 155     $ 150     $ 134     $ 140     $ 92     $ 113     $ 11     $ 13  
Interest cost
    1,216       1,257       279       295       901       891       51       48  
Expected return on plan assets
    (1,986 )     (2,052 )     (240 )     (278 )     (350 )     (422 )            
Amortization of prior service cost (credit)
    1,686       164       7       15       (455 )     (487 )     (22 )     (21 )
Recognized net actuarial loss
    208       220       82       113       337       432       31       34  
Curtailments, settlements, and other
    23       (21 )     14       78       (214 )     23              
Divestiture of Allison
    (20 )     (4 )                 216       (3 )            
                                                                 
Net (income) expense
  $ 1,282     $ (286 )   $ 276     $ 363     $ 527     $ 547     $ 71     $ 74  
                                                                 
 
                                                                 
    U.S. Plans
    Non-U.S. Plans
    U.S. Other
    Non-U.S.
 
    Pension Benefits     Pension Benefits     Benefits     Other Benefits  
    Nine Months Ended
    Nine Months Ended
    Nine Months Ended
    Nine Months Ended
 
    September 30,     September 30,     September 30,     September 30,  
    2007     2006     2007     2006     2007     2006     2007     2006  
    (Dollars in millions)  
Components of (income) expense
                                                               
Service cost
  $ 475     $ 575     $ 363     $ 381     $ 278     $ 457     $ 33     $ 39  
Interest cost
    3,648       3,713       800       723       2,704       3,011       144       143  
Expected return on plan assets
    (5,958 )     (6,110 )     (688 )     (629 )     (1,050 )     (1,172 )            
Amortization of prior service cost (credit)
    1,946       621       21       65       (1,378 )     (620 )     (63 )     (62 )
Recognized net actuarial loss
    630       906       250       303       1,016       1,668       89       100  
Curtailments, settlements, and other
    25       4,369       56       109       (213 )     23              
Divestiture of Allison
    (30 )     (13 )                 211       (12 )            
                                                                 
Net (income) expense
  $ 736     $ 4,061     $ 802     $ 952     $ 1,568     $ 3,355     $ 203     $ 220  
                                                                 
 
As a result of the Allison Transmission divestiture, we recorded an adjustment to the unrecognized prior service cost of our U.S. hourly and salaried pension plans of $18 million and our U.S. hourly and salaried OPEB plans of $223 million. Those adjustments were included in the determination of the gain recognized on the sale of Allison. The net periodic pension and OPEB benefit expenses related to Allison were reported as a component of discontinued operations. All such amounts related to Allison are reflected in the tables above, and the effects of those amounts are shown as an adjustment to arrive at net periodic pension and OPEB expense (income) from continuing operations.
 
Historically, we amortized prior service cost related to our hourly pension plans in the U.S. over the average remaining service period for active employees at the time of the amendment, currently approximately 10.1 years. We expensed lump sum payments granted to retirees in the quarter the contract was approved. In conjunction with


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
entering into the 2007 UAW labor agreement, we determined that the contractual life of the 2007 UAW labor agreement better reflected the period of future economic benefit received from pension plan amendments for its collectively bargained hourly pension plans. Therefore lump sum payments estimated at $.7 billion will be amortized over the contract period rather than expensed in the fourth quarter. Also, we recorded $1.6 billion, pre-tax, of additional pension expense in the third quarter of 2007 related to the accelerated recognition of previously unamortized prior service cost related to pension increases in the U.S. from prior collectively bargained agreements due to our determination that there is no period of future economic benefit remaining. Such charge is included as a component of Automotive costs of sales of $1.5 billion and a component of Selling, general and administrative expense of $.1 billion in the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2007.
 
In conjunction with the October 10, 2007 ratification of the 2007 National Agreement between GM and the UAW, GM and the UAW signed a Memorandum of Understanding — Post-Retirement Medical Care (Retiree MOU). The Retiree MOU (refer to Note 19) is intended to replace the tentative settlement agreement (2005 UAW Health Care Settlement Agreement) related to reductions in hourly retiree health care which is described below.
 
On March 31, 2006, the U.S. District Court for the Eastern District of Michigan approved the 2005 UAW Health Care Settlement Agreement. Upon court approval, the 2005 UAW Health Care Settlement Agreement was to remain in effect until at least September 2011, after which either GM or the UAW could cancel the agreement upon 90 days written notice. As mentioned above, the 2005 UAW Health Care Settlement Agreement will be replaced by the Retiree MOU at the later of the date when all appeals have been exhausted (Final Effective Date) or January 1, 2010. Given the significance of the effect of the 2005 UAW Health Care Settlement Agreement, the plans were remeasured in March 2006 generating a $1.3 billion reduction in OPEB expense for the remaining periods in 2006 and reduced the U.S. APBO by $14.5 billion. The effects of the settlement were recorded beginning in the third quarter of 2006.
 
The 2005 UAW Health Care Settlement Agreement also provides that we make contributions to a new independent Voluntary Employees’ Beneficiary Association (VEBA) (Mitigation Plan). The assets of the Mitigation Plan will be used to mitigate the effect of reduced GM health care coverage to individual UAW retirees, and depending on the level of mitigation, are expected to be available for a number of years. The new independent Mitigation Plan is being partially funded by our contributions of $1 billion in each of 2006, 2007 and 2011. We will also make future contributions subject to provisions of the 2005 UAW Health Care Settlement Agreement that relate to profit sharing payments, increases in the value of a notional number of shares of our common stock (collectively, the Supplemental Contributions), as well as wage deferral payments and dividend payments. We made $1 billion contributions to the independent VEBA in both the second quarters of 2007 and 2006. At the Final Effective Date, the Retiree MOU (refer to Note 19) eliminates our obligation to the Mitigation Plan for the Supplemental Contributions.
 
As detailed in Note 7, GM, Delphi and the UAW reached an agreement in March 2006 which intended to reduce the number of U.S. hourly employees through the Attrition Program. As a result of the Attrition Program, we have recognized curtailment losses under SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” due to the significant reduction in the expected aggregate years of future service of the employees in the U.S. hourly pension, OPEB and extended disability plans. The curtailment losses include recognition of the change in the projected benefit obligation (PBO) or APBO and a portion of the previously unrecognized prior service cost reflecting the reduction in expected future service. We recognized a curtailment loss related to the U.S. hourly pension plan of $4.4 billion at April 30, 2006. The impact of the curtailment loss related to the U.S. hourly OPEB plans measured at May 31, 2006, as a result of the Attrition Program, was recorded in the third quarter of 2006.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
The remeasurement of our U.S. hourly pension plan as of April 30, 2006, as a result of the Attrition Program, generated a $.4 billion reduction in pension expense for the nine months ended September 30, 2006. This remeasurement reduced the U.S. pension PBO by $1.2 billion.
 
Note 15.   Impairments, Restructuring and Other Initiatives
 
Impairments
 
We periodically review the carrying value of our long-lived assets to be held and used when events and circumstances warrant and in conjunction with the annual business planning cycle. If the carrying value of a long-lived asset is considered impaired, an impairment charge is recorded for the amount by which the carrying amount of the long-lived asset exceeds the fair market value for assets. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Product specific assets may become impaired as a result of declines in profitability due to changes in volume, pricing or costs. Asset impairment charges are recorded in Automotive cost of sales in the Condensed Consolidated Statements of Operations.
 
During the nine months ended September 30, 2007, we recorded impairment charges primarily related to product-specific assets totaling $84 million. Of this, $70 million was recorded at GMNA and $14 million was recorded at GMAP.
 
During the nine months ended September 30, 2006, we recorded impairment charges related to product specific and plant assets of $624 million. Of this amount, impairment charges related to product specific assets were recorded in the third quarter at GMNA of $102 million, in addition to impairment charges for various plant assets of $70 million at GMNA and $5 million at GME. Additional impairment charges were recorded during the nine months ended September 30, 2006 and related to product specific assets at GMNA of $303 million and at GME of $60 million. GME also recorded impairment charges of $84 million related to various plant assets.
 
During the third quarter of 2006, GMAC recognized a goodwill impairment loss of $828 million related to its Commercial Finance business. The fair value of the Commercial Finance business was determined using an internally developed discounted cash flow analysis based on five year projected net income and a market driven terminal value multiple. As GMAC was a wholly-owned subsidiary during the third quarter of 2006, the entire amount of this impairment loss is included in Financial services and insurance expense for the three and nine months ended September 30, 2006.
 
Restructuring and Other Initiatives
 
We have executed various restructuring and other initiatives and may execute additional initiatives in the future in order to realign manufacturing capacity to prevailing global automotive production and to improve the utilization of remaining facilities. Estimates of restructuring and other charges are based on information available at the time such charges are recorded. Due to the inherent uncertainty involved in estimating restructuring expenses, actual amounts paid for such activities may differ from amounts initially recorded. Accordingly, we may record revisions of previous estimates by adjusting previously established reserves.
 
During the three and nine months ended September 30, 2007, we recorded charges of $262 million and $399 million, respectively, for restructuring and other initiatives. Additional details as to the specific segment where such charges were recorded and the restructuring or other initiatives follow.
 
During the three and nine months ended September 30, 2007 GME recorded charges for separation programs of $262 million and $349 million, respectively. Charges of $33 million and $103 million were recorded in the three and nine months ended September 30, 2007, respectively, primarily related to early retirement programs, along with additional minor separations under other current programs in Germany. Approximately 4,900 employees will leave under early retirement programs in Germany through 2013. The total remaining cost for the early retirements,


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
which are currently being reviewed by management, will be recognized over the remaining service period of the employees. Additional separation programs have been announced with respect to the Antwerp, Belgium facility. These programs impacts approximately 1,900 employees, who will leave through June 30, 2008, and have total estimated costs of $400 million. Of this amount, $226 million was recorded in the three months ended September 30, 2007 in connection with these separation programs. The remaining cost of the Antwerp, Belgium program will be recognized through June 30, 2008 over the remaining service period of the employees. The remaining separation charges for the nine months ended September 30, 2007 related to separations in Sweden, the closure of GM’s Portugal assembly plant, and the shift reduction at the Ellesmere Port plant in the United Kingdom.
 
During the nine months ended September 30, 2007 GMAP recorded charges for separation programs of $50 million at its Australian facilities. This charge relates to the voluntary separation of 650 employees.
 
During the three and nine months ended September 30, 2006, we recorded charges of $118 million and $437 million, respectively, for restructuring and other initiatives. Additional details as to the specific segment where such charges were recorded and the restructuring or other initiatives follow.
 
During the three and nine months ended September 30, 2006 GME recorded charges for separations and contract cancellations of $118 million and $294 million, respectively. The most significant charges in the three and nine months ended September 30, 2006 totaling $35 million and $143 million, respectively, relate to the restructuring plan for the operations in Germany announced in the fourth quarter of 2004. The remaining charges totaling $83 million and $151 million for the three and nine months ended September 30, 2006 relate to the closure of GM’s assembly plant in Portugal and the reduction of one shift at the Ellesmere Port plant in the United Kingdom.
 
During the nine months ended September 30, 2006 GMNA recorded a charge of $100 million related to wage and benefit costs incurred under a salaried severance program, which allowed involuntarily terminated employees to receive continued salary and benefits for a period of time after termination.
 
During the nine months ended September 30, 2006 GMLAAM recorded restructuring charges of $43 million. These restructuring charges relate to the costs of voluntary employee separations at GM’s facilities in Brazil.
 
Note 16.   Restatement of Previously Issued Condensed Consolidated Financial Statements
 
As previously disclosed in our 2006 Annual Report on Form 10-K, we have restated our prior years’ consolidated financial statements to correct the accounting for certain derivative transactions under SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” as amended (SFAS No. 133) and various other accounting adjustments. As a result, the accompanying Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q as of and for the three and nine months ended September 30, 2006 have been restated.
 
Also, the Condensed Consolidated Financial Statements have been further adjusted as we sold the commercial and military business of Allison. Refer to Note 3. The operations and cash flows of Allison have been reported as discontinued operations for the three and nine months ended September 30, 2006.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
The following table sets forth a reconciliation of the previously reported and restated net loss for the three and nine months ended September 30, 2006, respectively:
 
                 
    Three Months Ended
    Nine Months Ended
 
    September 30,
    September 30,
 
    2006     2006  
    (Dollars in millions)  
 
Net loss, as previously reported
  $ (91 )   $ (3,025 )
Less income from discontinued operations
    130       361  
                 
Loss from continuing operations
    (221 )     (3,386 )
Pre-tax adjustments:
               
Derivative and hedge accounting adjustments
               
Commodity Contracts
               
“Normal purchases and normal sales” scope exception for certain commodity contracts
    (33 )     64  
Hedge accounting related to commodity cash flow hedges
    (194 )     126  
Foreign Exchange Contracts
               
Hedge accounting related to foreign currency cash flow and net investment hedges
    (48 )     54  
Interest Rate Contracts
               
Hedge accounting related to certain debt instruments
    336       (47 )
                 
Total derivative and hedge accounting adjustments
    61       197  
Other out-of-period adjustments
    (126 )     (58 )
                 
Total pre-tax adjustments
    (65 )     139  
Income tax expense (benefit)
    (9 )     31  
                 
Total of above adjustments, net of tax
    (56 )     108  
                 
Loss from continuing operations, as restated
    (277 )     (3,278 )
                 
Income from discontinued operations
    130       361  
Effect of restatement on discontinued operations, net of tax
          (11 )
                 
Net income from discontinued operations, as restated
    130       350  
                 
Net loss, as restated
  $ (147 )   $ (2,928 )
                 


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
The following table sets forth a reconciliation of previously reported and restated loss per share for the three and nine months ended September 30, 2006:
 
                 
    Three Months Ended
    Nine Months Ended
 
    September 30,
    September 30,
 
    2006     2006  
 
Net loss per share, as previously reported
  $ (.16 )   $ (5.34 )
Less income per share from discontinued operations
    .23       .64  
                 
Loss per share from continuing operations
    (.39 )     (5.98 )
Adjustments related to continuing operations
    (.10 )     .18  
                 
Loss per share from continuing operations, as restated
    (.49 )     (5.80 )
                 
Income per share from discontinued operations
    .23       .64  
Adjustments related to discontinued operations
          (.02 )
                 
Income per share from discontinued operations, as restated
    .23       .62  
                 
Net loss per share, as restated
  $ (.26 )   $ (5.18 )
                 
 
These restatement adjustments and revisions are further described below:
 
Derivatives and Hedge Accounting Adjustments
 
Commodity Contracts
 
In reviewing the accounting for certain commodity purchase contracts, we determined that we had incorrectly concluded that the “normal purchases and normal sales” scope exception in paragraph 10(b) of SFAS No. 133 applied. Therefore, these commodity purchase contracts should have been accounted for as derivatives. The financial statements have been restated to record the fair value of these purchase contracts in the Condensed Consolidated Balance Sheet and record the changes in the fair value of the commodity contracts as charges or credits in the Condensed Consolidated Statements of Operations. As a result of the restatement, additional derivative assets of $236 million were recorded at September 30, 2006. Additionally, pre-tax earnings were decreased, through an adjustment to Automotive cost of sales, by $33 million ($22 million after-tax) and increased by $64 million ($41 million after-tax) for the three and nine months ended September 30, 2006, respectively.
 
Additionally, we entered into various commodity derivatives contracts, including swaps and options, to hedge its forecasted purchases of precious and non-ferrous metals and energy. These commodity derivatives were designated as cash flow hedges. Under SFAS No. 133, hedge accounting is appropriate only for those hedging relationships that a company expects will be highly effective in achieving offsetting changes in fair value or cash flows attributable to the risk being hedged. To determine whether transactions satisfy these requirements, companies must periodically assess and document the effectiveness of their hedging relationships both retrospectively and prospectively and measure and recognize any ineffectiveness. For certain commodity cash flow hedges, we inappropriately applied the “matched terms” method of assessing hedge effectiveness as outlined in paragraph 65 of SFAS No. 133 by not considering in our assessment certain terms of the underlying commodity contracts that created ineffectiveness in the cash flow hedging relationship. In addition, for other commodity cash flow hedges, we did not properly document the hedging relationship or properly perform the periodic retrospective assessment of effectiveness necessary to qualify for hedge accounting or properly measure hedge ineffectiveness, and did not properly reclassify amounts from Accumulated other comprehensive income (AOCI) when the underlying hedged forecasted transaction affected earnings. Accordingly, the commodity derivatives should have been marked-to-market with gains and losses recorded in Automotive cost of sales. Changes in the fair value of the commodity derivatives that had been recorded in Other Comprehensive Income (OCI) as part of these cash flow


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
hedging relationships were reversed and recorded in Automotive cost of sales. Pre-tax earnings were decreased, through an adjustment to Automotive cost of sales, by $194 million ($126 million after-tax) and increased by $126 million ($82 million after-tax) for the three and nine months ended September 30, 2006, respectively.
 
Foreign Exchange Contracts
 
We enter into foreign currency forward contracts and cross-currency swaps to hedge foreign currency-denominated debt and forecasted transactions. We also designate foreign currency-denominated debt as hedges of net investments in foreign operations.
 
We concluded that we did not properly apply the “matched terms” method of assessing hedge effectiveness as outlined in paragraph 65 of SFAS No. 133, inadequately measured hedging effectiveness and lacked contemporaneous hedge documentation and, therefore, incorrectly applied hedge accounting to certain cash flow hedges and net investment hedges. The changes in fair value of certain derivatives used in cash flow hedging relationships, and amounts related to a net investment hedge previously recorded in AOCI were released from OCI and recorded in Automotive cost of sales. Pre-tax earnings were decreased by $94 million ($61 million after-tax) and were increased by $24 million ($16 million after-tax) for the three and nine months ended September 30, 2006, respectively.
 
In addition, we determined that we incorrectly applied cash flow hedge accounting treatment to one of two concurrent offsetting derivatives by accounting for the two derivatives separately instead of treating them as one combined arrangement in accordance with SFAS No. 133, “Implementation Issue F6, Concurrent Offsetting Matching Swaps and Use of One as Hedging Instrument”, and SFAS No. 133, “Implementation Issue K1, Determining Whether Separate Transactions Should Be Viewed as a Unit”. The changes in fair value of the derivatives used in this hedging strategy previously accounted for as cash flow hedges were released from AOCI and recorded in Automotive cost of sales. Pre-tax earnings were increased by $46 million ($30 million after-tax) and $30 million ($20 million after-tax) for the three and nine months ended September 30, 2006, respectively.
 
Interest Rate Contracts
 
GMAC determined that our hedge accounting documentation and hedge effectiveness assessment methodologies did not meet the requirements of paragraph 20(b) of SFAS No. 133 for certain hedges of callable fixed rate debt instruments. Under SFAS No. 133, hedge accounting is appropriate only for those hedging relationships that a company has a sufficiently documented expectation that such relationship will be highly effective in achieving offsetting changes in fair values attributable to the risk being hedged at the inception of the hedging relationship. To determine whether transactions satisfy these requirements, a company must periodically assess the effectiveness of its hedging relationships, both prospectively and retrospectively. After review, GMAC determined that the interest rate derivatives did not qualify for hedge accounting. Accordingly, hedge accounting should not have been applied to any of the hedging relationships in this strategy and therefore, market value adjustments on the debt instruments included in the hedging relationships related to changes in fair value due to movements in the designated benchmark interest rate should not have been recorded. Changes in the fair value of the debt instruments recorded in earnings under these fair value hedge relationships were reversed. Pre-tax earnings were increased, through an adjustment to Interest expense, by $336 million ($219 million after-tax) and were decreased by $47 million ($30 million after-tax) for the three and nine months ended September 30, 2006, respectively.
 
Other Out-of-Period Adjustments
 
Also, we identified adjustments that should have been recorded in the three and nine months ended September 30, 2006. Upon identification, we determined these adjustments to be immaterial, individually and in the aggregate, to our previously filed Condensed Consolidated Financial Statements, and recorded these out-of-period adjustments in the periods in which they were identified. Due to the adjustments that required a restatement


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
of our previously filed Condensed Consolidated Financial Statements, we are correcting these out-of-period adjustments by recording them in the proper periods.
 
The out-of-period adjustments in the table above include the following:
 
Unemployment benefit payments. Subsequent to December 31, 2005 but prior to the issuance of our 2005 consolidated financial statements, we were notified by the German Labor Office that we were released from certain contingent unemployment benefit payment obligations. We initially recorded the release from these obligations in the three months ended March 31, 2006. We subsequently determined that the adjustment should have been recorded in the three months ended December 31, 2005. Accordingly, as part of our restatement, pre-tax earnings were decreased, through an increase of Automotive cost of sales, by $50 million ($31 million after-tax) for the nine months ended September 30, 2006.
 
Automotive revenue recognition. We recorded an adjustment to correct deferred revenue related to data disks provided to customers to update their vehicle’s navigational system. We did not compute deferred revenue using fair value as determined by vendor specific objective evidence as required by EITF 00-21, “Revenue Arrangements with Multiple Deliverables”. Additionally, we did not defer revenue on the correct number of 2006 model year vehicles containing navigation systems. As part of our restatement, pre-tax earnings were decreased, through a reduction of Automotive sales, by $22 million ($14 million after-tax) and $65 million ($43 million after-tax) for the three and nine months ended September 30, 2006, respectively.
 
Development costs. We recorded an adjustment to correctly expense supplier development costs. As part of our restatement, pre-tax and after-tax earnings were increased, through a reduction of Automotive cost of sales, by $57 million for the nine months ended September 30, 2006.
 
Advertising expenses. Under our cooperative advertising program with our dealers, we are obligated to match a portion of the funds contributed by our dealers for advertising. We recorded an adjustment to correctly reflect the timing of our obligation under this arrangement. Previously, our matching portion of the advertising costs was expensed as incurred. As part of our restatement, pre-tax earnings were increased, through adjustments to Selling, general and administrative expense, by $17 million ($11 million after-tax) and decreased by $23 million ($15 million after-tax) for the three and nine months ended September 30, 2006, respectively.
 
Gain on sale of equity method investment. We erroneously calculated the gain on the sale of a portion of an equity method investment. As part of our restatement, pre-tax earnings were increased, through an increase to Automotive interest and other non operating income, by $36 million ($23 million after-tax) for the nine months ended September 30, 2006.
 
Employee related costs. We erroneously recorded employee-related costs related to the Attrition Program and restructuring activities at GME. As part of our restatement, pre-tax earnings were decreased, through an increase to Automotive cost of sales, by $52 million ($32 million after-tax) for the nine months ended September 30, 2006.
 
Manufacturing utilities costs. We recorded an adjustment to correctly expense manufacturing utilities costs. As part of our restatement, pre-tax earnings were increased, through a decrease to Automotive cost of sales, by $2 million ($1 million after-tax) and $25 million ($16 million after-tax) for the three and nine months ended September 30, 2006, respectively.
 
Extended disability curtailment costs. We recorded an adjustment to correctly state the extended disability curtailment costs based on updated actuarial assumptions. As part of our restatement, pre-tax earnings were decreased by, through an increase to Automotive cost of sales, $52 million ($34 million after-tax) for the three months ended September 30, 2006, with no effect on earnings for the nine months ended September 30, 2006.
 
Special attrition program charge. We recorded an adjustment to correctly state the special attrition program expense as a result of the review of employees’ eligibility. As part of our restatement, pre-tax earnings were


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
increased, through a decrease to Automotive cost of sales, by $28 million ($18 million after-tax) for the nine months ended September 30, 2006.
 
Extended warranty deferred revenue. We recorded an adjustment to correctly state deferred revenue as a result of the review of prior years’ sales. As part of our restatement, pre-tax earnings were decreased by $18 million ($11 million after-tax) for the nine months ended September 30, 2006. This adjustment affected the earnings of the Allison Transmission business.
 
Credit card. We recorded an adjustment to appropriately defer credit card revenue in accordance with Staff Accounting Bulletin No. 104 “Revenue Recognition” (SAB 104). As a result, we recorded an adjustment in the fourth quarter of 2006 to reverse $128 million of revenue which was then allocated to and recorded in the appropriate prior periods. As part of our restatement, pre-tax earnings were increased by $11 million ($7 million after-tax) and $31 million ($20 million after-tax) for the three and nine months ended September 30, 2006, respectively.
 
We also recorded other less significant out-of-period adjustments, the net effect of which decreased pre-tax earnings by $82 million ($54 million after-tax) and $27 million ($11 million after-tax) for the three and nine months ended September 30, 2006, respectively.
 
In addition to the above adjustments, to comply with EITF 00-10, “Accounting for Shipping and Handling Fees and Costs” (EITF 00-10), in 2006 we reclassified shipping and handling costs incurred to transport product to our customers. The correction for this reclassification increased Automotive sales and Automotive cost of sales by $1 billion and $3.4 billion for the three and nine months ended September 30, 2006, respectively.
 
Legal Services Plan
 
The accompanying Condensed Consolidated Balance Sheet and Statement of Stockholders’ Equity (Deficit) in this Quarterly Report on Form 10-Q as of September 30, 2006 and December 31, 2006 have been restated to correct the accounting for certain GM sponsored benefit plans that provide legal services to hourly employees represented by the UAW, IUE-CWA and the CAW (Legal Services Plans). Historically the Legal Services Plans were accounted for on a pay as you go basis. However, we have now concluded that the Legal Services Plans should be accounted for as defined benefit plans under the provisions of SFAS No. 106, “Employers Accounting for Postretirement Benefits Other than Pensions,” and a liability of $323 million has been recorded in our Condensed Consolidated Balance Sheet as of September 30, 2006, the earliest period included in these Condensed Consolidated Financial Statements. A charge in the amount of $211 million, which is net of a deferred tax asset of $112 million, to record the liability and related tax effects has been recorded as an adjustment to Retained earnings, because the liability related to the Legal Service Plans existed prior to December 31, 2004.
 
We have evaluated the effects of this misstatement on prior periods’ consolidated financial statements in accordance with the guidance provided by SEC Staff Accounting Bulletin No. 108, codified as SAB Topic 1.N, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements (SAB 108), and concluded that no prior period financial statements are materially misstated. However, we considered the effects of correcting this misstatement on our interim and forecasted annual results of operations for the period ended September 30, 2007 and period ending December 31, 2007, respectively, and concluded that the impact on these periods may be material. As permitted by SAB 108 we will correct our prior period consolidated financial statements for the immaterial effect of this misstatement the next time we file the prior period financial statements affected by the misstatement. As such, we do not intend to amend our previous filings with the SEC with respect to this misstatement.
 
In order to correct the accompanying Condensed Consolidated Financial Statements, we increased deferred tax assets and OPEB liabilities by $112 million and $323 million, respectively, at December 31, 2006. Previously reported amounts for deferred tax assets and OPEB liabilities of $33 billion and $50.1 billion, respectively, at


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
December 31, 2006 have been restated to $33.1 billion and $50.4 billion, respectively. We also increased deferred tax assets and OPEB liabilities by $112 million and $323 million, respectively, at September 30, 2006.
 
We are not restating the Condensed Consolidated Statements of Operations or Cash Flows for the three and nine months ended September 30, 2007 and 2006 in this Quarterly Report on Form 10-Q for this misstatement because we have concluded that the impact is immaterial.
 
We will reflect similar adjustments to deferred tax assets and OPEB liabilities in the consolidated Balance Sheets at December 31, 2006 in addition to an adjustment to opening retained earnings at January 1, 2005 that will be included in our Annual Report on Form 10-K for the year ending December 31, 2007. We will not restate our consolidated statement of operations or cash flows for the years ended December 31, 2004, 2005 and 2006, or any interim period in those years for this item, as the impact on those periods is also immaterial.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
The following is a summary of the effect of the restatement on the previously issued Condensed Consolidated Statements of Operations and Condensed Consolidated Balance Sheet:
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30, 2006     September 30, 2006  
    Previously
          Previously
       
    Reported
          Reported
       
    and
          and
       
    Reclassified(a)     Restated     Reclassified(a)     Restated  
    (Dollars in millions, except per share amounts)  
 
Net sales and revenue
                               
Automotive sales
  $ 38,569     $ 39,612     $ 124,305     $ 127,657  
Financial services and insurance revenue
    9,364       9,280       27,286       27,214  
                                 
Total net sales and revenue
    47,933       48,892       151,591       154,871  
                                 
Costs and expenses
                               
Automotive cost of sales
    36,457       37,184       122,189       124,598  
Selling, general and administrative expense
    3,147       3,155       9,708       9,740  
Financial services and insurance expense
    7,810       7,596       23,415       23,608  
Other expenses
    1,443       1,943       2,651       3,151  
                                 
Total costs and expenses
    48,857       49,878       157,963       161,097  
                                 
Operating loss
    (924 )     (986 )     (6,372 )     (6,226 )
Automotive and other interest expense
    (608 )     (529 )     (2,015 )     (1,861 )
Automotive interest income and other non-operating income
    425       310       2,285       2,093  
                                 
Loss from continuing operations before income taxes, other equity income and minority interests
    (1,107 )     (1,205 )     (6,102 )     (5,994 )
Income tax benefit
    (945 )     (977 )     (2,539 )     (2,523 )
Equity income (loss) and minority interests, net of tax
    (59 )     (49 )     176       193  
                                 
Loss from continuing operations
    (221 )     (277 )     (3,387 )     (3,278 )
Income from discontinued operations, net of tax
    130       130       362       350  
                                 
Net loss
  $ (91 )   $ (147 )   $ (3,025 )   $ (2,928 )
                                 
Basic earnings (loss) per share:
                               
Continuing operations
  $ (.39 )   $ (.49 )   $ (5.98 )   $ (5.80 )
Discontinued operations
    .23       .23       .64       .62  
                                 
Total
  $ (.16 )   $ (.26 )   $ (5.34 )   $ (5.18 )
                                 
Weighted average common shares outstanding, basic (millions)
    566       566       566       566  
                                 
Diluted earnings (loss) per share:
                               
Continuing operations
  $ (.39 )   $ (.49 )   $ (5.98 )   $ (5.80 )
Discontinued operations
    .23       .23       .64       .62  
                                 
Total
  $ (.16 )   $ (.26 )   $ (5.34 )   $ (5.18 )
                                 
Weighted average common shares outstanding, diluted (millions)
    566       566       566       566  
                                 
 
 
(a) The previously reported and reclassified columns have been restated to report Allison as discontinued operations for the three and nine months ended September 30, 2006.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
                 
    September 30, 2006  
    Previously
       
    Reported     Restated  
    (Dollars in millions)  
ASSETS
Current Assets
               
Cash and cash equivalents
  $ 17,802     $ 17,802  
Marketable securities
    107       107  
                 
Total cash and marketable securities
    17,909       17,909  
Accounts and notes receivable, net
    9,022       6,855  
Inventories
    14,825       14,822  
Equipment on operating leases, net
    6,569       6,569  
Deferred income taxes and other current assets
    10,698       10,813  
                 
Total current assets
    59,023       56,968  
Financing and Insurance Operations Assets
               
Cash and cash equivalents
    3,089       3,089  
Assets held for sale
    282,955       282,847  
Equipment on operating leases, net
    13,325       13,325  
Other assets
    4,378       1,827  
                 
Total Financing and Insurance Operations Assets
    303,747       301,088  
Non-Current Assets
               
Property, net
    38,893       38,959  
Deferred income taxes
    23,496       24,972  
Prepaid pension
    37,805       37,691  
Other assets
    6,614       8,357  
                 
Total non-current assets
    106,808       109,979  
                 
Total Assets
  $ 469,578     $ 468,035  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
               
Accounts payable (principally trade)
  $ 27,113     $ 27,318  
Short-term borrowings and current portion of long-term debt
    1,346       1,436  
Accrued expenses
    40,183       40,235  
                 
Total current liabilities
    68,642       68,989  
Financing and Insurance Operations Liabilities
               
Liabilities related to assets held for sale
    272,725       272,869  
Debt
    10,073       10,073  
Other liabilities and deferred income taxes
    4,794       2,243  
                 
Total Financing and Insurance Operations Liabilities
    287,592       285,185  
Non-Current Liabilities
               
Long-term debt
    31,414       33,118  
Postretirement benefits other than pensions
    34,211       34,534  
Pensions
    15,937       15,937  
Other liabilities and deferred income taxes
    19,426       17,714  
                 
Total non-current liabilities
    100,988       101,303  
                 
Total liabilities
    457,222       455,477  
Minority interest
    1,212       1,210  
Stockholders’ Equity
               
Preferred stock, no par value, 6,000,000 shares authorized, no shares issued and outstanding
           
Common stock, $12/3 par value (2,000,000,000 shares authorized, 756,637,541 and 565,611,157 shares issued and outstanding, respectively)
    943       943  
Capital surplus (principally additional paid-in capital)
    15,316       15,316  
Retained deficit
    (1,101 )     (616 )
Accumulated other comprehensive loss
    (4,014 )     (4,295 )
                 
Total stockholders’ equity
    11,144       11,348  
                 
Total Liabilities, Minority Interests, and Stockholders’ Equity
  $ 469,578     $ 468,035  
                 


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
Note 17.   Segment Reporting
 
We operate in two businesses, consisting of Automotive (GM Automotive or GMA) and Financing and Insurance Operations (FIO). Our four automotive regions consist of GMNA, GME, GMLAAM and GMAP. For the three and nine months ended September 30, 2007, our FIO business primarily consists of our 49% share of GMAC’s operating results, which we accounted for under the equity method, and two special purpose entities holding automotive leases previously owned by GMAC and its affiliates that were retained by us, as well as the elimination of intercompany transactions with GM Automotive and Corporate and Other. For the three and nine months ended September 30, 2006, our FIO business consisted of the consolidated operating results of GMAC’s lines of business as follows: Automotive Finance Operations, Mortgage Operations, Insurance, and Other, which included its Commercial Finance business and GMAC’s equity investment in Capmark (previously GMAC Commercial Finance). Also included in FIO is Other Financing, which consists of the equity earnings of financing entities that are not consolidated by GMAC as well as the elimination of intercompany transactions with GM Automotive and Corporate and Other. Corporate and Other includes the elimination of intersegment transactions, certain non-segment specific revenues and expenditures, including costs related to postretirement benefits for Delphi and other retirees, and certain corporate activities.
 
In the first quarter of 2007, we changed our segment presentation to reflect the elimination of transactions occurring between GM Automotive regions, previously included in the GMNA region, in the Auto Eliminations column within total GMA. These transactions consist primarily of intra-segment vehicle and service parts sales in accordance with our transfer pricing policy. Accordingly, 2006 amounts have been revised for comparability. Additionally, the three and nine months ended September 30, 2006, have been reclassified for the retroactive effect of discontinued operations. Refer to Note 3.
 
                                                                                                 
                                              Total
                         
                GM
          Auto
    Total
    Corporate
    Excluding
          Other
    Total
       
    GMNA     GME     LAAM     GMAP     Eliminations     GMA     & Other     FIO     GMAC(a)     Financing     Financing     Total  
    (Dollars in millions)  
As of and For the Three Months Ended September 30, 2007
                                                                                               
Automotive sales
                                                                                               
External customers
  $ 26,022     $ 8,322     $ 4,829     $ 3,933     $     $ 43,106     $ 28     $ 43,134     $     $     $     $ 43,134  
Intersegment
    585       400       115       1,513       (2,613 )                                          
                                                                                                 
Total automotive sales
    26,607       8,722       4,944       5,446       (2,613 )     43,106       28       43,134                         43,134  
Financial services and insurance revenue
                                                          700       700       700  
                                                                                                 
Total net sales and revenue
  $ 26,607     $ 8,722     $ 4,944     $ 5,446     $ (2,613 )   $ 43,106     $ 28     $ 43,134     $     $ 700     $ 700     $ 43,834  
                                                                                                 
Depreciation and amortization
  $ 1,341     $ 407     $ 76     $ 150     $ 9     $ 1,983     $ 14     $ 1,997     $     $ 297     $ 297     $ 2,294  
Interest income
  $ 365     $ 178     $ 41     $ 44     $ 1     $ 629     $ (277 )   $ 352     $     $ 36     $ 36     $ 388  
Interest expense
  $ 747     $ 134     $ 58     $ 61     $ 1     $ 1,001     $ (225 )   $ 776     $     $ 106     $ 106     $ 882  
Income tax expense (benefit)
  $ 36,429     $ 2,471     $ 34     $ 48     $ (9 )   $ 38,973     $ 140     $ 39,113     $ 50     $ 23     $ 73     $ 39,186  
Earnings (losses) of nonconsolidated affiliates
  $ 10     $ 10     $ 9     $ 86     $     $ 115     $     $ 115     $ (809 )   $     $ (809 )   $ (694 )
Income from discontinued operations, net of tax
  $ 45     $     $     $     $     $ 45     $     $ 45     $     $     $     $ 45  
Gain on sale of discontinued operations, net of tax
  $ 3,504     $     $     $     $     $ 3,504     $     $ 3,504     $     $     $     $ 3,504  
Net income (loss)
  $ (34,646 )   $ (2,869 )   $ 340     $ 138     $ (19 )   $ (37,056 )   $ (1,136 )   $ (38,192 )   $ (803 )   $ 32     $ (771 )   $ (38,963 )
Investments in nonconsolidated affiliates
  $ 326     $ 437     $ 64     $ 1,167     $     $ 1,994     $ 37     $ 2,031     $ 6,852     $     $ 6,852     $ 8,883  
Total assets
  $ 92,377     $ 27,655     $ 6,611     $ 14,860     $ (10,945 )   $ 130,558     $ (213 )   $ 130,345     $ 12,413     $ 6,742     $ 19,155     $ 149,500  
Goodwill
  $ 188     $ 575     $     $     $     $ 763     $     $ 763     $     $     $     $ 763  


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
                                                                                                 
                                              Total
                         
                GM
          Auto
    Total
    Corporate
    Excluding
          Other
    Total
       
    GMNA     GME     LAAM     GMAP     Eliminations     GMA     & Other     FIO     GMAC     Financing     Financing     Total  
    (Dollars in millions)  
 
As of and For the Three Months Ended September 30, 2006
                                                                                               
Automotive sales
                                                                                               
External customers
  $ 26,102     $ 7,048     $ 3,499     $ 3,003     $     $ 39,652     $ (40 )   $ 39,612     $     $     $     $ 39,612  
Intersegment
    686       396       159       844       (2,085 )                                          
                                                                                                 
Total automotive sales
    26,788       7,444       3,658       3,847       (2,085 )     39,652       (40 )     39,612                         39,612  
Financial services and insurance revenue
                                                    9,282       (2 )     9,280       9,280  
                                                                                                 
Total net sales and revenue
  $ 26,788     $ 7,444     $ 3,658     $ 3,847     $ (2,085 )   $ 39,652     $ (40 )   $ 39,612     $ 9,282     $ (2 )   $ 9,280     $ 48,892  
                                                                                                 
Depreciation and amortization
  $ 1,382     $ 378     $ 58     $ 114     $ 8     $ 1,940     $ 6     $ 1,946     $ 1,466     $ (905 )   $ 561     $ 2,507  
Interest income
  $ 421     $ 151     $ 22     $ 31     $ (1 )   $ 624     $ (430 )   $ 194     $ 697     $ (187 )   $ 510     $ 704  
Interest expense
  $ 819     $ 174     $ 15     $ 57     $     $ 1,065     $ (536 )   $ 529     $ 3,899     $ (18 )   $ 3,881     $ 4,410  
Income tax expense (benefit)
  $ (261 )   $ (63 )   $ (5 )   $ (260 )   $ 1     $ (588 )   $ (649 )   $ (1,237 )   $ 184     $ 76     $ 260     $ (977 )
Earnings (losses) of nonconsolidated affiliates
  $ 17     $ 12     $ (4 )   $ 79     $     $ 104     $ 3     $ 107     $ (5 )   $     $ (5 )   $ 102  
Income from discontinued operations, net of tax
  $ 130     $     $     $     $     $ 130     $     $ 130     $     $     $     $ 130  
Net income (loss)
  $ (537 )   $ (126 )   $ 183     $ 205     $ 4     $ (271 )   $ (25 )   $ (296 )   $ (173 )   $ 322     $ 149     $ (147 )
Investments in nonconsolidated affiliates
  $ 298     $ 387     $ 140     $ 1,124     $     $ 1,949     $ 42     $ 1,991     $     $     $     $ 1,991  
Total assets
  $ 132,745     $ 24,170     $ 4,687     $ 12,794     $ (7,687 )   $ 166,709     $ 238     $ 166,947     $ 309,730     $ (8,642 )   $ 301,088     $ 468,035  
Goodwill
  $ 296     $ 472     $     $     $     $ 768     $     $ 768     $     $     $     $ 768  
 


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
                                                                                                 
                                              Total
                         
                GM
          Auto
    Total
    Corporate
    Excluding
          Other
    Total
       
    GMNA     GME     LAAM     GMAP     Eliminations     GMA     & Other     FIO     GMAC(a)     Financing     Financing     Total  
    (Dollars in millions)  
 
For the Nine Months Ended September 30, 2007
                                                                                               
Automotive sales
                                                                                               
External customers
  $ 82,311     $ 25,563     $ 12,555     $ 11,193     $     $ 131,622     $ 73     $ 131,695     $     $     $     $ 131,695  
Intersegment
    2,016       1,257       299       4,276       (7,848 )                                          
                                                                                                 
Total automotive sales
    84,327       26,820       12,854       15,469       (7,848 )     131,622       73       131,695                         131,695  
Financial services and insurance revenue
                                                          2,530       2,530       2,530  
                                                                                                 
Total net sales and revenue
  $ 84,327     $ 26,820     $ 12,854     $ 15,469     $ (7,848 )   $ 131,622     $ 73     $ 131,695     $     $ 2,530     $ 2,530     $ 134,225  
                                                                                                 
Depreciation and amortization
  $ 4,170     $ 1,219     $ 227     $ 428     $ 32     $ 6,076     $ 27     $ 6,103     $     $ 1,010     $ 1,010     $ 7,113  
Interest income
  $ 916     $ 499     $ 107     $ 119     $ 1     $ 1,642     $ (648 )   $ 994     $     $ 302     $ 302     $ 1,296  
Interest expense
  $ 2,269     $ 523     $ 35     $ 177     $ 7     $ 3,011     $ (755 )   $ 2,256     $     $ 561     $ 561     $ 2,817  
Income tax expense (benefit)
  $ 36,354     $ 2,568     $ 170     $ 128     $ (12 )   $ 39,208     $ (526 )   $ 38,682     $ 46     $ 77     $ 123     $ 38,805  
Earnings (losses) of nonconsolidated affiliates
  $ 50     $ 30     $ 23     $ 335     $     $ 438     $ 2     $ 440     $ (874 )   $     $ (874 )   $ (434 )
Income from discontinued operations, net of tax
  $ 256     $     $     $     $     $ 256     $     $ 256     $     $     $     $ 256  
Gain on sale of discontinued operations, net of tax
  $ 3,504     $     $     $     $     $ 3,504     $     $ 3,504     $     $     $     $ 3,504  
Net income (loss)
  $ (34,656 )   $ (2,647 )   $ 754     $ 481     $ (23 )   $ (36,091 )   $ (1,258 )   $ (37,349 )   $ (779 )   $ 118     $ (661 )   $ (38,010 )

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
                                                                                                 
                                              Total
                         
                GM
          Auto
    Total
    Corporate
    Excluding
          Other
    Total
       
    GMNA     GME     LAAM     GMAP     Eliminations     GMA     & Other     FIO     GMAC     Financing     Financing     Total  
    (Dollars in millions)  
 
For the Nine Months Ended September 30, 2006
                                                                                               
Automotive sales
                                                                                               
External customers
  $ 86,159     $ 22,888     $ 10,182     $ 8,566     $     $ 127,795     $ (138 )   $ 127,657     $     $     $     $ 127,657  
Intersegment
    1,978       1,392       470       2,464       (6,303 )     1       (1 )                              
                                                                                                 
Total automotive sales
    88,137       24,280       10,652       11,030       (6,303 )     127,796       (139 )     127,657                         127,657  
Financial services and insurance revenue
                                                    27,143       71       27,214       27,214  
                                                                                                 
Total net sales and revenue
  $ 88,137     $ 24,280     $ 10,652     $ 11,030     $ (6,303 )   $ 127,796     $ (139 )   $ 127,657     $ 27,143     $ 71     $ 27,214     $ 154,871  
                                                                                                 
Depreciation and amortization
  $ 4,203     $ 1,278     $ 168     $ 295     $ 24     $ 5,968     $ 16     $ 5,984     $ 4,389     $ (1,680 )   $ 2,709     $ 8,693  
Interest income
  $ 1,014     $ 383     $ 68     $ 82     $     $ 1,547     $ (1,063 )   $ 484     $ 2,003     $ (498 )   $ 1,505     $ 1,989  
Interest expense
  $ 2,440     $ 486     $ 114     $ 164     $     $ 3,204     $ (1,343 )   $ 1,861     $ 11,735     $ (45 )   $ 11,690     $ 13,551  
Income tax expense (benefit)
  $ (2,486 )   $ (37 )   $ 80     $ 96     $ (1 )   $ (2,348 )   $ (1,277 )   $ (3,625 )   $ 767     $ 335     $ 1,102     $ (2,523 )
Earnings (losses) of nonconsolidated affiliates
  $ 122     $ 29     $ 5     $ 279     $     $ 435     $ 5     $ 440     $ (9 )   $     $ (9 )   $ 431  
Income from discontinued operations, net of tax
  $ 350     $     $     $     $     $ 350     $     $ 350     $     $     $     $ 350  
Net income (loss)
  $ (4,668 )   $ (106 )   $ 362     $ 1,073     $ (1 )   $ (3,340 )   $ (333 )   $ (3,673 )   $ 1,109     $ (364 )   $ 745     $ (2,928 )
 
 
(a) Refer to Note 5 for summarized financial information of GMAC for the three and nine months ended September 30, 2007.
 
Note 18.   Transactions with GMAC
 
We have entered into various operating and financing arrangements with GMAC. The nature and terms of these arrangements were negotiated at arm’s length. The following describes the transactions and their related financial statement effects that occurred between GM and GMAC for the three and nine months ended September 30, 2007 that have not been eliminated in our Condensed Consolidated Financial Statements.
 
Marketing Incentives and Operating Lease Residuals
 
As a marketing incentive, we may sponsor interest rate support, capitalized cost reduction and residual support programs as a way to lower customers’ monthly lease and retail contract payments. In addition we may sponsor lease pull-ahead programs to encourage customers to terminate their leases early in conjunction with the acquisition of a new GM vehicle.
 
Under the interest rate support program, we pay an amount to GMAC at the time of lease or retail contract origination to adjust the interest rate implicit in the lease or retail contract below GMAC’s standard interest rate. Such marketing incentives are referred to as rate support or subvention and the amount paid at contract origination represents the present value of the difference between the customer rates and the GMAC standard rates.
 
Under the capitalized cost reduction program, we pay an amount to GMAC at the time of lease or retail contract origination to reduce the principal amount implicit in the lease or retail contract below our standard MSRP (manufacturers suggested retail price) value.
 
Under the residual support program, the customers’ contractual residual value is adjusted above GMAC’s standard residual values. We reimburse GMAC to the extent that sales proceeds are less than the customers’ contractual residual value, limited to GMAC’s standard residual value. As it relates to U.S. lease originations and U.S. balloon retail contract originations occurring after April 30, 2006 that GMAC retained after the consummation of the GMAC sale, we agreed to begin payment of the present value of the expected residual support owed to GMAC


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
at the time of contract origination as opposed to after contract termination when the related used vehicle is sold. The residual support amount owed to GMAC is adjusted as the contracts terminate and, in cases where the estimate is adjusted, we may be obligated to pay GMAC or GMAC may be obliged to reimburse us. At September 30, 2007 the maximum additional amount that could be paid by us under the residual support program is $903 million. Our assessment is that it would be unlikely that the proceeds from the entire portfolio of assets would be lower than both the contractual residual value and GMAC’s standard residual rates. As of September 30, 2007, we have a total reserve of $92 million based on our estimated required future payments to GMAC associated with the residual support program.
 
Under the lease pull-ahead program, customers are encouraged to terminate their leases early in conjunction with the acquisition of a new GM vehicle. As part of this program, GMAC waives the customer’s remaining payment obligation under their current lease, and we compensate GMAC for any foregone revenue from the waived payments. Since these programs generally accelerate the re-sale of the vehicle, the proceeds are typically higher than otherwise would have been realized had the vehicle been sold at the contract maturity. The reimbursement to GMAC for the foregone payments is reduced by the amount of this benefit. We make anticipated payments to GMAC at the end of each month following lease termination. As with residual support payments discussed above, these estimates are adjusted to actual once all vehicles that could have been pulled ahead have terminated and the vehicles have been resold. To the extent that the original estimates are adjusted, GM or GMAC may be obligated to pay each other the difference, as appropriate under the lease pull-ahead programs.
 
In addition to the interest rate support, capitalized cost reduction, residual support and lease pull-ahead programs, we also participate in a risk sharing arrangement that was amended on November 30, 2006 and applies to all new lease contracts. We are responsible for risk sharing on returns of lease vehicles in the U.S. and Canada whose resale proceeds are less than standard GMAC residual values, subject to a limitation. We will also pay GMAC a quarterly leasing payment in connection with the agreement beginning in the first quarter of 2009 and ending in the fourth quarter of 2014. At September 30, 2007, the maximum amount guaranteed under the risk sharing arrangement is $978 million and would only be paid in the unlikely event that the proceeds from all outstanding lease vehicles would be lower than GMAC’s standard residual rates, subject to the limitation. As of September 30, 2007, we have a total reserve of $123 million based on our estimated future payments to GMAC associated with the risk sharing arrangement.
 
In accordance with our revenue recognition accounting policy, the marketing incentives, apart from the lease pull-ahead programs, as well as the risk sharing arrangement, are recorded as reductions to Automotive sales at the time of the sale of the vehicle to the dealers based on the estimated GMAC lease and retail contract penetration. The lease pull-ahead programs are recorded as reductions to Automotive sales when the specific lease pull-ahead program is announced. We paid $1.4 billion and $3.5 billion under these programs during the three and nine months ended September 30, 2007, respectively.
 
The terms and conditions of interest rate support, capitalized cost reduction, residual support and lease pull-ahead programs, as well as the risk sharing arrangement, are included in the U.S., Canadian and International Consumer Financing Services Agreements, which expire in November 2016.
 
Operating Lease Assets Transferred to GM by GMAC
 
In November 2006, GMAC transferred to us certain U.S. lease assets, along with related debt and other assets. GMAC retained an investment in a note, which had a balance of $373 million at September 30, 2007, and is secured by the lease assets transferred to us. GMAC continues to service the leased assets and related debt on our behalf and receives a servicing fee. GMAC is obligated, as servicer, to repurchase any leased asset that is in breach of any of the covenants in the securitization agreements. In addition, in a number of the transactions securitizing the lease assets, the trusts issued one or more series of floating rate debt obligations and entered into derivative transactions to eliminate the market risk associated with funding the fixed payment lease assets with floating interest rate debt. To


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
facilitate these securitization transactions, GMAC entered into secondary derivative transactions with the primary derivative counterparties, essentially offsetting the primary derivatives. As part of the transfer, we assumed the rights and obligations of the primary derivative while GMAC retained the secondary, leaving both companies exposed to market value movements of their respective derivatives. GM and GMAC subsequently entered into derivative transactions with each other that are intended to offset the exposure each party has to its component of the primary and secondary derivatives.
 
Exclusivity Arrangement
 
Subject to GMAC’s fulfillment of certain conditions, we have granted GMAC exclusivity for U.S., Canadian and international GM-sponsored consumer and wholesale marketing incentives for GM products in specified markets around the world, with the exception of Saturn branded products. In return for this exclusivity, GMAC will pay us an annual exclusivity fee of $105 million ($75 million for the U.S. retail business, $15 million for the Canadian retail business, $10 million for retail business in international operations, and $5 million for the dealer business) and is committed to provide financing to our customers and dealers consistent with historical practices. The amount of exclusivity fee revenue recognized by us for the three and nine months ended September 30, 2007 was $26 million and $79 million, respectively.
 
Marketing Service Agreement
 
GM and GMAC have entered into a 10 year marketing, promoting, advertising and customer support arrangement related to GM products, GMAC products and the retail financing for GM products. This agreement expires in November 2016.
 
Royalty Arrangement
 
For certain insurance products, GM and GMAC have entered into 10 year intellectual property license agreements giving GMAC the right to use the GM name on certain insurance products. In exchange, GMAC will pay a royalty fee of 3.25% of revenue, net of cancellations, related to these products with a minimum annual guarantee of $15 million. The amount of royalty recognized for the three and nine months ended September 30, 2007 was $5 million and $14 million, respectively.
 
Shared and Transition Services Agreement
 
GM and GMAC entered into a Shared and Transition Services Agreement to continue to provide to each other global support services, primarily treasury, tax, real estate and human resources, for a transition period of one to two years from the transaction date. GM expects that when the Shared and Transition Services Agreement expires, GM and GMAC will either renew this services agreement or GM and GMAC will perform the related services internally or potentially outsource to other providers.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
Balance Sheet
 
A summary of the balance sheet effects of transactions with GMAC at September 30, 2007 is as follows (dollars in millions):
 
         
Assets:
       
Accounts and notes receivable(a)
  $ 1,758  
Other assets(b)
    39  
Liabilities:
       
Accounts payable(c)
    643  
Short-term borrowings and current portion of long-term debt(d)
    2,935  
Accrued expenses(e)
    44  
Long-term debt(f)
    284  
 
 
(a) Represents wholesale settlements due from GMAC, amounts owed by GMAC with respect to the operating lease assets transferred to GM, and the exclusivity fee and royalty arrangement as discussed above.
 
(b) Primarily represents distributions due from GMAC on GM’s Preferred Membership Interests.
 
(c) Represents amounts accrued with respect to interest rate support, capitalized cost reduction, residual support and lease pull-ahead programs and the risk sharing arrangement.
 
(d) Represents wholesale financing, sales of receivable transactions and the short-term portion of term loans provided to certain dealerships wholly-owned by us or in which we have an equity interest. In addition, it includes borrowing arrangements with Adam Opel and arrangements related to GMAC’s funding of GM company-owned vehicles, rental car vehicles awaiting sale at auction and funding of the sale of GM vehicles in which we retain title while the vehicles are consigned to GMAC or dealers in the United Kingdom. The financing to GM remains outstanding until the title is transferred to the dealers. Also included is the short-term portion of a note provided to a wholly-owned subsidiary of GM holding debt related to the operating leases transferred to us and a note related to the overpayment of $317 million of income taxes by GMAC. These taxes were paid by GMAC to us and are expected to be refunded to GMAC on or before December 15, 2007.
 
(e) Represents mainly interest accrued on the transactions in (d) above.
 
(f) Represents primarily the long-term portion of term loans and a note payable with respect to the operating leases transferred to us discussed in (d) above.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
Statement of Operations
 
A summary of the income statement effects of transactions with GMAC is as follows:
 
                 
    Three Months Ended
    Nine Months Ended
 
    September 30,
    September 30,
 
    2007     2007  
    (Dollars in millions)  
 
Net sales and revenue(a)
  $ 175     $ 494  
Cost of sales and other expenses
    140       384  
Automotive interest income and other non-operating income(b)
    109       321  
Derivatives(c)
    14       13  
Interest expense(d)
    18       171  
Servicing expense(e)
    39       134  
 
 
(a) Represents primarily the sale of vehicles to a subsidiary of GMAC for a GM employee lease program.
 
(b) Represents income on GM’s Preferred Membership Interest in GMAC, exclusivity and royalty fee income and reimbursements by GMAC for certain services provided by GM. Included in this amount is rental income related to GMAC’s primary executive and administrative offices located in the Renaissance Center in Detroit, Michigan. The lease agreement expires on November 30, 2016.
 
(c) Represents gains recognized in connection with a derivative transaction entered into with GMAC as the counterparty.
 
(d) Represents interest incurred on term loans, notes payable and wholesale settlements.
 
(e) Represents servicing fees paid to GMAC on the automotive leases retained by us.
 
Note 19.   Subsequent Events
 
2007 National Agreement
 
On October 10, 2007, the 2007 National Agreement between the UAW and GM and the related Retiree MOU were ratified. The 2007 National Agreement covers the wages, hours and terms and conditions of employment for the UAW-represented employees, and the Retiree MOU provides that the responsibility for providing retiree health care will permanently shift from GM to a new retiree plan funded by a new independent VEBA. Final effectiveness of the Retiree MOU is subject to a number of conditions as described below, but we will begin executing certain provisions of the Retiree MOU promptly pursuant to its terms. Following are the key terms and provisions of the Retiree MOU and the 2007 National Agreement:
 
Retiree MOU
 
The Retiree MOU is subject to class certification and court approval. Therefore, the parties intend to negotiate and enter into a detailed settlement agreement and other related agreements (Final Settlement Documentation) to effect the transactions contemplated by the Retiree MOU, which will then be submitted to the United States District Court for the Eastern District of Michigan for approval. The Final Settlement Documentation will also require negotiation with and the approval of counsel retained by the named plaintiffs in the class action case filed against GM on September 26, 2007 by the UAW and putative class representatives of GM-UAW retirees (International Union, UAW, et al. v. General Motors Corporation, Case: 2:07-cv-14074 (E.D. Mich.)). Certain other provisions of the Retiree MOU will be carried out after the date the District Court issues an order approving the Retiree MOU and the Final Settlement Documentation (Initial Effective Date), and all provisions of the Retiree MOU will be effective


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(Unaudited) — (Continued)
 
on the later of the date when all appeals from the District Court’s order have been exhausted (Final Effective Date) or January 1, 2010 (Implementation Date).
 
The Retiree MOU provides that as of the Implementation Date, we will transfer our obligations for providing UAW retirees in the “Covered Group” with post-retirement medical benefits, including but not limited to hospital, surgical, medical, prescription, drug, vision, and, as applicable to a limited group of retirees, dental coverage, as well as the cost of administering such benefits and $76.20 of the Medicare Part B premium (Postretirement Medical Benefits) to a new retiree health care plan (New Plan) to be established and maintained by either an independent committee or a joint labor-management committee and to be funded by a newly established Voluntary Employee Beneficiary Association trust (New VEBA). The “Covered Group” is comprised of: (1) all members of the class defined in the 2005 UAW Health Care Settlement Agreement; (2) all future retirees as such term is defined in the 2005 UAW Health Care Settlement Agreement; (3) all currently active UAW-represented employees of GM with seniority as of September 14, 2007 who retire with eligibility for post-retirement medical coverage; (4) all UAW retirees from Delphi as of September 14, 2007 who are entitled to GM retiree medical coverage under a previous agreement negotiated among the UAW, GM, and Delphi (Delphi MOU); (5) upon their retirement, all active UAW-represented employees of Delphi or a former Delphi divested unit who are eligible for GM retiree medical coverage under the Delphi MOU; (6) all UAW retirees from any other closed or divested GM-UAW business units as of September 26, 2007 to the extent GM is responsible for their retiree medical coverage; and (7) upon retirement after September 26, 2007, all active UAW-represented employees of any other closed or divested GM-UAW unit if GM would have responsibility for their retiree medical coverage. The Covered Group also includes the spouses, surviving spouses, and dependents of such current or former GM-UAW employees who are eligible for GM-provided retiree medical coverage.
 
Prior to the Implementation Date, we will continue to provide Postretirement Medical Benefits to UAW retirees and their eligible spouses, surviving spouses and dependents on the basis set forth in the 2005 UAW Health Care Settlement Agreement. The New Plan and the New VEBA, when approved and implemented, will supersede the terms set forth in the 2005 UAW Health Care Settlement Agreement, and assume responsibility as of the Implementation Date for all Post-Retirement Medical Benefits as of the Implementation Date for the Covered Group for which we were previously responsible.
 
The New VEBA will also be established effective on the Implementation Date under the Retiree MOU and the Final Settlement Documentation. Funding for the New VEBA will begin within 10 days after the Final Effective Date, and will come from a number of sources:
 
  •  On January 1, 2008, we will allocate a percentage of the assets of the General Motors Welfare Benefit Trust (Internal VEBA) that is equal to the percentage of our OPEB liability attributable to UAW-associated employees and retirees and their eligible spouses, surviving spouses and dependents to a separate account (UAW Related Account), which will also hold the proportional investment returns on that percentage of the trust. Effective January 1, 2008 and subject to the termination of the Retiree MOU, we will not disburse any assets from the UAW Related Account until the Final Effective Date. We will then transfer the assets in the UAW Related Account or an amount equal to the balance in that account to the New VEBA.
 
  •  The assets and liabilities of the Mitigation VEBA (Note 14) including the remaining $1 billion contribution to be made by GM in 2011, will be transferred to the New VEBA after the transfer of assets of the Internal VEBA. Refer to Note 14.
 
  •  On January 1, 2008, we will establish a temporary asset account (TAA) and deposit a contingent cash payment equal to the difference between $18.5 billion and the value of the UAW Related Account on January 1, 2008. The Final Settlement Documentation and its court approval will provide that on the Initial Effective Date, we will also deposit in the TAA: (1) $3.8 billion (subject to adjustment for payments under the 2005 UAW Health Care Settlement Agreement) or, at our discretion, an annual amount as described in


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)
 
  the amortization schedule under “Wages/COLA” in Appendix C to the Retiree MOU; and (2) $1.8 billion or, at our discretion, an annual amount as described in the amortization schedule under “Base” in Appendix C to the Retiree MOU. We may prefund such annual payments by paying the applicable buyout amount provided in Appendix C to the Retire MOU. If we choose to pay these amounts either in total on the Initial Effective Date or later by terminating annual payments through the applicable buyout amount, our payment will include interest on the amount paid from January 1 of the applicable year through the date of the deposit.
 
  •  We will transfer the assets in the TAA related to these deposits or an amount equal to the balance in the TAA related to these deposits to the New VEBA after the transfer of the assets and liabilities of the External VEBA.
 
  •  On January 1, 2008, we will issue into the TAA a five-year convertible note in the principal amount of $4.4 billion with 6.75% interest payable semiannually (Convertible Note). We may call the Convertible Note at any time beginning three years after issuance. The Convertible Note may be converted into 109,312,500 shares of GM common stock, $12/3 par value (Converted Stock): (1) if GM provides notice that we are calling the Convertible Note; (2) within three months before the maturity date; or (3) if in any quarter, the closing market price of GM common stock is at least $48.00 for at least 20 trading days of the last 30 trading days in the preceding calendar quarter. The Final Settlement Documentation will include an agreement providing that the Convertible Note may not be sold or hedged before the Implementation Date. After the Implementation Date the Convertible Note or the Converted Stock may be sold subject to certain volume restrictions (maximum 54 million shares per year). After the Implementation Date, the New VEBA will have the right to demand registration of one public offering of the Convertible Note or the Converted Stock per year and to participate in public offerings of securities by GM, under certain circumstances. In private transactions, the New VEBA may not sell: (1) a block of Converted Stock that would be more than 2% of the outstanding shares of GM common stock to a single buyer; or (2) any Converted Stock to a holder of more than 5% of the outstanding shares of GM common stock that has intention to influence GM’s directors or management. The trustee of the New VEBA will vote Converted Stock held in the New VEBA in the same proportion as the votes cast by all other stockholders in a given election. The Trustee may sell the Convertible Note or the Converted Stock to a tender offeror only if the tender offer has been recommended by an independent committee of the GM Board of Directors. After the cash and other investments in the TAA have been transferred to the New VEBA, the Convertible Note (or another convertible note with identical terms other than the date of issuance) will be transferred to the New VEBA, as permitted by law governing contributions of employer securities to a benefit plan and a VEBA.
 
  •  On April 1, 2008, we will make an initial contribution of $165 million to the TAA. Each year beginning in 2009, if the annual cash flow projection for the New VEBA shows that the New VEBA will become insolvent within the next 25 years, GM will deposit $165 million by April 1 of that year (Shortfall Amount Contribution) into the TAA or, after the Implementation Date, into the New VEBA, provided that we will not make more than 19 Shortfall Amount Contributions (not including the payment on April 1, 2008 referred to in the previous sentence). At any time, we may prefund all future annual Shortfall Amount Contributions by paying the applicable buyout amount provided in Appendix C of the Retiree MOU. We will transfer the assets in the TAA related to the initial $165 million deposit and additional Shortfall Amount Contributions deposited in the TAA or an amount equal to the balance in the TAA related to such deposit and Shortfall Amount Contributions to the New VEBA in conjunction with the transfer to the New VEBA.
 
In the Retiree MOU, the UAW and GM acknowledged that our obligations are fixed and capped and that we are not responsible for, and do not provide a guarantee of: (1) the payment of future benefits to plan participants; (2) the asset returns of the funds in the TAA or the New VEBA; or (3) whether there will be sufficient assets in the New VEBA to fully pay the obligations of the New VEBA or New Plan. In the event the assets of the New VEBA are not


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Concluded)
 
sufficient to fully fund the obligations of the New Plan, the New VEBA and New Plan will be required to reduce benefits to plan participants.
 
In the Retiree MOU, GM and the UAW agreed to amend GM’s hourly pension plan on the Final Effective Date to provide GM retirees and surviving spouses who are members of the Covered Group and receiving a GM pension benefit with a flat monthly special lifetime benefit of $66.70, commencing on the first month following the Final Effective Date. This special lifetime benefit is intended to serve as cost pass-through to the New VEBA of an after-tax increase in the monthly contribution applicable to Post-Retirement Medical Benefits under the New Plan for the Covered Group. As a result, the New Plan will assess an additional monthly contribution of $51.67 to the Covered Group for retiree medical coverage.
 
Other Items
 
The 2007 National Agreement also established a new wage and benefit package for new hires (Tier II Wage) in certain non-core positions including material movement, kitting and sequencing and housekeeping. New hires in Tier II Wage positions will receive base wages of approximately $15.30 per hour versus $28.12 per hour for existing employees. In addition, these new hires will have higher cost sharing arrangements for active healthcare coverage, a Cash Balance pension plan and receive $1 per hour in 401(k) contributions in lieu of a defined benefit postretirement medical benefit plan. The agreement provides lump sum payments of $3,000 in 2007 and 3%, 4% and 3% of wages in 2008, 2009 and 2010, respectively. The lump sum payments will each be amortized over a one year period. Also, pension benefit increases and lump sum payments to retirees and covered employees of Delphi as defined in Note 10 were provided, which is estimated to increase our December 31, 2007 projected benefit obligation by $4.3 billion. These estimated increases in pension benefits also include increases to non-UAW hourly employees that historically have followed UAW contract provisions.
 
Conversion of Preferred Membership Interests in GMAC LLC
 
As described in Note 5, in connection with the GMAC Transaction, 1,555,000 Preferred Membership Interests in GMAC (Preferred Interests) were acquired by GM’s indirect wholly owned subsidiary GM Preferred Finance Co. Holdings Inc. (GM Finance). Effective November 1, 2007, 533,236 of the Preferred Interests held by GM Finance were converted into 3,912 Class B Membership Interests in GMAC (Class B Interests), in the interest of strengthening GMAC’s capital position. Following this transaction (Preferred Conversion), GM subsidiaries hold in the aggregate 1,021,764 Preferred Interests and 52,912 Class B Interests. The Preferred Conversion did not change our indirect ownership of 49% percentage of GMAC’s Common Membership Interests; FIM Holdings LLC continues to hold the remaining 51%.


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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Overview
 
General Motors Corporation (GM) is primarily engaged in the worldwide development, production, and marketing of automobiles. We develop, manufacture and market 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 the Automotive business). Our finance and insurance operations are primarily conducted through GMAC, the successor to General Motors Acceptance Corporation (together with GMAC LLC, GMAC), a wholly-owned subsidiary until the end of November 2006 when we sold a 51% controlling ownership interest in GMAC to a consortium of investors (the GMAC Transaction). Since the GMAC Transaction, we have accounted for our 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, we discuss 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.
 
In August 2007, we completed the sale of the commercial and military operations of our Allison Transmission (Allison) business. The negotiated purchase price of $5.6 billion in cash plus assumed liabilities was paid on closing. The purchase price was subject to adjustment based on the amount of Allison’s net working capital and debt on the closing date. Subsequently, we advanced $200 million to the buyer as a preliminary purchase price adjustment resulting in an adjusted purchase price of $5.4 billion. We currently anticipate that the final purchase price adjustment will be made in the fourth quarter of 2007. A gain on the sale of Allison in the amount of $5.3 billion ($3.5 billion after-tax), inclusive of the preliminary purchase price adjustments, was recognized in the three and nine months ended September 30, 2007. Allison, formerly a division of GM’s Powertrain Operations, is a global leader in the design and manufacture of commercial and military automatic transmissions and a premier global provider of commercial vehicle automatic transmissions for on-highway, including trucks, specialty vehicles, buses and recreational vehicles, off-highway and military vehicles, as well as hybrid propulsion systems for transit buses. GM Powertrain Operations’ facility near Baltimore, which manufactures automatic transmissions primarily for GM trucks and hybrid propulsion systems, was retained by us. The results of operations and cash flows of Allison have been reported in the Condensed Consolidated Financial Statements as discontinued operations for all periods presented. Historically, Allison had been reported in the North America Automotive business.
 
Financial Results
 
During the third quarter of 2007, we established a valuation allowance of $39 billion against our net deferred tax assets in the U.S., Canada and Germany. Such valuation allowance and charges associated with a reduction in the German business tax rate were the primary reasons for an increase in income tax expense. Accordingly, consolidated net loss was $39 billion and $38 billion for the three and nine months ended September 30, 2007, respectively. Loss from continuing operations before income taxes, other equity income and minority interests was $3.3 billion for the third quarter of 2007, compared to $1.2 billion for 2006. For the first nine months of 2007, loss from continuing operations before income taxes, other equity income and minority interests was $3 billion, compared to $6 billion in 2006.
 
Consolidated net sales and revenue was $43.8 billion for the three months ended September 30, 2007 as compared to $48.9 billion during the three months ended September 30, 2006. For the nine months ended September 30, 2007, our consolidated net sales and revenues were $134.2 billion, a decrease of $20.7 billion, or 13.3% below the $154.9 billion for the nine months ended September 30, 2006. Since the sale of a 51% controlling interest in GMAC on November 30, 2006, we began accounting for our remaining interest in GMAC using the equity method. Therefore, our consolidated results reflect our 49% share of the operating results of GMAC on an


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equity basis for the three and nine months ended September 30, 2007 as compared to the operating results of GMAC on a consolidated basis for the comparable periods in 2006. A discussion of our regional automotive operating results and Finance and Insurance Operations financial review follows.
 
Strategy
 
As previously described in more detail in our Annual Report on Form 10-K for the year ended December 31, 2006 (2006 Form 10-K), 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. Our first priority in 2007 is improving our earnings and cash flow, particularly in GMNA, the traditional core of our operations and financial results. Our turnaround plan for GMNA is built on four elements: (1) achieve and sustain product excellence; (2) revitalize our sales and marketing strategy; (3) accelerate cost reductions and quality improvements; and (4) address our health care/legacy cost burden. Our primary revenue related goals for 2007 include improving our contribution margin in North America by selling a more profitable vehicle product mix, which we are pursuing by emphasizing the quality and value of our vehicles, reducing reliance on sales incentives and increasing our marketing efforts on our newly launched products. Our primary cost related goals for 2007 in North America remain addressing our legacy cost burden and reducing our structural costs. Beginning in 2007, we are on track to achieve our announced target of reducing our annual structural costs in GMNA and Corporate and Other by $9 billion, on average, less than those costs in 2005. In October 2007, we entered into a new collective bargaining agreement (2007 National Agreement) with the International Union, United Automotive, Aerospace and Agricultural Implement Workers of America (UAW), including a Memorandum of Understanding — Post-Retirement Medical Benefits (Retiree MOU) that we anticipate will significantly support our structural cost reduction plans. We remain focused on repositioning our business for long-term competitiveness, including achieving a successful resolution to the issues related to the bankruptcy proceedings of Delphi Corporation (Delphi), a major supplier and former subsidiary. We recognize, however, that in the near term continuing weakness in the U.S. automotive market, and its impact on Canadian operations that are linked to the U.S. market, will provide a significant challenge to improving earnings and cash flow, and could constrain our ability to achieve future revenue goals.
 
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 Southeast Asian 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 these emerging markets, and to pursue additional growth opportunities through our relationships with Shanghai General Motors Co., Ltd. (Shanghai GM), GM Daewoo Auto & Technology Company (GM Daewoo) and other potential strategic partners, such as recently announced joint ventures in Malaysia and Uzbekistan. During the nine months ended September 30, 2007, key metrics such as net margin, operating income and market share show continued growth across key emerging markets. We believe that growth in these emerging markets will help to offset challenging near-term market conditions in mature markets, such as the U.S. and Germany.
 
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. We have been focusing on restructuring our operations and have 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.
 
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 strategy. In addition to continuing to improve the efficiency of our internal combustion engines, we are focused on the introduction of propulsion


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technologies which utilize alternative fuels and have intensified our efforts to displace traditional petroleum-based fuels. In September 2007, we launched Project Driveway, which will make more than 100 Chevrolet Equinox fuel cell electric vehicles available for driving by the public in the vicinity of Los Angeles, New York City, and Washington D.C. During the fourth quarter of 2007 we plan to introduce new 2-mode hybrid models of the Chevrolet Tahoe and the GMC Yukon.
 
Improve Business Results — Earnings and Cash Flow. We anticipate improved automotive earnings and cash flow in 2007, resulting from further cost reductions and increased vehicle 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 August 2007, we completed the sale of the commercial and military business of Allison for $5.4 billion in cash, and in the second quarter of 2007, we received $1.4 billion from a public offering of convertible securities. While implementing the Retiree MOU will require a significant initial investment of cash, as well as a limited amount of additional payments over time, we anticipate that the cost reductions resulting from the 2007 National Agreement and the Retiree MOU will improve our cash flow in the long term.
 
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 Note 16 to the Condensed Consolidated Financial Statements and should be read in conjunction with our 2006 Form 10-K. Additionally, the Condensed Consolidated Financial Statements have been further adjusted as we have sold the commercial and military operations of Allison. The operations and cash flows of Allison have been reported as discontinued operations for all periods presented. For additional information relating to the sale of Allison, refer to Note 3 to the Condensed Consolidated Financial Statements.
 
We operate in two businesses, consisting of Automotive (GM Auto or GMA) and Financing and Insurance Operations (FIO).
 
Our Auto business consists of GMNA, GME, GMLAAM, GMAP and intra-segment eliminations classified within Auto Eliminations, which collectively constitute GM Automotive (GMA).
 
For the three and nine months ended September 30, 2007, our FIO business primarily consists of our 49% share of GMAC’s operating results, which we accounted for under the equity method, and two special purpose entities holding automotive leases previously owned by GMAC and its affiliates that were retained by us having a net book value of $3.4 billion, as well as the elimination of intercompany transactions with GM Automotive and Corporate and Other. For the three and nine months ended September 30, 2006, our FIO business consisted of the consolidated operating results of GMAC’s lines of business as follows: Automotive Finance Operations, Mortgage Operations, Insurance, and Other, which included its Commercial Finance business and GMAC’s equity investment in Capmark, previously GMAC Commercial Finance. Also included in FIO is Other Financing, which consists of the equity earnings of financing entities that are not consolidated by GMAC as well as the elimination of intercompany transactions with GM Automotive and Corporate and Other.
 
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.


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Consolidated Results of Operations
 
                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2007     2006     2007     2006  
    (Dollars in millions)     (Dollars in millions)  
 
Net sales and revenue
                               
Automotive sales
  $ 43,134     $ 39,612     $ 131,695     $ 127,657  
Financial services and insurance revenue
    700       9,280       2,530       27,214  
                                 
Total net sales and revenue
    43,834       48,892       134,225       154,871  
                                 
Automotive cost of sales
    41,540       37,184       122,210       124,598  
Selling, general and administrative expense
    3,601       3,155       10,205       9,740  
Financial services and insurance expense
    640       7,596       2,334       23,608  
Other expenses
    350       1,943       925       3,151  
                                 
Operating loss
    (2,297 )     (986 )     (1,449 )     (6,226 )
Equity in loss of GMAC LLC
    (809 )           (874 )      
Automotive interest and other income (expense)
    (232 )     (219 )     (721 )     232  
                                 
Loss from continuing operations before income taxes, other equity income and minority interests
    (3,338 )     (1,205 )     (3,044 )     (5,994 )
Income tax expense (benefit)
    39,186       (977 )     38,805       (2,523 )
Equity income (loss) and minority interests, net of tax
    12       (49 )     79       193  
                                 
Loss from continuing operations
    (42,512 )     (277 )     (41,770 )     (3,278 )
Income from discontinued operations, net of tax
    3,549       130       3,760       350  
                                 
Net loss
  $ (38,963 )   $ (147 )   $ (38,010 )   $ (2,928 )
                                 
Net margin from continuing operations
    (97 )%     (.6 )%     (31.1 )%     (2.1 )%
 
Our consolidated net sales and revenue was $43.8 billion in the third quarter of 2007 compared to $48.9 billion in the third quarter of 2006. The reduction in total net sales and revenue was primarily due to our sale of a 51% controlling ownership interest in GMAC in November of 2006. Automotive sales increased $3.5 billion in the third quarter compared to 2006, reflecting our global growth outside North America. Operating loss increased by $1.3 billion compared to 2006, to $2.3 billion in the third quarter of 2007, driven largely by additional pension expense of $1.6 billion resulting from a change in the amortization period for prior service cost. Our loss from continuing operations was $42.5 billion for the third quarter of 2007, an increase of $42.2 billion from the third quarter of 2006 primarily as a result of the valuation allowance established against deferred tax assets in the U.S., Canada and Germany. Net loss for the third quarter of 2007 was $39 billion, reflecting increased income tax expense due to the establishment of a valuation allowance against deferred tax assets offset by a gain of $3.5 billion from the sale of Allison, compared to a net loss of $147 million in 2006. Further information on each of our businesses and geographic regions is presented below.
 
Our consolidated net sales and revenue for the nine months ended September 30, 2007 and 2006 was $134.2 billion and $154.9 billion, respectively. The net reduction in revenue was due to our sale of a 51% controlling ownership interest in GMAC in November of 2006, while automotive sales increased $4 billion. Operating loss was $1.4 billion, compared to a loss of $6.2 billion, for the nine months ended September 30, 2007 and 2006, respectively, reflecting improved automotive results. Our loss from continuing operations was $41.8 billion for the nine months ended September 30, 2007 and $3.3 billion for the corresponding period in 2006. Net loss for the first nine months of 2007 was $38 billion, compared to a net loss of $2.9 billion in 2006. The nine months results reflect


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increased income tax expense related to the establishment of a valuation allowance against deferred tax assets in the U.S., Canada and Germany.
 
Since our sale of a 51% controlling ownership interest in GMAC in November 2006, we have accounted for our 49% ownership interest in GMAC using the equity method. Therefore, our consolidated results reflect its 49% share of the operating results of GMAC on an equity basis for the three and nine months ended September 30, 2007, compared to the operating results of GMAC on a consolidated basis for the comparable periods of 2006. Revenue and net loss related to GMAC’s operations included in our consolidated results in the third quarter of 2006 were $9.3 billion and $173 million, respectively. For the nine months ended September 30, 2006, revenue and net income related to GMAC’s operations included in our consolidated results were $27.1 billion and $1.1 billion, respectively.
 
Changes in Consolidated Financial Condition
 
Deferred income taxes
 
In the third quarter of 2007, we recorded a charge of $39 billion related to establishing full valuation allowances against our deferred tax assets in the U.S., Canada and Germany. In accordance with SFAS No. 109, “Accounting for Income Taxes” (SFAS No. 109), we evaluate our deferred income taxes quarterly to determine if valuation allowances are required. SFAS No. 109 requires that companies assess whether valuation allowances should be established against their deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. In making such judgments, significant weight is given to evidence that can be objectively verified. As previously disclosed in our 2006 Form 10-K, we had determined in prior periods that valuation allowances were not necessary for our deferred tax assets in the U.S., Canada and Germany based on several factors including: (1) the degree to which our three-year historical cumulative losses were attributable to unusual items or charges, several of which were incurred as a result of actions to improve future profitability; (2) the long duration of our deferred tax assets; and (3) the expectation of continued strong earnings at GMAC and improved earnings in GMNA.
 
We believe that a valuation allowance is now required due to events and developments that occurred during the third quarter of 2007. In conducting our third quarter 2007 analysis, we utilized a consistent approach which considers our three-year historical cumulative income (loss) including an assessment of the degree to which any losses were driven by items that are unusual in nature and incurred in order to improve future profitability. In addition, we reviewed changes in near-term market conditions and any other factors arising during the period which may impact our future operating results. We consider both positive and negative evidence in our analysis. Our analysis for the third quarter of 2007 showed that we have a three-year historical cumulative loss in the U.S., Canada and Germany. This loss continued to exist even after adjusting our results to remove unusual items and charges, which is considered a significant factor in our analysis as it is objectively verifiable and therefore, significant negative evidence. This was coupled with other significant factors which all occurred in the third quarter of 2007. The ongoing weakness at GMAC related to its Residential Capital, LLC (ResCap) mortgage business resulting in substantial U.S. losses incurred in the third quarter of 2007. Further, the outlook for ResCap and the mortgage industry in general became highly uncertain, with significantly reduced near-term forecast profitability. In addition, in both the U.S. and Germany near-term automotive market conditions were more challenging than we believed in the second quarter of 2007. This, when combined with the pressures of the residential mortgage business, resulted in lower projected earnings in the near-term than we previously anticipated. We also noted that in the near-term a greater percentage of our deferred tax assets were going to be subject to expiration (e.g. 20 years) than in prior periods primarily due to changes associated with the Retiree MOU, which accelerates our tax deductions for OPEB liabilities when compared to our previously expected timing for these deductions. Accordingly, based on a three year historical cumulative loss, combined with significant and inherent uncertainty as to the timing of when we would be able to generate the necessary level of earnings to recover our deferred tax assets in the U.S., Canada and Germany, we concluded that a full valuation allowance was required.


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Accounts and notes receivable, net
 
Accounts and notes receivable were $10.7 billion at September 30, 2007 compared to $8.2 billion at December 31, 2006, an increase of $2.5 billion or 30.6%. This increase is primarily due to lower receivable balances at GMNA of $1.6 billion as of December 31, 2006, as a result of the seasonal plant shutdowns during the last two weeks of the year that significantly reduce shipments for the period, while we continue to collect outstanding receivables. GME, GMLAAM and GMAP contributed an additional $275 million, $200 million and $50 million to the increased receivables balance due to increased unit sales. GMAP’s receivables balance increased an additional $100 million, primarily due to increased dividends receivable from our non consolidated affiliate, Shanghai GM.
 
Inventories
 
Inventories at September 30, 2007 were $15.5 billion compared to $13.9 billion at December 31, 2006, an increase of $1.6 billion or 11.5%. The increase in inventories at September 30, 2007 is primarily due to increases in finished product of $550 million at GME and $550 million at GMAP, together with mix and currency effects. Additionally, GMLAAM and GMNA inventory balances increased $200 million and $150 million, respectively, in order to support higher sales forecasts for the rest of the year. GMNA and GME have also increased their raw materials balance by $600 million and $200 million to support future production. These increases in the inventory balance have been offset by a reduction of daily rental repurchase inventory at GMNA of $300 million.
 
Financing equipment on operating leases, net
 
Equipment on operating leases, net, at September 30, 2007 was $7.9 billion compared to $11.8 billion at December 31, 2006, a decrease of $3.9 billion or 33.4%. The decrease is due to the termination of vehicle leases that are not being replaced.
 
Automotive accounts payable (principally trade)
 
Automotive accounts payable at September 30, 2007 were $30.5 billion compared to $26.9 billion at December 31, 2006, an increase of $3.6 billion or 13.3%. The increase in accounts payable related to volume increases at each of the regions as follows: GMNA, $1.5 billion; GME, $175 million; GMLAAM, $350 million; and GMAP, $300 million, together with mix and currency effects. During the year-end shutdown period purchasing is significantly reduced while GM continues to pay suppliers on their normal payment terms.
 
Financing debt
 
Financing debt at September 30, 2007 was $6 billion compared to $9.4 billion at December 31, 2006, a decrease of $3.5 billion or 36.8%. The decrease in debt is primarily due to the repayment of the secured debt associated with the bankruptcy-remote subsidiaries that hold the equity interests in a number of trusts that own leased vehicles.
 
Financing other liabilities and deferred income taxes
 
Financing other liabilities and deferred income taxes at September 30, 2007 was $1.7 billion compared to $2.1 billion at December 31, 2006, a decrease of $.5 billion or 22.1%. The decrease is related primarily to a $1 billion payment to GMAC for amounts owed under the GMAC sales agreement to restore their tangible equity balance to $14.4 billion.


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GM Automotive Operations Financial Review
 
                                 
    Three Months Ended September 30,     Nine Months Ended September 30,