UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549-1004

 

Form 10-Q

 

 

 

Commission file number 1-143

 

GENERAL MOTORS CORPORATION
(Exact Name of Registrant as Specified in its Charter)

 

 

 

(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):

 

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

 

 

PART I

 

 

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share amounts)
(Unaudited)

 

 

Reference should be made to the notes to the condensed consolidated financial statements.

 

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
(Unaudited)

 

 

Reference should be made to the notes to the condensed consolidated financial statements.

 

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
(Dollars and shares in millions)
(Unaudited)

 

 

Reference should be made to the notes to the condensed consolidated financial statements.

 

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)

 

 

Reference should be made to the notes to the condensed consolidated financial statements.

 

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

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).

 

 

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

 

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.

 

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.

 

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) — (Continued)

 

 

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):

 

 

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

 

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):

 

 

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.

 

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:

 

 

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

 

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:

 

 

Summarized financial information of GMAC is as follows:

 

 

 

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) — (Continued)

 

 

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:

 

 

Management reviews and adjusts these estimates on a regular basis based on the differences between actual experience and historical estimates or other available information.

 

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.

 

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) — (Continued)

 

Activity for postemployment benefit costs is as follows:

 

 

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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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:

 

 

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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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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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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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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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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(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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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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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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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.

 

 

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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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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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.

 

 

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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The reconciliation of the amounts used in the basic and diluted loss per share computations is as follows (in millions, except per share amounts):

 

 

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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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:

 

 

 

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.

 

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

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The components of pension and OPEB expense are as follows: