ITEM 1. BUSINESS
GENERAL
The following information is incorporated herein by reference to the indicated pages in Part II:
While the major portion of the Corporation's operations is derived from the automotive products industry segment, GM also has financing and insurance operations and produces products and provides services in other industry segments. The automotive products segment consists of the design, manufacture, assembly, and sale of automobiles, trucks, and related parts and accessories. The financing and insurance operations assist in the merchandising of General Motors' products as well as other products. General Motors Acceptance Corporation (GMAC) and its subsidiaries offer financial services and certain types of insurance to dealers and customers. In addition, GMAC and its subsidiaries are engaged in mortgage banking and investment services. The other products segment consists of military vehicles, radar and weapon control systems, guided missile systems, and defense and commercial satellites; the design, installation, and operation of business information and telecommunication systems; as well as the design, development, and manufacture of locomotives.
Substantially all of the products in the automotive segment are marketed through retail dealers and through distributors and jobbers in the United States and Canada and through distributors and dealers overseas. At December 31, 1994, there were approximately 9,200 General Motors motor vehicle dealers in the United States, 900 in other North America (Canada and Mexico), and approximately 5,500 outlets overseas.
BACKLOG OF ORDERS
Shipments of General Motors' automotive products are made as promptly as possible after receipt of firm sales orders; therefore, no significant backlog of unfilled orders accumulates. GM Hughes Electronics Corporation had a $13.2 billion and $13.4 billion backlog of defense and commercial contracts at the end of 1994 and 1993, respectively.
RAW MATERIALS AND SERVICES
General Motors purchases materials, parts, supplies, freight transportation, energy, and other services from numerous unaffiliated firms. Interruptions in production or delivery of these goods or services could adversely affect General Motors.
COMPETITIVE POSITION
General Motors' principal competitors in passenger cars and trucks in the United States and Canada include Ford Motor Company, Chrysler Corporation, Toyota Corporation, Nissan Motor Corporation, Ltd., Honda Motor Company, Ltd., Mazda Motor Corporation, Mitsubishi Motors Corporation, Fuji Heavy Industries, Ltd. (Subaru), Volkswagen A.G., Hyundai Motor Company, Ltd., Daimler-Benz A.G. (Mercedes), Bayerische Motoren Werke AG (BMW), and Volvo AB. All but Volkswagen and Daimler-Benz currently operate vehicle manufacturing facilities in the United States or Canada although Mercedes has
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announced plans to build an assembly plant in the United States. Toyota and GM operate the New United Motor Manufacturing, Inc. facility in Fremont, California as a joint venture which currently builds passenger cars and light-duty trucks. Worldwide wholesale unit sales of General Motors passenger cars and trucks during the three years ended December 31, 1994 are summarized in Management's Discussion and Analysis in Part II.
Total industry new motor vehicle (passenger cars, trucks, and buses) registrations of domestic and foreign makes and General Motors' competitive position during the three years ended December 31, 1994 were as follows:
- ------------------------- (1) Preliminary
(2) Includes Canada and Mexico.
The above information on registrations of new cars, trucks, and buses was obtained from outside sources and that pertaining to General Motors' registrations includes units which are manufactured overseas by other companies and which are imported and sold by General Motors and affiliates.
RESEARCH AND DEVELOPMENT
In 1994, General Motors spent $7,035.8 million for research, manufacturing engineering, product engineering, and development activities related primarily to the development of new products or services or the improvement of existing products or services, including activities related to vehicle emissions control, improved fuel economy, and the safety of persons using General Motors products. In addition, $1,495.7 million was spent for customer-sponsored activities, the majority of which were government related. Comparable data for 1993 were $6,029.9 million for company-sponsored activities and $1,340.3 million for customer-sponsored activities and for 1992, $5,916.9 million and $1,185.5 million, respectively.
ENVIRONMENTAL MATTERS
Automotive Emissions Control
Both the Federal and California governments currently impose stringent emission control requirements on motor vehicles sold in their respective jurisdictions. These requirements include pre-production testing of vehicles, testing of vehicles after assembly, the imposition of emission defect and performance warranties, and the obligation to recall and repair customer-owned vehicles determined to be non-compliant with emissions requirements.
Both the U.S. Environmental Protection Agency (EPA) and the California Air Resources Board (CARB) continue to place great emphasis on compliance testing of customer-owned vehicles. Failure to comply with the emission standards or defective emission control hardware discovered during such testing can
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lead to substantial cost for General Motors related to emissions recalls. New CARB and Federal requirements will increase the time and mileage over which manufacturers are responsible for a vehicle's emission performance.
Both the EPA and the CARB emission requirements will become even more stringent in the future. A new tier of exhaust emission standards for cars and light-duty trucks, the "Tier 1" standards began phasing in for California vehicles in the 1993 model year and for Federal vehicles in the 1994 model year. The phase-in of these "Tier 1" standards will be completed by the 1997 model year.
In addition to the Tier 1 standards is the CARB Low Emission Vehicle (LEV) Program that begins with the 1994 model year and defines requirements through model year 2003 and beyond. This program sets even more stringent exhaust emission standards for cars and trucks sold in California. General Motors will have to meet the LEV Program requirements by marketing a mix of vehicles complying with the Tier 1 standards, Transitional Low Emission Vehicles (TLEVs), Low Emission Vehicles (LEVs), Ultra-Low Emission Vehicles (ULEVs), or Zero Emission Vehicles (ZEVs). From model years 1998 to 2000, 2% of cars and small light-duty trucks (up to 3,750 lb Loaded Vehicle Weight) sold in California must be ZEVs. This requirement increases to 5% in 2001 and 10% in 2003 and thereafter.
The Clean Air Act permits states that have areas with air quality problems to adopt the California car and truck emission standards in lieu of the Federal requirements and two states (New York and Massachusetts) have done so. In addition, the Ozone Transport Commission, representing twelve Northeast states and the District of Columbia, asked the EPA to impose the California LEV program requirements throughout the Northeast Ozone Transport Region (OTR). The EPA granted this request on January 24, 1995. This could mean that vehicles designed for the California LEV program, including ZEVs, would have to be offered for sale in that region of the country.
In addition to the above-mentioned exhaust emission programs, onboard diagnostic (OBD) devices, far more complex than those currently used to diagnose problems with emission control systems, will be required both Federally and in California effective with the 1996 model year. This new system has the potential of increasing warranty costs and the chance for recall.
New evaporative emission control requirements for cars and trucks begin phasing in with the 1995 model year in California and the 1996 model year Federally. Systems will need to be further modified to accommodate Federal onboard refueling vapor recovery (ORVR) control standards. ORVR phases in on passenger cars in the 1998 through 2000 model years and on light-duty trucks in the 2001 through 2006 model years.
Industrial Environmental Control
General Motors is subject to various laws relating to the protection of the environment, and is in various stages of investigation or remediation for sites where contamination has been alleged. GM has recorded an accrued liability of $694 million at December 31, 1994 and $659 million at December 31, 1993 for worldwide environmental cleanup as summarized below:
- GM has been identified as a potentially responsible party at sites identified by the EPA and state regulatory agencies for cleanup under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and similar state statutes. GM voluntarily and actively participates in cleanup activity where such involvement is verified. The foreseeable total liability for 1995 and beyond for sites involving GM is estimated to be $223 million, which was recorded at December 31, 1994. This compares to $231 million at December 31, 1993.
- For closed or closing plants owned by the Corporation, an estimated liability for environmental cleanup is typically recognized at the time the closure decision is made for actions which are not specifically required by regulations or government action but which serve to minimize future liability. Such liability, which is based on an environmental assessment of the plant property, is estimated at $141 million, which was recorded at December 31, 1994. This compares to $187 million at December 31, 1993.
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- GM is involved in cleanup actions at additional locations worldwide with a foreseeable liability of approximately $330 million, which was recorded at December 31, 1994. This compares to $241 million at December 31, 1993.
Various state and Federal regulations require an owner/operator of hazardous waste management facilities to demonstrate annually that it can provide funds for closure and post-closure care of its hazardous waste management facilities (HWMFs). In most instances, GM demonstrates its financial liability by meeting a financial test established by the various regulations. In some cases, financial instruments must be used to comply with the financial assurance requirements. As of December 31, 1994, GM's financial assurance requirement to cover total closure, post-closure, and mandated liability coverage totaled $151.9 million ($124.9 million closure and post-closure costs and $27 million aggregated liability) for the HWMFs owned and/or operated by the Corporation. These costs will be incurred only when an HWMF is closed and only for the amount covered for the individual HWMF. The annual inflator used by the EPA is projected to be 1.53% for 1994 (this is applied to the closure and post-closure costs); therefore, the total financial assurance for 1995 to cover the closure and post-closure cost amounts is estimated to be approximately $126.8 million.
Nuclear Regulatory Commission rules require the GM Technical Center Research Laboratories to demonstrate financial assurance for decommissioning certain licensed facilities in the amount of $155,440. The intent of this rule is to ensure that decommissioning will be accomplished in a safe and timely manner and that licensees will provide adequate funds to cover all costs associated with decommissioning.
The capital cost impact of the Clean Air Act Amendments of 1990 on GM stationary sources will depend on the specific requirements of new state and Federal regulations which must be developed and implemented over the next 10 years. These regulations include operating permit programs, nitrogen oxide control programs, chloro-fluoro-carbon phase out, and hazardous air pollutant control programs. The estimated cost of these programs over the next 10-15 years is approximately $1 billion. Annual operating permit emission fees will be approximately $9 million, and the fees are expected to be fully effective in 1995.
Expenditures by General Motors in the United States for industrial environmental control facilities during the three years ended December 31, 1994 were (in millions): 1994-$118; 1993-$186; and 1992-$150. The Corporation currently estimates that future expenditures for industrial environmental control facilities through 1998 will be (in millions): 1995-$181; 1996-$114; 1997-$89; and 1998-$67. Specific environmental expenses are difficult to isolate since expenditures may be made for more than one purpose, making precise classification difficult.
Vehicular Noise Control
The Federal Truck Regulation preempts all state/local noise regulations for trucks over 10,000 lb Gross Vehicle Weight Rating (GVWR). All jurisdictions regulating noise levels of school buses which are built on medium-duty truck chassis have adopted standards compatible with Federal regulations for medium-duty trucks. The Federal Truck Regulations contain label and owner's manual requirements.
Passenger cars and light-duty trucks are subject to state and local motor vehicle noise regulations. The current standard for vehicles in these classes, 80 dB as measured at 50 feet, has been in effect since 1975. Since the end of 1991, manufacturers have the option of meeting the 80 dB light vehicle standard using the test protocol for vehicle exports as measured at 25 feet. This option must be renewed with some state/local jurisdictions beginning with the 1997 model year. Future implementation of more stringent exhaust emission regulations and more stringent fuel economy regulations will require an assessment of increased costs of noise control.
Safety Affairs and Regulations
Expenditures to maintain the operational safety, occupant protection, and vehicle theft deterrence capability of new GM models continue. These expenditures include amounts for the study of alternative approaches for meeting the needs of all three areas.
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A final rule allowing use of Daytime Running Lights (DRL) as an option was issued by the National Highway Traffic Safety Administration (NHTSA). As a result, GM has announced its intent to provide DRL starting in 1995 on selected models. It is believed that this feature will enhance the overall crash avoidance capability of GM vehicles thus reducing crashes and increasing product sales.
GM is meeting the government requirement for passive restraints by selectively installing automatic lap/shoulder belts or driver supplemental inflatable restraints (air bags) on all passenger cars. The driver-side air bag concept has been approved for all remaining passenger cars, light-duty trucks, and vans during the 1994 through 1997 model years. Current plans call for a phase-in of the passenger-side air bag in these same cars from the 1994 through 1999 model years.
A new government requirement for passenger car side impact protection was issued in 1990 affecting future model year cars. A phase-in of the new requirement began September 1, 1993. The NHTSA proposed that new dynamic side impact protection requirements be applied to light-duty trucks and vans. If a final rule which is similar to the proposal is promulgated, side structure and interior trim designs of future models will be affected.
Regarding GM light-duty trucks and vans, a final rule required center high-mounted stop lamps by September 1, 1993. Also, head restraints are now required on all light-duty trucks and vans.
A final rule covering roof crush resistance has also been issued by the NHTSA for light-duty trucks and vans that is more stringent than for passenger cars. This rule addresses vehicles with a GVWR less than or equal to 6,000 lb and was effective September 1, 1994.
A final rule has been issued by NHTSA that extends the passenger car automatic restraint requirements to light-duty trucks and vans on a phased-in basis beginning September 1, 1994.
Lastly, a final rule has been issued by NHTSA that will require air bags be the only means used to meet the automatic restraint requirements for passenger cars and light-duty trucks and vans on a phased-in basis beginning September 1, 1996.
The NHTSA currently is considering the effects of fuel system crash integrity requirements of the Federal Motor Vehicle Safety Standard (FMVSS) (301). If any of the considerations ultimately are adopted as final rules, some undetermined redesign, cost, and weight increase could be expected for most of GM's vehicles. See Item 3, Legal Proceedings, Other Matters.
With the passage of the Anti-Car Theft Act of 1992, implementation costs for the 1993 calendar year affected approximately 22 passenger car assembly plants and 9 light-duty truck plants. For the affected truck plants, the major expenditures were for new label printer installations and additional stamping equipment. Both passenger car and truck plants affected will probably require some extra tooling to accommodate full VIN-stamping on the frame of each vehicle and noise-pollution reduction facilities to alleviate noise associated with VIN-stamping operations.
A bill has been introduced into Congress by Representative Danforth that would change the current Federal bumper impact requirement from 2.5 mph to 5 mph. The bill also calls for labeling that would define bumper performance. This bill may have an effect on future GM products that are designed to meet the existing FMVSS requirements. Additionally, performance labeling may cause additional testing that will lead to increased costs. This legislation also proposes to extend the requirement to minivans.
AUTOMOTIVE FUEL ECONOMY
The Energy Policy and Conservation Act passed in 1975 provided for production-weighted average fuel economy standards for passenger cars for 1978 and thereafter. Based on EPA combined city-highway test data, the General Motors 1994 model year domestic passenger car fleet is projected to attain a Corporate Average Fuel Economy (CAFE) of 27.4 miles per gallon (mpg) versus the standard of 27.5 mpg. The CAFE estimate for 1995 model year passenger cars is projected at 27.2 mpg versus the standard of 27.5 mpg. The projected shortfalls for 1993 through 1995 will be offset by credits projected to be earned in future model years.
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Fuel economy standards for light-duty trucks became effective in 1979. General Motors' CAFE fleet average for the 1994 model year is projected to be 19.9 mpg versus the standard of 20.5 mpg. For the 1995 model year, GM's truck CAFE is projected to be 20.0 mpg versus a standard of 20.6 mpg. The shortfall for 1994 will be partially offset by credits earned in 1991 and 1992. It is expected that the remaining 1994 shortfall and the 1995 shortfall will be offset by credits from future model years. However, the exact amount cannot be determined because standards have not been set beyond 1997.
GM's ability to meet increased CAFE standards is contingent on various future economic, consumer, legislative, and regulatory factors that GM cannot control and cannot predict with certainty. If GM could not comply with any new CAFE standards, GM could be subject to sizable civil penalties and could have to close plants or severely restrict product offerings to remain in compliance.
SEASONAL NATURE OF BUSINESS
In the automotive business, there are retail sales fluctuations of a seasonal nature, so that production varies from month to month. In addition, the changeover period related to the annual new model introduction has traditionally occurred in the third quarter of each year. For this reason, third quarter operating results are, in general, less favorable than those in the other three quarters of the year, depending on the magnitude of the changeover needed to commence production of new models incorporating, for example, design modifications related to more fuel-efficient vehicle packaging, stricter government standards for safety and emission controls, and consumer-oriented improvements in performance, comfort, convenience, and style.
SEGMENT REPORTING DATA
Industry segment and geographic segment data for 1994, 1993, and 1992 are summarized in Note 18 of Notes to Financial Statements in Part II.
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The Registrant makes no attempt herein to predict the future trend of its business and earnings or the effect thereon of the results of changes in general economic, industrial, regulatory, and international conditions.
ITEM 2.
ITEM 2. PROPERTIES
The Corporation, excluding General Motors Acceptance Corporation, has 295 locations operating in 37 states and 171 cities in the United States. Of these, 25 are engaged in the final assembly of GM cars and trucks; 26 are service parts operations responsible for distribution or warehousing; 13 are associated with Electronic Data Systems Corporation as large information processing centers; 36 major plants, offices, and research facilities relate to the operations of Hughes Aircraft Company; and the remainder are offices or involved primarily in the testing of vehicles or the manufacture of automotive components and power products. In addition, the Corporation has 20 locations in Canada and assembly, manufacturing, distribution, or warehousing operations in 51 other countries, including equity interests in associated companies which conduct assembly, manufacturing, or distribution operations. The major facilities outside the United States and Canada, which are principally vehicle manufacturing and assembly operations, are located in Germany, the United Kingdom, Brazil, Mexico, Austria, Belgium, and Spain.
Most facilities are owned by the Corporation or its subsidiaries. Leased properties consist primarily of warehouses and administration, engineering, and sales offices. The leases for warehouses generally provide for an initial period of five years and contain renewal options. Leases for sales offices are generally for shorter periods.
Properties of the Registrant and its subsidiaries include facilities which, in the opinion of management, are suitable and adequate for the manufacture, assembly, and distribution of their products.
Additional information regarding worldwide expenditures for plants and equipment is presented under Management's Discussion and Analysis in Part II.
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ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Corporation is a party as of December 31, 1994 are summarized on the following pages. Reference should also be made to Note 21 of notes to financial statements in Part II.
ENVIRONMENTAL MATTERS
On February 19, 1991, a complaint was filed in the Superior Court of Connecticut by the Connecticut Commissioner of Environmental Protection alleging that the plant in Bristol, Connecticut operated by GM's Delco Moraine NDH Division (now part of the Delco Chassis Division) had violated Connecticut's hazardous waste regulations in connection with its inspection, recordkeeping, and remediation of a spill of chromic acid at the plant site. The complaint seeks penalties of up to $25,000 per day for a period commencing sometime prior to April 1989 and running through November 1990. GM contends that its inspection, recordkeeping, and remediation practices in relation to the spill complied with applicable rules and regulations.
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On March 12, 1991, the Region II office of the Environmental Protection Agency (EPA) issued a Civil Administrative Complaint alleging that the plant operated by GM's Central Foundry Division (now part of the GM Powertrain Division) in Massena, New York had improperly disposed of polychlorinated biphenyl contaminated sludge during the period February 1984 through October 1987. The complaint seeks a fine of $14,176,000. GM believes that its disposal practices at Massena were in general compliance with applicable rules and regulations.
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On March 1, 1993, the U.S. EPA Region V issued a civil administrative complaint alleging that stormwater from the Chevrolet-Pontiac-GM of Canada Group's Pontiac Fiero plant in Pontiac, Michigan exceeded the facility's National Pollutant Discharge System Permit from May 1989 through May 1992. The EPA complaint, as amended, cites the Corporation for 94 exceedances of copper, lead, and zinc and is seeking $125,000 in penalties. There has been no production at the Fiero Plant since August 1988. The Corporation believes that the very low concentrations of metals found in the stormwater during the specified time period occurred as a result of acid rain dissolving metal from the gutters and roof. General Motors is contesting the allegations and has requested a hearing.
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On March 26, 1993, the Region V office of the EPA issued a Civil Administration Complaint against the Corporation alleging that 65 petroleum and hazardous substance underground storage tanks (USTs) which it has operated at its Technical Center in Warren, Michigan have been in violation of certain of the EPA UST regulations. The EPA has proposed a civil penalty of $267,447. Based upon its current evaluation of this matter, General Motors believes that the operations cited by the EPA's complaint have been and remain in substantial compliance with applicable UST regulations.
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In March 1993, the Michigan Department of National Resources (MDNR) notified the Corporation's Powertrain Division (PD) that MDNR was making a referral to the Michigan Attorney General for resolution of allegations by MDNR that a PD facility in Saginaw, Michigan had failed to conduct a timely environmental investigation to MDNR's satisfaction of a landfill and certain other areas at the facility's property, and that PD's on-site water recycling basins were improperly discharging contaminants to the groundwater and the Saginaw River.
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On June 28, 1994, the Attorney General for the State of Michigan, on behalf of the Michigan Department of Natural Resources (DNR), filed a complaint in Circuit Court of the 30th Judicial Circuit in Ingham County, Michigan alleging that several of GM's plants released polychlorinated biphenyls (commonly referred to as "PCBs") into the Saginaw River thereby causing damage to natural resources in the river and Saginaw Bay. The complaint also named the City of Saginaw and Bay City as defendants. The State has not asserted that it is seeking fines or penalties and no amount is specified in the complaint as damages, but the State is seeking reimbursement of all its past and future response costs, including enforcement costs, and natural resource damages relating to the Saginaw River and Bay. In this regard, representatives of the State have indicated that the State will be seeking "tens of millions of dollars" in damages as well as several million dollars in past response costs. GM is currently in discussions with representatives of the Michigan Attorney General and the DNR regarding this matter.
GM has also been advised that the U.S. Department of Interior ("DOI") may be conducting an investigation of these matters and any related damage to the environment, and that DOI may pursue independent claims against GM, the City of Saginaw and Bay City.
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On November 25, 1994, GM was notified that the U.S. EPA has requested that the U.S. Department of Justice (DOJ) commence a civil action against GM for injunctive relief and civil penalties for alleged violation of vehicle emissions standards and certification procedures under the Clean Air Act with respect to several recent model year vehicles and engines produced by GM's North American Automotive Operations (NAO). No claim has been filed and GM and DOJ/EPA have agreed to toll the running of any deadlines for filing claims through February 12, 1995 in order to avoid litigation and promote opportunities for settlement. DOJ/EPA have not specified the nature of any injunctive relief for the amount of civil penalties the government might seek. GM believes that the subject vehicles and engines were produced in compliance with the Clean Air Act.
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OTHER MATTERS
Two suits, denominated by plaintiffs as class actions, were filed in Delaware Chancery Court, Stephen A. Solomon v. General Motors Corporation, et al., on May 13, 1994 and TRV Holding Company v. General Motors Corporation, et al., on May 18, 1994. Both actions purport to be brought on behalf of holders of Class E common stock against the Corporation and its directors. The complaints make essentially the same allegations, namely, that defendants have breached and are continuing to breach their fiduciary duties to holders of Class E common stock by, among other things, planning and announcing a contribution of Class E common stock to the Corporation's U.S. Hourly-Rate Pension Plan, which plan and announcement were allegedly made for the purpose of -- setting the stage for GM's disposition of Electronic Data Systems Corporation (EDS) assets in a manner which will deprive holders of Class E common stock of the full value of their shares, and -- artificially capping the market price of Class E common stock to limit the price to be paid to holders of Class E common stock in connection with plaintiff's alleged design on behalf of GM to either sell EDS assets or tender for Class E common stock. The complaints seek monetary damages and an injunction to enjoin GM from contributing Class E common stock to its U.S. Hourly-Rate Pension Plan. The contribution of Class E common stock to GM's U.S. Hourly-Rate Pension Plan is described by GM under Item 2 of its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1994. GM believes the suits are without merit, intends to defend them vigorously, and does not believe that they will materially interfere with the Corporation's plan to complete the contribution of Class E common stock.
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U.S. Government contracts held by the Corporation and its subsidiaries are subject to termination by the U.S. Government either for its convenience or for default by the contractor. The costs recovered for terminations for convenience do not always fully reimburse the contractor, and the profit or fee received by the contractor may be lower than that which it had expected for the portion of the contract performed. In cases of termination for default, normal contract remedies generally apply. In addition, the U.S. Government has broad discretion to suspend or debar a contractor from engaging in new government business, including discretion as to the period of suspension and activities affected. A contractor may be debarred based on a conviction or civil judgment involving certain offenses, including fraud in connection with obtaining or performing a public contract, or subcontract thereunder, and may be suspended if indicted for such an offense or if there is other adequate evidence that such an offense has been committed. Like other government contractors, GM and its subsidiaries are subject to civil audits and criminal investigations relating to their contracting activity.
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In September 1973, Hughes Aircraft Company (Hughes) filed suit against the U.S. Government in the U.S. Court of Claims seeking reasonable and entire compensation for the unauthorized manufacture or use by the United States of the invention claimed in a Hughes patent (the "Williams Patent") covering "Velocity Control and Orientation of a Spin Stabilized Body," principally satellites. In late 1983, the United States Court of Appeals for the Federal Circuit (the U.S. Court with appellate jurisdiction for patent cases) ruled that the Williams Patent was valid and that the Government had infringed that patent. The compensation which Hughes is entitled to recover as a result of the Government's infringement is now being determined by the U.S. Court of Claims, as well as whether additional U.S. Government satellites also infringe.
The trial concluded in December 1988. Hughes contends that its recovery should be calculated in accordance with either of two methods for computing delay compensation and introduced evidence to support an award of approximately $4.8 billion or $1.5 billion depending upon the methods used. The Government sought to demonstrate to the Court that any damages awarded to Hughes in this case should not exceed $20-30 million. In August 1993, the Court determined that approximately $4 billion in satellite purchases infringed the patent. On June 17, 1994, the Court issued a decision awarding Hughes damages of $114 million. Hughes believes that the record supports a higher royalty rate, and, accordingly, on August 3, 1994 filed a notice of appeal pursuant to which Hughes will be seeking a higher award. Hughes is unable to estimate the duration of these appeal efforts.
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On August 21, 1992, EDS filed a breach of contract suit against the State of Florida (the "State") in the Circuit Court of the Second Judicial Circuit in Leon County, Florida, seeking recovery under various counts of more than $46 million in payment for unpaid computer equipment and information technology services. The suit arises out of a 1989 contract entered into between EDS and the Department of Health and Rehabilitative Services ("DHRS") of the State of Florida under which EDS had agreed to provide an information management system to the DHRS that would integrate its offices and computer programs statewide. EDS completed the system and turned it over to the Department in May 1992. On September 21, 1993, the State filed an Answer and Counterclaims, alleging principally breach of contract and breach of warranty. Under various counts, the State is requesting approximately $90 million in damages and approximately $140 million in indemnification for potential liability of the State to the Federal government. EDS and the State have agreed to resolve this matter through a final and binding Alternative Dispute Resolution process (ADR) which commenced on January 5, 1995. The ADR judge will make recommendations to the Circuit Court with respect to the final judgment that should be entered. Other than submitting exceptions to the Circuit Court prior to its consideration and adoption of the recommendations, there is no appeal. The parties have submitted motions for summary judgment to the ADR judge and, at this point, the ADR judge has recommended that summary judgments in the amount of approximately $27.5 million be awarded to EDS. Although the Circuit Court has refused to enter final judgment on these claims before the entire matter is
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resolved, it noted that DHRS had not filed exceptions to the recommendations and therefore entry of judgment on these claims appears likely.
EDS management believes that it has strong and meritorious defenses to any counterclaims which the State may assert and intends to defend itself vigorously while continuing to pursue recovery against the State under the claims which it has filed.
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Several actions seeking compensatory and punitive damages in unspecified amounts have been filed against Hughes by plaintiffs alleging that they suffered injuries as a result of the migration into the Tucson, Arizona water supply of toxic substances that were disposed of at a facility owned by the United States Government which Hughes operates under a contract with the U.S. Air Force. These actions include a class action filed in Arizona State Court, Cordova v. Hughes Aircraft Company (formerly Bahrs, et al. v. Hughes Aircraft Company, et al. (Super. Ct. Pima County)), an individual action filed on behalf of approximately 500 plaintiffs in Federal District Court in Arizona, Yslaja v. Hughes Aircraft Company (formerly Acevedo, et al. v. Hughes Aircraft Company), and a class action filed in Federal District Court in Arizona, Lanier v. Hughes Aircraft Company. Other governmental and private entities are known to have also been the source of toxic substances which may have migrated into the Tucson water supply. Hughes believes that it has strong defenses to the claims asserted against it and that it may have claims for contribution against the other entities.
The facts alleged in these cases are similar to the facts alleged in the previously reported action entitled Valenzuela v. Hughes Aircraft Company. As previously reported, the Valenzuela action was settled pursuant to an agreement under which Hughes' principal insurers provided $70.7 million and Hughes provided $13.8 million. At the time of such settlement, Hughes and its insurers were litigating in the United States District Court in Arizona their respective ultimate liability to one another for the amounts paid in the Valenzuela settlement. This litigation, entitled Smith, et al. v. Hughes Aircraft Company, was commenced in 1988 by various insurers seeking a declaratory judgment that the Valenzuela claims are not covered under the terms of the insurance policies issued to Hughes. These insurers have taken a similar position with respect to the more recently filed actions. In September 1991, the Smith court entered summary judgment in favor of Hughes' insurers who issued policies from 1971 to 1985, based upon "pollution exclusions" contained in those policies. In September 1992, the Smith court entered summary judgment in favor of Hughes' pre-1971 insurers based upon findings and conclusions that could have been adverse to Hughes with respect to other claims and proceedings. Hughes appealed these rulings to the Ninth Circuit Court of Appeals. In November 1993, the Ninth Circuit affirmed in substantial part the District Court's summary judgment on the "pollution exclusion" policies, but reversed the District Court's summary judgment on pre-1971 policies. The Ninth Circuit remanded the case for further proceedings in the District Court.
Contracts under which Hughes has operated the Air Force facility contain provisions under which indemnification from the Air Force may be provided for certain liabilities which Hughes may incur in connection with its operation of the facility to the extent such liabilities are not covered by insurance. Hughes intends to prosecute all appropriate claims it may have for insurance coverage and, if necessary, to pursue all appropriate claims for indemnification or contribution relating to the actions described above.
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In December 1992, the National Highway Traffic Safety Administration (NHTSA) of the U.S. Department of Transportation (DOT), granting a petition previously filed by the Center for Auto Safety and Public Citizen, opened an investigation to determine whether 1973-1987 model Chevrolet and GMC full-size pickup trucks contain a safety defect resulting in an unreasonably high incidence of fuel-fed fires in side impact collisions. NHTSA emphasized then and has repeated that granting the petition does not indicate that the agency has determined that a safety-related defect exists in these vehicles.
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On April 9, 1993, NHTSA made an informal request of GM that it voluntarily conduct a safety-related recall campaign on the vehicles. Although in its April 9, 1993 letter, NHTSA stated that its Office of Defects Investigation "believes that GM's fuel tank system in the subject vehicles contains a defect that relates to motor vehicle safety", it nevertheless stated that "this recommendation to conduct a safety recall does not reflect a formal conclusion by the agency, . . . should not be confused with an Initial or Final Determination of a safety defect pursuant to . . . the National Traffic and Motor Vehicle Safety Act, . . . (and) should (not) be confused with a recall order . . . " A recall order can only be issued by the agency if it makes a Final Determination (which it has not done in this case) that a defect exists which presents an unreasonable risk to motor vehicle safety.
On April 30, 1993, in a written response to NHTSA's letter of April 9, 1993, General Motors stated that based upon its evaluation of the data which NHTSA had then made available to GM as having been the basis for requesting the voluntary recall in its letter, General Motors continued to believe that its 1973-1987 pickup trucks are neither defective nor present an unreasonable risk, and that consequently no safety recall of such trucks is warranted. General Motors stated that it remained strongly of this view, and intended to press its position vigorously while continuing to cooperate with NHTSA's investigative efforts.
On October 17, 1994, the Secretary of Transportation, Federico Pena, (the Secretary), announced his initial decision that a safety-related defect exists in 1971-91 GM C/K pickup trucks having side-mounted fuel tanks. In his announcement, it was indicated that his final decision as to whether a safety-related defect exists or to close the investigation, would be made after a public meeting scheduled for December 6, 1994. In an October 31, 1994 letter to DOT, GM offered to treat the Secretary's October 17 decision as his final decision and order for the purposes of allowing DOT to proceed directly and promptly to Federal court, in order that the matter might be resolved in a judicial forum.
On November 17, 1994, General Motors filed suit against the Secretary, DOT, and NHTSA in the U.S. District Court for the Eastern District of Michigan. In that action, GM requested a declaratory judgment and injunctive relief vacating the Secretary's initial decision of October 17, 1994 (that the C/K pickup trucks contain a defect related to motor vehicle safety) and enjoining the defendants from taking any further action to compel a recall of the C/K pickup trucks.
On December 2, 1994, the Secretary announced that a comprehensive settlement had been agreed to between the Government and General Motors with respect to the Government investigation, the Government attempt to compel a GM recall of the C/K pickup trucks, and the suit filed by General Motors on November 17, 1994. Under this settlement, both General Motors and the Government commit to provide funding for certain national highway safety programs. Specifically, General Motors will fund over $51 million and the Government an additional $27 million toward certain highway safety programs during the next five years. The settlement agreement further provides that the Government's C/K pickup truck investigation will be closed, recall efforts terminated, and GM's lawsuit dismissed.
General Motors will continue to cooperate with the Government in its efforts to enhance the applicable Federal safety standard for vehicle fuel system integrity. GM presently plans to make its expenditures pursuant to the settlement in research (focusing on fire safety, burn and trauma injuries, driver impairment, and crash dummies) and in the areas of public education, computer modeling, and child safety seats.
Throughout the investigation and settlement, GM has consistently maintained that there is no basis for a determination by the Secretary of Transportation or any other party that the trucks' side-mounted fuel tanks are in violation of Federal safety standards or that a safety-related defect exists with respect to such tanks. GM remains prepared to defend the safety of the trucks in any court.
There are also pending individual product liability claims and lawsuits involving allegations of defects in the design of such vehicles resulting in fuel-fed fires following side impact collisions. GM intends to defend these cases vigorously.
In addition to the NHTSA investigation and the product liability cases, 38 class actions were filed in state and Federal courts against the Corporation, claiming that 1973-1987 model Chevrolet and GMC full-size pickup trucks are defective because their fuel tanks are mounted below the cab and outside the frame rails. 24
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Federal court class actions were transferred to the Federal court in Philadelphia, Pennsylvania by the Judicial Panel on Multidistrict Litigation. In these actions, plaintiffs claimed that the fuel tank locations make the vehicles unreasonably susceptible to fuel-fed fires following side impact collisions. Plaintiffs alleged breach of contract and warranty, negligence, fraud, and negligent misrepresentation, as well as violation of various state consumer protection laws. The lawsuits seek compensatory and punitive damages and injunctions requiring notice to owners, repairs, retrofitting, and "disgorgement" of revenues.
In July 1993, a nationwide class action settlement of the C/K pickup truck class actions was submitted to the Pennsylvania Federal court and a state court in Texas. After notice of the proposed settlement was sent to 6.3 million registered owners, the Pennsylvania and Texas courts held hearings to determine if the settlement was fair, reasonable and adequate. Both courts subsequently entered orders giving final approval of the settlement. Certain objectors filed appeals of those approvals to the U.S. Third Circuit Court of Appeals and a Texas State Court of Appeals. The Texas Court of Appeals in Texarkana on June 22, 1994 reversed the approval of the settlement affecting Texas residents. GM appealed that reversal before the Texas Supreme Court and that Court granted leave to proceed with the appeal. GM believes that it has a sound basis for prevailing in its appeal.
The Philadelphia Federal Court approval of substantially the same settlement is on appeal in the U.S. Third Circuit Court of Appeals and after argument before the Court of Appeals for the Third Circuit in August of 1994, that appeal is still pending.
Additionally, on October 14, 1993, Crowder, et al v. General Motors Corporation was filed as a purported class action in the Federal court in Dallas, Texas on behalf of owners of full-size pickup trucks and chassis cabs covered by the class action settlements who elected to be excluded from the settlements or purchased their trucks used after July 19, 1993. the allegations are essentially the same as those made in the other class actions. No determination has been made that the case may proceed as a class action. GM intends to vigorously defend the case and oppose certification of a class.
The settlement provides for owners of 1973-1986 model C/K and 1987-1991 R/V pickup trucks and chassis cabs as of July 19, 1993, the date the settlement was announced, to receive $1,000 Certificates from General Motors which may be used in connection with the purchase of any new GMC Truck or Chevrolet light-duty truck. The Certificates can be used in combination with other GM and GMAC incentive programs during the 15-month period after eligible owners are notified of the procedures for obtaining their Certificates. The Certificates are redeemable by the eligible owner or immediate family members residing at the same address. Within the original redemption period, Certificates also can be transferred at face value with the truck. Original Certificate holders also can elect to exchange the $1,000 Certificate for a non-transferable $500 Certificate issuable in the name of another person, such certificate being redeemable only toward the purchase of a new C/K pickup truck, and not being usable in combination with other incentives offered by GM or GMAC. Both the $1,000 and $500 Certificates can only be used at authorized Chevrolet and GMC Truck dealers and cannot be redeemed for cash or any other consideration. The Corporation believes that the settlement will not have a material adverse impact on its operations or financial condition.
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On June 1, 1994, the Corporation was informed by prosecutors with the U.S. Department of Justice ("DOJ") that the Corporation's wholly-owned subsidiary, Delco Electronics Corporation ("Delco Electronics"), is a target for criminal prosecution and subject to civil suit in connection with allegations that Delco Electronics is responsible for the transportation of hazardous wastes from its Maquiladora plant in Reynosa, Mexico into the United States. The related Government investigation is focused on four shipments of recyclable waste solvents during the period 1987-1990 which allegedly violated the U.S. Resource Conservation and Recovery Act ("RCRA") and the treaty with Mexico which established the Maquiladora industry. Representatives of the DOJ have not indicated what fines, penalties, or other damages they may seek to recover in their continued pursuit of this matter. Based on its own investigation, Delco Electronics believes it has strong defenses to any criminal prosecution and will defend itself vigorously.
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On October 24, 1994, a jury sitting in two cases consolidated for trial in the California Superior Court for the County of Los Angeles, both of which cases had been brought by individual plaintiffs, Jeffrey Lane v. Hughes Aircraft Company and David Villalpando v. Hughes Aircraft Company, rendered verdicts resulting in an aggregate award against Hughes in the amount of $89.5 million. $80 million of the award was for punitive damages and the remainder was for emotional distress and lost wages and benefits. One plaintiff alleged racial discrimination by Hughes with respect to pay and promotion, and both plaintiffs alleged retaliation by Hughes. Hughes vigorously denied plaintiffs' allegations. On December 15, 1994, Superior Court Judge Malcolm H. Mackey granted Hughes' motion for judgment in its favor notwithstanding the verdict, overturning the entire $89.5 million judgment against Hughes. The court also granted Hughes' alternative motion for an order for a new trial in the event that a court of appeals reverses Judge Mackey's ruling in favor of Hughes.
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ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable (N/A).
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PART II
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
CROSS REFERENCE SHEET
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RESPONSIBILITIES FOR CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements of General Motors Corporation and subsidiaries were prepared by management which is responsible for their integrity and objectivity. The statements have been prepared in conformity with generally accepted accounting principles and, as such, include amounts based on judgments of management. Financial information elsewhere in Part II is consistent with that in the consolidated financial statements.
Management is further responsible for maintaining a system of internal accounting controls, designed to provide reasonable assurance that the books and records reflect the transactions of the companies and that its established policies and procedures are carefully followed. From a stockholder's point of view, perhaps the most important feature in the system of control is that it is continually reviewed for its effectiveness and is augmented by written policies and guidelines, the careful selection and training of qualified personnel, and a strong program of internal audit.
Deloitte & Touche LLP, an independent auditing firm, is engaged to audit the consolidated financial statements of General Motors Corporation and its subsidiaries and issue reports thereon. The audit is conducted in accordance with generally accepted auditing standards which comprehend the consideration of internal accounting controls and tests of transactions to the extent necessary to form an independent opinion on the financial statements prepared by management. The Independent Auditors' Report appears on the next page.
The Board of Directors, through the Audit Committee (composed entirely of non-employee Directors), is responsible for assuring that management fulfills its responsibilities in the preparation of the consolidated financial statements. The Committee selects the independent auditors annually in advance of the Annual Meeting of Stockholders and submits the selection for ratification at the Meeting. In addition, the Committee reviews the scope of the audits and the accounting principles being applied in financial reporting. The independent auditors, representatives of management, and the internal auditors meet regularly (separately and jointly) with the Committee to review the activities of each, to ensure that each is properly discharging its responsibilities, and to assess the effectiveness of the system of internal accounting controls. It is management's conclusion that the system of internal accounting controls at December 31, 1994 provides reasonable assurance that the books and records reflect the transactions of the companies and that its established policies and procedures are complied with. To ensure complete independence, Deloitte & Touche LLP has full and free access to meet with the Committee, without management representatives present, to discuss the results of the audit, the adequacy of internal accounting controls, and the quality of the financial reporting.
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INDEPENDENT AUDITORS' REPORT
General Motors Corporation, its Directors, and Stockholders:
We have audited the Consolidated Balance Sheets of General Motors Corporation and subsidiaries as of December 31, 1994 and 1993 and the related Statements of Consolidated Operations and Consolidated Cash Flows for each of the three years in the period ended December 31, 1994. Our audits also included the financial statement schedule listed at Item 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
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(b) Reports on Form 8-K
One report on Form 8-K, dated December 5, 1994, was filed during the quarter ended December 31, 1994 reporting amendments to the By-Laws under Item 7, Financial Statements, Pro Forma Financial Information and Exhibits.
* Required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
SCHEDULE II -- ALLOWANCES
- ------------------------- Notes: (a) See analysis of allowance for financing losses in Note 10 to the Financial Statements. (b) Accounts written off. (c) Obsolete parts written off, etc.
Reference should be made to the Notes to Financial Statements.
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SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
GENERAL MOTORS CORPORATION ----------------------------------- (Registrant)
Date: March 6, 1995 By: /s/ John F. Smith, Jr.
-------------------------------------- (John F. Smith, Jr. Chief Executive Officer, President and Director)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on this 6th day of March 1995 by the following persons on behalf of the Registrant and in the capacities indicated.
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SIGNATURES -- CONCLUDED
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