UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549-1004
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF
---- 1934
For the transition period from to
Commission file number 1-143
GENERAL MOTORS CORPORATION
--------------------------
(Exact Name of Registrant as Specified in its Charter)
STATE OF DELAWARE 38-0572515
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
300 Renaissance Center, Detroit, Michigan 48265-3000
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (313) 556-5000
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X . No .
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X . No .
--- ---
As of July 31, 2003, there were outstanding 560,718,432 shares of the
issuer's $1-2/3 par value common stock and 1,108,336,710 shares of GM Class H
$0.10 par value common stock.
1
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
INDEX
Page No.
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Part I - Financial Information (Unaudited)
Item 1. Financial Statements
Consolidated Statements of Income for the Three Months
and Six Months Ended June 30, 2003 and 2002 3
Supplemental Information to the Consolidated Statements
of Income for the Three Months and Six Months
Ended June 30, 2003 and 2002 4
Consolidated Balance Sheets as of June 30, 2003,
December 31, 2002, and June 30, 2002 5
Supplemental Information to the Consolidated Balance
Sheets as of June 30, 2003, December 31, 2002,
and June 30, 2002 6
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2003 and 2002 7
Supplemental Information to the Condensed Consolidated
Statements of Cash Flows for the Six Months Ended
June 30, 2003 and 2002 8
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 4. Controls and Procedures 32
Part II - Other Information (Unaudited)
Item 1. Legal Proceedings 33
Item 4 Submission of Matters to a Vote of Security Holders 35
Item 6. Exhibits and Reports on Form 8-K 37
Signatures 37
Exhibit 31.1 Section 302 Certification of the Chief Executive Officer 38
Exhibit 31.2 Section 302 Certification of the Chief Financial Officer 39
Exhibit 32.1 Certification of the Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 40
Exhibit 32.2 Certification of the Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 41
Exhibit 99 Hughes Electronics Corporation Financial Statements
(Unaudited) and Management's Discussion and
Analysis of Financial Condition and Results of Operations 42
2
PART I
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
(dollars in millions except per share
amounts)
Total net sales and revenues $48,308 $48,339 $97,673 $94,553
------ ------ ------ ------
Cost of sales and other expenses 38,940 38,396 78,323 76,797
Selling, general, and
administrative expenses 6,083 6,090 11,789 11,691
Interest expense 2,265 2,072 4,393 3,930
------ ------ ------ ------
Total costs and expenses 47,288 46,558 94,505 92,418
------ ------ ------ ------
Income before income taxes and
minority interests 1,020 1,781 3,168 2,135
Income tax expense 265 563 921 688
Equity income (loss) and minority
interests 146 74 137 73
--- ----- ----- -----
Net income 901 1,292 2,384 1,520
Dividends on preference stocks - (23) - (47)
--- ----- ----- -----
Earnings attributable to common
stocks $901 $1,269 $2,384 $1,473
=== ===== ===== =====
Basic earnings (losses) per share
attributable to common stocks
(Note 7)
Earnings per share attributable to
$1-2/3 par value $1.58 $2.48 $4.30 $3.06
==== ==== ==== ====
Earnings (losses) per share
attributable to Class H $0.02 $(0.14) $(0.02) $(0.27)
==== ==== ==== ====
Earnings (losses) per share
attributable to common stocks
assuming dilution (Note 7)
Earnings per share attributable to
$1-2/3 par value $1.58 $2.43 $4.29 $3.02
==== ==== ==== ====
Earnings (losses) per share
attributable to Class H $0.02 $(0.14) $(0.02) $(0.27)
==== ==== ==== ====
Reference should be made to the notes to consolidated financial statements.
3
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION TO THE CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----
(dollars in millions)
AUTOMOTIVE, COMMUNICATIONS SERVICES, AND OTHER OPERATIONS
Total net sales and revenues $40,732 $41,718 $82,774 $81,491
------ ------ ------ ------
Cost of sales and other expenses 36,839 36,461 74,152 72,672
Selling, general, and
administrative expenses 3,781 3,818 7,122 7,508
Interest expense 402 302 723 464
------ ------ ------ ------
Total costs and expenses 41,022 40,581 81,997 80,644
Net expense from transactions with
Financing and Insurance 34 46 75 136
------ ------ ------ ------
Operations
(Loss) income before income taxes
and minority interests (324) 1,091 702 711
Income tax (benefit) expense (235) 311 (9) 151
Equity income (loss) and minority
interests 147 80 148 91
------ ------ ------ ------
Net income - Automotive,
Communications Services, and Other
Operations $58 $860 $859 $651
== === === ===
FINANCING AND INSURANCE OPERATIONS
Total revenues $7,576 $6,621 $14,899 $13,062
----- ----- ------ ------
Interest expense 1,863 1,770 3,670 3,466
Depreciation and amortization
expense 1,578 1,353 3,084 2,714
Operating and other expenses 2,068 1,951 4,245 3,856
Provisions for financing and
insurance losses 757 903 1,509 1,738
----- ----- ------ ------
Total costs and expenses 6,266 5,977 12,508 11,774
----- ----- ------ ------
Net income from transactions with
Automotive, Communications
Services, and Other Operations (34) (46) (75) (136)
----- --- ----- -----
Income before income taxes and
minority interests 1,344 690 2,466 1,424
Income tax expense 500 252 930 537
Equity income (loss) and minority
interests (1) (6) (11) (18)
----- --- ----- -----
Net income - Financing and
Insurance Operations $843 $432 $1,525 $869
=== === ===== ===
The above Supplemental Information is intended to facilitate analysis of General
Motors Corporation's businesses: (1) Automotive, Communications Services, and
Other Operations; and (2) Financing and Insurance Operations.
Reference should be made to the notes to consolidated financial statements.
4
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, June 30,
2003 Dec. 31, 2002
(Unaudited) 2002 (Unaudited)
----------- ---- -----------
ASSETS (dollars in millions)
Cash and cash equivalents $31,009 $21,449 $18,363
Marketable securities 18,777 16,825 14,304
------ ------ ------
Total cash and marketable securities 49,786 38,274 32,667
Finance receivables - net 153,600 134,647 119,636
Accounts and notes receivable (less allowances) 19,420 15,715 12,677
Inventories (less allowances) (Note 2) 11,093 9,967 9,757
Deferred income taxes 39,116 39,865 28,702
Equipment on operating leases - (less
accumulated depreciation) 36,576 32,988 33,598
Equity in net assets of nonconsolidated
associates 5,249 5,044 5,115
Property - net 38,384 37,514 36,451
Intangible assets - net (Note 3) 18,068 17,954 17,061
Other assets 39,553 37,028 40,665
------- ------- -------
Total assets $410,845 $368,996 $336,329
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable (principally trade) $27,402 $25,082 $23,983
Notes and loans payable 232,150 201,940 177,035
Postretirement benefits other than pensions 38,618 38,186 37,844
Pensions 23,968 22,762 9,451
Deferred income taxes 7,359 7,178 6,851
Accrued expenses and other liabilities 69,976 66,200 59,686
------- ------- -------
Total liabilities 399,473 361,348 314,850
Minority interests 991 834 788
Stockholders' equity
$1-2/3 par value common stock (outstanding,
560,712,564; 560,447,797; and
560,223,424 shares) (Note 7) 935 936 936
Class H common stock (outstanding,
1,108,139,876; 958,284,272;
and 958,005,494 shares) (Note 7) 111 96 96
Capital surplus (principally additional
paid-in capital) 22,815 21,583 21,557
Retained earnings 11,855 10,031 10,376
------ ------ ------
Subtotal 35,716 32,646 32,965
Accumulated foreign currency translation
adjustments (2,292) (2,784) (2,770)
Net unrealized loss on derivatives (205) (205) (188)
Net unrealized gains on securities 612 372 268
Minimum pension liability adjustment (23,450) (23,215) (9,584)
------ ------ ------
Accumulated other comprehensive loss (25,335) (25,832) (12,274)
------ ------ ------
Total stockholders' equity 10,381 6,814 20,691
------- ------- -------
Total liabilities and stockholders' equity $410,845 $368,996 $336,329
======= ======= =======
Reference should be made to the notes to consolidated financial statements.
5
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION TO THE CONSOLIDATED BALANCE SHEETS
June 30, June 30,
2003 Dec. 31, 2002
(Unaudited) 2002 (Unaudited)
----------- ---- -----------
ASSETS (dollars in millions)
Automotive, Communications Services, and Other
Operations
Cash and cash equivalents $18,582 $13,291 $14,421
Marketable securities 4,913 2,174 1,014
------- ------- -------
Total cash and marketable securities 23,495 15,465 15,435
Accounts and notes receivable (less allowances) 6,584 5,861 5,686
Inventories (less allowances) (Note 2) 11,093 9,967 9,757
Equipment on operating leases - (less
accumulated depreciation) 5,946 5,305 4,390
Deferred income taxes and other current assets 10,917 10,816 8,730
------ ------ ------
Total current assets 58,035 47,414 43,998
Equity in net assets of nonconsolidated 5,249 5,044 5,115
associates
Property - net 36,407 35,693 34,738
Intangible assets - net (Note 3) 14,715 14,611 13,763
Deferred income taxes 30,496 31,431 22,138
Other assets 8,016 7,781 17,307
------- ------- -------
Total Automotive, Communications Services, and
Other Operations assets 152,918 141,974 137,059
Financing and Insurance Operations
Cash and cash equivalents 12,427 8,158 3,942
Investments in securities 13,864 14,651 13,290
Finance receivables - net 153,600 134,647 119,636
Investment in leases and other receivables 41,470 35,517 34,168
Other assets 36,566 34,049 28,234
Net receivable from Automotive, Communications
Services, and Other Operations 1,128 1,089 638
------- ------- -------
Total Financing and Insurance
Operations assets 259,055 228,111 199,908
------- ------- -------
Total assets $411,973 $370,085 $336,967
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Automotive, Communications Services, and Other
Operations
Accounts payable (principally trade) $21,351 $20,169 $19,459
Loans payable 705 1,516 1,545
Accrued expenses 43,720 40,518 36,513
Net payable to Financing and
Insurance Operations 1,128 1,089 638
------- ------- -------
Total current liabilities 66,904 63,292 58,155
Long-term debt 20,513 16,651 16,831
Postretirement benefits other than pensions 34,674 34,275 33,990
Pensions 23,901 22,709 9,410
Other liabilities and deferred income taxes 15,634 15,461 14,506
------- ------- -------
Total Automotive, Communications Services, and
Other Operations liabilities 161,626 152,388 132,892
Financing and Insurance Operations
Accounts payable 6,051 4,913 4,524
Debt 210,932 183,773 158,659
Other liabilities and deferred income taxes 21,992 21,363 19,413
------- ------- -------
Total Financing and Insurance Operations
liabilities 238,975 210,049 182,596
------- ------- -------
Total liabilities 400,601 362,437 315,488
Minority interests 991 834 788
Stockholders' equity
$1-2/3 par value common stock (outstanding,
560,712,564; 560,447,797; and
560,223,424 shares) (Note 7) 935 936 936
Class H common stock (outstanding,
1,108,139,876; 958,284,272;
and 958,005,494 shares) (Note 7) 111 96 96
Capital surplus (principally additional paid-in
capital) 22,815 21,583 21,557
Retained earnings 11,855 10,031 10,376
------ ------ ------
Subtotal 35,716 32,646 32,965
Accumulated foreign currency translation
adjustments (2,292) (2,784) (2,770)
Net unrealized loss on derivatives (205) (205) (188)
Net unrealized gains on securities 612 372 268
Minimum pension liability adjustment (23,450) (23,215) (9,584)
------ ------ -------
Accumulated other comprehensive loss (25,335) (25,832) (12,274)
------ ------ -------
Total stockholders' equity 10,381 6,814 20,691
------- ------- -------
Total liabilities and stockholders' equity $411,973 $370,085 $336,967
======= ======= =======
The above Supplemental Information is intended to facilitate analysis of General
Motors Corporation's businesses: (1) Automotive, Communications Services, and
Other Operations; and (2) Financing and Insurance Operations.
Reference should be made to the notes to consolidated financial statements.
6
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June
30,
-----------------------
2003 2002
---- ----
(dollars in millions)
Net cash provided by operating activities $13,079 $12,876
Cash flows from investing activities
Expenditures for property (3,325) (3,540)
Investments in marketable securities -
acquisitions (7,200) (24,374)
Investments in marketable securities -
liquidations 5,804 22,310
Net originations and purchases of mortgage
servicing rights (1,152) (959)
Increase in finance receivables (71,636) (67,200)
Proceeds from sales of finance receivables 49,635 56,852
Operating leases - acquisitions (6,728) (7,053)
Operating leases - liquidations 5,668 5,016
Investments in companies, net of cash acquired (70) (274)
Proceeds from sale of business units 1,076 -
Other (1,111) 205
------ ------
Net cash used in investing activities (29,039) (19,017)
------ ------
Cash flows from financing activities
Net increase (decrease) in loans payable 825 (632)
Long-term debt - borrowings 42,622 18,473
Long-term debt - repayments (17,803) (11,407)
Repurchases of common and preference stocks - (97)
Proceeds from issuing common stocks - 69
Proceeds from sales of treasury stocks - 19
Cash dividends paid to stockholders (560) (607)
------ ------
Net cash provided by financing activities 25,084 5,818
------ -----
Effect of exchange rate changes on cash and
cash equivalents 436 131
------ ------
Net increase (decrease) in cash and cash
equivalents 9,560 (192)
Cash and cash equivalents at beginning of the
period 21,449 18,555
------ ------
Cash and cash equivalents at end of the period $31,009 $18,363
====== ======
Reference should be made to the notes to consolidated financial statements.
7
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION TO THE
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Automotive, Comm. Financing and
Serv. and Other Insurance
Six Months Ended June 30,
------------------------------------
2003 2002 2003 2002
---- ---- ---- ----
(dollars in millions)
Net cash provided by operating activities $7,407 $5,580 $5,672 $7,296
Cash flows from investing activities
Expenditures for property (2,941) (3,494) (384) (46)
Investments in marketable securities -
acquisitions (2,839) (802) (4,361) (23,572)
Investments in marketable securities -
liquidations 100 578 5,704 21,732
Net originations and purchases of mortgage
servicing rights - - (1,152) (959)
Increase in finance receivables - - (71,636) (67,200)
Proceeds from sales of finance receivables - - 49,635 56,852
Operating leases - acquisitions - - (6,728) (7,053)
Operating leases - liquidations - 5,668 5,016
Investments in companies, net of cash
acquired (70) (124) - (150)
Proceeds from sale of business units 1,076 - - -
Other (175) 510 (936) (305)
----- ----- ------ ------
Net cash used in investing activities (4,849) (3,332) (24,190) 15,685)
----- ----- ------ ------
Cash flows from financing activities
Net increase (decrease) in loans payable (943) (857) 1,768 225
Long-term debt - borrowings 4,060 6,186 38,562 12,287
Long-term debt - repayments (236) (183) (17,567) (11,224)
Repurchase of common and preference stocks - (97) - -
Proceeds from issuing common stocks - 69 - -
Proceeds from sales of treasury stocks - 19 - -
Cash dividends paid to stockholders (560) (607) - -
----- ----- ------ -----
Net cash provided by financing activities 2,321 4,530 22,763 1,288
----- ----- ------ -----
Effect of exchange rate changes on cash and
cash equivalents 373 130 63 1
Net transactions with Automotive/Financing
Operations 39 (919) (39) 919
------ ------ ------ ------
Net increase (decrease) in cash and cash
equivalents 5,291 5,989 4,269 (6,181)
Cash and cash equivalents at beginning of
the period 13,291 8,432 8,158 10,123
------ ------ ------ ------
Cash and cash equivalents at end of the
period $18,582 $14,421 $12,427 $3,942
====== ====== ====== =====
The above Supplemental Information is intended to facilitate analysis of General
Motors Corporation's businesses: (1) Automotive, Communications Services, and
Other Operations; and (2) Financing and Insurance Operations.
Reference should be made to the notes to consolidated financial statements.
8
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Financial Statement Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the U.S.
for interim financial information. In the opinion of management, all adjustments
(consisting of only normal recurring items), which are necessary for a fair
presentation have been included. The results for interim periods are not
necessarily indicative of results which may be expected for any other interim
period or for the full year. For further information, refer to the December 31,
2002 consolidated financial statements and notes thereto included in General
Motors Corporation's (the Corporation, General Motors, or GM) 2002 Annual Report
on Form 10-K, and all other GM, Hughes Electronics Corporation (Hughes), and
General Motors Acceptance Corporation (GMAC) filings with the U.S. Securities
and Exchange Commission.
GM presents its primary financial statements on a fully consolidated basis.
Transactions between businesses have been eliminated in the Corporation's
consolidated financial statements. These transactions consist principally of
borrowings and other financial services provided by Financing and Insurance
Operations (FIO) to Automotive, Communications Services, and Other Operations
(ACO).
To facilitate analysis, GM presents supplemental information to the
statements of income, balance sheets, and statements of cash flows for the
following businesses: (1) ACO, which consists of the design, manufacturing, and
marketing of cars, trucks, locomotives, and heavy-duty transmissions and related
parts and accessories, as well as the operations of Hughes; and (2) FIO, which
consists primarily of GMAC. GMAC provides a broad range of financial services,
including consumer vehicle financing, full-service leasing, fleet leasing,
dealer financing, vehicle extended service contracts, residential and commercial
mortgage services, vehicle and homeowners' insurance, and asset-based lending.
Certain amounts for 2002 were reclassified to conform with the 2003
classifications.
New Accounting Standards
Beginning January 1, 2003, the Corporation began expensing the fair market
value of stock options newly granted to employees pursuant to Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." The fair value of each option grant is estimated on the date of
the grant using the Black-Scholes option-pricing model. Such expense for the
three and six months ended June 30, 2003 was $11 million and $24 million, net of
tax, recorded in cost of sales and other expenses. For the three and six months
ended June 30, 2002, as permitted by SFAS No. 123, GM applied the intrinsic
value method of recognition and measurement under Accounting Principles Board
Opinion No. 25 (APB No. 25), "Accounting for Stock Issued to Employees," to its
stock options and other stock-based employee compensation awards. No
compensation expense related to employee stock options is reflected in net
income for these periods, as all options granted had an exercise price equal to
the market value of the underlying common stock on the date of the grant.
In accordance with the disclosure requirements of SFAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure," since GM adopted the
fair value based method of accounting for stock-based employee compensation
pursuant to SFAS No. 123 effective January 1, 2003 for newly granted options
only, the following table illustrates the effect on net income and earnings per
share if compensation cost for all outstanding and unvested stock options and
other stock-based employee compensation awards had been determined based on
their fair values at the grant date (dollars in millions except per share
amounts):
9
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Financial Statement Presentation (continued)
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2003 2002 2003 2002
---- ---- ---- ----
Net income, as reported $901 $1,292 $2,384 $1,520
Add: stock-based compensation expense with
respect to newly granted options, included in
reported net income, net of related tax
effects 11 - 24 -
Less: stock-based compensation expense
determined with respect to all outstanding
options, net of related tax effects (49) (82) (106) (176)
--- ----- ----- -----
Pro forma net income $863 $1,210 $2,302 $1,344
=== ===== ===== =====
Earnings (losses) attributable to common
stocks
$1-2/3 par value - as reported $884 $1,389 $2,408 $1,715
- pro forma 864 1,338 2,367 1,610
Class H - as reported $17 $(120) $(24) $(242)
- pro forma (1) (151) (65) (313)
Basic earnings (losses) per share
attributable to common stocks
$1-2/3 par value - as reported $1.58 $2.48 $4.30 $3.06
- pro forma 1.54 2.39 4.22 2.87
Class H - as reported $0.02 $(0.14) $(0.02) $(0.27)
- pro forma - (0.17) (0.06) (0.36)
Diluted earnings (losses) per share
attributable to common stocks
$1-2/3 par value - as reported $1.58 $2.43 $4.29 $3.02
- pro forma 1.54 2.34 4.22 2.83
Class H - as reported $0.02 $(0.14) $(0.02) $(0.27)
- pro forma - (0.17) (0.06) (0.36)
In December 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45).
FIN 45 requires that at the time a company issues a guarantee, the company must
recognize an initial liability for the fair value, or market value, of the
obligations it assumes under that guarantee. This interpretation is applicable
on a prospective basis to guarantees issued or modified after December 31, 2002.
FIN 45 also contains disclosure provisions surrounding existing guarantees,
which are effective for financial statements of interim or annual periods ending
after December 15, 2002 (see Note 5).
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46), which requires the consolidation of
certain entities considered to be variable interest entities (VIEs). An entity
is considered to be a VIE when it has equity investors who lack the
characteristics of having a controlling financial interest, or its capital is
insufficient to permit it to finance its activities without additional
subordinated financial support. Consolidation of a VIE by an investor is
required when it is determined that the investor will absorb a majority of the
VIE's expected losses or residual returns if they occur. FIN 46 provides certain
exceptions to these rules, including qualifying special purpose entities (QSPEs)
subject to the requirements of SFAS No. 140, VIEs created after January 31, 2003
must be consolidated immediately, while VIEs that existed prior to February 1,
2003 must be consolidated as of July 1, 2003.
Management is currently reviewing existing VIEs that may require
consolidation. With respect to GM's ACO business, it is reasonably possible that
certain VIEs with assets totaling approximately $1.2 billion, established
exclusively to facilitate GM's ACO leasing activities, may require
consolidation. Should GM default on all of its obligations with respect to its
involvement in these entities, GM's maximum exposure to loss would be
approximately $1.2 billion ($740 million after-tax).
10
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Financial Statement Presentation (concluded)
With respect to the FIO business, VIE structures are used to facilitate
various activities of GMAC, including securitization of loans, mortgage funding,
and other investing activities. Management has completed its analysis of its
VIEs to determine if GMAC is the primary beneficiary and if consolidation is
required effective July 1, 2003. Based on the results of this analysis,
management anticipates that VIEs with approximately $4.1 billion in assets will
be consolidated on GMAC's balance sheet due to the implementation of FIN 46.
GM's maximum exposure to loss related to these entities is approximately $2.4
billion ($1.5 billion after-tax) which primarily relates to retained interests
in these facilities.
Due to the complexity and the evolving interpretations of the new guidance,
management continues to assess the effects of FIN 46 on all of its interests in
variable interest entities.
In April 2003, the FASB issued SFAS No. 149, "Amendments of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and hedging activities. The Statement
is effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The adoption of this
standard did not have a material effect on the Corporation's financial condition
or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity," which provides
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. The Statement
is effective for financial instruments entered into or modified after May 31,
2003 and for pre-existing instruments as of the beginning of the first interim
period beginning after June 15, 2003. The adoption of this standard did not have
a material effect on the Corporation's financial condition or results of
operations.
Note 2. Inventories
Inventories included the following for Automotive, Communications Services,
and Other Operations (dollars in millions):
June 30, Dec. 31, June 30,
2003 2002 2002
----- ---- ----
Productive material, work in process, and
supplies $4,885 $4,915 $5,211
Finished product, service parts, etc. 7,984 6,859 6,383
------ ------ ------
Total inventories at FIFO 12,869 11,774 11,594
Less LIFO allowance 1,776 1,807 1,837
------ ------ ------
Total inventories (less allowances) $11,093 $9,967 $9,757
====== ===== =====
Note 3. Goodwill and Acquired Intangible Assets
The components of the Corporation's acquired intangible assets as of June 30,
2003, were as follows (dollars in millions):
Gross Accumulated Net
Carrying Amortization Carrying
Amount Amount
-----------------------------------
Automotive, Communications Services, and
Other Operations
------------------------------------------
Amortizing intangible assets:
Patents and intellectual property rights $304 $10 $294
Dealer network and subscriber base 356 202 154
---- ---- ---
Total 660 212 448
Non-amortizing intangible assets:
License fees - orbital slots 432
---
Total acquired intangible assets 880
---
Goodwill 7,041
Pension intangible asset 6,794
------
Total intangible assets 14,715
11
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3. Goodwill and Acquired Intangible Assets (concluded)
Financing and Insurance Operations
----------------------------------
Amortizing intangible assets:
Customer lists and contracts $71 $30 $41
Trademarks and other 40 14 26
Covenants not to compete 18 18 -
--- -- ---
Total 129 62 67
Total acquired intangible assets 67
Non-amortizing intangible assets:
Goodwill 3,286
-----
Total intangible assets 3,353
Total consolidated intangible assets $18,068
======
Estimated amortization expense in each of the next five years is as follows:
2004 - $70 million; 2005 - $47 million; 2006 - $47 million; 2007 - $47 million;
and 2008 - $43 million.
The changes in the carrying amounts of goodwill for the six months ended June
30, 2003, were as follows (dollars in millions):
(1) (1) Total GM
For the Six Months Ended GMNA GME Other Hughes ACO GMAC Total
June 30, 2003 ---- --- ----- ------ ----- ---- -----
Balance as of
December 31, 2002 $139 $338 $57 $6,458 $6,992 $3,273 $10,265
Goodwill acquired during
the period 16 - - 3 19 6 25
Effect of foreign currency
translation - 30 - - 30 14 44
Impairment losses - - - - - (7) (7)
--- --- --- ----- ----- ----- ------
Balance as of June 30, 2003 $155 $368 $57 $6,461 $7,041 $3,286 $10,327
=== === == ===== ===== ===== ======
(1) The amount recorded for Hughes excludes GM's purchase accounting adjustments
related to GM's acquisition of Hughes Aircraft Company. The carrying value of
$57 million in goodwill associated with the purchase is reported in the Other
segment.
Note 4. Product Warranty Liability
Policy, product warranty and recall campaigns liability included the following
(dollars in millions):
Six Months Twelve Months
Ended Months Ended
June 30, 2003 Dec. 31, 2002
------------- -------------
Beginning balance $8,856 $8,177
Payments (2,132) (4,182)
Increase in liability (warranties
issued during period) 2,240 4,418
Adjustments to liability (pre-existing (264) 323
warranties)
Effect of foreign currency translation 65 120
----- -----
Ending balance $8,765 $8,856
===== =====
12
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5. Commitments and Contingent Matters
Commitments
GM has guarantees related to its performance under lease arrangements and the
residual value of lease assets totaling $1.5 billion. Expiration dates vary, and
certain leases contain renewal options. The fair value of the underlying assets
is expected to fully mitigate GM's obligations under these guarantees.
Accordingly, no liabilities were recorded with respect to such guarantees.
The Corporation has guaranteed certain amounts related to the securitization
of mortgage loans. In addition, GMAC issues financial standby letters of credit
as part of their financing and mortgage operations. At June 30, 2003
approximately $59 million was recorded with respect to these guarantees, the
maximum exposure under which is approximately $3.7 billion.
In addition to guarantees, GM has entered into agreements indemnifying
certain parties with respect to environmental conditions pertaining to ongoing
or sold GM properties. Due to the nature of the indemnifications, GM's maximum
exposure under these agreements cannot be estimated. No amounts have been
recorded for such indemnities as the Corporation's obligations.
In connection with certain divestitures prior to January 1, 2003, GM has
provided guarantees with respect to benefits for former GM employees relating to
income protection, pensions, post-retirement healthcare and life insurance. Due
to the nature of these indemnities, the maximum exposure under these agreements
cannot be estimated. No amounts have been recorded for such indemnities as the
Corporation's obligations under them are not probable and estimable.
In addition to the above, in the normal course of business GM periodically
enters into agreements that incorporate indemnification provisions. While the
maximum amount to which GM may be exposed under such agreements cannot be
estimated, it is the opinion of management that these guarantees and
indemnifications are not expected to have a material adverse effect on the
Corporation's consolidated financial position or results of operations.
Contingent Matters
Litigation is subject to uncertainties and the outcome of individual
litigated matters is not predictable with assurance. Various legal actions,
governmental investigations, claims, and proceedings are pending against the
Corporation, including those arising out of alleged product defects;
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.
On March 18, 2003, DIRECTV Latin America, LLC (DLA LLC) filed a voluntary
petition for reorganization under Chapter 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court for the District of Delaware
(Bankruptcy Court). The filing does not include any of its operating companies
in Latin America and the Caribbean, which will continue regular operations. DLA
LLC continues to manage its business as a debtor-in-possession. As a
debtor-in-possession, management is authorized to operate the business, but may
not engage in transactions outside the ordinary course of business without
Bankruptcy Court approval. Subsequent to the filing of its Chapter 11 petition,
DLA LLC obtained Bankruptcy Court orders that, among other things, authorized
DLA LLC to pay certain pre-petition obligations related to employee wages and
benefits and to take certain actions where such payments or actions will benefit
its estate or preserve the going concern value of the business enterprise,
thereby enhancing the prospects of reorganization.
Investment in Fiat Auto Holdings
At the April 23, 2003, Annual General Shareholders Meeting of Fiat Auto
Holdings, B.V. (FAH), FAH adopted a Euro 5 billion recapitalization plan that
provides shareholders the option to make pro-rata capital contributions over the
eighteen months following adoption of the plan. When the plan was adopted, Fiat
S.p.A. (Fiat) held 80% of FAH and GM 20% (all shares of FAH are in fact owned by
subsidiaries of Fiat and GM through which any additional capital contributions
are channeled). Fiat has participated in the recapitalization by making a Euro 3
billion contribution, which was used by FAH to repay inter-company debts owed to
Fiat or its affiliates. Currently, GM does not plan to participate. Due to
Fiat's participation in the recapitalization, and GM's non-participation, Fiat
has reported that GM's interest in FAH has been reduced from 20% to 10%.
As discussed in GM's December 31, 2002 Annual Report on Form 10-K, the Master
Agreement provides that, from January 24, 2004 to July 24, 2009, Fiat may seek
to exercise a put option (the "Put") to require GM to purchase Fiat's FAH shares
at fair market value. Whether and when Fiat may seek to exercise the Put is
unknown, although Fiat, has recently stated in its 2002 Annual Report on Form
20F, filed with the U.S. Securities and Exchange Commission, that it views the
exercise of the Put only as a secondary possibility. Fiat also stated in its
Form 20F that it believes that the put is enforceable in accordance with the
terms of the Master Agreement. GM believes, however, that whether the Put could
ever be exercised is subject to the possibilities that it could be affected by
subsequent agreements of the companies, it could be non-exercisable under other
provisions of the Master Agreement, it could be unenforceable by reason of
actions Fiat has taken or may take, or Fiat may choose to not exercise the Put.
13
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5. Commitments and Contingent Matters (concluded)
Investment in Fiat Auto Holdings (concluded)
If the Put were implemented, the fair market value of FAH shares would be
determined by the average of three of the closest of four valuations that would
be prepared by four investment banks after conducting due diligence under
procedures set forth in the Master Agreement and based upon terms and conditions
to be incorporated in a purchase agreement which, at this time, the parties have
not prepared. Unless such a process and valuation is completed, the amount, if
any, that GM might have to pay for Fiat's FAH shares if there were to be a valid
exercise of the Put, is not quantifiable.
If there was to be a valid exercise of the Put, GM would have the option to
pay for Fiat's FAH shares entirely in shares of GM $1-2/3 par value common
stock, entirely in cash, or in whatever combination thereof GM may choose. Under
such circumstances, if and to the extent GM chose to pay in cash, that portion
of the purchase price could be paid to Fiat in four installments over a
three-year period and GM would expect to fund any such payments from normal
operating cash flows or financing activities.
If and when GM was to acquire Fiat's FAH shares, and thus become the sole
owner of FAH, GM would decide what, if any, additional capitalization would then
be appropriate for FAH and Fiat Auto. Specifically, if Fiat Auto were to need
additional funding, GM would have to decide whether or not to provide such
funding and under what conditions it might do so.
Unless FAH or Fiat Auto were subject to liquidation or insolvency, FAH's
consolidated financial statements would be required for financial reporting
purposes to be consolidated with those of GM. Any indebtedness, losses and
capital needs of FAH and Fiat Auto after their acquisition by GM are not
presently determinable, but they could have a material adverse effect on GM.
GM and Fiat have discussed potential alternatives to the Master Agreement,
and further discussions regarding the status of the Master Agreement are
planned.
European Matters
During September 2000, the European parliament passed a directive requiring
member states to adopt legislation regarding end-of-life vehicles and the
responsibility of manufacturers for dismantling and recycling vehicles they have
sold. European Union member states were required to transform the concepts
detailed in the directive into national law. The laws developed in the
individual national legislatures throughout Europe will have a significant
impact on the amount ultimately paid by the manufacturers for this issue.
Management is assessing the impact of this potential legislation on GM's
consolidated financial position and results of operations, and may include
charges to earnings in future periods.
The European Commission has approved a new block exemption regulation that
provides for a reform of the rules governing automotive distribution and service
in Europe. The European Commission's proposal would eliminate the current block
exemption in place since 1985 that permits manufacturers to control where their
dealerships are located and the brands that they sell. In order to implement
both the new regulatory changes as well as desired commercial strategies,
General Motors Europe (GME) issued a termination letter to all European Union
dealers (excluding those already under termination notice) while simultaneously
also offering an unconditional Letter of Intent to certain dealers to remain
part of GME's network. Dealers and authorized repairers are expected to sign new
agreements by September 30, 2003, when the new regulation becomes fully
effective. Management does not believe that the future impact of the changes to
the block exemption regulation will have a material adverse effect on GM's
consolidated financial position or results of operations.
Note 6. Comprehensive Income
GM's total comprehensive income was as follows (dollars in millions):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income $901 $1,292 $2,384 $1,520
Other comprehensive income 386 148 497 21
------ ------ ------ ------
Total $1,287 $1,440 $2,881 $1,541
===== ===== ===== =====
14
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7. Earnings Per Share Attributable to Common Stocks
Earnings per share (EPS) attributable to each class of GM common stock was
determined based on the attribution of earnings to each such class of common
stock for the period divided by the weighted-average number of common shares for
each such class outstanding during the period. Diluted EPS attributable to each
class of GM common stock considers the effect of potential common shares, unless
the inclusion of the potential common shares would have an antidilutive effect.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Earnings (losses) attributable to
common stocks
Earnings attributable to $1-2/3 par
value $884 $1,389 $2,408 $1,715
Earnings (losses) attributable to
Class H $17 $(120) $(24) $(242)
Earnings attributable to GM $1-2/3 par value common stock for the period
represent the earnings attributable to all GM common stocks, adjusted by the
earnings / (losses) attributable to GM Class H common stock for the respective
period.
Earnings (losses) attributable to GM Class H common stock for the six month
period ended June 30, 2002 represent the net income (loss) of Hughes, adjusted
to exclude the write-off of goodwill for DIRECTV Latin America and DIRECTV
Broadband recorded in Hughes' stand alone financial statements and other
adjustments. In accordance with SFAS No. 142, "Goodwill and Other Intangible
Assets," GM as of January 1, 2002 evaluated the carrying value of goodwill
associated with its Direct-to-Home Broadcast reporting unit in the aggregate and
determined the goodwill was not impaired. In addition, the adjusted losses are
reduced by the amount of dividends accrued on the Series A Preferred Stock of
Hughes (as an equivalent measure of the effect that GM's payment of dividends on
the GM Series H 6.25% Automatically Convertible Preference Stock would have if
paid by Hughes).
The calculated earnings (losses) are then multiplied by a fraction, the
numerator of which is equal to the weighted-average number of shares of GM Class
H common stock outstanding (1,108 million and 884 million during the three
months ended June 30, 2003 and 2002, respectively, and 1,049 million and 881
million during the six months ended June 30, 2003 and 2002, respectively), and
the denominator of which is a number equal to the weighted-average number of
shares of GM Class H common stock which if issued and outstanding would
represent a 100% interest in the earnings of Hughes (the "Average Class H
dividend base"). The Average Class H dividend base was 1.4 billion and 1.3
billion for the three months ended June 30, 2003 and 2002, and for the six
months ended June 30, 2003 and 2002, respectively.
In addition, the denominator used may be adjusted on occasion as deemed
appropriate by the GM Board to reflect subdivisions or combinations of the GM
Class H common stock, certain transfers of capital to or from Hughes, the
contribution of shares of capital stock of GM to or for the benefit of Hughes
employees, and the retirement of GM Class H common stock purchased by Hughes.
The GM Board's discretion to make such adjustments is limited by criteria set
forth in GM's Restated Certificate of Incorporation.
Shares of GM Class H common stock delivered by GM in connection with the
award of such shares to and the exercise of stock options by employees of Hughes
increase the numerator and denominator of the fraction referred to above. From
time to time, in anticipation of exercises of stock options, Hughes may purchase
GM Class H common stock from the open market. Upon purchase, these shares are
retired and therefore decrease the numerator and denominator of the fraction
referred to above.
On March 12, 2003, GM contributed 149.2 million shares of GM Class H common
stock valued at approximately $1.24 billion to certain of its U.S. employee
benefit plans. The contribution increased the amount of GM Class H common stock
held by GM's employee benefit plans to approximately 331 million shares and
reduced GM's retained economic interest in Hughes to approximately 19.9% from
30.7%.
15
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7. Earnings Per Share Attributable to Common Stocks (continued)
The reconciliation of the amounts used in the basic and diluted earnings per
share computations was as follows (dollars in millions except per share
amounts):
$1-2/3 Par Value Common Stock Class H Common Stock
-----------------------------------------------------------
Per Share Income/ Per Share
Income Shares Amount (Loss) Shares Amount
Three Months Ended June 30, 2003
Income $884 $17
Less: Dividends on preference
stocks - -
--- --
Basic EPS
Income attributable to
common stocks $884 561 $1.58 $17 1,108 $0.02
==== ====
Effect of Dilutive Securities
Assumed exercise of dilutive
stock options - - - 3
--- --- --- -----
Diluted EPS
Adjusted income attributable
to common stocks $884 561 $1.58 $17 1,111 $0.02
=== === ==== == ===== ====
Three Months Ended June 30, 2002
Income (loss) $1,397 $(105)
Less: Dividends on preference
stocks 8 15
----- ---
Basic EPS
Income (loss) attributable
to common stocks 1,389 560 $2.48 $(120) 884 $(0.14)
==== ====
Effect of Dilutive Securities
Assumed exercise of dilutive
stock options - 12 - -
----- --- ---- ---
stock options
Diluted EPS
Adjusted income (loss)
attributable to
common stocks $1,389 572 $2.43 $(120) 884 $(0.14)
===== === ==== ==== === =====
Six Months Ended June 30, 2003
Income (loss) $2,408 $(24)
Less: Dividends on preference
stocks - -
----- --
Basic EPS
Income (loss) attributable to
common stocks $2,408 561 $4.30 $(24) 1,049 $(0.02)
==== =====
Effect of Dilutive Securities
Assumed exercise of dilutive - - - -
----- --- --- -----
Diluted EPS
Adjusted income (loss)
attributable to
common stocks $2,408 561 $4.29 $(24) 1,049 $(0.02)
===== === ==== === ===== =====
Six Months Ended June 30, 2002
Income (loss) $1,730 $(210)
Less: Dividends on preference
stocks 15 32
----- ----
Basic EPS
Income (loss) attributable to
common stocks $1,715 560 $3.06 $(242) 881 $(0.27)
==== =====
Effect of Dilutive Securities
Assumed exercise of dilutive
stock options - 8 - -
----- --- ---- ---
Diluted EPS
Adjusted income (loss)
attributable to
common stocks $1,715 568 $3.02 $(242) 881 $(0.27)
===== === ==== ==== === =====
Certain stock options and convertible securities were not included in the
computation of diluted earnings per share for the periods presented since the
instruments' underlying exercise prices were greater than the average market
prices of GM $1-2/3 par value common stock and GM Class H common stock. In
addition, for periods in which there was an adjusted loss attributable to common
stocks, any outstanding options to purchase and/or securities convertible into
shares of GM $1-2/3 par value common stock and GM Class H common stock with
underlying exercise prices less than the average market prices were excluded
from the calculations of diluted loss per share, as inclusion of these
securities would have been antidilutive to the net loss per share.
16
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7. Earnings Per Share Attributable to Common Stocks (concluded)
The number of shares issuable pursuant to stock options and convertible
securities not included in the computation of diluted earnings per share as
discussed above was as follows:
$1-2/3 Par Value Class H
Common Stock Common Stock
Three Months Ended June 30, 2003 100,950,280 90,272,717
Three Months Ended June 30, 2002 73,055,706 96,537,709
Six Months Ended June 30, 2003 100,141,277 94,108,876
Six Months Ended June 30, 2002 74,759,302 96,868,939
Note 8. Depreciation and Amortization
Depreciation and amortization included in Cost of sales and other expenses
for Automotive, Communications Services, and Other Operations was as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Depreciation $1,342 $1,143 $2,578 $2,275
Amortization of special tools 651 622 1,353 1,251
Amortization of intangible
assets 24 - 48 3
----- ----- ----- -----
Total $2,017 $1,765 $3,979 $3,529
===== ===== ===== =====
Note 9. Hughes Transaction
On April 9, 2003, GM, Hughes and The News Corporation Limited (News
Corporation) announced the signing of definitive agreements that provide for,
among other things, the split-off of Hughes from GM and the simultaneous sale of
GM's approximately 19.8% economic interest in Hughes to News Corporation for $14
per share, or approximately $3.8 billion. GM would receive approximately $3.1
billion in cash with the remainder payable in News Corporation preferred
American Depositary Shares (News Corporation ADSs) and/or cash at News
Corporation's election. News Corporation would acquire an additional 14.2% stake
in Hughes from the holders of GM Class H common stock through a mandatory
exchange of a portion of their Hughes common stock received in the split-off,
which would provide News Corporation with a total of 34% of the then outstanding
capital stock of Hughes. In addition, GM would receive a cash dividend from
Hughes of $275 million in connection with the transactions. This dividend is
expected to be paid by Hughes through available cash balances.
Under the terms of the proposed transactions, holders of GM Class H common
stock would first exchange their shares for Hughes common stock on a
share-for-share basis in the split-off, followed immediately by an exchange of
approximately 17.7% of the Hughes common stock they receive in the split-off for
approximately $14 per share in News Corporation ADSs and/or cash. The number of
News Corporation ADSs payable to GM and Hughes common stockholders, based on a
fixed-price of $14 per Hughes share, will be adjusted within a collar range of
20% above or below the News Corporation ADS price of $22.40. This mandatory
exchange of about 17.7% of the shares of Hughes common stock for News
Corporation ADSs and/or cash would be taxable to the Hughes common stockholders
at the time. The transactions are structured in a manner that will not result in
the recapitalization of GM Class H common stock into GM $1-2/3 par value common
stock at a 120% exchange ratio, as currently provided for under certain
circumstances in the General Motors Restated Certificate of Incorporation, as
amended.
If the transactions are completed, Rupert Murdoch, chairman and chief
executive officer of News Corporation, would become chairman of Hughes, and
Chase Carey, who is currently serving as an advisor to News Corporation, would
become president and chief executive officer of Hughes. Eddy Hartenstein, Hughes
senior executive vice president, would be named vice chairman of Hughes. Hughes
would have 11 directors, the majority of which would be independent directors.
17
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9. Hughes Transaction (concluded)
The transactions are subject to a number of conditions, including, among
other things, obtaining U.S. antitrust and Federal Communications Commission
approvals, approval by a majority of each class of GM stockholders - GM $1-2/3
and GM Class H - voting both as separate classes and together as a single class
and a favorable ruling from the Internal Revenue Service that the split-off of
Hughes from GM would be tax-free to GM and its stockholders for U.S. federal
income tax purposes. No assurances can be given that the approvals will be
obtained or the transactions will be completed. The financial and other
information regarding Hughes contained in this Quarterly Report do not give any
effect to or make any adjustment for the anticipated completion of the
transactions.
During April 2003, the Hughes Board of Directors approved the
reclassification of the outstanding Hughes Series B convertible preferred stock
into Hughes Class B common stock of equivalent value, and a subsequent stock
split of Hughes common stock and Hughes Class B common stock through dividends
of additional shares. GM, in its capacity as the holder of all outstanding
Hughes capital stock, approved the reclassification. Shortly thereafter, GM
converted some of its Hughes common stock into an equivalent number of shares of
Hughes Class B common stock. As a result of these transactions, Hughes currently
has 1,207,518,237 shares of Hughes common stock and 274,373,316 shares of Hughes
Class B common stock issued and outstanding, all of which are owned by GM. The
terms of the Hughes common stock and Hughes Class B common stock are identical
in all respects (with the exception of provisions regarding stock-on-stock
dividends) and, at the option of the holder, the Hughes common stock may be
converted at any time into Hughes Class B common stock and vice versa. These
transactions had no impact on the outstanding number of shares of GM Class H
common stock or the Class H dividend base. In connection with the News
Corporation transactions, GM Class H common stock will be exchanged for Hughes
common stock, and the Hughes Class B common stock will be sold by GM to News
Corporation. Immediately after the completion of the News Corporation
transactions, all of the shares of Hughes Class B common stock held by News
Corporation will be converted into Hughes common stock.
Upon completion of the Hughes split-off and sale transactions, GM will record
the exchange of Hughes common stock for all the outstanding shares of GM Class H
common stock in the Hughes split-off share exchange at book value.
Simultaneously with the Hughes split-off, based on certain assumptions, GM will
sell all of its retained economic interest in Hughes (in the form of the Hughes
Class B common stock) to News Corporation for approximately $3.1 billion in cash
and up to an additional approximately $770 million in News Corporation ADSs
and/or cash, subject to adjustment based on the collar mechanism. Based on a
price of $14.00 per share of GM Class H common stock, the net book value of
Hughes at March 31, 2003, and certain other assumptions, the transactions would
have resulted in a gain of approximately $1.2 billion, net of tax. In addition,
GM currently anticipates that as a result of the transactions, there will be a
net reduction of GM stockholders' equity of approximately $7.1 billion.
The financial results of Hughes for all periods prior to the completion of
the transactions will be reported as discontinued operations in GM's
consolidated financial statements upon: (1) the receipt of the requisite GM
common stockholder approval of all proposals relating to the transactions; and,
(2) the satisfaction of all regulatory related conditions to the transactions.
18
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10. Segment Reporting
GM's reportable operating segments within its ACO business consist of General
Motors Automotive (GMA) (which is comprised of four regions: GM North America
(GMNA), GM Europe (GME), GM Latin America/Africa/Mid-East (GMLAAM), and GM Asia
Pacific (GMAP)), Hughes, and Other. GM's reportable operating segments within
its FIO business consist of GMAC and Other. Selected information regarding GM's
reportable operating segments were as follows (dollars in millions):
Other Total Total
GMNA GME GMLAAM GMAP GMA Hughes Other ACO GMAC Financing Financing GM
---- --- ------ ---- --- ------ ----- --- ---- --------- --------- ----
For the Three Months (dollars in millions)
Ended June 30, 2003
Manufactured products sales
and revenues:
External customers $29,034 $7,064 $984 $1,165 $38,247 $2,385 $100 $40,732 $7,580 $(4) $7,576 $48,308
Intersegment (476) 239 135 102 - 4 (4) - - - - -
------- ------ ----- ----- ------ ----- --- ------ ----- --- ----- ------
Total manufactured
products $28,558 $7,303 $1,119 $1,267 $38,247 $2,389 $96 $40,732 $7,580 $(4) $7,576 $48,308
====== ===== ===== ===== ====== ===== == ====== ===== === ===== ======
Interest income (a) $133 $68 $4 $1 $206 $16 $(105) $117 $1,180 $(64) $1,116 $1,233
Interest expense $325 $100 $26 $1 $452 $84 $(134) $402 $1,822 $41 $1,863 $2,265
Net income (loss) $83 $(3) $(103) $163 $140 $22 $(104) $58 $834 $9 $843 $901
Segment assets (b) $113,010 $21,509 $3,093 $2,255 $139,867 $20,313(c) $(7,262) $152,918 $258,568 $487 $259,055 $410,845
For the Three Months
Ended June 30, 2002
Manufactured products sales
and revenues:
External customers $31,029 $5,741 $1,233 $1,009 $39,012 $2,237 $469 $41,718 $6,599 $22 $6,621 $48,339
Intersegment (453) 260 73 120 - 4 (4) - - - - -
------ ------ ----- ----- ------ ----- --- ------ ----- --- ----- ------
Total manufactured
products $30,576 $6,001 $1,306 $1,129 $39,012 $2,241 $465 $41,718 $6,599 $22 $6,621 $48,339
====== ===== ===== ===== ====== ===== === ====== ===== == ===== ======
Interest income (a) $166 $67 $5 $3 $241 $8 $(101) $148 $735 $(40) $695 $843
Interest expense $268 $42 $30 $2 $342 $123 $(163) $302 $1,534 $236 $1,770 $2,072
Net income (loss) $1,277 $(170) $(73) $39 $1,073 $(156) $(57) $860 $431 $1 $432 $1,292
Segment assets (b) $98,670 $19,299 $3,655 $1,340 $122,964 $19,193(c) $(5,098) $137,059 $199,842 $66 $199,908 $336,329
See notes on next page.
19
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10. Segment Reporting (concluded)
Other Total Total
GMNA GME GMLAAM GMAP GMA Hughes Other ACO GMAC Financing Financing GM
---- --- ------ ---- --- ------ ----- --- ---- --------- --------- ----
For the Six Months (dollars in millions)
Ended June 30, 2003
Manufactured products sales
and revenues:
External customers $59,505 $13,421 $1,917 $2,181 $77,024 $4,608 $1,142 $82,774 $14,910 $(11) $14,899 $97,673
Intersegment (984) 504 247 233 - 8 (8) - - - - -
------ ------ ----- ----- ------ ----- ----- ------ ------ -- ------ ------
Total manufactured
products $58,521 $13,925 $2,164 $2,414 $77,024 $4,616 $1,134 $82,774 $14,910 $(11) $14,899 $97,673
====== ====== ===== ===== ====== ===== ===== ====== ====== == ====== ======
Interest income (a) $244 $150 $11 $2 $407 $22 $(236) $193 $2,178 $(134) $2,044 $2,237
Interest expense $636 $191 $43 $3 $873 $165 $(315) $723 $3,596 $74 $3,670 $4,393
Net income (loss) $631 $(68) $(115) $238 $686 $(32) $205 $859 $1,533 $(8) $1,525 $2,384
For the Six Months
Ended June 30, 2002
Manufactured products sales
and revenues:
External customers $60,772 $11,125 $2,483 $1,913 $76,293 $4,244 $954 $81,491 $12,952 $110 $13,062 $94,553
Intersegment (857) 460 124 273 - 9 (9) - - - - -
------ ------ ----- ----- ------ ----- --- ------ ------ -- ------ ------
Total manufactured
products $59,915 $11,585 $2,607 $2,186 $76,293 $4,253 $945 $81,491 $12,952 $110 $13,062 $94,553
====== ====== ===== ===== ====== ===== === ====== ====== === ====== ======
Interest income (a) $250 $131 $12 $5 $398 $12 $(189) $221 $1,439 $(129) $1,310 $1,531
Interest expense $382 $121 $58 $4 $565 $199 $(300) $464 $3,211 $255 $3,466 $3,930
Net income (loss) $1,931 $(702) $(113) $46 $1,162 $(312)(d) $(199) $651 $870 $(1) $869 $1,520
(a) Interest income is included in net sales and revenues from external
customers.
(b) Total GM assets exclude net payable/receivable between ACO and FIO of
$1.1 billion and $638 million as of June 30, 2003 and 2002, respectively.
(c) The amount reported for Hughes excludes a write-off of $739 million that was
recorded in the first quarter of 2002 by Hughes in its stand-alone
financial statements for goodwill impairments at DIRECTV Latin America and
DIRECTV Broadband, and other adjustments. In accordance with SFAS No. 142,
GM evaluated the carrying value of goodwill associated with its Hughes
Direct-to-Home Broadcast reporting unit in the aggregate and determined
that the goodwill was not impaired.
(d) Amount for Hughes excludes the cumulative effect of accounting change
recorded by Hughes in their stand alone financial statements as of January
1, 2002 related to the implementation of SFAS No. 142.
* * * * * *
20
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 11. Subsequent Events
On July 15, 2003, Hughes and The Boeing Company (Boeing) settled all matters
related to the previously reported dispute arising out of the 2000 sale by
Hughes of its satellite systems manufacturing businesses to Boeing. Under the
terms of the agreement, Hughes settled all outstanding purchase price adjustment
disputes with Boeing and paid an aggregate $360 million in cash on July 18, 2003
in satisfaction of both the disputed and undisputed portions of the purchase
price adjustment. Boeing also will be released from its commitment to pay Hughes
$4.4 million over the next seven years in connection with Boeing's participation
in the settlement with the U.S. Department of State on China launch issues of
the mid-1990s. Also in connection with the settlement, Hughes Network Systems
agreed to extend the scheduled launch date for the first Boeing built Spaceway
satellite from the fourth quarter of 2003 until February 2004.
In July, 2003 GM completed issuances of approximately $13.5 billion in GM
senior notes and convertible debentures and approximately $4.4 billion in
short-term GMAC senior notes and debt.
The offerings include $4.3 billion of GM Series C convertible debentures with
an annual coupon rate of 6.25% due July 15, 2033. The debentures can be
converted into GM $1-2/3 par value common stock, subject to the terms of the
conversion rights as described in the prospectus supplement, at a conversion
price of $47.62 per share, which is equal to a conversion rate of 0.525 shares
per $25.00 principal amount of Series C debentures, subject to adjustment.
21
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following management's discussion and analysis of financial condition and
results of operations (MD&A) should be read in conjunction with General Motors
Corporation's (the Corporation, General Motors, or GM) December 31, 2002
consolidated financial statements and notes thereto included in the 2002 Annual
Report on Form 10-K, along with the MD&A included in GM's Current Report on Form
8-K dated June 6, 2003, and all other GM, Hughes Electronics Corporation
(Hughes), and General Motors Acceptance Corporation (GMAC) filings with the U.S.
Securities and Exchange Commission. All earnings per share amounts included in
the MD&A are reported as diluted.
GM presents separate financial information for the following businesses:
Automotive, Communications Services, and Other Operations (ACO) and Financing
and Insurance Operations (FIO).
GM's reportable operating segments within its ACO business consist of:
. GM Automotive (GMA), which is comprised of four regions: GM North America
(GMNA), GM Europe (GME), GM Latin America/Africa/Mid-East (GMLAAM), and GM
Asia Pacific (GMAP);
. Hughes, which includes activities relating to digital entertainment,
information and communications services, and satellite-based private
business networks; and
. Other, which includes the design, manufacturing, and marketing of
locomotives, the elimination of intersegment transactions, certain
non-segment specific revenues and expenditures, and certain corporate
activities.
GM's reportable operating segments within its FIO business consist of GMAC
and Other Financing, which includes financing entities operating in the U.S.,
Canada, Brazil, and Mexico that are not associated with GMAC.
The disaggregated financial results for GMA have been prepared using a
management approach, which is consistent with the basis and manner in which GM
management internally disaggregates financial information for the purpose of
assisting in making internal operating decisions. In this regard, certain common
expenses were allocated among regions less precisely than would be required for
stand-alone financial information prepared in accordance with accounting
principles generally accepted in the U.S. (GAAP) and certain expenses (primarily
certain U.S. taxes related to non-U.S. operations) were included in the ACO
segment. The financial results represent the historical information used by
management for internal decision making purposes; therefore, other data prepared
to represent the way in which the business will operate in the future, or data
prepared on a GAAP basis, may be materially different.
22
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Vehicle Unit Sales (1)
Three Months Ended June 30,
-----------------------------------------------------
2003 2002
-----------------------------------------------------
GM as GM as
a % of a % of
Industry GM Industry Industry GM Industry
-------- -- -------- -------- -- --------
(units in thousands)
GMNA
United States
Cars 2,074 515 24.8% 2,245 590 26.3%
Trucks 2,467 751 30.4% 2,332 694 29.8%
----- ----- ----- -----
Total United States 4,541 1,266 27.9% 4,577 1,284 28.1%
Canada, Mexico, and Other 768 179 23.3% 825 208 25.2%
--- ----- ------ -----
Total GMNA 5,309 1,445 27.2% 5,402 1,492 27.6%
GME 5,075 477 9.4% 5,154 471 9.1%
GMLAAM 805 127 15.7% 925 143 15.4%
GMAP 3,725 184 4.9% 3,615 178 4.9%
----- ----- ------ -----
Total Worldwide 14,914 233 15.0% 15,096 2,284 15.1%
====== ===== ====== =====
Six Months Ended June 30,
-----------------------------------------------------
2003 2002
-----------------------------------------------------
GM as GM as
a % of a % of
Industry GM Industry Industry GM Industry
-------- -- -------- -------- -- --------
(units in thousands)
GMNA
United States
Cars 3,895 969 24.9% 4,144 1,060 25.6%
Trucks 4,467 1,315 29.4% 4,433 1,354 30.5%
----- ----- ----- -----
Total United States 8,362 2,284 27.3% 8,577 2,414 28.1%
Canada, Mexico, and Other 1,421 331 23.3% 1,503 388 25.8%
----- --- ------ ------
Total GMNA 9,783 2,615 26.7% 10,080 2,802 27.8%
GME 10,033 951 9.5% 10,227 937 9.2%
GMLAAM 1,613 254 15.8% 1,832 281 15.3%
GMAP 7,875 350 4.4% 7,232 335 4.6%
----- --- ------ -----
Total Worldwide 29,304 4,170 14.2% 29,371 4,355 14.8%
====== ===== ====== =====
Wholesale Sales (2)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------
2003 2002 2003 2002
---- ---- ---- ----
(units in thousands)
GMNA
Cars 589 704 1,187 1,316
Trucks 844 853 1,684 1,603
----- ----- ----- -----
Total GMNA 1,433 1,557 2,871 2,919
----- ----- ----- -----
GME
Cars 424 418 824 813
Trucks 23 19 49 48
-- ---- -- ----
Total GME 447 437 873 861
--- --- --- ---
GMLAAM
Cars 96 112 192 223
Trucks 26 47 51 91
-- ---- -- ----
Total GMLAAM 122 159 243 314
--- --- --- ---
GMAP
Cars 84 47 172 94
Trucks 55 39 110 100
-- -- --- ---
Total GMAP 139 86 282 194
--- -- --- ---
Total Worldwide 2,141 2,239 4,269 4,288
===== ===== ===== =====
See notes on next page.
23
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
(1) GM vehicle unit sales represent the transfer of vehicle ownership from
GM's initial customer (e.g. a dealer) to a final customer (e.g. a retail
consumer). These vehicles are manufactured by GM or manufactured by GM's
affiliates and sold either under a GM nameplate or through a GM-owned
distribution network. Consistent with industry practice, vehicle unit
sales information employs estimates of sales in certain countries where
public reporting is not legally required or otherwise available on a
consistent basis.
(2) Wholesale sales represent the transfer of vehicle ownership from GM to its
initial customer (e.g. a dealer). These vehicles are manufactured by GM
and certain affiliates and distributed through a GM-owned distribution
network.
GMA Financial Review
GMA's net income was $140 million for the second quarter of 2003, compared
with net income of $1.1 billion for the prior year quarter. For the six months
ended June 30, 2003, net income was $686 million, compared with $1.2 billion for
the prior year six month period. The decrease in second quarter and year-to-date
net income resulted from lower wholesale sales, continued pricing pressures in
North America and Europe, increased pension and other postretirement employee
benefit costs (OPEB) expense in the U.S, and unfavorable foreign exchange,
partially offset by continued favorable mix, material cost savings and other
cost savings.
GMNA's net income was $83 million for the second quarter of 2003, compared
with net income of $1.3 billion for the prior year quarter. For the six months
ended June 30, 2003, net income was $631 million compared with $1.9 billion for
the prior year six month period. The decrease in GMNA's second quarter and
year-to-date 2003 net income was primarily the result of lower wholesale sales,
intense pricing pressure, increased pension and OPEB expense, and higher
currency-exchange losses versus the year-ago period, which more than offset
improvements in sales mix, material cost, and a reduction in policy and warranty
reserves due to improved quality performance. Vehicle revenue per unit was
$18,565 for the second quarter of 2003, compared with $18,385 for the prior year
quarter.
On May 8, 2003, a tornado struck GM's Oklahoma City Car Assembly plant
causing severe damage. The tornado destroyed a portion of the plant's paint
shop, a powerhouse, and cooling towers and also caused damage to an adjoining
body shop. About 600 newly assembled sport-utility vehicles were damaged, as
were numerous employee vehicles in parking lots surrounding the facility.
Management's estimate of the cost of damage and loss of production in the second
quarter of 2003 was $168 million after-tax, or $0.30 per diluted share.
Approximately seven weeks later, on June 30, 2003, GM resumed production at the
plant.
GME's net loss was $3 million for the second quarter of 2003, compared with a
net loss of $170 million for the prior year quarter. For the six months ended
June 30, 2003, GME's net loss was $68 million compared with $702 million for the
prior six month period. The decrease in the second quarter and year-to-date 2003
loss was primarily due to structural and material cost reduction, increased
wholesale sales volumes, and improved mix, which were partially offset by
unfavorable foreign exchange, primarily at Saab. In addition, included in the
2002 net loss was a charge of $55 million related to the enacted end-of-life
vehicle legislation in the second quarter of 2002, and a charge of $407 million
related to the implementation of Project Olympia, in the first quarter of 2002.
GMLAAM's net loss was $103 million for the second quarter of 2003, compared
with a net loss of $73 million for the prior year quarter. For the six months
ended June 30, 2003, the net loss was $115 million compared with a net loss of
$113 million for the prior six month period. The increase in net loss for the
second quarter 2003 was primarily due to lower wholesale sales as a result of
the continuing economic weakness in Brazil and Venezuela. The increase in net
loss for the six month period ended June 30, 2003 compared to the prior six
month period was also due to continued economic weakness in Brazil and Venezuela
and lower sales volume, offset by greater exchange stability.
GMAP's net income was $163 million for the second quarter of 2003, compared
with net income of $39 million for the prior year quarter. For the six months
ended June 30, 2003, net income was $238 million compared with $46 million for
the prior six month period. The increase in net income for the second quarter
and year-to-date 2003 was primarily due to strong financial results at Holden,
along with improved equity earnings from Shangahi GM, Suzuki Motor Corporation
(Suzuki) and Fuji Heavy Industries Ltd., partially offset by equity losses at GM
Daewoo Auto & Technology Company (GM Daewoo).
Hughes Financial Review
Total net sales and revenues increased to $2.4 billion for the second quarter
of 2003 and $4.6 billion for the first six months of 2003, compared with $2.2
billion and $4.3 billion for the comparable periods in 2002. The increase in net
sales and revenues for the second quarter of 2003 and the first six months of
2003 resulted primarily from increased revenues at DIRECTV(R) U.S. due to growth
in subscriber base and higher monthly revenue per subscriber, and increased
revenues at Hughes Network Systems (HNS) due to higher sales in the set-top box
and broadband consumer businesses. These increases were partially offset by $55
million of revenues associated with the 2002 World Cup at DIRECTV Latin America
(DLA).
24
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Hughes Financial Review (concluded)
Hughes' net income was $22 million for the second quarter of 2003 compared to
a net loss of $156 million for the same period of 2002. Hughes net loss for the
six months ended June 30, 2003 totaled $32 million compared to $312 million for
the first six months of 2002. The change in net loss for the second quarter of
2003 and the first six months of 2003 was primarily due to additional margins
from the higher revenues at DIRECTV U.S. and HNS, reduced expenses resulting
from cost savings initiatives and the $75 million loss at DLA from the 2002
World Cup. These favorable factors were partially offset by a $37 million
pre-tax gain in the second quarter of 2002 resulting from the resolution of
remaining claims associated with the exit from the DIRECTV Japan business. In
addition, included in the first quarter and the first six months of 2002 was an
after-tax charge of $51 million for a contractual dispute associated with a
General Electrical Capital Corporation (GECC) contract and an after-tax gain of
$59 million for the favorable resolution of a lawsuit filed against the U.S.
government by Hughes on the National Aeronautics and Space Administration's
breach of contract to launch 10 satellites on the space shuttle.
On March 18, 2003, DIRECTV Latin America, LLC (DLA LLC) filed a voluntary
petition for reorganization under Chapter 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court for the District of Delaware
(Bankruptcy Court). The filing does not include any of its operating companies
in Latin America and the Caribbean, which will continue regular operations. DLA
LLC continues to manage its business as a debtor-in-possession. As a
debtor-in-possession, management is authorized to operate the business, but may
not engage in transactions outside the ordinary course of business without
Bankruptcy Court approval. Subsequent to the filing of its Chapter 11 petition,
DLA LLC obtained Bankruptcy Court orders that, among other things, authorized
DLA LLC to pay certain pre-petition obligations related to employee wages and
benefits and to take certain actions where such payments or actions will benefit
its estate or preserve the going concern value of the business enterprise,
thereby enhancing the prospects of reorganization.
Sale of GM Defense Business
For the six months ended June 30, 2003, other ACO operations included a
pre-tax gain of approximately $814 million, or approximately $505 million
after-tax ($0.90 per diluted share of GM $1-2/3 par value common stock),
recorded in net sales and revenues in GM's Consolidated Statements of Income
related to the sale of GM's Defense operations (light armored vehicle business)
to General Dynamics Corporation on March 1, 2003. The sale also generated net
proceeds of approximately $1.1 billion in cash.
GMAC Financial Review
GMAC's net income was $834 million and $431 million for the second quarter
ended June 30, 2003 and 2002, respectively and net income for the six month
periods ended June 30, 2003 and 2002 was $1.5 billion and $870 million,
respectively.
Three Months Ended Six Months Ended
(Dollars in millions) June 30, June 30,
---------------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Financing operations $396 $347 $698 $602
Mortgage operations 415 58 786 206
Insurance operations 23 26 49 62
---- ---- ------ ----
Net income $834 $431 $1,533 $870
=== === ===== ===
Income from financing operations was $396 million for the second quarter of
2003, compared with income of $347 million for the prior year quarter. Income
for the first six months of 2003 from financing operations totaled $698 million,
compared with income of $602 million for the first six months in the prior year.
For the second quarter 2003 the increase reflects lower credit loss provisions,
which more than offset the unfavorable impact of lower net interest margins and
continued weakness in lease termination values.
Income from mortgage operations was $415 million for the second quarter of
2003, compared with income of $58 million for the prior year quarter. Income for
the first six months of 2003 from mortgage operations totaled $786 million,
compared with income of $206 million for the first six months in the prior year.
Mortgage operations' record quarter earnings reflected exceptionally strong
origination volume in the residential sector and continued strong results at
commercial mortgage operations. Earnings were up $357 million compared to the
second quarter last year, when results were negatively impacted by considerably
higher write-downs of mortgage servicing rights.
25
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
GMAC Financial Review (concluded)
Income from insurance operations was $23 million for the second quarter of
2003, compared with income of $26 million for the prior year quarter. Income for
the first six months of 2003 from insurance operations totaled $49 million,
compared with income of $62 million for the first six months in the prior year.
While underwriting income increased for the second quarter 2003, earnings were
adversely affected by a write-down of certain investment securities issues that
have not sufficiently recovered in value during the recent strengthening in
equity markets.
LIQUIDITY AND CAPITAL RESOURCES
Financing Structure
In the second quarter of 2003, GM and GMAC experienced adequate access to the
capital markets as GM and GMAC were able to issue various securities to raise
capital and extend borrowing terms consistent with GM's need for financial
flexibility. On April 9, 2003 Standard & Poor's affirmed GM and GMAC's ratings
at BBB, but changed its rating outlook to negative, from stable. On April 22,
2003 Dominion Bond Rating Service (DBRS) downgraded GM's and GMAC's senior debt
rating from A to A (low) and at the same time, confirmed the commercial paper
rating at R-1 (low) with a stable outlook. On June 13, 2003, Moody's lowered
GM's long-term rating to Baa1 from A3 and GMAC's to A3 from A2 with a rating
outlook of negative. Moody's also reduced GMAC's short-term rating to Prime-2
from Prime-1. On June 19, 2003, Fitch downgraded GM's and GMAC's long-term debt
rating to BBB+ from A- and confirmed the commercial paper rating at F2 with a
rating outlook of negative. These ratings actions are not expected to have a
significant adverse effect on GM's and GMAC's ability to obtain bank credit or
to sell asset-backed securities. Refer to the table below for a summary of GM's
and GMAC's credit ratings.
GM GMAC GM GMAC GM GMAC
------------------------------------------------------
Rating Agency Senior Debt Commercial Paper Outlook
------------------------------------------------------
DBRS A (low) A (low) R1 (low) R1 (low) Stable Stable
Fitch BBB+ BBB+ F2 F2 Negative Negative
Moody's Baa1 A3 Prime-2 Prime-2 Negative Negative
S&P BBB BBB A2 A2 Negative Negative
GM's and GMAC's access to the capital markets remained sufficient to meet the
Corporation's capital needs. GM completed issuances of approximately $13.5
billion in GM senior notes and convertible debentures and approximately $4.4
billion in short-term GMAC senior notes and debt in a single event financing in
the beginning of the third quarter of 2003. GM expects that substantially all of
the $13.5 billion of proceeds of the GM senior notes and convertible debentures
issued will be used to partially fund certain of GM's U.S. pension funds and
certain other retiree benefit obligations. GM expects to make significant cash
contributions to these funds by late 2003. GM and GMAC expect that they will
continue to have adequate access to the capital markets sufficient to meet the
corporations needs for financial flexibility.
As an additional source of funds, GM currently has unrestricted access to a
$5.6 billion line of credit with a syndicate of banks which is committed through
June 2008. In addition, GM has an additional $3.2 billion in committed
facilities with various maturities and uncommitted lines of credit of $2.7
billion. Similarly, GMAC currently has a $4.2 billion syndicated line of credit
committed through June 2004, $4.4 billion committed through June 2008, $4.3
billion of bilateral committed lines with various maturities, and uncommitted
lines of credit of $17.8 billion. In addition, New Center Asset Trust (NCAT) has
$19.2 billion of liquidity facilities committed through June 2004. Mortgage
Interest Networking Trust (MINT) has $3.4 billion of liquidity facilities
committed through April 2004. NCAT and MINT are non-consolidated limited purpose
statutory trusts, which are structured as qualifying special purpose entities
(QSPEs), established to issue asset-backed commercial paper (See Off Balance
Sheet Arrangements).
Automotive, Communications Services, and Other Operations
At June 30, 2003, cash, marketable securities, and $3.4 billion of assets of
the Voluntary Employees' Beneficiary Association (VEBA) trust invested in
fixed-income securities totaled $26.9 billion, compared with cash, marketable
securities, and $3.0 billion of assets of the VEBA trust invested in
fixed-income securities totaling $18.5 billion at December 31, 2002 and $18.4
billion at June 30, 2002. The increase from December 31, 2002 was primarily due
to earnings from automotive operations, sale of the GM Defense business in the
first quarter of 2003, and net debt issuances totaling $3.5 billion in the first
six months of 2003 by GM and Hughes. Total assets in the VEBA trust used to
pre-fund part of GM's other postretirement benefits liability approximated $6.7
billion at June 30, 2003, compared with $5.8 billion at December 31, 2002 and
$6.0 billion at June 30, 2002. Strong cash flows from operations in the first
six months of 2003 enabled GM to make a cash contribution of $3.0 billion to
its VEBA trust on August 6, 2003.
26
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Automotive, Communications Services, and Other Operations (concluded)
Long-term debt was $20.5 billion at June 30, 2003, compared with $16.7
billion at December 31, 2002 and $16.8 billion at June 30, 2002. The ratio of
long-term debt to long-term debt and GM's net assets of Automotive,
Communications Services, and Other Operations was 173.8% at June 30, 2003,
compared with 267.0% at December 31, 2002 and 80.2% at June 30, 2002. The ratio
of long-term debt and short-term loans payable to the total of this debt and
GM's net assets of Automotive, Communications Services, and Other Operations was
169.6% at June 30, 2003, compared with 234.3% at December 31, 2002 and 81.5% at
June 30, 2002.
Net liquidity, calculated as cash, marketable securities, and $3.4 billion of
assets of the VEBA trust invested in fixed-income securities less the total of
loans payable and long-term debt, was $5.7 billion at June 30, 2003, compared
with $298 million, including $3.0 billion of assets of the VEBA, at December 31,
2002 and $59 million, including $3.0 billion of assets of the VEBA, at June 30,
2002.
In order to provide financial flexibility to GM and its suppliers, GM
maintains a trade payables program through GECC under which GECC pays
participating GM suppliers the amount due from GM in advance of the original due
date. In exchange for the earlier payment, these suppliers accept a discounted
payment. On the original due date of the payables, GM pays GECC the full amount.
At June 30, 2003 GM owed approximately $957 million to GECC under this program,
which is classified as accounts payable in GM's financial statements. In
addition, GM has the right under the agreement to defer payment to GECC with
respect to all or a portion of receivables which it has paid on behalf of GM.
The deferral period ranges from 10 days to 40 days and would also be classified
as accounts payable in GM's financial statements. Deferred payments are subject
to interest during the deferral period. As of June 30, 2003, GM had not elected
to defer payment on any such payables. If any of GM's long-term unsecured debt
obligations become subject to a rating by S&P of BBB- (GM's current rating is
BBB, with a negative outlook) or below BBB-, or a rating by Moody's of Baa3,
with a negative outlook (GM's current rating is Baa1, with a negative outlook)
or below Baa3, the program would be unavailable to GM and its suppliers. GM
does not anticipate that discontinuance of the availability of the GECC program
would result in a material disruption to the supply of parts and materials to
GM, nor would it have a material adverse effect on GM's financial position,
results of operations or cash flows. The maximum amount permitted under the
program is $2.0 billion.
Financing and Insurance Operations
At June 30, 2003, GMAC's consolidated assets totaled $258.6 billion, compared
with $227.7 billion at December 31, 2002 and $199.8 billion at June 30, 2002.
The increase from December 31, 2002 was primarily the result of an increase in
earning assets such as finance receivables and loans. The continued use of GM
sponsored special rate financing programs, combined with an increased use of
securitizations structured as financing transactions (primarily in mortgage
operations) resulted in an increase in consumer finance receivables and loans.
Additional asset growth was the result of an increase in wholesale receivables
outstanding due to higher dealer inventories.
Consistent with the growth in assets, GMAC's total debt increased to $210.2
billion at June 30, 2003, compared with $183.1 billion at December 31, 2002 and
$157.8 billion at June 30, 2002. GMAC's liquidity, as well as its ability to
profit from ongoing activity, is in large part dependent upon its timely access
to capital and the costs associated with raising funds in different segments of
the capital markets. Liquidity is managed to preserve stable, reliable and cost
effective sources of cash to meet all current and future obligations. GMAC's
strategy in managing liquidity risk has been to develop diversified funding
sources across a global investor base. GMAC is experiencing historically high
unsecured borrowing spreads due to a combination of volatility in the capital
markets, weakness in the automotive sector of the corporate bond markets, and
concerns regarding the financial outlook of GM. As a result, GMAC continues to
use securitization and retail debt programs in addition to its unsecured debt
sources. Management expects to continue to use diverse funding sources to
maintain its financial flexibility and expects that access to the capital
markets will continue at levels sufficient to meet GMAC's funding needs.
27
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Investment in Fiat Auto Holdings
At the April 23, 2003, Annual General Shareholders Meeting of Fiat Auto
Holdings, B.V. (FAH), FAH adopted a Euro 5 billion recapitalization plan that
provides shareholders the option to make pro-rata capital contributions over the
eighteen months following adoption of the plan. When the plan was adopted, Fiat
S.p.A. (Fiat) held 80% of FAH and GM 20% (all shares of FAH are in fact owned by
subsidiaries of Fiat and GM through which any additional capital contributions
are channeled). Fiat has participated in the recapitalization by making a Euro 3
billion contribution, which was used by FAH to repay inter-company debts owed to
Fiat or its affiliates. Currently, GM does not plan to participate. Due to
Fiat's participation in the recapitalization, and GM's non-participation, Fiat
has reported that GM's interest in FAH has been reduced from 20% to 10%.
As discussed in GM's December 31, 2002 Annual Report on Form 10-K, the Master
Agreement provides that, from January 24, 2004 to July 24, 2009, Fiat may seek
to exercise a put option (the "Put") to require GM to purchase Fiat's FAH shares
at fair market value. Whether and when Fiat may seek to exercise the Put is
unknown, although Fiat, has recently stated in its 2002 Annual Report on Form
20F, filed with the U.S. Securities and Exchange Commission, that it views the
exercise of the Put only as a secondary possibility. Fiat also stated in its
Form 20F that it believes that the put is enforceable in accordance with the
terms of the Master Agreement. GM believes, however, that whether the Put could
ever be exercised is subject to the possibilities that it could be affected by
subsequent agreements of the companies, it could be non-exercisable under other
provisions of the Master Agreement, it could be unenforceable by reason of
actions Fiat has taken or may take, or Fiat may choose to not exercise the Put.
If the Put were implemented, the fair market value of FAH shares would be
determined by the average of three of the closest of four valuations that would
be prepared by four investment banks after conducting due diligence under
procedures set forth in the Master Agreement and based upon terms and conditions
to be incorporated in a purchase agreement which, at this time, the parties have
not prepared. Unless such a process and valuation is completed, the amount, if
any, that GM might have to pay for Fiat's FAH shares if there were to be a valid
exercise of the Put, is not quantifiable.
If there was to be a valid exercise of the Put, GM would have the option to
pay for Fiat's FAH shares entirely in shares of GM $1-2/3 par value common
stock, entirely in cash, or in whatever combination thereof GM may choose. Under
such circumstances, if and to the extent GM chose to pay in cash, that portion
of the purchase price could be paid to Fiat in four installments over a
three-year period and GM would expect to fund any such payments from normal
operating cash flows or financing activities.
If and when GM was to acquire Fiat's FAH shares, and thus become the sole
owner of FAH, GM would decide what, if any, additional capitalization would then
be appropriate for FAH and Fiat Auto. Specifically, if Fiat Auto were to need
additional funding, GM would have to decide whether or not to provide such
funding and under what conditions it might do so.
Unless FAH or Fiat Auto were subject to liquidation or insolvency, FAH's
consolidated financial statements would be required for financial reporting
purposes to be consolidated with those of GM. Any indebtedness, losses and
capital needs of FAH and Fiat Auto after their acquisition by GM are not
presently determinable, but they could have a material adverse effect on GM.
GM and Fiat have discussed potential alternatives to the Master Agreement,
and further discussions regarding the status of the Master Agreement are
planned.
Off-Balance Sheet Arrangements
GM and GMAC use off-balance sheet special purpose entities (SPEs) where the
economics and sound business principles warrant their use. GM's principal use of
SPEs occurs in connection with the securitization and sale of financial assets
generated or acquired in the ordinary course of business by GM's wholly-owned
subsidiary GMAC and its subsidiaries and, to a lesser extent, by GM. The assets
securitized and sold by GMAC and its subsidiaries consist principally of
mortgages, and wholesale and retail loans secured by vehicles sold through GM's
dealer network. The assets sold by GM consist of trade receivables. GM and GMAC
use SPEs in a manner consistent with conventional practices in the
securitization industry, the purpose of which is to isolate the receivables for
the benefit of securitization investors. The use of SPEs enables GM and GMAC to
access the highly liquid and efficient markets for the sale of these types of
financial assets when they are packaged in securitized forms.
28
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Off-Balance Sheet Arrangements (concluded)
GM leases real estate and equipment from various SPEs which have been
established to facilitate the financing of those assets for GM by nationally
prominent, creditworthy lessors. These assets consist principally of office
buildings, warehouses, and machinery and equipment. The use of SPEs allows the
parties providing the financing to isolate particular assets in a single entity
and thereby syndicate the financing to multiple third parties. This is a
conventional financing technique used to lower the cost of borrowing and, thus,
the lease cost to a lessee such as GM. There is a well-established market in
which institutions participate in the financing of such property through their
purchase of interests in these SPEs. All of the SPEs established to facilitate
property leases to GM are owned by institutions which are truly independent of,
and not affiliated with, GM. These institutions maintain substantial equity
investments in their SPEs. No officers, directors or employees of GM, GMAC, or
their affiliates hold any direct or indirect equity interests in such SPEs.
Assets in SPEs were as follows (dollars in millions):
Automotive, Communications Services, and June 30, Dec. 31, June 30,
Other Operations 2003 2002 2002
----------------------------------------- ---------------------------------
Assets leased under operating leases $2,951 $2,904 $2,727
Trade receivables sold 373 439 889
------ ------ ------
Total $3,324 $3,343 $3,616
===== ===== =====
Financing and Insurance Operations
----------------------------------
Receivables sold or securitized:
- Mortgage loans $106,415 $112,128 $110,228
- Retail finance receivables 13,436 16,164 13,291
- Wholesale finance receivables 17,422 17,415 16,179
------- ------- -------
Total $137,273 $145,707 $139,698
======= ======= =======
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46).
This interpretation addresses consolidation of certain variable interest
entities (VIEs), which include entities previously referred to as SPEs. An
entity is considered to be a VIE when it has equity investors who lack the
characteristics of having a controlling financial interest, or its capital is
insufficient to permit it to finance its activities without additional
subordinated financial support. Consolidation of a VIE by an investor is
required when it is determined that the investor will absorb a majority of the
VIE's expected losses or residual returns if they occur. FIN 46 provides certain
exceptions to these rules, including QSPEs subject to the requirements of SFAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." VIEs created after January 31, 2003 must be
consolidated immediately, while VIEs that existed prior to February 1, 2003 must
be consolidated as of July 1, 2003.
Management is currently reviewing existing VIEs that may require
consolidation. With respect to GM's ACO business, it is reasonably possible that
certain VIEs with assets totaling approximately $1.2 billion, established
exclusively to facilitate GM's ACO leasing activities, may require
consolidation. Should GM default on all of its obligations with respect to its
involvement in these entities, GM's maximum exposure to loss would be
approximately $1.2 billion ($740 million after-tax).
With respect to the FIO business, VIE structures are used to facilitate
various activities of GMAC, including securitization of loans, mortgage funding,
and other investing activities. Management has completed its analysis of its
VIEs to determine if GMAC is the primary beneficiary and if consolidation is
required effective July 1, 2003. Based on the results of this analysis,
management anticipates that VIEs with approximately $4.1 billion in assets will
be consolidated on GMAC's balance sheet due to the implementation of FIN 46.
GM's exposure to loss related to these entities is approximately $2.4 billion
($1.5 billion after-tax) which primarily relates to retained interests in these
facilities.
Due to the complexity and evolving interpretations, management continues to
assess the effects of FIN 46 on all of its interests in variable interest
entities.
BOOK VALUE PER SHARE
Book value per share is determined based on the liquidation rights of the
various classes of common stock. Book value per share of GM $1-2/3 par value
common stock was $13.27 at June 30, 2003, compared with $9.06 at December 31,
2002 and $27.52 at June 30, 2002. Book value per share of GM Class H common
stock was $2.65 at June 30, 2003, compared with $1.81 at December 31, 2002 and
$5.50 at June 30, 2002.
29
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
DIVIDENDS
Dividends may be paid on GM's common stocks only when, as, and if declared by
the GM Board in its sole discretion. The amount available for the payment of
dividends on each class of common stock will be reduced on occasion by dividends
paid on that class and will be adjusted on occasion for changes to the amount of
surplus attributed to the class resulting from the repurchase or issuance of
shares of that class.
GM's policy is to distribute dividends on its $1-2/3 par value common stock
based on the outlook and indicated capital needs of the business. On May 6,
2003, the GM Board declared a quarterly cash dividend of $0.50 per share on GM
$1-2/3 par value common stock, paid June 10, 2003, to holders of record on May
16, 2003. With respect to GM Class H common stock, the GM Board has determined
that it will not pay any cash dividends at this time in order to allow the
earnings of Hughes to be retained for investment in its businesses.
HUGHES TRANSACTIONS
On April 9, 2003, GM, Hughes and The News Corporation Limited (News
Corporation) announced the signing of definitive agreements that provide for,
among other things, the split-off of Hughes from GM and the simultaneous sale of
GM's approximately 19.8% economic interest in Hughes to News Corporation for $14
per share, or approximately $3.8 billion. GM would receive approximately $3.1
billion in cash with the remainder payable in News Corporation preferred
American Depositary Shares (News Corporation ADSs) and/or cash at News
Corporation's election. News Corporation would acquire an additional 14.2% stake
in Hughes from the holders of GM Class H common stock through a mandatory
exchange of a portion of their Hughes common stock received in the split-off,
which would provide News Corporation with a total of 34% of the then outstanding
capital stock of Hughes. In addition, GM would receive a cash dividend from
Hughes of $275 million in connection with the transactions. This dividend is
expected to be paid by Hughes through available cash balances.
Under the terms of the proposed transactions, holders of GM Class H common
stock would first exchange their shares for Hughes common stock on a
share-for-share basis in the split-off, followed immediately by an exchange of
approximately 17.7% of the Hughes common stock they receive in the split-off for
approximately $14 per share in News Corporation ADSs and/or cash. The number of
News Corporation ADSs payable to GM and Hughes common stockholders, based on a
fixed-price of $14 per Hughes share, will be adjusted within a collar range of
20% above or below the News Corporation ADS price of $22.40. This mandatory
exchange of about 17.7% of the shares of Hughes common stock for News
Corporation ADSs and/or cash would be taxable to the Hughes common stockholders
at the time. The transactions are structured in a manner that will not result in
the recapitalization of GM Class H common stock into GM $1-2/3 par value common
stock at a 120% exchange ratio, as currently provided for under certain
circumstances in the General Motors Restated Certificate of Incorporation, as
amended.
If the transactions are completed, Rupert Murdoch, chairman and chief
executive officer of News Corporation, would become chairman of Hughes, and
Chase Carey, who is currently serving as an advisor to News Corporation, would
become president and chief executive officer of Hughes. Eddy Hartenstein, Hughes
senior executive vice president, would be named vice chairman of Hughes. Hughes
would have 11 directors, the majority of which would be independent directors.
The transactions are subject to a number of conditions, including, among
other things, obtaining U.S. antitrust and Federal Communications Commission
approvals, approval by a majority of each class of GM stockholders - GM $1-2/3
and GM Class H - voting both as separate classes and together as a single class
and a favorable ruling from the Internal Revenue Service that the split-off of
Hughes from GM would be tax-free to GM and its stockholders for U.S. federal
income tax purposes. No assurances can be given that the approvals will be
obtained or the transactions will be completed. The financial and other
information regarding Hughes contained in this Quarterly Report do not give any
effect to or make any adjustment for the anticipated completion of the
transactions.
During April 2003, the Hughes Board of Directors approved the
reclassification of the outstanding Hughes Series B convertible preferred stock
into Hughes Class B common stock of equivalent value, and a subsequent stock
split of Hughes common stock and Hughes Class B common stock through dividends
of additional shares. GM, in its capacity as the holder of all outstanding
Hughes capital stock, approved the reclassification. Shortly thereafter, GM
converted some of its Hughes common stock into an equivalent number of shares of
Hughes Class B common stock. As a result of these transactions, Hughes currently
has 1,207,518,237 shares of Hughes common stock and 274,373,316 shares of Hughes
Class B common stock issued and outstanding, all of which are owned by GM. The
terms of the Hughes common stock and Hughes Class B common stock are identical
in all respects (with the exception of provisions regarding stock-on-stock
dividends) and, at the option of the holder, the Hughes common stock may be
converted at any time into Hughes Class B common stock and vice versa. These
transactions had no impact on the outstanding number of shares of GM Class H
common stock or the Class H
30
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
HUGHES TRANSACTIONS (concluded)
dividend base. In connection with the News Corporation transactions, GM Class H
common stock will be exchanged for Hughes common stock, and the Hughes Class B
common stock will be sold by GM to News Corporation. Immediately after the
completion of the News Corporation transactions, all of the shares of Hughes
Class B common stock held by News Corporation will be converted into Hughes
common stock.
Upon completion of the Hughes split-off and sale transactions, GM will record
the exchange of Hughes common stock for all the outstanding shares of GM Class H
common stock in the Hughes split-off share exchange at book value.
Simultaneously with the Hughes split-off, based on certain assumptions, GM will
sell all of its retained economic interest in Hughes (in the form of the Hughes
Class B common stock) to News Corporation for approximately $3.1 billion in cash
and up to an additional approximately $770 million in News Corporation ADSs
and/or cash, subject to adjustment based on the collar mechanism. Based on a
price of $14.00 per share of GM Class H common stock, the net book value of
Hughes at March 31, 2003, and certain other assumptions, the transactions would
have resulted in a gain of approximately $1.2 billion, net of tax. In addition,
GM currently anticipates that as a result of the transactions, there will be a
net reduction of GM stockholders' equity of approximately $7.1 billion.
The financial results of Hughes for all periods prior to the completion of
the transactions will be reported as discontinued operations in GM's
consolidated financial statements upon: (1) the receipt of the requisite GM
common stockholder approval of all proposals relating to the transactions; and,
(2) the satisfaction of all regulatory related conditions to the transactions.
INVESTMENT IN GM DAEWOO
In the fourth quarter of 2002, GM invested $251 million in GM Daewoo common
stock. The original transaction agreements contemplated the Daewoo Creditor
Group receiving approximately 82 million shares (of the total 250 million of
authorized shares for this transaction) for a projected 33% equity participation
in GM Daewoo, with the remaining shares allocated to GM, Suzuki and Shanghai
Automotive Industry Corporation (SAIC) (together, the "GM Group shareholders")
for projected ownership of 42.1%, 14.9% and 10% in GM Daewoo, respectively.
The Korea Development Bank (KDB), which was the sole member of the Daewoo
Creditor Group at closing, subscribed for only 29.9% of the total common shares.
Through June 30, 2003, the GM Group shareholders had the option to subscribe for
the unsubscribed shares, which was exercisable in the event that KDB was unable
to identify another party to be an additional Daewoo Creditor Group shareholder.
Prior to the expiration of the option (and following KDB's failure to identify
an additional Daewoo Creditor Group shareholder), the GM Group shareholders,
with the concurrence of KDB, collectively agreed to let the unissued shares
remain unsubscribed. Therefore, the current capital structure reflects GM,
Suzuki, SAIC and KDB owning 44.6%, 14.9%, 10.6% and 29.9%, respectively. GM will
continue to account for its investment in GM Daewoo using the equity method.
EMPLOYMENT AND PAYROLLS
Worldwide employment at June 30, (in thousands) 2003 2002
---- ----
GMNA 192 199
GME 64 69
GMLAAM 23 24
GMAP 13 11
Hughes 11 12
GMAC 31 31
Other 7 11
--- ---
Total employees 341 357
=== ===
Three Months Ended Six Months Ended
June 30, June 30
-----------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Worldwide payrolls - (in billions) $5.3 $5.4 $10.7 $10.4
=== === ==== ====
31
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
CRITICAL ACCOUNTING ESTIMATES
The consolidated financial statements of GM are prepared in conformity with
GAAP, which requires the use of estimates, judgments, and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the periods presented.
GM has identified a number of critical accounting estimates. An accounting
estimate is considered critical if: the estimate requires management to make
assumptions about matters that were highly uncertain at the time the estimate
was made; different estimates reasonably could have been used; or if changes in
the estimate that would have a material effect on the Corporation's financial
condition or results of operations are reasonably likely to occur from period to
period.
GM's critical accounting estimates relate to the following areas: sales
allowances, policy and warranty, impairment of long-lived assets, pension and
OPEB costs, postemployment benefits, allowance for credit losses, investments in
operating leases, mortgage servicing rights, and accounting for derivatives and
other contracts at fair value. These critical accounting estimates are discussed
in the Corporation's 2002 Annual Report on Form 10-K filed with the U.S.
Securities and Exchange Commission.
Management believes that the accounting estimates employed are appropriate
and resulting balances are reasonable; however, actual results could differ from
the original estimates, requiring adjustments to these balances in future
periods. The Corporation has discussed the development, selection and
disclosures of these critical accounting estimates with the Audit Committee of
GM's Board of Directors, and the Audit Committee has reviewed the Corporation's
disclosures relating to these estimates. There have been no material changes to
the Corporation's significant accounting policies that affected the
Corporation's financial condition or results of operations in the second quarter
of 2003.
* * * * * *
ITEM 4. Controls and Procedures
The Corporation maintains disclosure controls and procedures designed to
ensure that information required to be disclosed in reports filed under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the specified time periods. As of the end of the period
covered by this report, the Corporation's Chief Executive Officer and Chief
Financial Officer evaluated, with the participation of GM's management, the
effectiveness of the Corporation's disclosure controls and procedures. Based on
the evaluation, which disclosed no significant deficiencies or material
weaknesses, the Corporation's Chief Executive Officer and Chief Financial
Officer concluded that the Corporation's disclosure controls and procedures are
effective. There were no changes in the Corporation's internal control over
financial reporting that occurred during the Corporation's most recent fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, the Corporation's internal control over financial reporting.
* * * * * *
32
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
PART II
ITEM 1. LEGAL PROCEEDINGS
(a) Material pending legal proceedings, other than ordinary routine litigation
incidental to the business, to which the Corporation, or its principal
subsidiaries, became a party during the quarter ended June 30, 2003, or
subsequent thereto, but before the filing of this report are summarized below:
Other Matters
-------------
As previously reported, DIRECTV is involved in several lawsuits with the
National Rural Telecommunications Cooperative (NRTC), Pegasus Satellite
Television, Inc. and Golden Sky Systems, Inc. (collectively Pegasus) and a class
of NRTC members (the Class), regarding premium programming, launch fees, certain
advanced services, contract term and post-contract rights of first refusal. On
September 11, 2002, DIRECTV filed a motion for summary judgment pertaining to
the damages sought by the NRTC for breaches alleged with respect to premium
programming, launch fees and advanced services. DIRECTV also moved for summary
judgment on tort interference and California Business & Professions Code
ss.17200 claims (17200 Claims) of Pegasus and the Class. In rulings in May and
June 2003, the Court held that the NRTC has no damage recovery with respect to
advanced services, and that the NRTC can only prove damages with respect to
premium programming and launch fees if it is able to establish a willful and
intentional breach done by decision of the Board or by an empowered senior
executive. The Court further granted DIRECTV's motion on the interference claims
of Pegasus and the Class, eliminating all their claims for compensatory and
punitive damages. The Court also narrowed their ss.17200 Claims, granting
summary judgment to DIRECTV on claims that DIRECTV acted unlawfully or
fraudulently and eliminating some claims for restitution. The Court ruled that
there was a disputed issue of fact as to whether DIRECTV, Pegasus and the Class
are competitors. If it is determined that they are competitors, judgment will be
entered in DIRECTV's favor. If not, Pegasus and the Class must prove that
DIRECTV acted unfairly within the meaning of the California Business &
Professions Code. In addition, the Court granted DIRECTV's motion for summary
judgment on its declaratory relief claim that the contracts between NRTC and
each of Pegasus Satellite Television, Inc., Golden Sky Systems, Inc., and the
Class, respectively, do not include rights of first refusal. The trial date in
this matter has been set for August 7, 2003.
* * *
On June 27, 2000, SuperGuide Corporation (SuperGuide) filed suit in the
United States District Court for the Western District of North Carolina against
DIRECTV Enterprises, Inc., DIRECTV, Inc. and DIRECTV Operations, Inc., which
Hughes refers to together in this paragraph as the DIRECTV defendants, Hughes,
Thomson Consumer Electronics, Inc., EchoStar Communications Corporation,
EchoStar Satellite Corporation and EchoStar Technologies Corporation, alleging
infringement of three United States patents and seeking unspecified damages and
injunctive relief. Gemstar Development Corp. was added as a third-party
defendant because it asserts to have exclusive control of the patents by reason
of a license agreement with SuperGuide. Based on beneficial rulings narrowing
the scope of the asserted claims, the defendants filed motions for summary
judgment, and on July 3, 2002, the court granted summary judgment of
non-infringement to the DIRECTV defendants, Hughes and DIRECTV system
manufacturers under all asserted claims of the three patents in the case.
Judgment for all defendants dismissing all claims of infringement and awarding
costs to defendants was entered on July 25, 2002. Notices of appeal to the Court
of Appeals for the Federal Circuit were filed, and the appeal was argued on July
10, 2003.
* * *
(b) Previously reported legal proceedings which have been terminated, either
during the quarter ended June 30, 2003, or subsequent thereto, but before the
filing of this report are summarized below:
On November 21, 2001, Broadcast Innovations, LLC filed suit in the United
States District Court for the District of Colorado against DIRECTV, Inc.,
Hughes, Thomson multimedia, Inc., Pegasus Satellite Television, Inc., Dotcast,
Inc., and EchoStar Communications Corporation, alleging infringement of two
United States patents and seeking unspecified damages and injunction. In July
2003, DIRECTV system defendants (DIRECTV, Hughes and Thomson) entered into a
settlement agreement and the matter was dismissed with prejudice on July 17,
2003.
* * *
33
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
LEGAL PROCEEDINGS (concluded)
Hughes also has reported previously on a purported class action, P. Shoenfeld
Asset Management LLC, et al. v. Shaw et al., filed in Delaware Chancery Court on
December 18, 2002, against Hughes and the PanAmSat Board of Directors. The suit
alleged that the settlement between EchoStar Communications Corporation and
Hughes of all claims related to the termination of the proposed merger between
EchoStar and Hughes favored Hughes in violation of alleged fiduciary duties. On
July 10, 2003, the Delaware Chancery Court granted defendants' motions to
dismiss all claims with prejudice and denied plaintiffs' motion for leave to
amend the complaint. On August 4, 2003 the plaintiffs filed a notice of appeal
with the Delaware Supreme Court.
On July 15, 2003, Hughes and The Boeing Company (Boeing) settled all matters
related to the previously reported dispute arising out of the 2000 sale by
Hughes of its satellite systems manufacturing businesses to Boeing. Under the
terms of the agreement, Hughes settled all outstanding purchase price adjustment
disputes with Boeing and paid an aggregate $360 million in cash on July 18, 2003
in satisfaction of both the disputed and undisputed portions of the purchase
price adjustment. Boeing also will be released from its commitment to pay Hughes
$4.4 million over the next seven years in connection with Boeing's participation
in the settlement with the U.S. Department of State on China launch issues of
the mid-1990s. Also in connection with the settlement, Hughes Network Systems
(HNS) agreed to extend the scheduled launch date for the first Boeing built
Spaceway satellite from the fourth quarter of 2003 until February 2004.
* * *
* * * *
34
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The annual meeting of stockholders of the Registrant was held on June 3,
2003.
At that meeting, the following matters were submitted to a vote of the
stockholders of General Motors Corporation:
2003 General Motors Annual Meeting
Final Voting Results
(All classes of common stock)
Proposal Voting Results
-------- --------------
Votes* Percent**
------ ---------
Item No. 1
Nomination and Election of Directors
The Judges subscribed and delivered a certificate reporting that the
following nominees for directors had received the number of votes* set opposite
their respective names.
Percy N. Barnevik For 618,901,619 97.8%
Withheld 13,870,316 2.2
John H. Bryan For 597,986,323 94.5
Withheld 34,785,612 5.5
Armando M. Codina For 620,036,485 98.0
Withheld 12,735,450 2.0
George M. C. Fisher For 598,141,334 94.5
Withheld 34,630,601 5.5
Karen Katen For 598,122,727 94.5
Withheld 34,649,208 5.5
Alan G. Lafley For 610,920,852 96.5
Withheld 21,851,083 3.5
Philip A. Laskawy For 610,870,585 96.5
Withheld 21,901,350 3.5
E. Stanley O'Neal For 617,352,592 97.6
Withheld 15,419,343 2.4
Eckhard Pfeiffer For 612,627,468 96.8
Withheld 20,144,467 3.2
G. Richard Wagoner, Jr. For 618,538,541 97.8
Withheld 14,233,394 2.2
In addition, 2,734 votes were cast 0.0
for each of the following:
John Chevedden, James Dollinger,
William Dean Fitzpatrick, Lucy Kessler,
John Lauve, Louis Lauve III, Steve Mahac,
Erik Nielsen, Larry Parks, Danny Taylor,
William L. Walde, William Woodward, M.D.
Item No. 2
A proposal of the Board of For 602,711,448 95.2%
Directors that the Against 20,889,147 3.3
stockholders ratify the Abstain 9,171,340 1.5
selection of Deloitte
& Touche as independent public
accountants for the year 2003.
Item No. 3
A stockholder proposal that For 37,485,864 7.2%
the Board take the necessary Against 470,464,403 90.3
steps to have the accounting Abstain 13,086,533 2.5
consulting firm not be a
spin-off from the same
accounting firm.
35
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Proposal Voting Results
-------- --------------
Votes* Percent**
------ ---------
Item No. 4
A stockholder proposal that For 29,613,661 5.7%
GM report by August 2003 on Against 447,190,782 85.8
estimated total annual Abstain 44,232,361 8.5
greenhouse gas emissions
from operations and products,
how GM can reduce greenhouse
gas emissions from its vehicles,
and an evaluation of public
policies that would assist GM
in achieving emissions reductions.
Item No. 5
A stockholder proposal that For 41,731,548 8.0%
the Board amend the bylaws Against 467,922,358 89.8
to require a strictly Abstain 11,382,818 2.2
independent director, who is
not the current or former CEO
of GM, to serve as chairman.
Item No. 6
A stockholder proposal that For 165,078,006 31.7%
GM not adopt, maintain or Against 344,534,378 66.1
extend any poison pill Abstain 11,424,414 2.2
unless submitted to a
stockholder vote.
Item No. 7
A stockholder proposal that For 158,535,001 30.4%
the Board adopt a cumulative Against 345,329,404 66.3
voting bylaw. Abstain 17,172,292 3.3
Item No. 8
A stockholder proposal that For 55,565,117 10.7%
strictly independent Against 453,202,674 87.0
directors be nominated Abstain 12,269,011 2.3
for key Board committees to
the fullest extent possible.
Item No. 9
A stockholder proposal that For 53,714,860 10.3%
the Board adopt a policy Against 454,931,082 87.3
that all future stock options Abstain 12,390,758 2.4
to senior executives and
directors be performance-based.
Item No. 10
A stockholder proposal that For 48,105,465 9.2%
the Board appoint as Against 460,332,842 88.4
independent auditors only Abstain 12,598,442 2.4
firms and their affiliates
that agree not to provide GM
with non-audit consulting
services.
* Numbers represent the aggregate voting power of all votes cast as of June 3,
2003, with holders of GM $1-2/3 par value common stock casting one vote per
share and holders of GM Class H common stock casting 0.2 vote per share,
which represents the applicable voting power after the three-for-one stock
split of the GM Class H common stock in the form of a 200% stock dividend,
paid on June 30, 2000, to GM Class H common stockholders of record on June
13, 2000.
** Percentages represent the aggregate voting power of both classes of GM common
stock cast for each item.
* * * * * *
36
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit Page
Number Exhibit Name Number
------ ------------ ------
(31.1) Section 302 Certification of the Chief Executive Officer 38
(31.2) Section 302 Certification of the Chief Financial Officer 39
(32.1) Certification of the Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 40
(32.2) Certification of the Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 41
(99) Hughes Electronics Corporation Financial Statements and
Management's Discussion and Analysis of Financial
Condition and Results of Operations 42
(b) Reports on Form 8-K
Seventeen reports on Form 8-K, were filed April 1, 2003, April 10, 2003,
April 14, 2003, April 15, 2003*, April 23, 2003, May 1, 2003, May 15, 2003, June
3, 2003, June 6, 2003, June 10, 2003*, June 12, 2003*, June 13, 2003, June 19,
2003 (3), and June 20, 2003 (2) during the quarter ended June 30, 2003 reporting
matters under Item 5, Other Events, reporting certain agreements under Item 7,
Financial Statements, Pro Forma Financial Information, and Exhibits.
--------------------------
* Reports submitted to the Securities and Exchange Commission under Item 9,
Regulation FD Disclosure. Pursuant to General Instruction B of Form 8-K the
reports submitted under Item 9 are not deemed to be "filed" for the purpose of
Section 18 of the Securities Exchange Act of 1934 and we are not subject to the
liabilities of that section. We are not incorporating, and will not incorporate
by reference these reports into a filing under the Securities Act or the
Exchange Act.
* * * * * *
SIGNATURES
Pursuant to the requirements 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: August 8, 2003 By: /s/PETER R. BIBLE.
--- ------------------
(Peter R. Bible,
Chief Accounting Officer)
37