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 June 30, 2008
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          
 
Commission file number 1-143
 
GENERAL MOTORS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
 
 
     
     
STATE OF DELAWARE
(State or other jurisdiction of
Incorporation or Organization)
  38-0572515
(I.R.S. Employer
Identification No.)
     
300 Renaissance Center, Detroit, Michigan
(Address of Principal Executive Offices)
  48265-3000
(Zip Code)
 
(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 “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
             
Large accelerated filer  þ
  Accelerated filer  o   Non-accelerated filer  o
(Do not check if a smaller reporting company)
  Smaller reporting company  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 July 31, 2008, the number of shares outstanding of the Registrant’s common stock was 566,162,606 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)     1  
    Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2008 and 2007     1  
    Condensed Consolidated Balance Sheets at June 30, 2008, December 31, 2007 and June 30, 2007     2  
    Condensed Consolidated Statement of Stockholders’ Deficit for the Six Months Ended June 30, 2008 and 2007     3  
    Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007     4  
    Notes to Condensed Consolidated Financial Statements     5  
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     46  
  Quantitative and Qualitative Disclosures About Market Risk     98  
  Controls and Procedures     98  
 
  Legal Proceedings     100  
  Risk Factors     102  
  Submission of Matters to a Vote of Security Holders     110  
  Exhibits     113  
    114  
 Consent of Hamilton, Robinovitz and Associates
 Certification of the CEO
 Certification of the CFO
 Section 1350 Certification of CEO
 Section 1350 Certification of CFO


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
    Six Months Ended
 
    June 30,     June 30,  
    2008     2007     2008     2007  
 
Net sales and revenue
                               
Automotive sales
  $ 37,673     $ 45,783     $ 79,617     $ 88,074  
Financial services and insurance revenue
    483       894       1,028       1,830  
                                 
Total net sales and revenue
    38,156       46,677       80,645       89,904  
                                 
Costs and expenses
                               
Automotive cost of sales
    43,546       41,666       81,698       80,395  
Selling, general and administrative expense
    3,754       3,293       7,453       6,604  
Financial services and insurance expense
    579       811       1,075       1,694  
Other expenses
    2,753       575       3,484       575  
                                 
Total costs and expenses
    50,632       46,345       93,710       89,268  
                                 
Operating income (loss)
    (12,476 )     332       (13,065 )     636  
Equity in income (loss) of GMAC LLC (Note 5)
    (1,930 )     118       (3,542 )     (65 )
Automotive and other interest expense
    (721 )     (681 )     (1,495 )     (1,480 )
Automotive interest income and other non-operating income (expense), net
    (231 )     682       87       1,203  
                                 
Income (loss) from continuing operations before income taxes, equity income and minority interests
    (15,358 )     451       (18,015 )     294  
Income tax expense (benefit)
    308       (320 )     961       (381 )
Equity income, net of tax
    128       170       260       326  
Minority interests, net of tax
    67       (157 )     (6 )     (259 )
                                 
Income (loss) from continuing operations
    (15,471 )     784       (18,722 )     742  
Income from discontinued operations, net of tax (Note 3)
          107             211  
                                 
Net income (loss)
  $ (15,471 )   $ 891     $ (18,722 )   $ 953  
                                 
Basic earnings (loss) per share:
                               
Continuing operations
  $ (27.33 )   $ 1.38     $ (33.07 )   $ 1.31  
Discontinued operations
          0.19             0.37  
                                 
Total
  $ (27.33 )   $ 1.57     $ (33.07 )   $ 1.68  
                                 
Weighted average common shares outstanding, basic (millions)
    566       566       566       566  
                                 
Diluted earnings (loss) per share:
                               
Continuing operations
  $ (27.33 )   $ 1.37     $ (33.07 )   $ 1.30  
Discontinued operations
          0.19             0.37  
                                 
Total
  $ (27.33 )   $ 1.56     $ (33.07 )   $ 1.67  
                                 
Weighted average common shares outstanding, diluted (millions)
    566       569       566       569  
                                 
Cash dividends per share
  $ 0.25     $ 0.25     $ 0.50     $ 0.50  
                                 
 
Reference should be made to the notes to the condensed consolidated financial statements.


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Table of Contents

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
(Unaudited)
 
                         
    June 30,
    December 31,
    June 30,
 
    2008     2007     2007  
ASSETS
Current Assets
                       
Cash and cash equivalents
  $ 19,356     $ 24,549     $ 22,040  
Marketable securities
    1,150       2,139       1,573  
                         
Total cash and marketable securities
    20,506       26,688       23,613  
Accounts and notes receivable, net
    8,946       9,659       10,233  
Inventories
    17,744       14,939       15,073  
Assets held for sale
                683  
Equipment on operating leases, net
    4,669       5,283       5,889  
Other current assets and deferred income taxes
    3,576       3,566       12,471  
                         
Total current assets
    55,441       60,135       67,962  
Financing and Insurance Operations Assets
                       
Cash and cash equivalents
    198       268       258  
Investments in securities
    214       215       192  
Equipment on operating leases, net
    3,804       6,712       9,145  
Equity in net assets of GMAC LLC
    3,454       7,079       7,555  
Other assets
    2,807       2,715       2,819  
                         
Total Financing and Insurance Operations assets
    10,477       16,989       19,969  
Non-Current Assets
                       
Equity in net assets of nonconsolidated affiliates
    2,367       1,919       2,000  
Property, net
    44,038       43,017       41,404  
Goodwill and intangible assets, net
    1,070       1,066       973  
Deferred income taxes
    1,014       2,116       32,449  
Prepaid pension
    17,991       20,175       18,305  
Other assets
    3,648       3,466       3,577  
                         
Total non-current assets
    70,128       71,759       98,708  
                         
Total Assets
  $ 136,046     $ 148,883     $ 186,639  
                         
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities
                       
Accounts payable (principally trade)
  $ 30,097     $ 29,439     $ 30,742  
Short-term borrowings and current portion of long-term debt
    8,008       6,047       5,150  
Liabilities related to assets held for sale
                526  
Accrued expenses
    37,373       34,822       34,621  
                         
Total current liabilities
    75,478       70,308       71,039  
Financing and Insurance Operations Liabilities
                       
Debt
    2,753       4,908       7,133  
Other liabilities and deferred income taxes
    884       905       855  
                         
Total Financing and Insurance Operations liabilities
    3,637       5,813       7,988  
Non-Current Liabilities
                       
Long-term debt
    32,450       33,384       34,134  
Postretirement benefits other than pensions
    47,476       47,375       48,353  
Pensions
    11,774       11,381       11,654  
Other liabilities and deferred income taxes
    20,825       16,102       15,972  
                         
Total non-current liabilities
    112,525       108,242       110,113  
                         
Total liabilities
    191,640       184,363       189,140  
Commitments and contingencies (Note 9)
                       
Minority interests
    1,376       1,614       1,268  
Stockholders’ 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 566,162,598 shares issued and outstanding as of June 30, 2008, respectively, 756,637,541 and 566,059,249 shares issued and outstanding as of December 31, 2007, respectively, and 756,637,541 and 565,864,695 shares issued and outstanding as of June 30, 2007, respectively)
    944       943       943  
Capital surplus (principally additional paid-in capital)
    15,335       15,319       15,255  
Retained earnings (accumulated deficit)
    (58,470 )     (39,392 )     577  
Accumulated other comprehensive loss
    (14,779 )     (13,964 )     (20,544 )
                         
Total stockholders’ deficit
    (56,970 )     (37,094 )     (3,769 )
                         
Total Liabilities, Minority Interests and Stockholders’ Deficit
  $ 136,046     $ 148,883     $ 186,639  
                         
 
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’ DEFICIT
(Dollars and shares in millions)
(Unaudited)
 
                                                         
                                  Accumulated
       
                            Retained
    Other
       
    Shares of
                Comprehensive
    Earnings
    Comprehensive
    Total
 
    Common
    Common
    Capital
    Income
    (Accumulated
    Income
    Stockholders’
 
    Stock     Stock     Surplus     (Loss)     Deficit)     (Loss)     Deficit  
 
Balance December 31, 2006
    566     $ 943     $ 15,336             $ 195     $ (22,126 )   $ (5,652 )
Net income
                    $ 953       953             953  
Other comprehensive income (loss):
                                                       
Foreign currency translation adjustments
                      357                    
Unrealized gain on derivatives
                      42                    
Unrealized loss on securities
                      (3 )                  
Defined benefit plans:
                                                       
Net prior service costs
                      (415 )                  
Net actuarial gain
                      446                    
Net transition asset / obligation
                      2                    
                                                         
Other comprehensive income
                      429             429       429  
                                                         
Comprehensive income
                          $ 1,382                          
                                                         
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 No. 48
                              137             137  
Stock options
                18                           18  
Cash dividends paid
                              (283 )           (283 )
Purchase of convertible note hedge
                (99 )                         (99 )
                                                         
Balance June 30, 2007 — as restated
    566     $ 943     $ 15,255             $ 577     $ (20,544 )   $ (3,769 )
                                                         
Balance December 31, 2007
    566     $ 943     $ 15,319             $ (39,392 )   $ (13,964 )   $ (37,094 )
Net loss
                    $ (18,722 )     (18,722 )           (18,722 )
Other comprehensive income (loss):
                                                       
Foreign currency translation adjustments
                      13                    
Unrealized loss on derivatives
                      (305 )                  
Unrealized loss on securities
                      (170 )                  
Defined benefit plans:
                                                       
Net prior service costs
                      160                    
Net actuarial loss
                      (515 )                  
Net transition asset / obligation
                      2                    
                                                         
Other comprehensive loss
                      (815 )           (815 )     (815 )
                                                         
Comprehensive loss
                          $ (19,537 )                        
                                                         
Effects of GMAC LLC adoption of SFAS No. 157 and No. 159 (Note 5)
                              (76 )           (76 )
Stock options and other
          1       16               3             20  
Cash dividends paid
                              (283 )           (283 )
                                                         
Balance June 30, 2008
    566     $ 944     $ 15,335             $ (58,470 )   $ (14,779 )   $ (56,970 )
                                                         
 
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)
 
                 
    Six Months Ended
 
    June 30,  
    2008     2007  
 
Net cash provided by (used in) continuing operating activities
  $ (2,188 )   $ 4,027  
Cash provided by discontinued operating activities
          240  
                 
Net cash provided by (used in) operating activities
    (2,188 )     4,267  
Cash flows from investing activities
               
Expenditures for property
    (4,125 )     (2,884 )
Investments in marketable securities, acquisitions
    (2,172 )     (5,971 )
Investments in marketable securities, liquidations
    3,141       4,532  
Capital contribution to GMAC LLC
          (1,022 )
Operating leases, liquidations
    1,863       1,613  
Other
    (259 )     (111 )
                 
Net cash used in continuing investing activities
    (1,552 )     (3,843 )
Cash used in discontinued investing activities
          (13 )
                 
Net cash used in investing activities
    (1,552 )     (3,856 )
Cash flows from financing activities
               
Net decrease in short-term borrowings
    (1,592 )     (2,562 )
Borrowings of long-term debt
    929       1,572  
Payments made on long-term debt
    (806 )     (1,132 )
Cash dividends paid to stockholders
    (283 )     (283 )
                 
Net cash used in continuing financing activities
    (1,752 )     (2,405 )
Cash used in discontinued financing activities
           
                 
Net cash used in financing activities
    (1,752 )     (2,405 )
Effect of exchange rate changes on cash and cash equivalents
    229       169  
                 
Net decrease in cash and cash equivalents
    (5,263 )     (1,825 )
Cash and cash equivalents at beginning of the period
    24,817       24,123  
                 
Cash and cash equivalents at end of the period
  $ 19,554     $ 22,298  
                 
 
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
 
We (also General Motors Corporation, GM or the Corporation) are primarily engaged in the worldwide production and marketing of cars and trucks. We operate in two businesses, consisting of Automotive (GM Automotive or GMA) and Financing and Insurance Operations (FIO). We develop, manufacture and market vehicles worldwide through our four automotive segments which consist of GM North America (GMNA), GM Europe (GME), GM Latin America/Africa/Mid-East (GMLAAM) and GM Asia Pacific (GMAP). Our finance and insurance operations are primarily conducted through our 49% equity interest in GMAC LLC (GMAC), which is accounted for under the equity method of accounting. 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.
 
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 our opinion, these condensed consolidated financial statements include all adjustments, consisting of only normal recurring items, considered necessary for a fair presentation of our financial position and results of operations. 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, 2007 (2007 10-K) as filed with the SEC.
 
The condensed consolidated financial statements include our accounts and those of our subsidiaries that we control due to ownership of a majority voting interest. In addition, we consolidate variable interest entities for which we are the primary beneficiary. Our share of earnings or losses of nonconsolidated affiliates are included in our 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 affiliate. We use the cost method of accounting if we are not able to exercise significant influence over the operating and financial decisions of the affiliate. All intercompany balances and transactions have been eliminated in consolidation.
 
  Change in Presentation of Financial Statements
 
Prior period results have been reclassified for the retroactive effect of discontinued operations. Refer to Note 3. In the quarter ended June 30, 2008, we reclassified amounts related to a vehicle assembly agreement from Automotive cost of sales to Automotive sales to more appropriately report the arrangement on a net basis. Certain reclassifications have been made to the 2007 financial information to conform it to the current period presentation.
 
Change in Accounting Principles
 
  Fair Value Measurements
 
On January 1, 2008 we adopted Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements” (SFAS No. 157), which provides a consistent definition of fair value that focuses on exit price and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. SFAS No. 157 requires expanded disclosures about fair value measurements and establishes a three-level hierarchy for fair value measurements based on the observability of inputs to the valuation of an asset or liability at the measurement date. The standard also requires that a company consider its own nonperformance risk when measuring liabilities carried at fair value, including derivatives. In February 2008 the Financial Accounting Standards Board (FASB) approved FASB Staff Position (FSP) No. 157-2, “Effective Date of FASB


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Table of Contents

 
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Statement No. 157” (FSP No. 157-2), that permits companies to partially defer the effective date of SFAS No. 157 for one year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. FSP No. 157-2 does not permit companies to defer recognition and disclosure requirements for financial assets and financial liabilities or for nonfinancial assets and nonfinancial liabilities that are remeasured at least annually. SFAS No. 157 is effective for financial assets and financial liabilities and for nonfinancial assets and nonfinancial liabilities that are remeasured at least annually for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The provisions of SFAS No. 157 are applied prospectively. We have decided to defer adoption of SFAS No. 157 for one year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The effect of our adoption of SFAS No. 157 on January 1, 2008 was not material and no adjustment to Accumulated deficit was required. Refer to Note 11 for more information regarding the impact of our adoption of SFAS No. 157 with respect to financial assets and liabilities.
 
  The Fair Value Option for Financial Assets and Financial Liabilities — including an Amendment of SFAS No. 115
 
On January 1, 2008 we adopted 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 were not previously 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 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. SFAS No. 159 also establishes presentation and disclosure requirements to help financial statement users understand the effect of the election. We have not elected to measure any financial assets and financial liabilities at fair value which were not previously required to be measured at fair value. Therefore, the adoption of this standard has had no impact on our financial condition and results of operations.
 
  Accounting for Uncertainty in Income Taxes
 
On January 1, 2007 we adopted FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes” (FIN No. 48), which supplements SFAS No. 109, “Accounting for Income Taxes” (SFAS No. 109), by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. FIN No. 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 No. 48, companies are required to adjust their financial statements to reflect only those tax positions that are more likely than not to be sustained. We adopted FIN No. 48 as of January 1, 2007, and recorded a decrease to Accumulated deficit of $137 million as a cumulative effect of a change in accounting principle with a corresponding decrease to the liability for uncertain tax positions.
 
  Accounting for Nonrefundable Payments for Goods or Services to Be Used in Future Research and Development Activities
 
In June 2007 the FASB ratified Emerging Issues Task Force (EITF) No. 07-3, “Accounting for Nonrefundable Payments for Goods or Services to Be Used in Future Research and Development Activities” (EITF No. 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. EITF No. 07-3 is effective for new arrangements on a prospective basis for fiscal years beginning after December 15, 2007. The adoption of this guidance did not 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)
 
  Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards
 
In June 2007 the FASB ratified EITF No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (EITF No. 06-11), which requires entities to record to additional paid-in capital the tax benefits on dividends or dividend equivalents that are charged to accumulated deficit for certain share-based awards. In a share-based payment arrangement, employees may receive dividends or dividend equivalents on awards of nonvested equity shares and 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 capital surplus should be included in the pool of excess tax benefits available to absorb tax deficiencies on share-based payment awards. EITF No. 06-11 is effective for fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. The adoption of this guidance did not have a material effect on our financial condition and results of operations.
 
Accounting Standards Not Yet Adopted
 
  Business Combinations
 
In December 2007 the FASB issued SFAS No. 141(R), “Business Combinations” (SFAS No. 141(R)), which retained the underlying concepts under existing standards in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting but SFAS No. 141(R) changed the method of applying the acquisition method in a number of significant aspects. SFAS No. 141(R) will require that: (1) for all business combinations, the acquirer records all assets and liabilities of the acquired business, including goodwill, generally at their fair values; (2) certain pre-acquisition contingent assets and liabilities acquired be recognized at their fair values on the acquisition date; (3) contingent consideration be recognized at its fair value on the acquisition date and, for certain arrangements, changes in fair value will be recognized in earnings until settled; (4) acquisition-related transaction and restructuring costs be expensed rather than treated as part of the cost of the acquisition and included in the amount recorded for assets acquired; (5) in step acquisitions, previous equity interests in an acquiree held prior to obtaining control be re-measured to their acquisition-date fair values, with any gain or loss recognized in earnings; and (6) when making adjustments to finalize initial accounting, companies revise any previously issued post-acquisition financial information in future financial statements to reflect any adjustments as if they had been recorded on the acquisition date. SFAS No. 141(R) is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. SFAS No. 141(R) amends SFAS No. 109 such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of this statement should also apply the provisions of SFAS No. 141(R). Once effective, this standard will be applied to all future business combinations.
 
  Noncontrolling Interests in Consolidated Financial Statements
 
In December 2007 the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB 51” (SFAS No. 160), which amends Accounting Research Bulletin (ARB) No. 51 “Consolidated Financial Statements” (ARB No. 51) to establish new standards that will govern the accounting for and reporting of noncontrolling interests in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Also, SFAS No. 160 requires that: (1) noncontrolling interest, previously referred to as minority interest, be reported as part of equity in the consolidated financial statements; (2) losses be allocated to the noncontrolling interest even when such allocation might result in a deficit balance, reducing the losses attributed to the controlling interest; (3) changes in ownership interests be treated as equity transactions if control is maintained; (4) upon a loss of control, any gain or loss on the interest sold be recognized in earnings; and (5) the noncontrolling interest’s share be recorded at the fair value of net assets acquired, plus its share of goodwill. SFAS No. 160 is effective on a prospective basis for all fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, except for the presentation and disclosure requirements, which will be applied retrospectively. We are currently evaluating the effects that SFAS No. 160 will have on our financial condition and results of operations.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
  Disclosures about Derivative Instruments and Hedging Activities — an Amendment of FASB Statement No. 133
 
In March 2008 the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an Amendment of FASB Statement No. 133” (SFAS No. 161), that expands the disclosure requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS No. 133). SFAS No. 161 requires additional disclosures regarding: (1) how and why an entity uses derivative instruments; (2) how derivative instruments and related hedged items are accounted for under SFAS No. 133; and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. In addition, SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives described in the context of an entity’s risk exposures, quantitative disclosures about the location and fair value of derivative instruments and associated gains and losses, and disclosures about credit-risk-related contingent features in derivative instruments. SFAS No. 161 is effective for fiscal years and interim periods within these fiscal years, beginning after November 15, 2008.
 
  Accounting for Convertible Debt Instruments
 
In May 2008 the FASB ratified FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)” (FSP No. APB 14-1), which requires issuers of convertible debt securities within its scope to separate these securities into a debt component and into an equity component, resulting in the debt component being recorded at fair value without consideration given to the conversion feature. Issuance costs are also allocated between the debt and equity components. FSP No. APB 14-1 will require that convertible debt within its scope reflect an entity’s nonconvertible debt borrowing rate when interest expense is recognized. FSP No. APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, and shall be applied retrospectively to all prior periods. We estimate that upon adoption, interest expense will increase for all periods presented with fiscal year 2009 pre-tax interest expense increasing by approximately $125 million based on our current level of indebtedness.
 
  Participating Share-Based Payment Awards
 
In June 2008 the FASB ratified FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities” (FSP No. EITF 03-6-1), which addresses whether instruments granted in share-based payment awards are participating securities prior to vesting and, therefore, must be included in the earnings allocation in calculating earnings per share under the two-class method described in SFAS No. 128, “Earnings per Share” (SFAS No. 128). FSP No. EITF 03-6-1 requires that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend-equivalents be treated as participating securities in calculating earnings per share. FSP No. EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, and shall be applied retrospectively to all prior periods. We are currently evaluating the effects, if any that FSP No. EITF 03-6-1 may have on earnings per share.
 
  Determination of Whether an Equity-Linked Financial Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock
 
In June 2008 the FASB ratified EITF No. 07-5, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” (EITF No. 07-5), which requires that an instrument’s contingent exercise provisions are analyzed first based upon EITF No. 01-6, “The Meaning of ‘Indexed to a Company’s Own Stock’ ” (EITF No. 01-6). If this evaluation does not preclude consideration of an instrument as indexed to its own stock, the instrument’s settlement provisions are then analyzed. An instrument is considered indexed to an entity’s own stock if its settlement amount will equal the difference between the fair value of a fixed number of the entity’s equity shares and a fixed amount of cash or another financial asset. EITF No. 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, with recognition of a cumulative effect of change in accounting principle for all instruments existing at


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
the effective date to the balance of retained earnings. We are currently evaluating the effects, if any, that EITF No. 07-5 may have on our financial condition and results of operations.
 
  Accounting for Collaborative Arrangements
 
In December 2007 the FASB ratified EITF No. 07-1, “Accounting for Collaborative Arrangements” (EITF No. 07-1), which requires revenue generated and costs incurred by the parties in the collaborative arrangement be reported in the appropriate line in each company’s financial statements pursuant to the guidance in EITF No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent” (EITF No. 99-19) and not account for such arrangements using the equity method of accounting. EITF No. 07-1 also includes enhanced disclosure requirements regarding the nature and purpose of the arrangement, rights and obligations under the arrangement, accounting policy, and the amount and income statement classification of collaboration transactions between the parties. EITF No. 07-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, and shall be applied retrospectively (if practicable) to all prior periods presented for all collaborative arrangements existing as of the effective date. We are currently evaluating the effects, if any, that EITF No. 07-1 may have on the presentation and classification of these activities in our consolidated financial statements.
 
  Accounting, by Lessees, for Nonrefundable Maintenance Deposits
 
In June 2008 the FASB ratified EITF No. 08-3, “Accounting by Lessees for Nonrefundable Maintenance Deposits” (EITF No. 08-3), which specifies that nonrefundable maintenance deposits that are contractually and substantively related to maintenance of leased assets are to be accounted for as deposit assets. EITF No. 08-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, with recognition of a cumulative effect of change in accounting principle to the opening balance of retained earnings for the first year presented. We are currently evaluating the effects, if any, that EITF No. 08-3 may have on our financial condition and results of operations.
 
Note 3. Divesture of Business
 
  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 results of operations and cash flows of Allison have been reported in our condensed consolidated financial statements as discontinued operations in the quarter and year to date period ended June 30, 2007. Historically, Allison was reported within GMNA.
 
The following table summarizes the results of discontinued operations:
 
                 
    Three Months Ended
    Six Months Ended
 
    June 30, 2007     June 30, 2007  
    (Dollars in millions)  
 
Net sales
  $ 518     $ 1,061  
Operating income from discontinued operations
  $ 171     $ 336  
Income tax provision
  $ 62     $ 123  
Income from discontinued operations, net of tax
  $ 107     $ 211  
 
As part of the transaction, we entered into an agreement with the buyers of Allison 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. Our 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 our loan to the new parent company of Allison. At June 30, 2008 we have not provided financing pursuant to


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
this agreement. 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.
 
Note 4. Inventories
 
Inventories are comprised of the following:
 
                         
    June 30,
    December 31,
    June 30,
 
    2008     2007     2007  
    (Dollars in millions)  
 
Productive material, work in process and supplies
  $ 7,235     $ 6,267     $ 5,707  
Finished product, including service parts
    11,969       10,095       10,820  
                         
Total inventories at FIFO
    19,204       16,362       16,527  
Less LIFO allowance
    (1,460 )     (1,423 )     (1,454 )
                         
Total automotive inventories
    17,744       14,939       15,073  
FIO off-lease vehicles, included in FIO Other assets
    325       254       240  
                         
Total inventories
  $ 18,069     $ 15,193     $ 15,313  
                         
 
Note 5. Investment in Nonconsolidated Affiliates
 
Information regarding our share of net income (loss) for our nonconsolidated affiliates is included in the table below:
 
                                 
    Three Months
    Six Months
 
    Ended
    Ended
 
    June 30,     June 30,  
    2008     2007     2008     2007  
    (Dollars in millions)  
 
GMAC
  $ (1,204 )   $ 118     $ (1,506 )   $ (65 )
GMAC Common Membership Interests impairments
    (726 )           (2,036 )      
Shanghai General Motors Co., Ltd and SAIC-GM-Wuling Automobile Co., Ltd. 
    87       117       203       233  
Others
    41       53       57       93  
                                 
Total
  $ (1,802 )   $ 288     $ (3,282 )   $ 261  
                                 
 
Summarized financial information of GMAC is as follows:
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2008     2007     2008     2007  
    (Dollars in millions)  
 
Condensed Consolidated Statements of Operations:
                               
Total financing revenue
  $ 4,822     $ 5,316     $ 9,754     $ 10,613  
Depreciation expense on operating lease assets
  $ 1,401     $ 1,173     $ 2,797     $ 2,255  
Interest expense
  $ 2,869     $ 3,735     $ 6,048     $ 7,407  
Income (loss) before income tax expense
  $ (2,309 )   $ 452     $ (2,879 )   $ 297  
Income tax expense
  $ 173     $ 159     $ 192     $ 309  
Net income (loss)
  $ (2,482 )   $ 293     $ (3,071 )   $ (12 )
Net income (loss) available to members
  $ (2,456 )   $ 240     $ (3,071 )   $ (116 )
 


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
                         
    June 30,
    December 31,
    June 30,
 
    2008     2007     2007  
    (Dollars in millions)  
 
Condensed Consolidated Balance Sheets:
                       
Loans held for sale
  $ 12,942     $ 20,559     $ 20,268  
Finance receivables and loans, net
  $ 117,343     $ 124,759     $ 162,192  
Investment in operating leases, net
  $ 32,810     $ 32,348     $ 28,893  
Other assets
  $ 28,510     $ 28,255     $ 25,076  
Total assets
  $ 227,692     $ 248,939     $ 279,278  
Total debt
  $ 173,489     $ 193,148     $ 224,454  
Accrued expenses, deposit and other liabilities
  $ 30,261     $ 28,713     $ 25,238  
Total liabilities
  $ 215,376     $ 233,374     $ 261,465  
Redeemable preferred membership interests
  $     $     $ 2,226  
Preferred interests
  $ 1,052     $ 1,052     $  
Total equity
  $ 12,316     $ 15,565     $ 15,587  
 
Information related to our Preferred and Common Membership Interests in GMAC is as follows:
 
                         
    June 30,
    December 31,
    June 30,
 
    2008     2007     2007  
    (Dollars in millions)  
 
Preferred Membership Interests (shares)
    1,021,764       1,021,764       1,555,000  
Percentage ownership of Preferred Membership Interests issued and outstanding
    100 %     100 %     74 %
Carrying value of Preferred Membership Interests
  $ 294     $ 1,046     $ 1,596  
Carrying value of Common Membership Interests
  $ 3,454     $ 7,079     $ 7,555  
 
In the quarters ended March 31 and June 30, 2008, we determined that our investments in GMAC Common and Preferred Membership Interests were impaired and that such impairments were other than temporary. Accordingly, we recorded impairment charges of $726 million and $2.0 billion in the quarter and year to date period ended June 30, 2008 in Equity in loss of GMAC LLC to reduce the carrying value of our investment in GMAC Common Membership Interests to its estimated fair value of $3.5 billion after considering the impact of recording our share of GMAC’s results in the quarter and year to date period ended June 30, 2008. We also recorded impairment charges of $608 million and $750 million in the quarter and year to date period ended June 30, 2008, respectively, in Automotive interest income and other non-operating income (expense), net to reduce the carrying value of our investment in Preferred Membership Interests to its estimated fair value of $294 million at June 30, 2008. Our measurements of fair value were determined in accordance with SFAS No. 157 utilizing Level 3 inputs of the fair value hierarchy established in SFAS No. 157. Refer to Note 11 for further information on the specific valuation methodology.
 
In the quarter ended June 30, 2008, GMAC elected not to pay a quarterly dividend related to our Preferred Membership Interests. We accrued dividends of $38 million and $77 million for the quarter and year to date period ended June 30, 2007, respectively, related to our Preferred Membership Interests.
 
On January 1, 2008, GMAC adopted SFAS No. 157 and No. 159. As a result of their adoption of SFAS No. 157, GMAC recorded an adjustment to retained earnings related to the recognition of day-one gains on purchased mortgage servicing rights and certain residential loan commitments. As a result of their adoption of SFAS No. 159, GMAC elected to measure, at fair value, certain financial assets and liabilities including certain collateralized debt obligations and certain mortgage loans held for investment in financing securitization structures. As a result, we reduced our Equity in net assets of GMAC LLC and increased our Accumulated deficit by $76 million in the year to date period ended June 30, 2008 reflecting our proportional share of the cumulative effect of GMAC’s adoption of SFAS No. 157 and No. 159.

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Refer to Note 16 for a description of the related party transactions with GMAC.
 
  Electro-Motive Diesel, Inc.
 
In April 2008, we converted a note receivable with a basis of $37 million, which resulted from the sale of our Electro-Motive Division in April 2005, for a 30% common equity interest in Electro-Motive Diesel, Inc. the successor company (EMD). We subsequently sold our common equity interest in EMD for $80 million in cash and a note receivable of $7 million, due in December 2008. We recognized a gain on the sale of our common equity interest of $50 million, which is recorded in Automotive interest income and other non-operating income (expense), net.
 
Note 6. 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 is as follows:
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2008     2007     2008     2007  
    (Dollars in millions)  
 
Automotive
                               
Depreciation and impairment
  $ 1,179     $ 1,219     $ 2,405     $ 2,464  
Amortization and impairment of special tools
    827       850       1,599       1,570  
Amortization of intangible assets
    20       18       40       35  
                                 
Total
    2,026       2,087       4,044       4,069  
                                 
Financing and Insurance Operations
                               
Depreciation and impairment
    285       334       496       713  
                                 
Total consolidated depreciation and amortization
  $ 2,311     $ 2,421     $ 4,540     $ 4,782  
                                 
 
Note 7. Product Warranty Liability
 
Activity for policy, product warranty, recall campaigns and certified used vehicle warranty liabilities is as follows:
 
                         
    Six Months
    Year
    Six Months
 
    Ended
    Ended
    Ended
 
    June 30,
    December 31,
    June 30,
 
    2008     2007     2007  
    (Dollars in millions)  
 
Beginning balance
  $ 9,615     $ 9,064     $ 9,064  
Increase in liability (warranties issued during period)
    2,126       5,135       2,592  
Payments
    (2,594 )     (4,539 )     (2,240 )
Adjustments to liability (pre-existing warranties)
    268       (165 )     (95 )
Effect of foreign currency translation
    71       223       142  
Liabilities transferred in the sale of Allison (Note 3)
          (103 )     (103 )
                         
Ending balance
  $ 9,486     $ 9,615     $ 9,360  
                         
 
We review and adjust 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)
 
Note 8. Pensions and Other Postretirement Benefits
 
  Adoption of SFAS No. 158
 
We recognize the funded status of our benefit plans in accordance with the provisions of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (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 obligations 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 an increase to Accumulated deficit of $782 million, $425 million 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 in the quarter 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 a decrease to Accumulated other comprehensive loss 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 $390 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.
 
The components of pension and other postemployment benefits (OPEB) net periodic expense (income) for the quarter and the year to date period ended June 30, 2008 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
 
    June 30,     June 30,     June 30,     June 30,  
    2008     2007     2008     2007     2008     2007     2008     2007  
    (Dollars in millions)  
Components of (income) expense
                                                               
Service cost
  $ 140     $ 160     $ 97     $ 110     $ 71     $ 93     $ 9     $ 11  
Interest cost
    1,303       1,216       313       266       919       901       59       48  
Expected return on plan assets
    (2,054 )     (1,986 )     (244 )     (229 )     (341 )     (350 )            
Amortization of prior service cost (credit)
    198       130       350       7       (466 )     (461 )     (26 )     (21 )
Amortization of transition obligation
                2                                
Recognized net actuarial loss
    62       211       70       86       187       339       30       30  
Curtailments, settlements and other
    3,049             216       20       (36 )     1              
Divestiture of Allison
          (5 )                       (2 )            
                                                                 
Net (income) expense from continuing operations
  $ 2,698     $ (274 )   $ 804     $ 260     $ 334     $ 521     $ 72     $ 68  
                                                                 
 


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
                                                                 
    U.S. Plans
    Non-U.S. Plans
    U.S. Other
    Non-U.S.
 
    Pension Benefits     Pension Benefits     Benefits     Other Benefits  
    Six Months Ended
    Six Months Ended
    Six Months Ended
    Six Months Ended
 
    June 30,     June 30,     June 30,     June 30,  
    2008     2007     2008     2007     2008     2007     2008     2007  
    (Dollars in millions)  
Components of (income) expense
                                                               
Service cost
  $ 290     $ 320     $ 202     $ 229     $ 145     $ 186     $ 18     $ 21  
Interest cost
    2,595       2,431       633       521       1,833       1,803       119       94  
Expected return on plan assets
    (4,114 )     (3,972 )     (496 )     (447 )     (685 )     (700 )            
Amortization of prior service cost (credit)
    408       259       359       14       (931 )     (922 )     (50 )     (41 )
Amortization of transition obligation
                4                                
Recognized net actuarial loss
    128       422       139       168       374       678       57       57  
Curtailments, settlements and other
    3,266       2       221       41       (32 )     1              
Divestiture of Allison
          (10 )                       (5 )            
                                                                 
Net (income) expense from continuing operations
  $ 2,573     $ (548 )   $ 1,062     $ 526     $ 704     $ 1,041     $ 144     $ 131  
                                                                 
 
As a result of the Allison divestiture discussed in Note 3, we recorded an adjustment to the unamortized 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 in the quarter ended September 30, 2007. Those adjustments were included in the determination of the gain recognized on the sale of Allison. The net periodic pension and OPEB 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.
 
  Settlement Agreement
 
In October 2007, we signed a Memorandum of Understanding — Post-Retirement Medical Care (Retiree MOU) with the International Union, United Automotive, Aerospace and Agricultural Implement Workers of America (UAW), now superseded by the settlement agreement entered into in February 2008 (Settlement Agreement). The Settlement Agreement provides that responsibility for providing retiree health care will permanently shift from us to a new retiree plan funded by a new independent Voluntary Employee Beneficiary Association trust (New VEBA). The United States District Court for the Eastern District of Michigan certified the class and granted preliminary approval of the Settlement Agreement and we mailed notices to the class in March 2008. The fairness hearing was held on June 3, 2008 and on July 31, 2008 the court approved the Settlement Agreement. All appeals, if any, are expected to be exhausted no later than January 1, 2010.
 
When fully implemented, the Settlement Agreement will cap our payment for retiree healthcare obligations to UAW associated employees, retirees and dependents as defined in the Settlement Agreement; will supersede and replace the 2005 UAW Health Care Settlement Agreement, as discussed in our 2007 10-K; and will transfer responsibility for administering retiree healthcare benefits for these individuals to a new retiree health care plan (the New Plan) to be established and funded by the New VEBA. Before it can become effective, the Settlement Agreement is subject to the exhaustion of any appeals of the July 31, 2008 court approval and the completion of discussions between us and the SEC regarding whether the accounting treatment for the transactions contemplated by the Settlement Agreement is on a basis we find to be reasonably satisfactory. In light of these contingencies, no recognition of the Settlement Agreement has been made in these condensed consolidated financial statements. The Settlement Agreement provides that on the later of January 1, 2010, or final court approval of the Settlement Agreement including the expiration of all appeals (Final Settlement Date), we will transfer our obligations to provide covered UAW employees with postretirement medical benefits to the New Plan.

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
In accordance with the Settlement Agreement, effective January 1, 2008 for bookkeeping purposes only, we divided the existing internal VEBA into two bookkeeping accounts. One account consists of the percentage of the existing internal VEBA’s assets at January 1, 2008 that is equal to the estimated percentage of our hourly OPEB obligation covered by the existing internal VEBA attributable to non-UAW represented employees and retirees, their eligible spouses, surviving spouses and dependents (Non-UAW Related Account) and had a balance of $1.2 billion. The second account consists of the remaining percentage of the assets in the existing internal VEBA at January 1, 2008 (UAW Related Account) and had a balance of $14.5 billion. No amounts will be withdrawn from the UAW Related Account, including its investment returns, from January 1, 2008 until the transfer of assets to the New VEBA.
 
In February 2008, pursuant to the Settlement Agreement, we issued a $4.0 billion short-term note (Short-Term Note) to LBK, LLC, a Delaware limited liability company of which we are the sole member (LBK). The Short-Term Note pays interest at a rate of 9% and matures on the date that the face amount of the Short-Term Note is paid with interest to the New VEBA in accordance with the terms of the Settlement Agreement. LBK will hold the Short-Term Note until maturity.
 
In February 2008, pursuant to the Settlement Agreement, we issued $4.4 billion principal amount of our 6.75% Series U Convertible Senior Debentures due December 31, 2012 (Convertible Note) to LBK. LBK will hold the Convertible Note until it is transferred to the New VEBA in accordance with the terms of the Settlement Agreement. Interest on the Convertible Note is payable semiannually. In accordance with the Settlement Agreement, LBK would have transferred any interest it receives on the Convertible Note to a temporary asset account we maintain. The funds in the temporary asset account would have been transferred to the New VEBA in accordance with the terms of the Settlement Agreement.
 
As allowed by the Settlement Agreement and consented to by the Class Counsel, we are deferring approximately $1.7 billion of payments contractually required under the Settlement Agreement to the New VEBA, including interest on the above mentioned Convertible Note which would have been payable to the temporary asset accounts in 2008 and 2009. These payments are deferred until the Final Settlement Date and will be increased by an annual interest factor of 9%.
 
In conjunction with the issuance of the Convertible Note, we entered into certain cash-settled derivative instruments maturing on June 30, 2011 with LBK that will have the economic effect of reducing the conversion price of the Convertible Note from $40 to $36. These derivative instruments will also entitle us to partially recover the additional economic value provided if our common stock price appreciates to between $63.48 and $70.53 per share by June 30, 2011 and to fully recover the additional economic value provided if our common stock price reaches $70.53 per share or above by June 30, 2011. Pursuant to the Settlement Agreement, LBK will transfer its interests in the derivatives to the New VEBA when the Convertible Note is transferred from LBK to the New VEBA following the Implementation Date.
 
Because LBK is a wholly-owned consolidated subsidiary, these securities, and the related interest income and expense, have been and will continue to be eliminated in our condensed consolidated financial statements until the Final Settlement Date.
 
Beginning in 2009, we may be required, under certain circumstances, to contribute an additional $165 million per year, limited to a maximum of an additional 19 payments, to either the temporary asset account or the New VEBA (when established). Such contributions will be required only if annual cash flow projections show that the New VEBA will become insolvent on a rolling 25-year basis. However, the potential $165 million contribution due in 2009 will be deferred until the Final Settlement Date and increased by an annual interest factor of 9%. At any time, we will have the option to prepay all remaining contingent $165 million payments.
 
Additionally, at the Final Settlement Date, which is expected to be in 2010, we would be required to transfer $7.0 billion, including the deferred amounts discussed above, subject to adjustment, to the New VEBA. Further at that time, we may either transfer an additional $5.6 billion to the New VEBA, subject to adjustment, or we may instead opt to make annual payments of varying amounts between $421 million and $3.3 billion through 2020. At any time after the Final Settlement Date we will have the option to prepay all remaining payments.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
  2008 Special Attrition Programs and U.S. Facility Idlings
 
In February 2008 we entered into agreements with the UAW and the International Union of Electronic, Electrical, Salaried, Machine and Furniture Workers of America — Communication Workers of America (IUE-CWA) regarding special attrition programs which were intended to further reduce the number of hourly employees. The UAW attrition program (2008 UAW Special Attrition Program) offered to our 74,000 UAW-represented employees consists of wage and benefit packages for normal and voluntary retirements, buyouts or pre-retirement employees with 26 to 29 years of service. In addition to their vested pension benefits, those employees that are retirement eligible will receive a lump sum payment, depending upon job classification, that will be funded from our U.S. hourly pension plan. For those employees not retirement eligible, other buyout options were offered. The terms offered to the 2,300 IUE-CWA represented employees (2008 IUE-CWA Special Attrition Program) are similar to those offered through the 2008 UAW Special Attrition Program. As a result of the 2008 UAW Special Attrition Program and 2008 IUE-CWA Special Attrition Program (2008 Special Attrition Programs), we recognized a curtailment loss on the U.S hourly pension plan under SFAS No. 88 “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits” (SFAS No. 88), of $2.4 billion (measured at May 31, 2008) due to the significant reduction in the expected aggregate years of future service as a result of the employees accepting the voluntary program. In addition, we recorded $633 million and $800 million of special termination benefits for irrevocable employee acceptances in the quarter and year to date period ended June 30, 2008, respectively. The combined curtailment loss and other special termination benefits in the quarter and year to date period ended June 30, 2008 of $3.0 billion and $3.2 billion, respectively, were recorded in Automotive cost of sales.
 
In addition to the expenses discussed above, the remeasurement of the U.S. hourly pension plan at May 31, 2008 generated an increase in net periodic pension income of $7 million in the quarter and year to date period ended June 30, 2008, as compared to the amount determined in connection with the December 31, 2007 remeasurement. The U.S. hourly pension plan remeasurement resulted in an increase to the projected benefit obligation (PBO) of $842 million at May 31, 2008, which includes the impact of other previously announced facility idlings in the U.S. as well as changes in certain actuarial assumptions. The discount rate used to determine the PBO at May 31, 2008 was 6.45%. This represents a 15 basis point increase from the 6.30% used at December 31, 2007. This impact is reflected in the tables above.
 
In anticipation of the possibility of a curtailment as a result of the 2008 UAW Special Attrition Program, we remeasured the UAW hourly medical plan at May 31, 2008. Subsequent to the remeasurement we determined that a curtailment did not occur, however as required by SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other than Pensions” (SFAS No. 106), we have recorded the effects of the May 31, 2008 remeasurement of the UAW hourly medical plan in our condensed consolidated financial statements. This impact resulted in an immaterial adjustment to accumulated postretirement benefit obligation (APBO) and our net periodic OPEB expense which is reflected in the tables above. As a result of the 2008 Special Attrition Programs a number of smaller OPEB plans were curtailed in accordance with SFAS No. 106. The remeasurements of these plans resulted in a $104 million curtailment gain under SFAS No. 106. In addition we recorded $68 million of special termination benefits and other costs in the quarter and year to date period ended June 30, 2008 related to OPEB plans.
 
  Canada Facility Idlings and Canadian Auto Workers Union Negotiations
 
In the quarter ended June 30, 2008, we reached an agreement with the Canadian Auto Workers Union (CAW) (2008 CAW Agreement) which resulted in increased pension benefits. Additionally, subsequent to reaching an agreement with the CAW, we announced our plan to cease production at the Oshawa Truck Plant (Oshawa) in Canada due to a decrease in consumer demand for trucks which triggered a curtailment of the Canadian hourly and salaried pension plans (Canadian Pension Plans). Accordingly, we remeasured the Canadian Pension Plans at May 31, 2008 using a discount rate of 6.0%. Also included in the remeasurement were the effects of other previously announced facility idlings as well as changes in certain other actuarial assumptions. The remeasurements resulted in a curtailment loss of $177 million under SFAS No. 88 related to the Canadian Pension Plans and, before foreign exchange effects, an increase to the PBO of $262 million. In addition, we recorded $37 million of contractual termination benefits in the quarter and year to date period ended June 30, 2008.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Prior to the 2008 CAW Agreement, we amortized prior service cost related to our hourly defined benefit pension plan in Canada over the remaining service period for active employees at the time of the amendment, currently estimated to be 10 years. In conjunction with entering into the 2008 CAW Agreement, we evaluated the 2008 CAW Agreement and the relationship with the CAW and determined that the contractual life of the labor agreements is now a better reflection of the period of future economic benefit received from pension plan amendments negotiated as part of our collectively bargained agreement. Therefore, we are amortizing these amounts over a three year period. We recorded $334 million of additional net periodic pension expense in the quarter and year to date period ended June 30, 2008 related to the accelerated recognition of previously unamortized prior service costs related to pension increases in Canada from prior collectively bargained agreements. This additional expense is primarily related to a change in the amortization period of existing prior service costs at the time of the 2008 CAW Agreement. The combined pension related charges of $548 million were recorded in Automotive cost of sales in the quarter and year to date period ended June 30, 2008.
 
Additionally, we remeasured the Canadian Hourly Retiree Medical Plan on May 31, 2008. The remeasurement reflected the plan amendment in the 2008 CAW Agreement as well as the announced capacity reductions and utilized updated actuarial assumptions, including the discount rate. The remeasurement resulted in an immaterial adjustment to the APBO and to net periodic OPEB expense for the quarter and year to date period ended June 30, 2008.
 
  Legal Services Plans and Restatement of Financial Information
 
The accompanying condensed consolidated balance sheet and statement of stockholders’ deficit at June 30, 2007 have been restated to correct the accounting for certain benefit plans that provide legal services to hourly employees represented by the UAW, IUE-CWA and the CAW (Legal Services Plans) as discussed in our 2007 10-K. In order to correct the condensed consolidated balance sheet at June 30, 2007, we increased deferred tax assets and OPEB liabilities by $112 million and $323 million, respectively. This resulted in a reduction of $211 million to the previously reported stockholders’ deficit at June 30, 2007. We have not restated the condensed consolidated statements of operations or cash flows for the quarter and year to date period ended June 30, 2007 for this misstatement because we have concluded that the impact is immaterial.
 
Note 9. Commitments and Contingencies
 
  Commitments
 
We have provided guarantees related to the residual value of certain operating leases. At June 30, 2008, the maximum potential amount of future undiscounted payments that could be required to be made under these guarantees amounted to $95 million. These guarantees terminate during years ranging from 2008 to 2035. Certain leases contain renewal options. In May 2008, we purchased our headquarters building in Detroit. Prior to the purchase, we were leasing the building under an operating lease and had guaranteed $626 million related to its residual value. The guarantee expired in conjunction with the acquisition.
 
We have agreements with third parties that guarantee the fulfillment of certain suppliers’ commitments and related obligations. At June 30, 2008, the maximum potential future undiscounted payments that could be required to be made under these guarantees amount to $631 million. Included in this amount is $570 million which relates to a guarantee provided to GMAC in Brazil in connection with dealer floor plan financing. This guarantee is secured by a $653 million certificate of deposit provided by GMAC to which we have title. These guarantees terminate during years ranging from 2008 to 2017, or upon the occurrence of specific events, such as an entity’s cessation of business. We have recorded liabilities totaling $26 million related to these guarantees.
 
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 may also apply to certain guarantees.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
We also provide payment guarantees on commercial loans made by GMAC and outstanding with certain third parties, such as dealers or rental car companies. At June 30, 2008, the maximum commercial obligations we guaranteed related to these loans was $132 million. Years of expiration related to these guarantees range from 2008 to 2012. We determined the value ascribed to the guarantees to be insignificant based on the credit worthiness of the third parties.
 
In connection with certain divestitures of assets or operating businesses, we have entered into agreements indemnifying certain buyers and other parties with respect to environmental conditions pertaining to real property we owned. Also, in connection with such divestitures, we have provided guarantees with respect to benefits to be paid to former employees relating to pensions, postretirement health care and life insurance. Aside from indemnifications and guarantees related to Delphi Corporation (Delphi) or a specific divested unit, both of which are discussed below, due to the conditional nature of these obligations it is not possible to estimate our maximum exposure under these indemnifications or guarantees. No amounts have been recorded for such obligations as they are not probable and estimable at this time.
 
In addition to the guarantees and indemnifying agreements mentioned above, we 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.
 
Refer to Note 16 for additional information on guarantees that we provide to GMAC.
 
  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 our opinion that none of these items, when finally resolved, is expected to have a material adverse effect on our financial position or liquidity. However, it is possible that the resolution of one or more environmental matters could exceed the amounts accrued in an amount that could be material to our results of operations in any particular reporting period.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
  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:
 
  •   A majority of these claims seek damages for illnesses alleged to have resulted from asbestos used in brake components;
  •   Limited numbers of claims have arisen from asbestos contained in the insulation and brakes used in the manufacturing of locomotives; and
  •   Claims brought by contractors who allege exposure to asbestos-containing products while working on premises we owned.
 
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, we believe that only a small proportion of the claimants has or will develop any asbestos-related physical impairment. Only a small percentage of the claims pending against us allege causation of a 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.
 
We record the estimated liability associated with asbestos personal injury claims where the expected loss is both probable and can reasonably be estimated. In the quarter ended December 31, 2007, we retained Hamilton, Rabinovitz & Associates, Inc. (HRA), a firm specializing in estimating asbestos claims to assist us in determining our potential liability for pending and unasserted future asbestos personal injury claims. The analysis relies on and includes the following information and factors:
 
  •   A third party forecast of the projected incidence of malignant asbestos-related disease likely to occur in the general population of individuals occupationally exposed to asbestos;
  •   Data concerning claims filed against us and resolved, amounts paid, and the nature of the asbestos-related disease or condition asserted during approximately the last four years (Asbestos Claims Experience);
  •   The estimated rate of asbestos-related claims likely to be asserted against us in the future based on our Asbestos Claims Experience and the projected incidence of asbestos-related disease in the general population of individuals occupationally exposed to asbestos;
  •   The estimated rate of dismissal of claims by disease type based on our Asbestos Claims Experience; and
  •   The estimated indemnity value of the projected claims based on our Asbestos Claims Experience, adjusted for inflation.
 
We reviewed a number of factors, including the analysis provided by HRA and increased our reserve by $349 million in the quarter ended December 31, 2007 to reflect a reasonable estimate of our probable liability for pending and future asbestos-related claims projected to be asserted over the next ten years, including legal defense costs. We will monitor our actual claims experience for consistency with this estimate and make periodic adjustments as appropriate.
 
We believe that our analysis was based on the most relevant information available combined with reasonable assumptions, and that we may prudently rely on its conclusions to determine the estimated liability for asbestos-related claims. We note, however, that the analysis is inherently subject to significant uncertainties. The data sources and assumptions used in connection with the analysis may not prove to be reliable predictors with respect to claims asserted against us. Our experience in the recent past includes substantial variation in relevant factors, and a change in any of these assumptions — which include the source of the claiming population, the filing rate and the value of claims — could significantly increase or decrease the estimate. In addition, other external factors such as legislation affecting the format or timing of litigation, the actions of other entities sued in asbestos personal injury actions, the distribution of assets from various trusts established to pay asbestos claims and the outcome of cases litigated to a final verdict could affect the estimate.
 
At June 30, 2008, December 31, 2007 and June 30, 2007, our liability recorded for asbestos-related matters was $672 million, $637 million and $538 million, respectively. The reserve balance between June 30, 2007 and December 31,


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
2007 increased primarily as a result of a $349 million increase in the reserve for probable pending and future asbestos claims, as discussed above, which was partially offset by a reduction in the reserve for existing claims of $251 million resulting from fewer claims and lower expenses than previously estimated.
 
  Contingent Matters — Litigation
 
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 (ERISA), 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. In certain cases we are the plaintiff or appellant related to these types of matters.
 
With regard to the litigation 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 June 30, 2008. We believe that we have appropriately accrued for such matters under SFAS No. 5 “Accounting for Contingencies” (SFAS No. 5), or, for matters not requiring accrual, that such matters will not have a material adverse effect on our results of operations or financial position based on information currently available to us. Litigation is inherently unpredictable, however, and unfavorable resolutions could occur. Accordingly, it is possible that an adverse outcome from such proceedings could exceed the amounts accrued in an amount that could be material to us with respect to our results of operations in any particular reporting period.
 
In July 2008 we reached a tentative settlement of the General Motors Securities Litigation suit and recorded a charge of $277 million in the quarter ended June 30, 2008. We believe that a portion of our settlement costs are covered by insurance. We anticipate recording income of approximately $200 million in the third quarter of 2008 associated with insurance-related indemnification proceeds for previously recorded litigation related costs, including the cost incurred to settle the General Motors Securities Litigation suit.
 
  Delphi Corporation
 
     Benefit Guarantee
 
In 1999, we spun-off Delphi Automotive Systems Corporation (DASC), which became Delphi. Delphi is our largest supplier of automotive systems, components and parts and we are Delphi’s largest customer. At the time of the spin-off, employees of DASC became employees of Delphi. As part of the separation agreements, Delphi assumed the pension and other postretirement benefit obligations for these transferred U.S. hourly employees who retired after October 1, 2000 and we retained pension and other postretirement obligations for U.S. hourly employees who retired on or before October 1, 2000. Additionally at the time of the spin-off, we entered into separate agreements with the UAW, the IUE-CWA and the United Steel Workers (USW) (individually, the UAW, IUE-CWA and USW Benefit Guarantee Agreements and, collectively, the Benefit Guarantee Agreements) providing contingent benefit guarantees whereby we would make payments for certain pension benefits and OPEB to certain former U.S. hourly employees that became employees of Delphi (defined as Covered Employees). Each Benefit Guarantee Agreement contains separate benefit guarantees relating to pension and OPEB obligations, with different triggering events. The UAW, IUE-CWA and USW required through the Benefit Guarantee Agreements that in the event that Delphi or its successor companies ceases doing business or becomes subject to financial distress we could be liable if Delphi fails to provide the corresponding benefits at the required level. 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


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
corresponding benefit guarantee. In turn, Delphi has entered into an agreement (Indemnification Agreement) with us that requires Delphi to indemnify us if we are required to perform under the UAW Benefit Guarantee Agreement. In addition, with respect to pension benefits, our guarantee 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 Indemnification Agreement and the UAW Benefit Guarantee Agreements were recently extended until September 30, 2008.
 
We received notice from Delphi, dated October 8, 2005, that it was more likely than not that we would become obligated to provide benefits pursuant to the Benefit Guarantee Agreements, in connection with its commencement of Chapter 11 proceedings under the U.S. Bankruptcy Code. The notice stated that Delphi was unable to estimate the timing and scope of any benefits we might be required to provide under the Benefit Guarantee Agreements; however, in 2005, we believed it was probable that we had incurred a liability under the Benefit Guarantee Agreements. Also, on October 8, 2005, Delphi filed a petition for Chapter 11 proceedings under the U.S. Bankruptcy Code for itself and many of its U.S. subsidiaries. In June 2007 we entered into a Memorandum of Understanding with Delphi and the UAW (Delphi UAW MOU) which included terms relating to the consensual triggering of the UAW Benefit Guarantee Agreement as well as additional terms relating to Delphi’s restructuring. Under the Delphi UAW MOU we also agreed to pay for certain healthcare costs of Delphi retirees and their beneficiaries in order to provide a level of benefits consistent with those provided to our retirees and their beneficiaries from the Mitigation Plan VEBA, as discussed in our 2007 10-K. We also 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. Such amount is expected to be amortized to expense over future years. In August 2007, we entered into a Memorandum of Understanding with Delphi and the IUE-CWA (Delphi IUE-CWA MOU), and we entered into two separate Memoranda of Understanding with Delphi and the USW (collectively the USW MOUs). The terms of the Delphi IUE-CWA MOU and the USW MOUs are similar to the Delphi UAW MOU with regard to the consensual triggering of the Benefit Guarantee Agreements.
 
     Delphi-GM Settlement Agreements
 
We have entered into comprehensive settlement agreements with Delphi (Delphi-GM Settlement Agreements) consisting of a Global Settlement Agreement, as amended (GSA) and a Master Restructuring Agreement, as amended (MRA) that would become effective upon Delphi’s substantial consummation of its Plan of Reorganization (POR) and our receipt of consideration provided for in the POR. The GSA is intended to resolve outstanding issues between Delphi and us that have arisen or may arise before Delphi’s emergence from Chapter 11. The MRA is intended to govern certain aspects of our commercial relationship following Delphi’s emergence from Chapter 11. The more significant items contained in the Delphi-GM Settlement Agreements include our commitment 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;
  •   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;
  •   Assume $1.5 billion of net pension obligations of Delphi and Delphi providing us a $1.5 billion note receivable;
  •   Reimburse Delphi for all retirement incentives and half of the buyout payments made pursuant to the various attrition program provisions and to reimburse certain U.S. hourly buydown payments made to hourly employees of Delphi;
  •   Award future product programs to Delphi and provide Delphi with ongoing preferential sourcing for other product programs, with Delphi re-pricing existing and awarded business;
  •   Reimburse certain U.S. hourly labor costs incurred to produce systems, components and parts for us from October 1, 2006 through September 14, 2015 at certain U.S. facilities owned or to be divested by Delphi (Labor Cost Subsidy);
  •   Reimburse Delphi’s cash flow deficiency attributable to production at certain U.S. facilities that continue to produce systems, components and parts for us until the facilities are either closed or sold by Delphi (Production Cash Burn Support); and
  •   Guarantee a minimum recovery of the net working capital that Delphi has invested in certain businesses held for sale.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
In addition, Delphi agreed to provide us or our designee with an option to purchase all or any of certain Delphi businesses for one dollar if such businesses have not been sold by certain specified deadlines. If such a business is not sold either to a third party or to us or any affiliate pursuant to the option by the applicable deadline, we (or at our option, an affiliate) will be deemed to have exercised the purchase option, and the unsold business, including materially all of its assets and liabilities, will automatically transfer to the GM “buyer”. Similarly, under the Delphi UAW MOU if such a transfer has not occurred by the applicable deadline, responsibility for the UAW hourly employees of such an unsold business affected would automatically transfer to us or our designated affiliate.
 
The GSA also resolves all claims in existence as of the effective date of Delphi’s POR that either Delphi or we have or may have against the other. Additionally, the GSA provides that Delphi will pay us: (1) $1.5 billion in a combination of at least $750 million in cash and a second lien note; and (2) $1.0 billion in junior preferred convertible stock at POR value upon Delphi’s substantial consummation of its POR. In February 2008 we informed Delphi that we were prepared to reduce the cash portion of our distributions significantly and accept an equivalent amount of debt in the form of a first or second lien note to help facilitate Delphi’s successful emergence from bankruptcy proceedings. Under Delphi’s POR and as a result of our agreed participation in Delphi’s exit financing, our total recovery would have consisted of $300 million in cash, $2.7 billion in second lien debt and $1.0 billion in junior preferred convertible stock at the POR value. The second lien debt includes $1.5 billion relating to our assumption of $1.5 billion of Delphi net pension obligations. The ultimate value of any consideration is contingent on the fair market value of Delphi’s securities upon emergence from bankruptcy. In the course of discussions since April 2008, it has become clear that based on negotiations with Delphi and other stakeholders the structure and amounts of our distributions would change.
 
In January 2008, Delphi withdrew its March 2006 motion under the U.S. Bankruptcy Code seeking to reject certain supply contracts with us.
 
The Bankruptcy Court entered an order on January 25, 2008 confirming Delphi’s POR, including the Delphi-GM Settlement Agreements. On April 4, 2008, Delphi announced that although it had met the conditions required to substantially consummate its POR, including obtaining $6.1 billion in exit financing, Delphi’s plan investors refused to participate in the closing of the transaction contemplated by the POR, which was commenced but not completed because of the plan investors’ position. The current credit markets, the lack of plan investors and the challenges facing the auto industry make it difficult for Delphi to emerge from bankruptcy. As a result, it is unlikely that Delphi will emerge from bankruptcy in the near-term. We believe that Delphi will continue to seek alternative arrangements to emerge from bankruptcy, but there can be no assurance that Delphi will be successful in obtaining any alternative arrangements. The resulting uncertainty could potentially disrupt our ability to plan future production and realize our cost reduction goals, affect our relationship with the UAW, result in our providing additional financial support to Delphi, receive less than the distributions that we expected from the resolution of Delphi’s bankruptcy proceedings, and assume some of Delphi’s obligations to its workforce and retirees.
 
We continue to work with Delphi and its stakeholders to facilitate Delphi’s efforts to emerge from bankruptcy. As part of this effort, in May 2008, we agreed to advance up to $650 million to Delphi during 2008, which is within the amounts we would have owed under the Delphi-GM Settlement Agreements had Delphi emerged from bankruptcy in April 2008. In August 2008 we agreed to increase the amount we could advance to $950 million during 2008, which is within the amounts we would owe under the Delphi-GM Settlement Agreements if Delphi were to emerge from bankruptcy in December 2008. We will receive an administrative claim for funds we advance to Delphi under this arrangement. We also are discussing with Delphi the possible implementation of the Delphi-GM Settlement Agreements in the near-term.
 
In the quarter and year to date period ended June 30, 2008, we recorded charges in Other expenses of $2.8 billion and $3.5 billion, respectively, to increase our net liability related to the Benefit Guarantee Agreements, primarily due to expectations of increased obligations and updated estimates reflecting uncertainty around the nature, value and timing of our recoveries upon emergence of Delphi from bankruptcy. In addition, in the quarter ended June 30, 2008, we recorded a charge of $294 million primarily in connection with the Delphi-GM Settlement Agreements in Automotive cost of sales. In the quarter and year to date


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
period ended June 30, 2007, we recorded charges in Other expenses totaling $575 million to increase our estimated liability under the Benefit Guarantee Agreements and Delphi-GM Settlement Agreements. Since 2005, we have recorded total charges of $11.0 billion in Other expenses in connection with the Benefit Guarantee Agreements and Delphi-GM Settlement Agreements which reduces recovery on our bankruptcy claims to $0. These charges are net of consideration we may receive for assumption of Delphi’s net pension obligations. Our commitments under the Delphi-GM Settlement Agreements for the Labor Cost Subsidy and Production Cash Burn Support in the quarter ended June 30, 2008 are included in the $294 million charge and are expected to result in additional expense of between $250 million and $400 million annually in 2009 through 2015, which will be treated as a period cost and expensed as incurred as part of Automotive cost of sales. Due to the uncertainties surrounding Delphi’s ability to emerge from bankruptcy it is reasonably possible that additional losses could arise in the future, but we currently are unable to estimate the amount or range of such losses, if any.
 
  Benefit Guarantees Related to Divested Facilities
 
We have entered into various guarantees regarding benefits for our former employees at two previously divested facilities that manufacture component parts whose results continue to be included in our consolidated financial statements in accordance with FASB Interpretation (FIN) No. 46(R), “Consolidation of Variable Interest Entities” (FIN No. 46(R)). For these divested facilities, 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 facilities and with the UAW guaranteeing certain postretirement health care benefits and payment of postemployment benefits.
 
In 2007, we recognized favorable adjustments of $44 million related to these facility idlings, in addition to a $38 million curtailment gain with respect to OPEB.
 
Note 10. Income Taxes
 
Under Accounting Principles Board Opinion No. 28, “Interim Financial Reporting” (APB No. 28), 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.
 
Pursuant to SFAS No. 109, valuation allowances have been established for deferred tax assets based on a “more likely than not” threshold. Our ability to realize our deferred tax assets depends on our ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction. We have considered the following possible sources of taxable income when assessing the realization of our deferred tax assets:
 
  •   Future reversals of existing taxable temporary differences;
  •   Future taxable income exclusive of reversing temporary differences and carryforwards;
  •   Taxable income in prior carryback years; and
  •   Tax-planning strategies.
 
Pursuant to SFAS No. 109, concluding that a valuation allowance is not required is difficult when there is significant negative evidence which is objective and verifiable, such as cumulative losses in recent years. We utilize a rolling three years of actual and current year anticipated results as our primary measure of our cumulative losses in recent years. However, because a substantial portion of those cumulative losses related to various non-recurring matters and the implementation of our North American Turnaround Plan, we adjusted those three-year cumulative results for the effect of these items. The analysis performed in the quarters ended September 30, 2007 and March 31, 2008 indicated that in the United States, Canada, Germany


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
and the United Kingdom, we had cumulative three-year losses on an adjusted basis. In Spain, we anticipate being in a cumulative three-year loss position in the near-term. This is considered significant negative evidence which is objective and verifiable and therefore, difficult to overcome. In addition, as discussed in “Near-Term Market Challenges” our near-term financial outlook in these jurisdictions remains challenging. Accordingly, in the quarter ended September 30, 2007, we concluded that the objectively verifiable negative evidence of our recent historical losses combined with our challenging near-term outlook out-weighed other factors and that it was more likely than not that we would not generate taxable income to realize our net deferred tax assets, in whole or in part in the United States, Canada and Germany. Our three-year adjusted cumulative loss in the United States at June 30, 2008 has increased from that at December 31, 2007; therefore we continue to believe this conclusion is appropriate. As it relates to our assessment in the United States, many factors in our evaluation are not within our control, particularly:
 
  •   The possibility for continued or increasing price competition in the highly competitive U.S. market;
  •   Continued high fuel prices and the effect that may have on consumer preferences related to our most profitable products, fullsize pick-up trucks and sport utility vehicles;
  •   Uncertainty over the effect on our cost structure from more stringent U.S. fuel economy and global emissions standards which may require us to sell higher volumes of alternative fuel vehicles across our portfolio;
  •   Uncertainty as to the future operating results of GMAC; and
  •   Acceleration of tax deductions for OPEB liabilities as compared to prior expectations due to changes associated with the Settlement Agreement.
 
We recorded full valuation allowances against our net deferred tax assets in the United States, Canada and Germany in the quarter ended September 30, 2007 and in Spain and the United Kingdom in the quarter ended March 31, 2008. With regard to the United States, Canada, Germany, Spain and the United Kingdom we continue to believe that full valuation allowances are needed against our net deferred tax assets in these tax jurisdictions.
 
If, in the future, we generate taxable income in the United States, Canada, Germany, Spain and the United Kingdom on a sustained basis, our conclusion regarding the need for full valuation allowances in these tax jurisdictions could change, resulting in the reversal of some or all of such valuation allowances. If our U.S., Canadian, German, Spanish or United Kingdom operations generate taxable income prior to reaching profitability on a sustained basis, we would reverse a portion of the valuation allowance related to the corresponding realized tax benefit for that period, without changing our conclusions on the need for a full valuation allowance against the remaining net deferred tax assets.
 
In the quarter ended March 31, 2008 and the year to date period ended June 30, 2008, we recognized income tax expense on Loss from continuing operations before income taxes, equity income and minority interests due to the effect of valuation allowances totaling $379 million recorded against our net deferred tax assets in the United Kingdom of $173 million and Spain of $206 million, which is discussed in more detail below. In the quarter and year to date period ended June 30, 2008 we recognized income tax expense on Loss from continuing operations before income taxes, equity income and minority interests due to the impact of no longer recording tax benefits for losses incurred in the United States, Canada, Germany, Spain, and the United Kingdom, unless offset by pretax income from other than continuing operations, based on the valuation allowances established in the quarters ended September 30, 2007 and March 31, 2008, as disclosed in our 2007 10-K and Quarterly Report on Form 10-Q for the period ended March 31, 2008, respectively.
 
In the quarter ended March 31, 2008, we determined that it was more likely than not that we would not realize our net deferred tax assets, in whole or in part, in Spain and the United Kingdom and recorded full valuation allowances totaling $379 million against our net deferred tax assets in these tax jurisdictions. The following summarizes the significant changes occurring in the three months ended March 31, 2008, which resulted in our decision to record these full valuation allowances.
 
In the United Kingdom, we are in a three-year adjusted cumulative loss position and our near-term and mid-term financial outlook for automotive market conditions is more challenging than we believed in the quarter ended December 31, 2007. Our outlook deteriorated based on our projections of the combined effects of the challenging foreign exchange environment and


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
unfavorable commodity prices. Additionally, we have increased our estimate of the potential costs that may arise from the regulatory and tax environment relating to carbon dioxide (CO2) emissions in the European Union, including legislation enacted or announced in 2008.
 
In Spain, although we are not currently in a three-year adjusted cumulative loss position our near-term and mid-term financial outlook deteriorated significantly in the three months ended March 31, 2008 such that we anticipate being in a three-year adjusted cumulative loss position in the near- and mid-term. In Spain, as in the United Kingdom, we are unfavorably affected by the combined effects of the foreign exchange environment and commodity prices, including our estimate of the potential costs that may arise from the regulatory and tax environment relating to CO2 emissions.
 
At June 30, 2008 and December 31, 2007, the amount of consolidated gross unrecognized tax benefits before valuation allowances was $2.9 billion and $2.8 billion, respectively, and the amount that would favorably affect the effective income tax rate in future periods after valuation allowances were $90 million and $68 million, respectively. At June 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 $2.6 billion and $1.7 billion, respectively. These amounts consider the guidance in FSP No. 48-1, “Definition of Settlement in FASB Interpretation No. 48” (FSP No. 48-1). At June 30, 2008, $2.3 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 have been reviewed by the Internal Revenue Service, and except for one transfer pricing matter, it is likely that this examination will conclude in 2008. We have submitted requests for Competent Authority assistance on the transfer pricing matter. The Internal Revenue Service is currently reviewing our 2004 through 2006 federal income tax returns. In addition, our previously filed tax returns are currently under review in Argentina, Australia, Belgium, Canada, Ecuador, France, Germany, Greece, India, Indonesia, Italy, Japan, Korea, Mexico, New Zealand, Russia, Spain, Switzerland, Taiwan, Thailand, Turkey, the United Kingdom and Venezuela. Tax audits in Mexico and the United Kingdom concluded during 2008. At June 30, 2008 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 2007 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.
 
Note 11. Fair Value Measurements
 
In September 2006, the FASB issued SFAS No. 157 and in February 2007, issued SFAS No. 159. Both standards address aspects of the expanding application of fair value accounting. Effective January 1, 2008, we adopted SFAS No. 157 and SFAS No. 159. Pursuant to the provisions of FSP No. 157-2, we have decided to defer adoption of SFAS No. 157 for one year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. There was no adjustment to Accumulated deficit as a result of our adoption of SFAS No. 157. SFAS No. 159 permits an entity to measure certain financial assets and financial liabilities at fair value that were not previously required to be measured at fair value. We have not elected to measure any financial assets or financial liabilities at fair value which were not previously required to be measured at fair value.
 
SFAS No. 157 provides for the following:
 
  •   Defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, and establishes a framework for measuring fair value;


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
  •   Establishes a three-level hierarchy for fair value measurements based upon the observability of inputs to the valuation of an asset or liability at the measurement date;
  •   Requires consideration of our nonperformance risk when valuing liabilities; and
  •   Expands disclosures about instruments measured at fair value.
 
SFAS No. 157 also establishes a three-level valuation hierarchy for fair value measurements. These valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. These two types of inputs create the following fair value hierarchy:
 
  •   Level 1 — Quoted prices for identical instruments in active markets;
  •   Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable: and
  •   Level 3 — Instruments whose significant inputs are unobservable.
 
Following is a description of the valuation methodologies we used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.
 
  Securities
 
We classify our securities within Level 1 of the valuation hierarchy where quoted prices are available in an active market. Level 1 securities include exchange-traded equities. If quoted market prices are not available, we determine the fair values of our securities using pricing models, quoted prices of securities with similar characteristics or discounted cash flow models. These models are primarily industry-standard models that consider various assumptions, including time value and yield curve as well as other relevant economic measures. Examples of such securities, which we would generally classify within Level 2 of the valuation hierarchy, include U.S. government and agency securities, certificates of deposit, commercial paper, and corporate debt securities. In certain cases where there is limited activity or less observability to inputs to the valuation, we classify our securities within Level 3 of the valuation hierarchy. Inputs to the Level 3 security fair value measurements consider various assumptions, including time value, yield curve, prepayment speeds, default rates, loss severity, current market and contractual prices for underlying financial instruments as well as other relevant economic measures. Securities classified within Level 3 include certain mortgage-backed securities, certain corporate debt securities and other securities.
 
  Derivatives
 
The majority of our derivatives are valued using internal models that use as their basis readily observable market inputs, such as time value, forward interest rates, volatility factors, and current and forward market prices for commodities and foreign exchange rates. We generally classify these instruments within Level 2 of the valuation hierarchy. Such derivatives include interest rate swaps, cross currency swaps, foreign currency derivatives and commodity derivatives. We classify derivative contracts that are valued based upon models with significant unobservable market inputs as Level 3 of the valuation hierarchy. Examples include certain long-dated commodity purchase contracts and interest rate derivatives with notional amounts that fluctuate over time. Models for these fair value measurements include unobservable inputs based on estimated forward rates and prepayment speeds.
 
SFAS No. 157 requires that the valuation of derivative liabilities must take into account the company’s own nonperformance risk. Effective January 1, 2008, we updated our derivative liability valuation methodology to consider our own nonperformance risk as observed through the credit default swap market and bond market.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The following table presents the financial instruments measured at fair value on a recurring basis:
 
                                 
   
Fair Value Measurements on a Recurring Basis at June 30, 2008
 
    Level 1     Level 2     Level 3     Total  
          (Dollars in millions)        
 
Assets
                               
Securities
                               
Equity
  $ 416     $ 20     $     $ 436  
United States government and agency
          908             908  
Mortgage-backed
                248       248  
Certificates of deposit
          2,977             2,977  
Commercial paper
          5,288             5,288  
Corporate debt
          453             453  
Other
          2       234       236  
Derivatives
                               
Cross currency swaps
          17             17  
Interest rate swaps
          104       6       110  
Foreign currency derivatives
          684             684  
Commodity derivatives
          662       341       1,003  
                                 
Total Assets
  $ 416     $ 11,115     $ 829     $ 12,360  
                                 
Liabilities
                               
Derivatives
                               
Cross currency swaps
  $     $ 82     $     $ 82  
Interest rate swaps
                6       6  
Foreign currency derivatives
          1,930             1,930  
Commodity derivatives
          239             239  
                                 
Total Liabilities
  $     $ 2,251     $ 6     $ 2,257  
                                 


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The tables below include the activity in the balance sheet accounts for financial instruments classified within Level 3 of the valuation hierarchy. When a determination is made to classify a financial instrument within Level 3, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement. Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components which are validated to external sources.
 
                                                 
          Level 3 Financial Assets and Liabilities
       
          Three Months Ended June 30, 2008        
    Mortgage-backed
    Interest Rate
    Commodity
    Corporate Debt
    Other
    Total Net
 
    Securities(a)     Swaps, net     Derivatives(b)     Securities(a)     Securities(a)     Assets  
                (Dollars in millions)              
 
Beginning balance
  $      283     $      —     $ 354     $ 51     $ 221     $ 909  
Total realized/unrealized gains (losses):
                                               
Included in earnings
    (9 )           15             (12 )     (6 )
Included in other comprehensive income
    6                         11       17  
Purchases, issuances, and settlements
    (32 )           (28 )     (51 )     14       (97 )
Transfer in and/or out of Level 3
                                   
                                                 
Ending balance
  $ 248     $     $ 341     $     $ 234     $ 823  
                                                 
Amount of total gains and (losses) for the period included in earnings attributable to the change in unrealized gains or (losses) relating to assets still held at the reporting date
  $ (9 )   $     $ 15     $     $ (12 )   $ (6 )
                                                 
(a) Realized gains (losses) and other than temporary impairments on marketable securities are recorded in Automotive interest and other non-operating income (expense), net.
(b) Realized and unrealized gains (losses) on commodity derivatives are recorded in Automotive cost of sales and changes in fair value are attributable to changes in base metal and precious metal prices.
 
Unrealized securities holding gains and losses are excluded from earnings and reported in Other comprehensive income until realized. Gains and losses are not realized until an instrument is settled or sold. On a monthly basis, we evaluate whether unrealized losses related to investments in debt and equity securities are other than temporary. Factors considered in determining whether a loss is other than temporary include the length of time and extent to which the fair value has been below cost, the financial condition and near-term prospects of the issuer and our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery. If losses are determined to be other than temporary, the loss is recognized and the investment carrying amount is adjusted to a revised fair value. Other than temporary impairment losses of $11 million and $28 million were recorded for the quarter and year to date period ended June 30, 2008, respectively.
 


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
                                                 
          Level 3 Financial Assets and Liabilities
       
          Six Months Ended June 30, 2008        
    Mortgage-backed
    Interest Rate
    Commodity
    Corporate Debt
    Other
    Total Net
 
    Securities(a)     Swaps, net(b)     Derivatives(c)     Securities(a)     Securities(a)     Assets  
                (Dollars in millions)              
 
Beginning balance
  $ 283     $ 2     $ 257     $ 28     $ 258     $ 828  
Total realized/unrealized gains (losses):
                                               
Included in earnings
    (9 )           134       23       (32 )     116  
Included in other comprehensive income
    1                         8       9  
Purchases, issuances, and settlements
    (27 )     (2 )     (50 )     (51 )           (130 )
Transfer in and/or out of Level 3
                                   
                                                 
Ending balance
  $ 248     $     $ 341     $     $ 234     $ 823  
                                                 
Amount of total gains and (losses) for the period included in earnings attributable to the change in unrealized gains or (losses) relating to assets still held at the reporting date
  $ (9 )   $     $ 134     $     $ (32 )   $ 93  
                                                 
(a) Realized gains (losses) and other than temporary impairments on marketable securities are recorded in Automotive interest and other non-operating income (expense), net.
(b) Reflects fair value of Interest rate swap derivative assets, net of liabilities.
(c) Realized and unrealized gains (losses) on commodity derivatives are recorded in Automotive cost of sales and changes in fair value are attributable to changes in base metal and precious metal prices.
 
The following table presents the financial instruments measured at fair value on a nonrecurring basis in periods subsequent to initial recognition:
 
                                                 
          Fair Value Measurements Using              
          Quoted Prices in
                         
          Active Markets
    Significant Other
    Significant
    Three Months
    Six Months
 
          for Identical
    Observable
    Unobservable
    Ended
    Ended
 
    June 30,
    Assets
    Inputs
    Inputs
    June 30, 2008
    June 30, 2008
 
    2008     (Level 1)     (Level 2)     (Level 3)     Total Losses     Total Losses  
                (Dollars in millions)              
 
Assets
                                               
Investment in GMAC Common Membership Interests
  $ 3,454     $     $     $ 3,454     $ (726 )   $ (2,036 )
Investment in GMAC Preferred Membership Interests
    294                   294       (608 )     (750 )
                                                 
Total
  $ 3,748     $     $     $ 3,748     $ (1,334 )   $ (2,786 )
                                                 

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
In accordance with the provisions of APB No. 18, “The Equity Method of Accounting for Investments in Common Stock” (APB No. 18), we review the carrying values of our investments when events and circumstances warrant. This review requires the comparison of the fair values of our investments to their respective carrying values. The fair value of our investments is determined based on valuation techniques using the best information that is available, and may include quoted market prices, market comparables, and discounted cash flow projections. An impairment loss would be recorded whenever a decline in fair value below the carrying value is determined to be other than temporary.
 
At December 31, 2007 we disclosed that we did not believe our investment in GMAC was impaired however, there were many economic factors which were unstable at that time. Such factors included the instability of the global credit and mortgage markets, deteriorating conditions in the residential and home building markets, and credit downgrades of GMAC and GMAC’s Residential Capital, LLC (ResCap). In the quarter ended March 31, 2008, the instability in the global credit and mortgage markets increased, and the residential and home building markets continued to deteriorate. Additionally, it was necessary for GMAC to continue to provide funding and capital infusions to ResCap, and GMAC’s and ResCap’s credit ratings were further downgraded.
 
As a result of these factors, we reevaluated our investment in GMAC Common and Preferred Membership Interests for possible impairment. Accordingly, our investment in GMAC Common Membership Interests, with a pre-impairment carrying amount of $6.7 billion at March 31, 2008, was written down to its estimated fair value of $5.4 billion at March 31, 2008, after considering the impact of recording our share of GMAC’s results for the quarter ended March 31, 2008. The resulting impairment charge of $1.3 billion was recorded in Equity in loss of GMAC LLC. Additionally, our investment in GMAC Preferred Membership Interests, with a pre-impairment carrying amount of $1.0 billion at March 31, 2008, was written down to its estimated fair value of $902 million at March 31, 2008. The resulting impairment charge of $142 million was recorded in Automotive interest income and other non-operating income (expense), net.
 
In the quarter ended June 30, 2008 a decline in consumer demand for automobiles, particularly pick-up trucks and sport utility vehicles, negatively impacted GMAC’s North American automotive business, including impairment of the vehicles on operating leases due to the decline in residual values. The instability of the global credit and mortgage markets continued in the quarter ended June 30, 2008, and increased in Europe, which caused significant losses at ResCap. As a result of these factors, we reevaluated our investment in GMAC Common and Preferred Membership Interests for possible impairment. Accordingly, our investment in GMAC Common Membership Interests, with a pre-impairment carrying amount of $4.2 billion at June 30, 2008, was written down to its estimated fair value of $3.5 billion at June 30, 2008, after considering the impact of recording our share of GMAC’s results for the quarter ended June 30, 2008. The resulting impairment charge of $726 million was recorded in Equity in loss of GMAC LLC. Our investment in GMAC Preferred Membership Interests, with a pre-impairment carrying amount of $902 million at June 30, 2008, was written down to its estimated fair value of $294 million at June 30, 2008. The resulting impairment charge of $608 million was recorded in Automotive interest income and other non-operating income (expense), net.
 
Continued or decreased demand for automobiles, and continued or increased instability of the global credit and mortgage markets could further negatively impact GMAC’s lines of businesses, and result in future impairments of our investment in GMAC Common and Preferred Membership Interests.
 
In order to determine the fair value of our investment in GMAC Common Membership Interests, we first determined a fair value of GMAC by applying various valuation techniques to its significant business units, and then applied our 49% equity interest to the resulting fair value. Our determination of the fair value of GMAC encompassed applying valuation techniques, which included Level 3 inputs, to GMAC’s significant business units as follows:
 
  •   Auto Finance — We obtained industry data, such as equity and earnings ratios for other industry participants, and developed average multiples for these companies based upon a comparison of their businesses to Auto Finance.
  •   Insurance — We developed a peer group, based upon such factors as equity and earnings ratios and developed average multiples for these companies.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
  •   ResCap — We obtained industry data for an industry participant who we believe to be comparable, and also utilized the implied valuation based on an acquisition of an industry participant who we believe to be comparable.
  •   Commercial Finance Group — We obtained industry data, such as price and earnings ratios, for other industry participants, and developed average multiples for these companies based upon a comparison of their businesses to the Commercial Finance Group.
 
In order to determine the fair value of our investment in GMAC Preferred Membership Interests, we applied valuation techniques, which included Level 3 inputs, to various characteristics of the GMAC Preferred Membership Interests as follows:
 
  •   Utilizing information as to the pricing on similar investments and changes in yields of other GMAC securities, we developed a discount rate for the valuation.
  •   Utilizing assumptions as to the receipt of dividends on the GMAC Preferred Membership Interests, the expected call date and a discounted cash flow model, we developed a present value of the related cash flows.
 
At June 30, 2008 we adjusted our assumptions as to the appropriate discount rate to utilize in the valuation due to the changes in the market conditions which occurred in the quarter ended June 30, 2008. Additionally, we adjusted our assumptions as to the likelihood of payments of dividends and expected call date of the Preferred Membership Interests.
 
Note 12. GMNA Postemployment Benefit Costs
 
As previously discussed in our 2007 10-K, the majority of our hourly employees working within GMNA are represented by various labor unions. We have specific labor contracts with each union, some of which require us to pay idled employees certain wage and benefit costs. Costs to idle, consolidate or close facilities and provide postemployment benefits to employees idled on an other than temporary basis are accrued based on our best estimate of the wage and benefit costs to be incurred. 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. As a result of the 2008 Special Attrition Programs and other facility idling announcements in the quarter and year to date period ended June 30, 2008, we recorded $1.3 billion of additional postemployment benefit costs in accordance with SFAS No. 112, “Employer’s Accounting for Postemployment Benefits” (SFAS No. 112). Refer to Note 8.
 
Activity for postemployment benefit costs is as follows:
 
                         
    Six Months Ended
    Year Ended
    Six Months Ended
 
    June 30,
    December 31,
    June 30,
 
    2008     2007     2007  
    (Dollars in millions)  
 
Beginning balance
  $ 858     $ 1,269     $ 1,269  
Additions
    1,324       364       92  
Interest accretion
    13       21       9  
Payments
    (316 )     (792 )     (524 )
Adjustments
    (98 )     (4 )     19  
                         
Ending balance
  $ 1,781     $ 858     $ 865  
                         


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The number of employees included in the idled or to be idled facilities and subject to special attrition programs are as follows:
 
                         
    June 30,
    December 31,
    June 30,
 
    2008     2007     2007  
 
Employees at idled or to be idled facilities
    12,700       8,900       8,000  
Employees subject to various attrition programs
    5,100       3,800       4,400  
 
Note 13. Restructuring and Other Initiatives
 
We have executed various restructuring and other initiatives and may execute additional initiatives in the future to align manufacturing capacity to prevailing global automotive production and to improve the utilization of remaining facilities. Such initiatives may include facility idlings, consolidation of operations and functions, production relocations or reductions and voluntary and involuntary employee separation programs. Estimates of restructuring and other initiative charges are based on information available at the time such charges are recorded. Due to the inherent uncertainty involved, actual amounts paid for such activities may differ from amounts initially recorded. Accordingly, we may revise previous estimates.
 
The following table summarizes our restructuring and other initiative charges:
 
                                 
    Three Months
    Six Months
 
    Ended
    Ended
 
    June 30,     June 30,  
    2008     2007     2008     2007  
    (Dollars in millions)  
 
Automotive Operations:
                               
GMNA
  $ 1     $ 3     $ 2     $ 5  
GME
    79       30       202       87  
GMLAAM
    3       18       6       18  
GMAP
    61       1       61       41  
                                 
Total Automotive Operations
  $ 144     $ 52     $ 271     $ 151  
                                 
 
Refer to Note 12 for further discussion of postemployment benefits costs related to hourly employees of GMNA, and Note 8 for pension and other postretirement benefit charges related to our hourly employee separation initiatives.
 
  2008 Activities
 
The following table details the components of our restructuring charges by segment in the quarter ended June 30, 2008:
 
                                                 
                            Corporate and
       
    GMNA     GME     GMLAAM     GMAP     Other     Total  
    (Dollars in millions)  
 
Separation costs
  $ 1     $ 100     $ 3     $ 61     $     $ 165  
Other
          (21 )                       (21 )
                                                 
Total restructuring charges
  $ 1     $ 79     $ 3     $ 61     $     $ 144  
                                                 


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The following table details the components of our restructuring charges by segment in the year to date period ended June 30, 2008:
 
                                                 
                            Corporate and
       
    GMNA     GME     GMLAAM     GMAP     Other     Total  
    (Dollars in millions)  
 
Separation costs
  $ 2     $ 223     $ 6     $ 61     $     $ 292  
Other
          (21 )                       (21 )
                                                 
Total restructuring charges
  $ 2     $ 202     $ 6     $ 61     $     $ 271  
                                                 
 
GMNA recorded restructuring charges of $1 million and $2 million in the quarter and year to date period ended June 30, 2008, respectively. These charges related to a U.S. salaried severance program, which allows involuntarily terminated employees to receive ongoing wages and benefits for no longer than 12 months.
 
GME recorded net restructuring charges of $79 million and $202 million in the quarter and year to date period ended June 30, 2008, respectively. These charges were related to the following restructuring initiatives:
 
  •   In the quarter and year to date period ended June 30, 2008, GME recorded restructuring charges of $27 million and $100 million, respectively, for retirement programs, along with additional minor separations under other current programs in Germany. Approximately 4,600 employees will leave under early retirement programs in Germany through 2013. The total remaining cost for the early retirements will be recognized over the remaining required service period of the employees.
  •   In the quarter ended June 30, 2007, we announced additional separation programs at the Antwerp, Belgium facility. These programs impact 1,900 employees, who will leave through August 2008, and have total estimated costs of $440 million. Of this amount, we recorded $35 million and $80 million in the quarter and year to date period ended June 30, 2008, respectively. In 2007 we recorded $353 million in connection with these separation programs. The remaining cost of the Antwerp, Belgium program will be recognized over the remaining required service period of the employees through August 2008.
  •   In the quarter ended June 30, 2008, we announced separation programs at the Strasbourg, France facility. In the quarter and year to date period ended June 30, 2008, we recorded restructuring charges of $16 million.
  •   The remaining $22 million and $27 million in separation charges reported in the quarter and year to date period ended June 30, 2008, respectively, relate to the cost of initiatives previously announced. These include voluntary separations in Sweden and the United Kingdom.
  •   Additionally, GME reversed accruals for $21 million in the quarter and year to date period ended June 30, 2008 associated with the favorable resolution of claims by the government of Portugal filed in conjunction with the plant closure in Azambuja in 2006.
 
GMLAAM recorded restructuring charges of $3 million and $6 million in the quarter and the year to date period ended June 30, 2008, respectively. These charges related to separation programs in South Africa and Chile.
 
GMAP recorded restructuring charges of $61 million in the quarter and year to date period ended June 30, 2008. The charge was related to a facility idling at GM Holden, Ltd. (GM Holden), which manufactures FAM II 4 cylinder engines. The program will impact 645 employees, who will leave through December 2009, and has total estimated costs of $67 million. The remaining cost of this program will be recognized over the remaining required service period of the employees.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
     2007 Activities
 
The following table details the components of our restructuring charges by segment in the quarter ended June 30, 2007:
 
                                                 
                            Corporate and
       
    GMNA     GME     GMLAAM     GMAP     Other     Total  
    (Dollars in millions)  
 
Separation costs
  $ 3     $ 30     $ 18     $ 1     $     $ 52  
Other
                                   
                                                 
Total restructuring charges
  $ 3     $ 30     $ 18     $ 1     $     $ 52  
                                                 
 
The following table details the components of our restructuring charges by segment in the year to date period ended June 30, 2007:
 
                                                 
                            Corporate and
       
    GMNA     GME     GMLAAM     GMAP     Other     Total  
    (Dollars in millions)  
 
Separation costs
  $ 5     $ 87     $ 18     $ 41     $     $ 151  
Other
                                   
                                                 
Total restructuring charges
  $ 5     $ 87     $ 18     $ 41     $     $ 151  
                                                 
 
GMNA recorded restructuring charges of $3 million and $5 million in the quarter and year to date period ended June 30, 2007, respectively. The charges were related to a U.S. salaried severance program as described in more detail above.
 
GME recorded charges relating to separation programs of $30 million and $87 million in the quarter and year to date period ended June 30, 2007, respectively. These charges were related to the following restructuring initiatives:
 
  •   In the quarter and year to date period ended June 30, 2007, GME recorded charges in Germany of $27 million and $70 million, respectively. These charges primarily related to early retirement programs, along with additional minor separations under other programs in Germany as described in more detail above.
  •   The remaining $3 million in separation charges reported in the quarter ended June 30, 2007 relate to initiatives in Belgium. The remaining $17 million in separation charges reported in the year to date period ended June 30, 2007 also relate to initiatives announced in Sweden and the United Kingdom.
 
GMLAAM recorded restructuring charges of $18 million in the quarter and year to date period ended June 30, 2007 for employee separations at General Motors do Brasil Ltd. (GM do Brasil). These initiatives were announced and completed in the quarter ended June 30, 2007 and resulted in the separation of 600 employees.
 
GMAP recorded charges of $1 million and $41 million in the quarter and year to date period ended June 30, 2007, respectively. The charges were related to a voluntary employee separation program at GM Holden, which was announced in the quarter ended March 31, 2007. This initiative reduces the facility’s workforce by 650 employees as a result of increased plant operational efficiency.
 
Note 14. 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 or asset group is considered impaired, an impairment charge is recorded for the amount by which the carrying amount exceeds fair market value. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
involved. Product-specific assets may become impaired as a result of declines in profitability due to changes in volume, pricing or costs. Impairment charges related to automotive assets are recorded in Automotive cost of sales. Refer to Note 13 for additional detail on restructuring and other initiatives.
 
We periodically review the carrying value of our portfolio of equipment on operating leases for impairment when events and circumstances warrant and in conjunction with our quarterly review of residual values and associated depreciation rates. If the carrying value is considered impaired, an impairment charge is recorded for the amount by which the carrying value exceeds the fair market value. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Impairment charges are recorded in Financial services and insurance expense.
 
In addition, we test our goodwill for impairment annually and when an event occurs or circumstances change such that it is reasonably possible that impairment may exist. The annual impairment test requires the identification of our reporting units and a comparison of the fair value of each of our reporting units to the respective carrying value. The fair value of our reporting units is determined based on valuation techniques using the best information that is available, primarily discounted cash flow projections. If the carrying value of a reporting unit is greater than the fair value of the reporting unit then impairment may exist.
 
Our impairment charges in the quarters and year to date periods ended June 30, 2008 and 2007 are as follows:
 
                 
    Three Months Ended
 
    June 30,  
    2008     2007  
    (Dollars in millions)  
 
Long-lived asset impairments related to restructuring initiatives
  $ 28     $  
Other long-lived asset impairments
          14  
Equipment on operating leases, net
    105        
                 
Total
  $ 133     $ 14  
                 
 
                 
    Six Months
 
    Ended
 
    June 30,  
    2008     2007  
    (Dollars in millions)  
 
Long-lived asset impairments related to restructuring initiatives
  $ 28     $  
Other long-lived asset impairments
          14  
Equipment on operating leases, net
    105        
                 
Total
  $ 133     $ 14  
                 
 
  2008 Impairments
 
GMAP recorded $28 million of long-lived asset impairment charges related to restructuring initiatives at GM Holden in the quarter and year to date period ended June 30, 2008.
 
In the quarter ended June 30, 2008, FIO recorded $105 million of impairment charges related to our portfolio of equipment on operating leases. The impairment charge was the result of our regular review of residual values related to these leased assets. In the quarter ended June 30, 2008, residual values of sport utility vehicles and fullsize pick-up trucks experienced a sudden and significant decline as a result of a shift in customer preference to passenger cars and crossover vehicles and away from sport


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
utility vehicles and fullsize pick-up trucks. This decline in residual values was the primary reason for the impairment charge.
 
  2007 Impairments
 
GMAP recorded $14 million of long-lived asset impairment charges in the quarter and year to date period ended June 30, 2007, related to the cessation of production VZ Commodore passenger car derivatives at GM Holden.
 
Note 15. Earnings (Loss) Per Share
 
Basic and diluted earnings (loss) per share have been computed by dividing Income (loss) from continuing operations by the weighted average number of shares outstanding during the period.
 
The amounts used in the basic and diluted earnings (loss) per share computations are as follows:
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2008     2007     2008     2007  
    (In millions, except per share amounts)  
 
Income (loss) from continuing operations
  $ (15,471 )   $ 784     $ (18,722 )   $ 742  
Income from discontinued operations, net of tax
          107             211  
                                 
Net income (loss)
  $ (15,471 )   $ 891     $ (18,722 )   $ 953  
                                 
Average number of shares outstanding
    566       566       566       566  
Incremental effect of shares from exercise of stock options and vesting of restricted stock units
          3             3  
                                 
Average number of dilutive shares outstanding
    566       569       566       569  
                                 
Basic income (loss) per share from continuing operations
  $ (27.33 )   $ 1.38     $ (33.07 )   $ 1.31  
Incremental effect of exercise of stock options and vesting of restricted stock units
          (.01 )           (.01 )
                                 
Diluted income (loss) per share from continuing operations
  $ (27.33 )   $ 1.37     $ (33.07 )   $ 1.30  
                                 
 
Certain stock options with exercise prices that exceed the fair market value of our common stock have an antidilutive effect and therefore were excluded from the computation of diluted earnings (loss) per share. The number of such options not included in the computation of diluted earnings (loss) per share was 101 million and 93 million at June 30, 2008 and 2007, respectively.
 
No shares potentially issuable to satisfy the in-the-money amount of our convertible debentures have been included in the computation of diluted earnings (loss) per share for the quarters and year to date periods ended June 30, 2008 and 2007 as our various series of convertible debentures were not in-the-money.
 
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 June 30, 2008 and 2007, the principal amount of outstanding Series A convertible debentures was $39 million.
 
Note 16. Transactions with GMAC
 
We have entered into various operating and financing arrangements with GMAC as more fully described in our 2007 10-K. The following describes the financial statement effects at June 30, 2008, December 31, 2007 and June 30, 2007 and for the quarters and the year to date periods ended June 30, 2008 and 2007 which are included in our condensed consolidated financial statements.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
  U.S. Marketing Incentives and Operating Lease Residuals
 
                         
    June 30,
    December 31,
    June 30,
 
    2008     2007     2007  
    (Dollars in millions)  
 
Residual Support Program:
                       
Liabilities recorded
  $ 914     $ 118     $ 51  
Maximum obligations
  $ 1,398     $ 1,062     $ 662  
                         
Risk Sharing:
                       
Liabilities recorded
  $ 574     $ 144     $ 112  
Maximum amount guaranteed
  $ 1,418     $ 1,118     $ 781  
 
                 
    Six Months Ended
 
    June 30,  
    2008     2007  
    (Dollars in millions)  
 
Total U.S. payments to GMAC, primarily related to marketing incentives and operating lease residual program
  $ 1,988     $ 2,083  
 
  Equipment on Operating Leases Transferred to Us by GMAC
 
                         
    June 30,
    December 31,
    June 30,
 
    2008     2007     2007  
    (Dollars in millions)  
 
Note payable balance, secured by the assets transferred
  $ 35     $ 35     $ 406  
 
In the quarter ended June 30, 2008, residual values of sport utility vehicles and fullsize pick-up trucks experienced a sudden and significant decline as a result of a shift in customer preference to passenger cars and crossover vehicles and away from sport utility vehicles. This decline in residual values is the primary factor responsible for the impairment charge of $716 million and $105 million recorded by GMAC and us, respectively, in the quarter ended June 30, 2008 related to equipment on operating leases. The determination of vehicle residual values is a significant assumption in these impairment analyses and in the determination of amounts to accrue under the residual support and risk sharing agreements discussed above. It is reasonably possible that vehicle residual values could decline in the future and that we or GMAC may be required to record further impairment charges, which may be material. In addition, it is reasonably possible that such declines in residual values may result in increases in required payments under the residual support and risk sharing agreements discussed above.
 
  Revenues
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2008     2007     2008     2007  
    (Dollars in millions)  
 
U.S. exclusivity fee revenue
  $ 26     $ 26     $ 53     $ 53  
U.S. royalty revenue
  $ 4     $ 5     $ 8     $ 9  
 
  Participation Agreement
 
On June 4, 2008, we, along with Cerberus ResCap Financing LLC (Cerberus Fund) entered into a Participation Agreement (Participation Agreement) with GMAC. The Participation Agreement provides that we will fund up to $368 million in loans made by GMAC to ResCap through a $3.5 billion secured loan facility GMAC has provided to ResCap (ResCap Facility), and


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
that the Cerberus Fund will fund up to $382 million. The ResCap Facility expires on May 1, 2010, and all funding pursuant to the Participation Agreement is to be done on a pro-rata basis between us and the Cerberus Fund.
 
We and the Cerberus Fund are required to fund our respective portions of the Participation Agreement when the amount outstanding pursuant to the ResCap Facility exceeds $2.75 billion, unless a default event has occurred, in which case we and the Cerberus Fund are required to fund our respective maximum obligations. Amounts funded by us and the Cerberus Fund pursuant to the Participation Agreement are subordinate to GMAC’s interest in the ResCap Facility, and all principal payments remitted by ResCap under the ResCap Facility are applied to GMAC’s outstanding balance, until such balance is zero. Principal payments remitted by ResCap while GMAC’s outstanding balance is zero are applied on a pro-rata basis to us and the Cerberus Fund.
 
The ResCap Facility is secured by various assets held by ResCap and its subsidiaries, and we are entitled to receive interest at LIBOR plus 2.75% for the amount we have funded pursuant to the Participation Agreement. In addition, we and the Cerberus Fund are also entitled to receive our pro-rata share of the 1.75% interest on GMAC’s share of the total outstanding balance. At June 30, 2008, ResCap had fully drawn down the maximum amount pursuant to the ResCap Facility, and we had funded our maximum obligation of $368 million, which is recorded in Equity in net assets of non consolidated affiliates.
 
  Unsecured Obligations
 
An agreement between GMAC and us limits certain of our unsecured obligations to GMAC arising from specific operating and financing arrangements in the United States to $1.5 billion, estimated in good faith. As a result of the recent market developments, including a decline in residual values of sport utility vehicles and full size pick-up trucks, the current estimate of our pertinent obligations exceeded the cap. In response, on August 6, 2008, we paid GMAC $646 million representing prepayment of the obligations included in the estimate of total liabilities subject to the cap.
 
Balance Sheet
 
A summary of the balance sheet effects of transactions with GMAC is as follows:
 
                         
    June 30,
    December 31,
    June 30,
 
    2008     2007     2007  
    (Dollars in millions)  
 
Assets:
                       
Accounts and notes receivable (a)
  $ 1,747     $ 1,285     $ 1,245  
Other current assets (b)
  $     $ 30     $ 97  
Equity in net assets of nonconsolidated affiliates (c)
  $ 368     $     $  
Liabilities:
                       
Accounts payable (d)
  $ 516     $ 548     $ 621  
Short-term borrowings and current portion of long-term debt (e)
  $ 2,646     $ 2,802     $ 2,870  
Accrued expenses (f)
  $ 3,430     $ 2,134     $ 1,924  
Long-term debt (g)
  $ 104     $ 119     $ 366  
(a) Represents wholesale settlements due from GMAC, as well as amounts owed by GMAC with respect to the Equipment on operating leases, net transferred to us, and the exclusivity fee and royalty arrangement.
(b) Primarily represents distributions due from GMAC on our Preferred Membership Interests.
(c) Represents amounts funded pursuant to the Participation Agreement.
(d) Primarily represents amounts accrued for interest rate support, capitalized cost reduction, residual support and lease pull-ahead programs and the risk sharing arrangement.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
(e) Represents wholesale financing, sales of receivable transactions and the short-term portion of term loans provided to certain dealerships which we own or in which we have an equity interest. In addition, it includes borrowing arrangements with GME locations and arrangements related to GMAC’s funding of our company-owned vehicles, rental car vehicles awaiting sale at auction and funding of the sale of our vehicles in which we retain title while the vehicles are consigned to GMAC or dealers, primarily in the United Kingdom. Our financing remains outstanding until the title is transferred to the dealers. This amount also includes the short-term portion of a note provided to our wholly-owned subsidiary holding debt related to the Equipment on operating leases, net transferred to us from GMAC.
(f) Primarily represents accruals for marketing incentives on vehicles which are sold, or anticipated to be sold, to customers or dealers and financed by GMAC in the U.S. This includes the estimated amount of residual support accrued under the residual support and risk sharing programs, rate support under the interest rate support programs, operating lease and finance receivable capitalized cost reduction incentives paid to GMAC to reduce the capitalized cost in automotive lease contracts and retail automotive contracts, and costs under lease pull-ahead programs. In addition it includes interest accrued on the transactions in (e) above.
(g) Primarily represents the long-term portion of term loans and a note payable with respect to the Equipment on operating leases, net transferred to us mentioned in (e) above.
 
Statement of Operations
 
A summary of the income statement effects of transactions with GMAC is as follows:
 
                                         
    Three Months Ended
    Six Months Ended
       
    June 30,     June 30,        
    2008     2007     2008     2007        
          (Dollars in millions)              
 
Net sales and revenues (a)
  $ (2,566 )   $ (1,717 )   $ (3,613 )   $ (2,977 )        
Cost of sales and other expenses (b)
  $ 239     $     $ 390     $ 1          
Automotive interest income and other non-operating income (expense), net (c)
  $ 85     $ 105     $ 172     $ 212          
Interest expense (d)
  $ 59     $ 73     $ 114     $ 153          
Servicing expense (e)
  $ 22     $ 45     $ 50     $ 95          
Derivative gain (loss) (f)
  $ (6 )   $ 6     $ (1 )   $ 1          
(a) Primarily represents the reduction in net sales and revenues for marketing incentives on vehicles which are sold, or anticipated to be sold, to customers or dealers and financed by GMAC in the U.S. This includes the estimated amount of residual support accrued under the residual support and risk sharing programs, rate support under the interest rate support programs, operating lease and finance receivable capitalized cost reduction incentives paid to GMAC to reduce the capitalized cost in automotive lease contracts and retail automotive contracts, and costs under lease pull-ahead programs. This amount is offset by net sales for vehicles sold to GMAC for employee and governmental lease programs and third party resale purposes.
(b) Primarily represents cost of sales on the sale of vehicles to GMAC for employee and governmental lease programs and third party resale purposes. Also includes miscellaneous expenses for services performed for us by GMAC.
(c) Represents income or loss on our Preferred Membership Interests in GMAC, interest earned on amounts outstanding under the Participation Agreement, exclusivity and royalty fee income and reimbursements by GMAC for certain services we provided. 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.
(d) Represents interest incurred on term loans, notes payable and wholesale settlements.
(e) Represents servicing fees paid to GMAC on the automotive leases we retained.
(f) Represents gains and losses recognized in connection with a derivative transaction entered into with GMAC as the counterparty.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
 
Note 17. Segment Reporting
 
We operate in two businesses, consisting of GM Automotive (or GMA) and FIO. Our four automotive segments consist of GMNA, GME, GMLAAM and GMAP. We manufacture our cars and trucks in 35 countries under the following brands: Buick, Cadillac, Chevrolet, GMC, GM Daewoo, Holden, HUMMER, Opel, Pontiac, Saab, Saturn, Vauxhall and Wuling. Our FIO business consists of our 49% share of GMAC’s operating results, which we account for under the equity method, and Other Financing, which is comprised primarily of two special purpose entities holding automotive leases previously owned by GMAC and its affiliates that we retained, and the elimination of inter-segment transactions between GM Automotive and Corporate and Other.
 
Corporate and Other includes the elimination of inter-segment transactions, certain non-segment specific revenues and expenses, including costs related to postretirement benefits for Delphi and other retirees and certain corporate activities. Amounts presented in Automotive sales, Interest income and Interest expense in the tables that follow principally relate to the inter-segment transactions eliminated at Corporate and Other. All inter-segment balances and transactions have been eliminated in consolidation.
 
In the quarter ended December 31, 2007, we changed our measure of segment profitability from net income to income before income taxes plus equity income, net of tax and minority interests, net of tax. Amounts for the quarter and year to date period ended June 30, 2007 have been revised to reflect these periods on a comparable basis for the changes discussed above. Additionally, 2007 amounts have been reclassified for the retroactive effect of discontinued operations as discussed in Note 3.
 
In the quarter ended June 30, 2008 we determined that GM Daewoo Auto & Technology Company (GM Daewoo), our 50.9% owned and consolidated Korean subsidiary, included in our GMAP segment, had been applying hedge accounting to certain derivative contracts designated as cash flow hedges of forecasted sales without fully considering whether these sales were at all times probable of occurring. Under SFAS No. 133, gains and losses on derivatives used to hedge a probable forecasted transaction are deferred as a component of Other comprehensive income and reclassified into earnings in the period the forecasted transaction occurs. Gains and losses on derivatives related to forecasted transactions that are not probable of occurring are required to be recorded in current period earnings. In the quarter ended June 30, 2008, we corrected our previous accounting by recognizing in Automotive sales $407 million of losses ($262 million in income (loss) from continuing operations before income taxes and $150 million after-tax and after minority interests) on these derivatives which had been inappropriately deferred in Accumulated other comprehensive income. Approximately $250 million ($163 million in income (loss) from continuing operations before income taxes and $93 million after-tax and after minority interests) should have been recognized in earnings in the quarter ended March 31, 2008, and the remainder should have been recognized in prior periods, predominantly in 2007. We have not restated our condensed consolidated financial statements or prior annual financial statements because we have concluded that the effect of correcting for this item and other minor out-of-period adjustments is not material to the current quarter and to each of the earlier periods.
 


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
                                                                                                 
                                              Total
                         
                            GMA
    Total
    Corporate
    Excluding
          Other
    Total
       
    GMNA     GME     GMLAAM     GMAP     Eliminations     GMA     & Other(a)     FIO     GMAC(c)     Financing(b)     FIO     Total  
    (Dollars in millions)  
 
At and For the Three Months Ended June 30, 2008
                                                                                               
Automotive sales
                                                                                               
External customers
  $ 19,044     $ 9,922     $ 5,019     $ 3,688     $     $ 37,673     $     $ 37,673     $     $     $     $ 37,673  
Inter-segment
    776       657       90       1,470       (2,993 )                                          
                                                                                                 
Total automotive sales
    19,820       10,579       5,109       5,158       (2,993 )     37,673             37,673                         37,673  
Financial services and insurance revenues
                                                          483       483       483  
                                                                                                 
Total net sales and revenues
  $ 19,820     $ 10,579     $ 5,109     $ 5,158     $ (2,993 )   $ 37,673     $     $ 37,673     $     $ 483     $ 483     $ 38,156  
                                                                                                 
Depreciation, amortization and impairment
  $ 1,243     $ 523     $ 75     $ 160     $ 11     $ 2,012     $ 14     $ 2,026     $     $ 285     $ 285     $ 2,311  
Equity in loss of GMAC LLC
  $     $     $     $     $     $     $     $     $ (1,930 )   $     $ (1,930 )   $ (1,930 )
Interest income
  $ 221     $ 166     $ 88     $ 26     $ 1     $ 502     $ (317 )   $ 185     $     $ 17     $ 17     $ 202  
Interest expense
  $ 638     $ 204     $ (10 )   $ 52     $ 2     $ 886     $ (165 )   $ 721     $     $ 35     $ 35     $ 756  
Income (loss) from continuing operations before income taxes, equity income and minority interest
  $ (9,334 )   $ 12     $ 442     $ (359 )   $ (14 )   $ (9,253 )   $ (3,499 )   $ (12,752 )   $ (2,551 )   $ (55 )   $ (2,606 )   $ (15,358 )
Equity income (loss), net of tax
    (6 )     21       9       104             128             128                         128  
Minority interests, net of tax
    (6 )     (13 )     (6 )     92             67       (1 )     66             1       1       67  
                                                                                                 
Income (loss) from continuing operations before income taxes
  $ (9,346 )   $ 20     $ 445     $ (163 )   $ (14 )   $ (9,058 )   $ (3,500 )   $ (12,558 )   $ (2,551 )   $ (54 )   $ (2,605 )   $ (15,163 )
                                                                                                 
Investments in nonconsolidated affiliates
  $ 571     $ 408     $ 55     $ 1,296     $     $ 2,330     $ 37     $ 2,367     $ 3,454     $     $ 3,454     $ 5,821  
Total assets
  $ 84,844     $ 28,544     $ 9,437     $ 15,267     $ (12,012 )   $ 126,080     $ (511 )   $ 125,569     $ 8,074     $ 2,403     $ 10,477     $ 136,046  
Goodwill
  $ 166     $ 605     $     $     $     $ 771     $     $ 771     $     $     $     $ 771  
 

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
                                                                                                 
                                              Total
                         
                            GMA
    Total
    Corporate
    Excluding
          Other
    Total
       
    GMNA     GME     GMLAAM     GMAP     Eliminations     GMA     & Other(a)     FIO     GMAC(c)     Financing(b)     FIO     Total  
    (Dollars in millions)  
 
At and For the Three Months Ended June 30, 2007
                                                                                               
Automotive sales
                                                                                               
External customers
  $ 28,775     $ 9,056     $ 4,262     $ 3,690     $     $ 45,783     $     $ 45,783     $     $     $     $ 45,783  
Inter-segment
    888       456       71       1,597       (3,012 )                                          
                                                                                                 
Total automotive sales
    29,663       9,512       4,333       5,287       (3,012 )     45,783             45,783                         45,783  
Financial services and insurance revenues
                                                          894       894       894  
                                                                                                 
Total net sales and revenues
  $ 29,663     $ 9,512     $ 4,333     $ 5,287     $ (3,012 )   $ 45,783     $     $ 45,783     $     $ 894     $ 894     $ 46,677  
                                                                                                 
Depreciation, amortization and impairment
  $ 1,426     $ 431     $ 78     $ 131     $ 14     $ 2,080     $ 7     $ 2,087     $     $ 334     $ 334     $ 2,421  
Equity in income of GMAC LLC
  $     $     $     $     $     $     $     $     $ 118     $     $ 118     $ 118  
Interest income
  $ 298     $ 166     $ 40     $ 41     $     $ 545     $ (152 )   $ 393     $     $ 126     $ 126     $ 519  
Interest expense
  $ 778     $ 198     $ (59 )   $ 60     $ 3     $ 980     $ (299 )   $ 681     $     $ 207     $ 207     $ 888  
Income (loss) from continuing operations before income taxes, equity income and minority interests
  $ (98 )   $ 312     $ 295     $ 282     $ (1 )   $ 790     $ (579 )   $ 211     $ 154     $ 86     $ 240     $ 451  
Equity income (loss), net of tax
    27       12       8       122       1       170             170                         170  
Minority interests, net of tax
    (17 )     (9 )     (7 )     (124 )           (157 )           (157 )                       (157 )
                                                                                                 
Income (loss) from continuing operations before income taxes
  $ (88 )   $ 315     $ 296     $ 280     $     $ 803     $ (579 )   $ 224     $ 154     $ 86     $ 240     $ 464  
                                                                                                 
Income from discontinued operations, net of tax
  $ 107     $     $     $     $     $ 107     $     $ 107     $     $     $     $ 107  
Investments in nonconsolidated affiliates
  $ 316     $ 436     $ 133     $ 1,080     $     $ 1,965     $ 35     $ 2,000     $ 7,555     $     $ 7,555     $ 9,555  
Total assets
  $ 128,465     $ 27,411     $ 5,447     $ 14,897     $ (9,335 )   $ 166,885     $ (215 )   $ 166,670     $ 13,059     $ 6,910     $ 19,969     $ 186,639  
Goodwill
  $ 192     $ 500     $     $     $     $ 692     $     $ 692     $     $     $     $ 692  
 

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
                                                                                                 
                                              Total
                         
                            GMA
    Total
    Corporate
    Excluding
          Other
    Total
       
    GMNA     GME     GMLAAM     GMAP     Eliminations     GMA     & Other(a)     FIO     GMAC(c)     Financing(b)     FIO     Total  
    (Dollars in millions)  
 
For the Six Months Ended
June 30, 2008
                                                                                               
Automotive sales
                                                                                               
External customers
  $ 43,050     $ 19,154     $ 9,685     $ 7,728     $     $ 79,617     $     $ 79,617     $     $     $     $ 79,617  
Inter-segment
    1,313       1,334       187       2,726       (5,560 )                                          
                                                                                                 
Total automotive sales
    44,363       20,488       9,872       10,454       (5,560 )     79,617             79,617                         79,617  
Financial services and insurance revenues
                                                          1,028       1,028       1,028  
                                                                                                 
Total net sales and revenues
  $ 44,363     $ 20,488     $ 9,872     $ 10,454     $ (5,560 )   $ 79,617     $     $ 79,617     $     $ 1,028     $ 1,028     $ 80,645  
                                                                                                 
Depreciation, amortization and impairment
  $ 2,506     $ 987     $ 155     $ 347     $ 24     $ 4,019     $ 25     $ 4,044     $     $ 496     $ 496     $ 4,540  
Equity in loss of GMAC LLC
  $     $     $     $     $     $     $     $     $ (3,542 )   $     $ (3,542 )   $ (3,542 )
Interest income
  $ 492     $ 339     $ 160     $ 55     $ 1     $ 1,047     $ (602 )   $ 445     $     $ 39     $ 39     $ 484  
Interest expense
  $ 1,272     $ 420     $ 45     $ 105     $ 5     $ 1,847     $ (352 )   $ 1,495     $     $ 83     $ 83     $ 1,578  
Income (loss) from continuing operations before income taxes, equity income and minority interest
  $ (10,129 )   $ 81     $ 960     $ (157 )   $ (12 )   $ (9,257 )   $ (4,528 )   $ (13,785 )   $ (4,279 )   $ 49     $ (4,230 )   $ (18,015 )
Equity income (loss), net of tax
    (26 )     34       14       238             260             260                         260  
Minority interests, net of tax
    (3 )     (20 )     (12 )     42             7       (1 )     6             (12 )     (12 )     (6 )
                                                                                                 
Income (loss) from continuing operations before income taxes
  $ (10,158 )   $ 95     $ 962     $ 123     $ (12 )   $ (8,990 )   $ (4,529 )   $ (13,519 )   $ (4,279 )   $ 37     $ (4,242 )   $ (17,761 )
                                                                                                 
Expenditures for property
  $ 2,332     $ 609     $ 153     $ 386     $ 142     $ 3,622     $ 503     $ 4,125     $     $     $     $ 4,125  
 

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
                                                                                                 
                                              Total
                         
                            GMA
    Total
    Corporate
    Excluding
          Other
    Total
       
    GMNA     GME     GMLAAM     GMAP     Eliminations     GMA     & Other(a)     FIO     GMAC(c)     Financing(b)     FIO     Total  
    (Dollars in millions)  
 
For the Six Months Ended
June 30, 2007
                                                                                               
Automotive sales
                                                                                               
External customers
  $ 56,289     $ 17,126     $ 7,726     $ 6,933     $     $ 88,074     $     $ 88,074     $     $     $     $ 88,074  
Inter-segment
    1,431       857       184       2,762       (5,234 )                                          
                                                                                                 
Total automotive sales
    57,720       17,983       7,910       9,695       (5,234 )     88,074             88,074                         88,074  
Financial services and insurance revenues
                                                          1,830       1,830       1,830  
                                                                                                 
Total net sales and revenues
  $ 57,720     $ 17,983     $ 7,910     $ 9,695     $ (5,234 )   $ 88,074     $     $ 88,074     $     $ 1,830     $ 1,830     $ 89,904  
                                                                                                 
Depreciation, amortization and impairment
  $ 2,792     $ 812     $ 151     $ 278     $ 23     $ 4,056     $ 13     $ 4,069     $     $ 713     $ 713     $ 4,782  
Equity in loss of GMAC LLC
  $     $     $     $     $     $     $     $     $ (65 )   $     $ (65 )   $ (65 )
Interest income
  $ 551     $ 321     $ 66     $ 75     $     $ 1,013     $ (371 )   $ 642     $     $ 266     $ 266     $ 908  
Interest expense
  $ 1,522     $ 389     $ (23 )   $ 116     $ 6     $ 2,010     $ (530 )   $ 1,480     $     $ 455     $ 455     $ 1,935  
Income (loss) from continuing operations before income taxes, equity income and minority interest
  $ (309 )   $ 314     $ 550     $ 376     $ (8 )   $ 923     $ (789 )   $ 134     $ 20     $ 140     $ 160     $ 294  
Equity income (loss), net of tax
    40       20       14       249       1       324       2       326                         326  
Minority interests, net of tax
    (27 )     (15 )     (14 )     (202 )           (258 )     (1 )     (259 )                       (259 )
                                                                                                 
Income (loss) from continuing operations before income taxes
  $ (296 )   $ 319     $ 550     $ 423     $ (7 )   $ 989     $ (788 )   $ 201     $ 20     $ 140     $