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 September 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
----------------- ----------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
300 Renaissance Center, Detroit, Michigan 48265-3000
- ----------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (313) 556-5000
--------------
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 October 31, 2003, there were outstanding 560,750,876 shares of the
issuer's $1-2/3 par value common stock and 1,108,902,873 shares of GM Class H
$0.10 par value common stock.
1
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
INDEX
Page No.
Part I - Financial Information (Unaudited) --------
Item 1. Financial Statements
Consolidated Statements of Income for the Three Months
and Nine Months Ended September 30, 2003 and 2002 3
Supplemental Information to the Consolidated Statements
of Income for the Three Months and Nine Months
Ended September 30, 2003 and 2002 4
Consolidated Balance Sheets as of September 30, 2003,
December 31, 2002, and September 30, 2002 5
Supplemental Information to the Consolidated Balance
Sheets as of September 30, 2003, December 31, 2002,
and September 30, 2002 6
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2003 and 2002 7
Supplemental Information to the Condensed Consolidated
Statements of Cash Flows for the Nine Months Ended
September 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 24
Item 4. Controls and Procedures 34
Part II - Other Information (Unaudited)
Item 1. Legal Proceedings 34
Item 4. Submission of Matters to a Vote of Security Holders 35
Item 6. Exhibits and Reports on Form 8-K 37
Signatures 38
Exhibit 31.1 Section 302 Certification of the Chief Executive Officer 39
Exhibit 31.2 Section 302 Certification of the Chief Financial Officer 40
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 41
Exhibit 32.2 Certification of the Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 42
Exhibit 99 Hughes Electronics Corporation Financial Statements
(Unaudited)and Management's Discussion and Analysis
of Financial Condition and Results of Operations 43
2
PART I
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------ -------------
2003 2002 2003 2002
---- ---- ---- ----
(dollars in millions except per share amounts)
Total net sales and revenues $45,929 $43,580 $143,602 $138,133
------ ------ ------- -------
Cost of sales and other expenses 37,016 36,957 115,339 113,754
Selling, general, and
administrative expenses 6,003 6,104 17,792 17,795
Interest expense 2,567 1,924 6,960 5,854
------ ------ ------- -------
Total costs and expenses 45,586 44,985 140,091 137,403
------ ------ ------- -------
Income (loss) before income taxes
and minority interests 343 (1,405) 3,511 730
Income tax expense (benefit) 89 (551) 1,010 137
Equity income and minority
interests 171 50 308 123
--- ---- ------ ---
Net income (loss) 425 (804) 2,809 716
Dividends on preference stocks - - - (47)
--- --- ----- ---
Earnings (losses) attributable
to common stocks $425 $(804) $2,809 $669
=== === ===== ===
Basic earnings (losses) per share
attributable to common stocks
(Note 8)
$1-2/3 par value $0.79 $(1.42) $5.09 $1.65
==== ==== ==== ====
Class H $(0.02) $(0.01) $(0.04) $(0.28)
==== ==== ==== ====
Earnings (losses) per share
attributable to common stocks
assuming dilution (Note 8)
$1-2/3 par value $0.79 $(1.42) $5.08 $1.63
==== ==== ==== ====
Class H $(0.02) $(0.01) $(0.04) $(0.28)
==== ==== ==== ====
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 Nine Months Ended
September 30, September 30,
------------ -------------
2003 2002 2003 2002
---- ---- ---- ----
(dollars in millions)
AUTOMOTIVE, COMMUNICATIONS SERVICES,
AND OTHER OPERATIONS
Total net sales and revenues $38,431 $36,657 $121,205 $118,148
------ ------ ------- -------
Cost of sales and other expenses 34,900 34,868 109,052 107,540
Selling, general, and
administrative expenses 3,495 3,645 10,617 11,153
Interest expense 587 242 1,310 706
------ ------ ------- -------
Total costs and expenses 38,982 38,755 120,979 119,399
Net expense from transactions with
Financing and Insurance
Operations 64 72 139 208
---- ------ --- ---
Income (loss) before income taxes
and minority interests (615) (2,170) 87 (1,459)
Income tax (benefit) (285) (835) (294) (684)
Equity income and minority
interests 129 88 277 179
--- ----- --- ---
Net income (loss) - Automotive,
Communications Services, and
Other Operations $(201) $(1,247) $658 $(596)
=== ===== === ===
FINANCING AND INSURANCE OPERATIONS
Total revenues $7,498 $6,923 $22,397 $19,985
----- ----- ------ ------
Interest expense 1,980 1,682 5,650 5,148
Depreciation and amortization
expense 1,484 1,395 4,568 4,109
Operating and other expenses 2,315 2,315 6,560 6,171
Provisions for financing and
insurance losses 825 838 2,334 2,576
----- ----- ------ ------
Total costs and expenses 6,604 6,230 19,112 18,004
Net income from transactions with
Automotive, Communications Services,
and Other Operations (64) (72) (139) (208)
--- --- ----- -----
Income before income taxes and
minority interests 958 765 3,424 2,189
Income tax expense 374 284 1,304 821
Equity income (loss) and minority
interests 42 (38) 31 (56)
--- --- ----- -----
Net income - Financing and
Insurance Operations $626 $443 $2,151 $1,312
=== === ===== =====
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
Sept. 30, Sept. 30,
2003 Dec. 31, 2002
(Unaudited) 2002 (Unaudited)
----------- ---- -----------
ASSETS (dollars in millions)
Cash and cash equivalents $41,854 $21,449 $22,008
Marketable securities 21,368 16,825 15,022
------ ------ ------
Total cash and marketable securities 63,222 38,274 37,030
Finance receivables - net 160,233 134,647 125,958
Accounts and notes receivable (less allowances) 17,817 15,715 14,116
Inventories (less allowances) (Note 2) 11,229 9,967 10,673
Deferred income taxes 38,902 39,865 29,778
Equipment on operating leases - net 35,982 32,988 32,871
Equity in net assets of nonconsolidated
associates 5,803 5,044 5,045
Property - net 39,171 37,514 36,328
Intangible assets - net (Note 3) 18,064 17,954 17,100
Other assets 44,054 37,028 38,777
------- ------- -------
Total assets $434,477 $368,996 $347,676
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable (principally trade) $30,129 $25,082 $24,572
Notes and loans payable 261,323 201,940 186,531
Postretirement benefits other than pensions 35,875 38,186 37,976
Pensions 19,127 22,762 9,785
Deferred income taxes 6,965 7,178 5,969
Accrued expenses and other liabilities 68,965 66,200 62,894
------- ------- -------
Total liabilities 422,384 361,348 327,727
Minority interests 1,324 834 817
Stockholders' equity
$1-2/3 par value common stock (outstanding,
560,741,759; 560,447,797; and
560,322,989 shares) (Note 8) 935 936 936
Class H common stock (outstanding,
1,108,731,138; 958,284,272;
and 958,110,288 shares) (Note 8) 111 96 96
Capital surplus (principally additional
paid-in capital) 22,884 21,583 21,561
Retained earnings 12,000 10,031 9,291
------ ------ -------
Subtotal 35,930 32,646 31,884
Accumulated foreign currency translation
adjustments (2,099) (2,784) (3,009)
Net unrealized losses on derivatives (130) (205) (286)
Net unrealized gains on securities 515 372 141
Minimum pension liability adjustment (23,447) (23,215) (9,598)
------ ------ ------
Accumulated other comprehensive loss (25,161) (25,832) (12,752)
------ ------ ------
Total stockholders' equity 10,769 6,814 19,132
------- ------- -------
Total liabilities and stockholders' equity $434,477 $368,996 $347,676
======= ======= =======
Reference should be made to the notes to consolidated financial statements.
5
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION TO THE CONSOLIDATED BALANCE SHEETS
Sept. 30, Sept. 30,
2003 Dec. 31, 2002
(Unaudited) 2002 (Unaudited)
----------- ---- -----------
ASSETS (dollars in millions)
Automotive, Communications Services,
and Other Operations
Cash and cash equivalents $20,530 $13,291 $14,670
Marketable securities 8,022 2,174 1,360
------ ------- ------
Total cash and marketable securities 28,552 15,465 16,030
Accounts and notes receivable (less allowances) 6,613 5,861 5,649
Inventories (less allowances) (Note 2) 11,229 9,967 10,673
Equipment on operating leases
(less accumulated depreciation) 6,401 5,305 4,524
Deferred income taxes and other current assets 10,842 10,816 9,061
------ ------ ------
Total current assets 63,637 47,414 45,937
Equity in net assets of nonconsolidated
associates 5,803 5,044 5,045
Property - net 37,174 35,693 34,569
Intangible assets - net (Note 3) 14,808 14,611 13,796
Deferred income taxes 30,353 31,431 22,884
Other assets 7,980 7,781 15,112
------- ------- -------
Total Automotive, Communications Services,
and Other Operations assets 159,755 141,974 137,343
Financing and Insurance Operations
Cash and cash equivalents 21,324 8,158 7,338
Investments in securities 13,346 14,651 13,662
Finance receivables - net 160,233 134,647 125,958
Investment in leases and other receivables 38,781 35,517 34,629
Other assets 41,038 34,049 28,746
Net receivable from Automotive, Communications
Services, and Other Operations 1,735 1,089 529
------- ------- -------
Total Financing and Insurance Operations
assets 276,457 228,111 210,862
------- ------- -------
Total assets $436,212 $370,085 $348,205
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Automotive, Communications Services,
and Other Operations
Accounts payable (principally trade) $22,727 $20,169 $19,851
Loans payable 1,105 1,516 1,472
Accrued expenses 42,207 40,518 36,817
Net payable to Financing and
Insurance Operations 1,735 1,089 529
------ ------ ------
Total current liabilities 67,774 63,292 58,669
Long-term debt 34,150 16,651 16,794
Postretirement benefits other than pensions 31,949 34,275 34,138
Pensions 19,063 22,709 9,742
Other liabilities and deferred income taxes 15,560 15,461 15,764
------- ------- -------
Total Automotive, Communications Services,
and Other Operations liabilities 168,496 152,388 135,107
Financing and Insurance Operations
Accounts payable 7,402 4,913 4,721
Debt 226,068 183,773 168,265
Other liabilities and deferred income taxes 22,153 21,363 20,163
------- ------- -------
Total Financing and Insurance Operations
liabilities 255,623 210,049 193,149
------- ------- -------
Total liabilities 424,119 362,437 328,256
Minority interests 1,324 834 817
Total stockholders' equity 10,769 6,814 19,132
------- ------- -------
Total liabilities and stockholders' equity $436,212 $370,085 $348,205
======= ======= =======
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)
Nine Months Ended
September 30,
---------------------
2003 2002
---- ----
(dollars in millions)
Net cash provided by operating activities $10,299 $17,190
Cash flows from investing activities
Expenditures for property (5,224) (4,990)
Investments in marketable securities -
acquisitions (12,600) (35,024)
Investments in marketable securities -
liquidations 7,997 32,425
Net originations and purchases of mortgage
servicing rights (2,029) (1,290)
Increase in finance receivables (103,738) (102,899)
Proceeds from sales of finance receivables 76,177 85,492
Operating leases - acquisitions (9,282) (9,817)
Operating leases - liquidations 8,137 7,722
Investments in companies, net of cash acquired (206) (306)
Proceeds from sale of business units 1,076 -
Other - net (918) 223
------ ------
Net cash used in investing activities (40,610) (28,464)
------ ------
Cash flows from financing activities
Net increase (decrease) in loans payable (436) 7,528
Long-term debt - borrowings 80,065 25,731
Long-term debt - repayments (28,579) (18,009)
Repurchases of common and preference stocks - (97)
Proceeds from issuing common stocks - 64
Proceeds from sales of treasury stocks - 19
Cash dividends paid to stockholders (840) (887)
------ ------
Net cash provided by financing activities 50,210 14,349
------ ------
Effect of exchange rate changes on cash and
cash equivalents 506 378
------ ------
Net increase in cash and cash equivalents 20,405 3,453
Cash and cash equivalents at beginning of the
period 21,449 18,555
------ ------
Cash and cash equivalents at end of the period $41,854 $22,008
====== ======
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
--------------- ---------
Nine Months Ended September 30,
----------------------------------
2003 2002 2003 2002
---- ---- ---- ----
(dollars in millions)
Net cash provided by operating activities $1,121 $8,147 $9,178 $9,043
Cash flows from investing activities
Expenditures for property (4,756) (4,920) (468) (70)
Investments in marketable securities -
acquisitions (7,033) (1,391) (5,567) (33,633)
Investments in marketable securities -
liquidations 1,185 821 6,812 31,604
Net originations and purchases of mortgage
servicing rights - - (2,029) (1,290)
Increase in finance receivables - - (103,738)(102,899)
Proceeds from sales of finance receivables - - 76,177 85,492
Operating leases - acquisitions - - (9,282) (9,817)
Operating leases - liquidations - - 8,137 7,722
Investments in companies, net of cash
acquired (64) (156) (142) (150)
Proceeds from sale of business units 1,076 - - -
Other - net (277) 258 (641) (35)
----- ----- ------ ------
Net cash used in investing activities (9,869) (5,388) (30,741) (23,076)
----- ----- ------ ------
Cash flows from financing activities
Net increase (decrease) in loans payable (866) (930) 430 8,458
Long-term debt - borrowings 17,262 6,149 62,803 19,582
Long-term debt - repayments (588) (183) (27,991) (17,826)
Repurchase of common and preference stocks - (97) - -
Proceeds from issuing common stocks - 64 - -
Proceeds from sales of treasury stocks - 19 - -
Cash dividends paid to stockholders (840) (887) - -
------ ----- ------ ------
Net cash provided by financing activities 14,968 4,135 35,242 10,214
------ ----- ------ ------
Effect of exchange rate changes on
cash and cash equivalents 373 372 133 6
Net transactions with Automotive/Financing
Operations 646 (1,028) (646) 1,028
------ ------ ------ ------
Net increase (decrease) in cash and cash
equivalents 7,239 6,238 13,166 (2,785)
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 $20,530 $14,670 $21,324 $7,338
====== ====== ====== =====
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 (SEC).
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
grant using the Black-Scholes option-pricing model. Such expense for the three
and nine months ended September 30, 2003 was $19 million and $58 million ($12
million and $36 million, net of tax), recorded in cost of sales and other
expenses. For the three and nine months ended September 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 Nine Months
Ended Ended
September 30, September 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss), as reported $425 $(804) $2,809 $716
Add: stock-based compensation expense with
respect to newly granted options, included in
reported net income, net of related tax
effects 12 - 36 -
Less: stock-based compensation expense
determined with respect to all outstanding (39) (75) (145) (251)
--- --- ----- ---
options, net of related tax effects
Pro forma net income (loss) $398 $(879) $2,700 $465
=== === ===== ===
Earnings (losses) attributable to common
stocks
$1-2/3 par value - as reported $443 $(795) $2,852 $922
- pro forma 429 (843) 2,796 769
Class H - as reported $(18) $(9) $(43) $(253)
- pro forma (31) (36) (96) (351)
Basic earnings (losses) per share
attributable to common stocks
$1-2/3 par value - as reported $0.79 $(1.42) $5.09 $1.65
- pro forma 0.77 (1.50) 4.99 1.37
Class H - as reported $(0.02) $(0.01) $(0.04) $(0.28)
- pro forma (0.03) (0.04) (0.09) (0.39)
Diluted earnings (losses) per share
attributable to common stocks
$1-2/3 par value - as reported $0.79 $(1.42) $5.08 $1.63
- pro forma 0.76 (1.50) 4.98 1.36
Class H - as reported $(0.02) $(0.01) $(0.04) $(0.28)
- pro forma (0.03) (0.04) (0.09) (0.39)
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 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 6.
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
VIEs expected losses or residual returns if they occur. FIN 46 provides certain
exceptions to these rules, relating to qualifying special purpose entities
(QSPEs) subject to the requirements of SFAS No. 140. Upon its original issuance,
FIN 46 required that VIEs created after January 31, 2003 would be consolidated
immediately, while VIEs created prior to February 1, 2003 were to be
consolidated as of July 1, 2003.
In October 2003, the FASB deferred the effective date for consolidation of
VIEs created prior to February 1, 2003 to December 31, 2003 for calendar
year-end companies, with earlier application encouraged. GM adopted FIN 46 as of
its original effective date of July 1, 2003 for entities created prior to
February 1, 2003. The application of the consolidation provisions of FIN 46
resulted in an increase in assets and debt of approximately $4.7 billion ($972
million in ACO, and $3.7 billion in FIO), and a cumulative effect of accounting
change recorded in cost of sales and other expenses of $92 million after-tax,
related to ACO and no net income impact at FIO. Refer to Note 5 to the
Consolidated Financial Statements for further discussion of GM's involvement in
Variable Interest Entities.
10
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Financial Statement Presentation (concluded)
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):
Sept. 30, Dec. 31, Sept. 30,
2003 2002 2002
---- ---- ----
Productive material, work in process, and
and supplies $4,979 $4,915 $5,274
Finished product, service parts, etc. 8,023 6,859 7,236
------ ------ ------
Total inventories at FIFO 13,002 11,774 12,510
Less LIFO allowance 1,773 1,807 1,837
------ ----- ------
Total inventories (less allowances) $11,229 $9,967 $10,673
====== ===== ======
Note 3. Goodwill and Intangible Assets
The components of the Corporation's intangible assets as of September 30, 2003,
were as follows (dollars in millions):
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
-----------------------------------
Automotive, Communications Services, and
Other Operations
- ----------------------------------------
Amortizing intangible assets:
Patents and intellectual property rights $303 $20 $283
Dealer network and subscriber base 355 214 141
--- --- ---
Total 658 234 424
Non-amortizing intangible assets:
License fees - orbital slots 432
---
Total acquired intangible assets 856
---
Goodwill 7,143
Pension intangible asset 6,809
------
Total intangible assets 14,808
11
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3. Goodwill and Intangible Assets (concluded)
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
--------------------------------
Financing and Insurance Operations
- ----------------------------------
Amortizing intangible assets:
Customer lists and contracts $70 $31 $39
Trademarks and other 49 15 34
Covenants not to compete 18 18 -
--- --- ---
Total 137 64 73
Total intangible assets 73
Non-amortizing intangible assets:
Goodwill 3,183
-----
Total intangible assets 3,256
Total consolidated intangible assets $18,064
======
Estimated amortization expense in each of the next five years is as follows:
2004 - $71 million; 2005 - $48 million; 2006 - $48 million; 2007 - $48 million;
and 2008 - $44 million.
The changes in the carrying amounts of goodwill for the nine months ended
September 30, 2003, were as follows (dollars in millions):
(1) (1) Total Total
For the Nine Months Ended GMNA GME Other Hughes ACO GMAC GM
September 30, 2003 ---- --- ------ ------- --- ---- -----
Balance as of December 31,
2002 $139 $338 $57 $6,458 $6,992 $3,273 $10,265
Goodwill acquired during
the period 109 - - 4 113 14 127
Goodwill written off due to
sale of assets (4) - - - (4) - (4)
Effect of foreign currency
translation - 42 - - 42 14 56
Impairment/Other (2) - - - - - (118) (118)
--- --- --- ----- ----- ----- ------
Balance as of September 30,
2003 $244 $380 $57 $6,462 $7,143 $3,183 $10,326
=== === === ===== ===== ===== ======
(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.
(2) In September 2003, GMAC received $110 million related to a settlement of a
claim involving the 1999 acquisition of the asset-based lending and factoring
business of The Bank of New York. Of the settlement amount, $109 million was
considered a purchase price adjustment, reducing the related goodwill; the
remainder represented a reimbursement of tax claims paid on behalf of The Bank
of New York.
Note 4. Product Warranty Liability
Policy, product warranty and recall campaigns liability included the following
(dollars in millions):
Nine Months Ended Twelve Months Ended
Sept. 30, 2003 Dec. 31, 2002
-------------- -------------
Beginning balance $8,856 $8,177
Payments (3,338) (4,182)
Increase in liability (warranties
issued during period) 3,400 4,418
Adjustments to liability (pre-existing
warranties) (351) 323
Effect of foreign currency translation 68 120
----- ------
Ending balance $8,635 $8,856
===== =====
12
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5. Variable Interest Entities
As discussed in Note 1 to the Consolidated Financial Statements, GM applied
the provisions of FIN 46 for all entities beginning July 1, 2003. In connection
with the application of FIN 46, GM is providing information below concerning
variable interest entities that: (1) are consolidated by GM because GM is deemed
to be the primary beneficiary and (2) those entities that GM does not
consolidate because, although GM has significant interests in such variable
interest entities, GM is not the primary beneficiary.
Automotive, Communications Services, and Other Operations
Synthetic Leases -- GM leases real estate and equipment from various special
purpose entities (SPEs) that 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. Certain of
these SPEs were determined to be VIEs under FIN 46. For those leases where GM
provides a residual value guarantee of the leased property and is considered the
primary beneficiary under FIN 46, GM consolidated these entities as of July 1,
2003. This resulted in an increase in assets and debt of $917 million, and a
cumulative effect of accounting change related to ACO (recorded as a charge to
cost of sales and other expenses) of $27 million after-tax.
Investments-- Hughes has investments in local operating companies providing
DIRECTV programming services in Venezuela and Puerto Rico, of which Hughes owns
19.5% and 40.0%, respectively. These entities were determined to be VIEs and
Hughes is considered to be the primary beneficiary. GM consolidated these
entities as of July 1, 2003, resulting in an increase in assets of $55 million
and a cumulative effect of accounting change (recorded as a charge to cost of
sales and other expenses) of $65 million after-tax.
The total after-tax charge to ACO net income was $92 million.
Financing and Insurance Operations
Mortgage warehouse funding -- GMAC's Mortgage operations sell commercial and
residential mortgage loans through various structured finance arrangements in
order to provide funds for the origination and purchase of future loans. These
structured finance arrangements include sales to off-balance sheet warehouse
funding entities, including GMAC- and bank-sponsored commercial paper conduits.
Transfers of assets from GMAC into each facility are accounted for as sales
based on the provisions of SFAS No. 140 and as such creditors of these
facilities have no recourse to the general credit of GMAC. Some of these
warehouse funding entities represent variable interest entities under FIN 46.
For certain mortgage warehouse entities, management determined that GMAC does
not have the majority of the expected losses or returns and, as such,
consolidation is not appropriate under FIN 46. The assets in these entities
totaled $1.9 billion, of which $1.1 billion represents GMAC's maximum exposure
to loss. The maximum exposure would only occur in the unlikely event that there
was a complete loss on the underlying assets of the entities. In other entities,
GMAC was considered the primary beneficiary, and the activities of these
entities were either terminated prior to July 1, 2003 or GMAC consolidated these
entities pursuant to FIN 46. The consolidation of particular entities was a
decision driven in part by the Company's desire to invest in certain asset
classes on the balance sheet. Had management not had any interest in investing
in such assets, the Company might have restructured the entities to ensure
continued off-balance sheet treatment. As of September 30, 2003 the assets in
these entities were classified as mortgage loans held for sale ($1.8 billion)
and consumer mortgage loans ($1.7 billion) in GMAC's consolidated balance sheet
with corresponding liabilities reflected as a component of debt.
13
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5. Variable Interest Entities (concluded)
Interests in Real Estate Partnerships -- The Company's Mortgage operations
syndicate investments in real estate partnerships to unaffiliated investors and,
in certain partnerships, guarantee the timely payment of a specified return to
those investors. Returns to investors in the partnerships syndicated by the
Company are derived from tax credits and tax losses generated by underlying
operating partnership entities that develop, own, and operate affordable housing
properties throughout the United States. Syndicated tax credit partnerships that
contain a guarantee are reflected in the Company's financial statements under
the financing method. In addition, the Company has variable interests in the
underlying operating partnerships (primarily in the form of limited
partnership interests). The results of the Company's variable interest analysis
indicated that GMAC is not the primary beneficiary of these partnerships and,
as a result, is not required to consolidate these entities under FIN 46. Assets
outstanding in these partnerships approximated $2.5 billion at September 30,
2003. GMAC's exposure to loss at such time was $567 million, representing the
amount payable to investors in the event of liquidation of the partnerships.
The Company's exposure to loss increases as unaffiliated investors place
additional quaranteed commitments with the Company. Considering such committed
amounts, the Company's exposure to loss in future periods is not expected to
exceed $1 billion.
Collateralized debt obligations (CDOs) -- GMAC's Mortgage operations sponsor,
purchase subordinate and equity interests in, and serve as collateral manager
for CDOs. Under CDO transactions, a trust is established that purchases a
portfolio of securities and issues debt and equity certificates, representing
interests in the portfolio of assets. In addition to receiving variable
compensation for managing the portfolio, the Company sometimes retains equity
investments in the CDOs. The majority of the CDOs sponsored by the Company were
initially structured or have been restructured (with approval by the senior
beneficial interest holders) as qualifying special purpose entities, and are
therefore exempt from FIN 46. For the Company's remaining CDOs, the results of
the primary beneficiary analysis support the conclusion that consolidation is
not appropriate under FIN 46 because GMAC does not have the majority of the
expected losses or returns. The assets in these CDOs totaled $1.3 billion of
which GMAC's maximum exposure to loss is $98 million, representing GMAC's
retained interests in these entities. The maximum exposure to loss would only
occur in the unlikely event that there was a complete loss on the underlying
assets of the entities.
Automotive Finance Receivables -- In certain securitization transactions,
GMAC securitizes consumer and commercial finance receivables into bank-sponsored
multi-seller commercial paper conduits. These conduits provide a funding source
to GMAC (as well as other sellers into the conduit) as they fund the purchase of
the receivables through the issuance of commercial paper. Total assets
outstanding in these bank-sponsored conduits approximated $12 billion as of
September 30, 2003. While GMAC has a variable interest in these conduits, the
Company is not deemed to be the primary beneficiary, as GMAC does not retain the
majority of the expected losses or returns. GMAC's maximum exposure to loss as a
result of its involvement with these non-consolidated variable interest entities
is $149 million and would only be realized in the event of a complete loss on
the assets that GMAC sold.
Note 6. Commitments and Contingent Matters
Commitments
GM has guarantees related to its performance under operating lease
arrangements and the residual value of lease assets totaling $604 million.
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 September 30, 2003
approximately $76 million was recorded with respect to these guarantees, the
maximum exposure under which is approximately $4.0 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.
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.
14
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6. Commitments and Contingent Matters (continued)
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%. Fiat participated in the
recapitalization by making a Euro 3 billion contribution, which FAH used 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 Annual Report on Form 10-K for the period ending
December 31, 2002, 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 their 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 has,
however, asserted to Fiat that the sale of certain assets of the financing
business of Fiat Auto and the recapitalization of FAH represent material
breaches of the Master Agreement, with the result that the Master Agreement,
including the Put, is terminable by GM. Notwithstanding these different views,
GM and Fiat share a desire to continue to build on the cooperation the parties
have worked on for the past several years in the joint ventures and other
cooperative contractual arrangements they have entered into which are
independent of the Master Agreement, and to provide an opportunity to pursue
a resolution of these different views. Towards that end, Fiat and GM entered
into a standstill agreement on October 26, 2003, the provisions of which enable
GM to defer until December 15, 2004, the necessity of electing the remedy of
termination of the Master Agreement, and with it the Put, without such deferral
prejudicing the right of GM to elect that remedy after December 15, 2004.
On October 26, 2003, Fiat and GM also entered into an amendment to the Master
Agreement that shifts the Put period by one year, so that it begins on January
24, 2005 and runs to July 24, 2010.
If the Put were implemented, the fair market value of FAH shares would be
determined by the averaging of the three 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.
15
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6. Commitments and Contingent Matters (concluded)
If there were 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 were 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 if
GM chooses to fund such needs.
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 have signed new
agreements as of October 1, 2003, as the new regulation is becoming 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 7. Comprehensive Income (loss)
GM's total comprehensive income was as follows (dollars in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss) $425 $(804) $2,809 $716
Other comprehensive income
(loss) 174 (478) 671 (457)
--- ----- ----- ---
Total $599 $(1,282) $3,480 $259
=== ===== ===== ===
Note 8. 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.
16
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8. Earnings Per Share Attributable to Common Stocks (continued)
Three Months Ended Nine Months
September 30, Ended
September 30,
------------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Earnings (losses) attributable to
common stocks
$1-2/3 par value $443 $(795) $2,852 $922
Class H $(18) $(9) $(43) $(253)
Earnings attributable to GM $1-2/3 par value common stock for the period
represent the earnings (losses) attributable to all GM common stocks, adjusted
by the losses attributable to GM Class H common stock for the respective period.
Losses attributable to GM Class H common stock for the nine month period
ended September 30, 2002 represent the net 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 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 (1.1 billion and 958 million during the three months ended
September 30, 2003 and 2002, respectively, and 1.1 billion and 907 million
during the nine months ended September 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 for the three months ended
September 30, 2003 and 2002, and for the for the nine months ended September 30,
2003 and 2002, 1.4 billon and 1.3 billion 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. The denominator of the GM
Class H fraction as of September 30, 2003 was 1,383,050,745.
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%.
17
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8. 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 and shares in millions except per
share amounts):
$1-2/3 Par Value Common Stock - Class H Common Stock
----------------------------------------------------------
Income/ Per Share Income/ Per Share
(Loss) Shares Amount (Loss) Shares Amount
------ ------ ------ ------ ------ ------
Three Months Ended
September 30, 2003
Income (loss) $443 $(18)
Less: Dividends on preference
stocks - -
--- ---
Basic EPS
Income (loss) attributable
to common stock $443 561 $0.79 $(18) 1,108 $(0.02)
==== =====
Effect of Dilutive Securities
Assumed exercise of dilutive
stock options - - - -
--- --- --- -----
Diluted EPS
Adjusted income (loss)
attributable to
common stocks $443 561 $0.79 $(18) 1,108 $(0.02)
=== === ==== === ===== =====
Three Months Ended
September 30, 2002
Loss $(795) $(9)
Less: Dividends on preference
stocks - -
--- ---
Basic EPS
Loss attributable to common
stocks (795) 560 $(1.42) $(9) 958 $(0.01)
==== =====
Effect of Dilutive Securities
Assumed exercise of dilutive
stok options - - - -
--- --- --- ---
Diluted EPS
Adjusted loss attributable to
common stocks $(795) 560 $(1.42) $(9) 958 $(0.01)
=== === ==== = === =====
Nine Months Ended
September 30, 2003
Income (loss) $2,852 $(43)
Less: Dividends on preference
stocks - -
----- ---
Basic EPS
Income (loss) attributable
to common stocks $2,852 561 $5.09 $(43) 1,069 $(0.04)
==== ====
Effect of Dilutive Securities
Assumed exercise of dilutive
stock options - - (0.01) - -
----- --- --- -----
Diluted EPS
Adjusted income (loss)
attributable to
common stocks $2,852 561 $5.08 $(43) 1,069 $(0.04)
===== === ==== === ===== =====
Nine Months Ended
September 30, 2002
Income (loss) $937 $(221)
Less: Dividends on preference
stocks 15 32
--- ---
Basic EPS
Income (loss) attributable to
common stocks $922 560 $1.65 $(253) 907 $(0.28)
=====
Effect of Dilutive Securities
Assumed exercise of dilutive
stock options - 5 (0.02) - -
--- --- ---- --- ---
Diluted EPS
Adjusted income (loss)
attributable to
common stocks $922 565 $1.63 $(253) 907 $(0.28)
=== === ==== === === =====
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.
18
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8. Earnings Per Share Attributable to Common Stocks (concluded)
Options to purchase shares of common stock not included in the computation of
diluted earnings per share because of their antidilutive effect were as follows
(shares in millions):
$1-2/3 Par Value Class H
Common Stock Common Stock
------------ ------------
Three Months Ended September 30, 2003 81 92
Three Months Ended September 30, 2002 86 96
Nine Months Ended September 30, 2003 81 94
Nine Months Ended September 30, 2002 29 97
In addition, securities convertible into 147 million shares of GM $1-2/3 par
value common stock were outstanding at September 30, 2003. These shares are not
currently issuable.
Note 9. 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 Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Depreciation $1,326 $1,166 $3,904 $3,441
Amortization of special tools 676 645 2,029 1,896
Amortization of intangible
assets 29 3 77 6
----- ----- ----- -----
Total $2,031 $1,814 $6,010 $5,343
===== ===== ===== =====
Note 10. 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.
19
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10. Hughes Transaction (concluded)
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. On September 11, 2003, GM received a private-letter ruling
from the U.S. Internal Revenue Service confirming that the distribution of
Hughes Electronics common stock to the holders of GM Class H common stock, in
connection with the split-off of Hughes, would be tax-free to GM and its Class H
stockholders for federal income tax purposes. On October 6, 2003 GM announced
that stockholders had approved the transactions. (See Note 12). No assurances
can be given that the governmental 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 September 30, 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
(received on October 6, 2003); and, (2) the satisfaction of all regulatory
related conditions to the transactions.
20
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 11. 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 September 30, 2003
Manufactured products
sales and revenues:
External customers $27,339 $6,085 $1,150 $1,194 $35,768 $2,582 $81 $38,431 $7,473 $25 $7,498 $45,929
Intersegment (529) 185 154 190 - 4 (4) - - - - -
------ ----- ----- ----- ------ ----- -- ------ ----- --- ----- ------
Total manufactured
products $26,810 $6,270 $1,304 $1,384 $35,768 $2,586 $77 $38,431 $7,473 $25 $7,498 $45,929
====== ===== ===== ===== ====== ===== == ====== ===== == ===== ======
Interest income (a) $281 $116 $4 $1 $402 $10 $(123) $289 $1,388 $(52) $1,336 $1,625
Interest expense $400 $66 $40 $3 $509 $76 $2 $587 $1,950 $30 $1,980 $2,567
Net income (loss) $128 $(152) $(104) $162 $34 $(23) $(212) $(201) $630 $(4) $626 $425
Segment assets (b) $114,930 $21,439 $3,068 $2,723 $142,160 $19,583(c) $(1,988) $159,755 $275,852 $605 $276,457 $434,477
For the Three Months
Ended September 30, 2002
Manufactured products
sales and revenues:
External customers $27,195 $5,326 $1,064 $1,002 $34,587 $2,174 $(104) $36,657 $6,801 $122 $6,923 $43,580
Intersegment (491) 238 97 156 - 4 (4) - - - - -
------ ----- ----- ----- ------ ----- --- ------ ----- --- ----- ------
Total manufactured
products $26,704 $5,564 $1,161 $1,158 $34,587 $2,178 $(108) $36,657 $6,801 $122 $6,923 $43,580
====== ===== ===== ===== ====== ===== === ====== ===== === ===== ======
Interest income (a) $165 $80 $7 $4 $256 $5 $(108) $153 $852 $(42) $810 $963
Interest expense $211 $92 $78 $2 $383 $76 $(217) $242 $1,745 $(63) $1,682 $1,924
Net income (loss) $417 $(180) $(61) $76 $252 $(13) $(1,486) $(1,247) $476 $(33) $443 $(804)
Segment assets (b) $100,889 $18,815 $3,104 $1,265 $124,073 $18,708 (c) $(5,438) $137,343 $210,988 $(126) $210,862 $347,676
See notes on next page.
21
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 11. Segment Reporting (concluded)
Other Total Total
GMNA GME GMLAAM GMAP GMA Hughes Other ACO GMAC Financing Financing GM
---- --- ------ ---- --- ------ ----- --- ---- --------- --------- ----
For the Nine Months (dollars in millions)
Ended September 30, 2003
Manufactured products
sales and revenues:
External customers $86,844 $19,506 $3,067 $3,375 $112,792 $7,190 $1,223 $121,205 $22,383 $14 $22,397 $143,602
Intersegment (1,513) 689 401 423 - 12 (12) - - - - -
------ ------ ----- ----- ------- ----- ----- ------- ------ -- ------ -------
Total manufactured
products $85,331 $20,195 $3,468 $3,798 $112,792 $7,202 $1,211 $121,205 $22,383 $14 $22,397 $143,602
====== ====== ===== ===== ======= ===== ===== ======= ====== == ====== =======
Interest income (a) $525 $266 $15 $3 $809 $32 $(359) $482 $3,566 $(186) $3,380 $3,862
Interest expense $1,036 $257 $83 $6 $1,382 $241 $(313) $1,310 $5,546 $104 $5,650 $6,960
Net income (loss) $759 $(220) $(219) $400 $720 $(55) $(7) $658 $2,163 $(12) $2,151 $2,809
For the Nine Months
Ended September 30, 2002
Manufactured products
sales and revenues:
External customers $87,967 $16,451 $3,547 $2,915 $110,880 $6,418 $850 $118,148 $19,753 $232 $19,985 $138,133
Intersegment (1,348) 698 221 429 - 13 (13) - - - - -
------ ------ ----- ----- ------- ----- --- ------- ------ --- ------ -------
Total manufactured $86,619 $17,149 $3,768 $3,344 $110,880 $6,431 $837 $118,148 $19,753 $232 $19,985 $138,133
====== ====== ===== ===== ======= ===== === ======= ====== === ====== =======
Interest income (a) $415 $211 $19 $9 $654 $17 $(297) $374 $2,291 $(171) $2,120 $2,494
Interest expense $593 $213 $136 $6 $948 $275 $(517) $706 $4,956 $192 $5,148 $5,854
Net income (loss) $2,348 $(882) $(174) $122 $1,414 $(325)(d) $(1,685) $(596) $1,346 $(34) $1,312 $716
(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 $1.7 billion and $529 million as of September 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.
* * * * * *
22
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12. Subsequent Events
On October 6, 2003 GM announced that stockholders had approved transactions
that will result in the split off of its subsidiary, Hughes Electronics Corp.,
and the acquisition of 34 percent of Hughes common stock by News Corporation. Of
the stockholders who participated in the solicitation, approximately 94 percent
of the GM $1-2/3 par value common stock and approximately 94 percent of the GM
Class H stock was voted in support of the proposals. With respect to the
combined vote of both classes of stockholders, more than 94 percent of those
votes were cast in support of each proposal. In total, about 61 percent of GM
$1-2/3 par value common stock and about 75 percent of GM Class H stock was voted
in support of each of the proposals presented in the consent solicitation
statement. About 65 percent of the combined vote of both classes of stockholders
was in favor of each proposal. See Part II, Item 4 for additional details.
The 2003 United Auto Workers (UAW) labor contract was ratified on October 6,
2003 covering a four-year term from 2003-2007. The contract includes a $3,000
lump sum payment per UAW employee paid in October 2003, and a 3% performance
bonus per UAW employee to be paid in October 2004. GM will amortize these
payments over the 12 month period following the respective payment dates. UAW
employees will receive a gross wage increase of 2% in 2005 and 3% in 2006.
Active UAW employees were also granted pension benefit increases. There were no
pension benefit increases granted to current retirees and surviving spouses.
However, the contract does provide for four lump sum payments and two vehicle
discount vouchers for current retirees and surviving spouses. The retiree lump
sum payments and vehicle discount vouchers will result in a charge to GM's 2003
fourth quarter cost of sales of approximately $1.2 billion ($725 million
after-tax).
In early October 2003, GM made a cash contribution of $8.0 billion to its
U.S. pensions trust. This contribution, in addition to the $5.5 billion
contributed in September 2003, completed the planned contribution of the net
proceeds from the GM senior notes and convertible debentures issued during July,
2003.
On October 26, 2003 Fiat and General Motors agreed to delay by one year the
start of an agreement that would allow Fiat to sell its 90 percent ownership in
FAH to GM. GM currently owns the remaining 10 percent of FAH. The Master
Agreement provides that Fiat may seek to exercise a put option (the "Put") to
require GM to purchase FAH shares at fair market value starting in 2004.
However, under the new agreement, the term of the put will be delayed one year
until January 24, 2005, and will last until 2010. See Note 6.
23
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.
24
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Vehicle Unit Sales (1)
Three Months Ended September 30,
-----------------------------------------------------
2003 2002
-----------------------------------------------------
GM as GM as
a % of a % of
Industry GM Industry Industry GM Industry
-------- -- -------- -------- -- --------
(units in thousands)
GMNA
United States
Cars 2,017 530 26.3% 2,180 547 25.1%
Trucks 2,507 768 30.6% 2,358 723 30.6%
----- ------ ----- ------
Total United States 4,524 1,298 28.7% 4,538 1,270 28.0%
Canada, Mexico, and Other 725 183 25.2% 733 183 25.0%
------ ------ ------ ------
Total GMNA 5,249 1,481 28.2% 5,271 1,453 27.6%
GME 4,713 433 9.2% 4,610 416 9.0%
GMLAAM 888 137 15.4% 911 152 16.7%
GMAP 3,916 192 4.9% 3,697 174 4.7%
------ ----- ------ -----
Total Worldwide 14,766 2,243 15.2% 14,489 2,195 15.1%
====== ===== ====== =====
Nine Months Ended September 30,
-----------------------------------------------------
2003 2002
-----------------------------------------------------
GM as GM as
a % of a % of
Industry GM Industry Industry GM Industry
-------- -- -------- -------- -- --------
(units in thousands)
GMNA
United States
Cars 5,913 1,499 25.4% 6,325 1,608 25.4%
Trucks 6,972 2,083 29.9% 6,791 2,077 30.6%
------ ----- ------ -----
Total United States 12,885 3,582 27.8% 13,116 3,685 28.1%
Canada, Mexico, and Other 2,147 514 23.9% 2,235 570 25.5%
------ ----- ------ -----
Total GMNA 15,032 4,096 27.3% 15,351 4,255 27.7%
GME 14,804 1,387 9.4% 14,841 1,354 9.1%
GMLAAM 2,554 391 15.3% 2,742 433 15.8%
GMAP 11,754 542 4.6% 10,894 509 4.7%
------ ----- ------ -----
Total Worldwide 44,144 6,416 14.5% 43,828 6,551 14.9%
====== ===== ====== =====
Wholesale Sales (2)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------
2003 2002 2003 2002
---- ---- ---- ----
(units in thousands)
GMNA
Cars 519 564 1,706 1,880
Trucks 733 744 2,417 2,347
----- ------ ----- -----
Total GMNA 1,252 1,308 4,123 4,227
----- ----- ----- -----
GME
Cars 351 341 1,175 1,154
Trucks 21 23 71 71
---- ---- ------ ------
Total GME 372 364 1,246 1,225
--- --- ----- -----
GMLAAM
Cars 104 116 296 339
Trucks 30 46 81 137
--- ---- ---- ---
Total GMLAAM 134 162 377 476
--- --- --- ---
GMAP
Cars 75 50 246 144
Trucks 56 69 166 169
--- ---- --- -----
Total GMAP 131 119 412 313
--- --- --- ---
Total Worldwide 1,889 1,953 6,158 6,241
===== ===== ===== =====
See notes on next page.
25
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 vehicles manufactured by GM and certain
investees and distributed through a GM-owned distribution network.
GMA Financial Review
GMA's net income was $34 million for the third quarter of 2003, compared with
net income of $252 million for the prior year quarter. For the nine months ended
September 30, 2003, net income was $720 million, compared with $1.4 billion for
the prior year nine month period. The decrease in third quarter and year-to-date
net income was a result of 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 strong product mix, material cost savings and
improved equity results at GMAP.
In connection with the upcoming completion of the reviews being performed as
part of GM's annual budget and business planning process, it is likely that
global operating charges will result in the fourth quarter of 2003, as GM
completes analyses and takes appropriate actions to improve automotive
profitability in the future.
GMNA's net income was $128 million for the third quarter of 2003, compared
with net income of $417 million for the prior year quarter. For the nine months
ended September 30, 2003, net income was $759 million compared with $2.3 billion
for the prior year nine month period. The decrease in third quarter net income
resulted from lower wholesale sales, the impact of pricing and incremental
pension and OPEB expense in the U.S., which were offset by favorable product mix
and material cost performance. In addition, included in GMNA's income for the
third quarter of 2003 was a charge related to the adoption of FIN 46 in cost of
sales and other expenses of $27 million, after-tax; a benefit of $70 million
after-tax related to decreased pension expense as a result of the $13.5 billion
pension contributions in September and October 2003 (See Liquidity and Capital
Resources, Financing Structure within Management Discussion and Analysis, for
further detail); and a $55 million after-tax decrease in the product recall
campaign accrual as a result of the analysis performed in the third quarter. The
decrease in year-to-date 2003 net income relates to 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 product mix and material cost. In addition, included in 2002
third quarter and year-to-date net income is an after-tax charge of $116 million
related to costs associated with the transfer of commercial truck production
from Janesville, Wisconsin, to Flint, Michigan. Vehicle revenue per unit was
$18,984 for the third quarter of 2003, compared with $18,782 for the prior year
quarter.
The 2003 United Auto Workers (UAW) labor contract was ratified on October 6,
2003 covering a four-year term from 2003-2007. The contract includes a $3,000
lump sum payment per UAW employee paid in October 2003, and a 3% performance
bonus per UAW employee to be paid in October 2004. GM will amortize these
payments over the 12 month period following the respective payment dates. UAW
employees will receive a gross wage increase of 2% in 2005 and 3% in 2006.
Active UAW employees were also granted pension benefit increases. There were no
pension benefit increases granted to current retirees and surviving spouses.
However, the contract does provide for four lump sum payments and two vehicle
discount vouchers for current retirees and surviving spouses. The retiree lump
sum payments and vehicle discount vouchers will result in a charge to GM's 2003
fourth quarter cost of sales of approximately $1.2 billion ($725 million
after-tax).
GME's net loss was $152 million for the third quarter of 2003, compared with
a net loss of $180 million for the prior year quarter. For the nine months ended
September 30, 2003, GME's net loss was $220 million compared with a net loss of
$882 million for the prior nine month period. The decrease in the third quarter
and year-to-date 2003 net 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. In addition, included in the
2002 net loss was a charge of $55 million after-tax related to the enacted
end-of-life vehicle legislation in the second quarter of 2002, and a charge of
$407 million after-tax related to the implementation of Project Olympia, in the
first quarter of 2002.
26
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
GMA Financial Review (concluded)
GMLAAM's net loss was $104 million for the third quarter of 2003, compared
with a net loss of $61 million for the prior year quarter. For the nine months
ended September 30, 2003, the net loss was $219 million compared with a net loss
of $174 million for the prior nine month period. The increase in net loss for
the third quarter and year-to-date 2003 was primarily due to the continued
economic weakness in Brazil and increases in material costs, which were
partially offset by favorable net price.
GMAP's net income was $162 million for the third quarter of 2003, compared
with net income of $76 million for the prior year quarter. For the nine months
ended September 30, 2003, net income was $400 million compared with $122 million
for the prior nine month period. The increase in net income for the third
quarter was primarily due to strong equity earnings from Shanghai GM, and Suzuki
Motor Corporation (Suzuki), partially offset by equity losses at GM Daewoo Auto
& Technology Company (GMDAT). The increase in year-to-date 2003 net income was
primarily due to strong equity earnings from Shanghai GM, Suzuki, and Fuji Heavy
Industries Ltd., partially offset by equity losses at GMDAT.
Hughes Financial Review
Total net sales and revenues increased to $2.6 billion for the third quarter
of 2003 and $7.2 billion for the first nine months of 2003, compared with $2.2
billion and $6.4 billion for the comparable periods in 2002. The increase in net
sales and revenues for the third quarter of 2003 and the first nine months of
2003 resulted primarily from increased revenues at DIRECTV U.S. due to growth in
subscriber base and higher monthly revenue per subscriber, and increased
revenues at Hughes Network Systems (HNS) due to increased sales in the HNS
satellite based business. In the first nine months of 2003, the increase was
partially offset by lower DIRECTV Latin America revenues related to the World
Cup programming services in 2002 as well as smaller subscriber base and further
devaluations to several Latin American currencies in 2003.
Hughes' net loss was $23 million for the third quarter of 2003 compared to a
net loss of $14 million for the same period of 2002. Hughes net loss for the
nine months ended September 30, 2003 totaled $55 million compared to a net loss
of $325 million for the first nine months of 2002. The higher net loss for the
third quarter of 2003 was primarily due to a $159 million pre-tax gain in 2002
resulting from the sale of 8.8 million shares of Thomson Multimedia common stock
and a third quarter 2003 non-cash charge of $65 million related to the adoption
of FASB Interpretation No. 46, "Consolidation of Variable Interest Entities"
(FIN 46). These charges were partially offset by higher 2003 operating profit
primarily due to additional margins from higher revenues at DIRECTV U.S. and HNS
as well as reduced expenses resulting from cost saving initiatives, the
favorable resolution of certain tax refund claims for $48 million in the
quarter, a $32 million write-down of two equity investments and a pre-tax loss
of $25 million related to the sale of SkyPerfecTV! common stock in the third
quarter of 2002, and the absence of net losses in 2003 at DIRECTV Broadband due
to its shutdown on February 28, 2003. The lower pre-tax losses recorded in the
first nine months of 2003 were also due to the $75 million pre-tax loss at DLA
from the 2002 World Cup and an after-tax charge of $51 million for a contractual
dispute associated with a General Electric Capital Corporation contract in 2002.
These improvements were partially offset by the higher income tax benefit
generated in 2002 resulting from larger pre-tax losses and an after-tax gain of
$59 million in 2002 due to the favorable resolution of a lawsuit filed with the
U.S. government on March 22, 1991.
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. Under Chapter 11
of the bankruptcy code, 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 nine months ended September 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.
27
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
GMAC Financial Review
GMAC's net income was $630 million and $476 million for the third quarter
ended September 30, 2003 and 2002, respectively and net income for the nine
month periods ended September 30, 2003 and 2002 was $2.2 billion and $1.3
billion, respectively.
Three Months Ended Nine Months Ended
(Dollars in millions) September 30, September 30,
-----------------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Financing operations $320 $303 $1,018 $904
Mortgage operations 253 153 1,039 359
Insurance operations 57 20 106 83
--- --- ----- -----
Net income $630 $476 $2,163 $1,346
=== === ===== =====
Net Income from financing operations was $320 million for the third quarter
of 2003, compared with net income of $303 million for the prior year quarter.
Net Income for the first nine months of 2003 from financing operations totaled
$1.0 billion, compared with net income of $904 million for the first nine months
in the prior year. For the third quarter 2003 the increase reflects lower credit
loss provisions, which more than offset the unfavorable impact of lower net
interest spreads earned on higher asset levels.
Net Income from mortgage operations was $253 million for the third quarter of
2003, compared with net income of $153 million for the prior year quarter. Net
Income for the first nine months of 2003 from mortgage operations totaled $1.0
billion, compared with net income of $359 million for the first nine months in
the prior year. Mortgage operations' increased earnings reflected higher
origination and securitization volumes in both the residential and commercial
mortgage sectors.
Net Income from insurance operations was $57 million for the third quarter of
2003, compared with net income of $20 million for the prior year quarter. Net
Income for the first nine months of 2003 from insurance operations totaled $106
million, compared with net income of $83 million for the first nine months in
the prior year. The increases in income for the quarter and year-to date were
attributed mainly to net capital losses incurred during 2002, which included the
write-down of certain investment securities.
LIQUIDITY AND CAPITAL RESOURCES
Financing Structure
In the third 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 October 21, 2003 Standard & Poor's affirmed GM and GMAC's
ratings at BBB, with a rating outlook of negative. This rating action is 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. GMAC also continued to have access
to various other forms of capital. GM and GMAC expect that they will continue to
have adequate access to the capital markets sufficient to meet the corporation's
needs for financial flexibility.
In September and in October, 2003 GM made contributions to partially fund
certain of GM's U.S. pension funds of $5.5 billion and $8.0 billion,
respectively, using the net proceeds of the GM senior notes and convertible
debentures. Including $900 million in GM Class H common stock contributed in
March 2003, total contributions to GM's U.S. pension funds equal $14.4 billion
for the year.
28
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Financing Structure (concluded)
Pension plan assets for GM's U.S. Hourly and Salaried pension plans earned
returns of 14% through the end of September. As a result of year-to-date
contributions, assuming asset returns remain at 14% for the full year and a
6.25% discount rate, the U.S. hourly and salary pension plans will be
underfunded by approximately $7.0 billion at year-end. GM intends to contribute
an additional $4 to $6 billion to the U.S. pension plans with the successful
completion of the Hughes transactions, which could further reduce the unfunded
position to approximately $1 to $3 billion.
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. GM also 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, $4.3 billion committed through June 2008, $4.4 billion of bilateral
committed lines with various maturities, and uncommitted lines of credit of
$17.2 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
established to issue asset-backed commercial paper (See Off Balance Sheet
Arrangements).
Automotive, Communications Services, and Other Operations
At September 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 $32.0 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 $19.0
billion at September 30, 2002. The increase from December 31, 2002 was primarily
due to earnings from automotive operations, the sale of the GM Defense business
in the first quarter of 2003, and net debt issuances totaling $15.8 billion in
the first nine 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 $10.0 billion at September 30, 2003, compared with $5.8 billion at
December 31, 2002 and $5.8 billion at September 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 which was in
addition to the $300 million of Class H stock contributed to the VEBA in March
2003.
Long-term debt was $34.1 billion at September 30, 2003, compared with $16.7
billion at December 31, 2002 and $16.8 billion at September 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 134.4% at September 30, 2003,
compared with 267.0% at December 31, 2002 and 88.3% at September 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 133.0% at September 30, 2003, compared with 234.3% at December 31, 2002 and
89.1% at September 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 a negative $3.3 billion at September 30,
2003, compared with $298 million, including $3.0 billion of assets of the VEBA,
at December 31, 2002 and $764 million, including $3.0 billion of assets of the
VEBA, at September 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 September 30, 2003 GM owed approximately $1.1 billion 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 September 30, 2003, GM had elected
not 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-, with a negative
outlook (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, GE may immediately terminate the
program 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.
29
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Financing and Insurance Operations
At September 30, 2003, GMAC's consolidated assets totaled $275.9 billion,
compared with $227.7 billion at December 31, 2002 and $211.0 billion at
September 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 $225.4
billion at September 30, 2003, compared with $183.1 billion at December 31, 2002
and $167.6 billion at September 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.
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%. Fiat participated in the
recapitalization by making a Euro 3 billion contribution, which FAH used 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 Annual Report on Form 10-K for the period ending
December 31, 2002, 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 their 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 has,
however, asserted to Fiat that the sale of certain assets of the financing
business of Fiat Auto and the recapitalization of FAH represent material
breaches of the Master Agreement, with the result that the Master Agreement,
including the Put, is terminable by GM. Notwithstanding these different views,
GM and Fiat share a desire to continue to build on the cooperation the parties
have worked on for the past several years in the joint ventures and other
cooperative contractual arrangements they have entered into which are
independent of the Master Agreement, and to provide an opportunity to pursue a
resolution of these different views. Towards that end, Fiat and GM entered into
a standstill agreement on October 26, 2003, the provisions of which enable GM
to defer until December 15, 2004, the necessity of electing the remedy of
termination of the Master Agreement, and with it the Put, without such deferral
prejudicing the right of GM to elect that remedy after December 15, 2004. On
October 26, 2003, Fiat and GM also entered into an amendment to the Master
Agreement that shifts the Put period by one year, so that it begins on January
24, 2005 and runs to July 24, 2010.
If the Put were implemented, the fair market value of FAH shares would be
determined by the averaging of the three 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 were 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.
30
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
Investment in Fiat Auto Holdings (concluded)
If and when GM were 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 if
GM chooses to fund such needs.
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 entities where the economics and sound
business principles warrant their use. GM's principal use of off-balance sheet
entities 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. In addition, GM leases real estate and equipment from various off-balance
sheet entities that 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. For further discussion of GM's use of off-balance sheet entities,
refer to the Off-Balance Sheet Arrangements section of Management's Discussion
and Analysis in GM's 2002 Annual Report on Form 10-K.
The amount of off-balance sheet entities used by the Automotive,
Communications Services, and Other Operations has decreased since December 31,
2002 due to GM's implementation of FIN 46 as of July 1, 2003. FIN 46 required
the consolidation of certain off-balance sheet entities that were determined to
be VIEs in which GM was the primary beneficiary. (See Note 6).
The amounts outstanding in off-balance sheet facilities used by the Financing
and Insurance Operations has decreased since December 31, 2002 as GMAC continues
to use securitization transactions that, while similar in legal structure to
off-balance sheet securitizations, are accounted for as secured financings and
are recorded as debt on the balance sheet.
Assets in off-balance sheet entities were as follows (dollars in millions):
Automotive, Communications Services, and Sept. 30, Dec. 31, Sept.30,
Other Operations 2003 2002 2002
- ---------------------------------------- ---- ---- ----
Assets leased under operating leases $2,139 $2,904 $2,845
Trade receivables sold 378 439 422
------ ------ ------
Total $2,517 $3,343 $3,267
====== ====== ======
Financing and Insurance Operations
- ----------------------------------
Receivables sold or securitized:
- Mortgage loans $100,749 $112,128 $110,497
- Retail finance receivables 11,404 16,164 15,181
- Wholesale finance receivables 17,284 17,415 13,986
------- ------- -------
Total $129,437 $145,707 $139,664
======= ======= =======
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 $13.76 at September 30, 2003, compared with $9.06 at December
31, 2002 and $25.44 at September 30, 2002. Book value per share of GM Class H
common stock was $2.75 at September 30, 2003, compared with $1.81 at December
31, 2002 and $5.09 at September 30, 2002.
31
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 August 5,
2003, the GM Board declared a quarterly cash dividend of $0.50 per share on GM
$1-2/3 par value common stock, paid September 10, 2003, to holders of record on
August 15, 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. On September 11, 2003, GM received a private-letter ruling
from the U.S. Internal Revenue Service confirming that the distribution of
Hughes Electronics common stock to the holders of GM Class H common stock, in
connection with the split-off of Hughes, would be tax-free to GM and its Class H
stockholders for federal income tax purposes. On October 6, 2003 GM announced
that stockholders had approved the transactions. (See Note 12). No assurances
can be given that the governmental 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
32
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
HUGHES TRANSACTIONS (concluded)
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 September 30, 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 (received on
October 6, 2003); and, (2) the satisfaction of all regulatory related conditions
to the transactions.
EMPLOYMENT AND PAYROLLS
Worldwide employment at September 30, 2003 2002
(in thousands) ---- ----
GMNA 190 197
GME 63 68
GMLAAM 23 23
GMAP 14 11
Hughes 12 12
GMAC 32 31
Other 6 8
--- ---
Total employees 340 350
=== ===
Three Months Ended Nine Months Ended
September 30, September 30
------------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Worldwide payrolls - (in billions) $5.0 $5.1 $15.7 $15.6
=== === ==== ====
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
33
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
CRITICAL ACCOUNTING ESTIMATES (concluded)
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 SEC.
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 third 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.
* * * * * *
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 September 30, 2003, or
subsequent thereto, but before the filing of this report are summarized below:
Other Matters
As previously reported, four purported class actions were brought in
Delaware Chancery Court and two in Los Angeles Superior Court challenging the
proposed split off of Hughes Electronics Corporation (Hughes) and the
acquisition by The News Corporation Ltd. of approximately 34% of Hughes.
Plaintiffs in both Delaware and California have filed consolidated complaints.
The new consolidated complaints are similar to the original complaints, except
that Delaware complaint adds allegations challenging the adequacy of the
disclosures in the Consent Solicitation and only names GM and members of the GM
board of directors as defendants. The Delaware plaintiffs filed a motion for
preliminary injunction and to expedite discovery and hearing on their motion so
that their motion could be decided before the anticipated closing of the
transaction. The Delaware Chancery Court on October 2, 2003, denied plaintiffs'
motion for expedition. GM has filed motions to dismiss the Delaware case, and,
with Hughes, has filed a motion to stay the California case.
* * *
34
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS (concluded)
As previously reported, DIRECTV is involved in 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
August 11, 2003, DIRECTV, NRTC and the Class entered into a settlement agreement
to resolve all claims and disputes between those parties. The settlement
agreement will not become final until the Court approves the terms of the Class
settlement. On September 23, 2003, the Class filed its ex parte application for
preliminary approval of the settlement and approval of the form of class notice.
After a hearing on the application, the Court signed an order giving preliminary
approval to the settlement and setting January 5, 2004 as the date for hearing
replies and objections to the proposed settlement. The terms of the settlement
will not have a material adverse effect upon the financial condition or results
of operations for DIRECTV or Hughes. Pegasus has not agreed to the settlement
and filed a motion to intervene. The Court has tentatively ruled against the
Pegasus motion, and the parties await the Court's final order.
* * *
As previously reported, in April 2001, Robert Garcia, doing business as
Direct Satellite TV, an independent retailer of DIRECTV(R) system equipment,
instituted arbitration proceedings against DIRECTV, Inc. in Los Angeles,
California regarding his commissions and certain charge-back disputes. On
October 4, 2001, Mr. Garcia filed a class action complaint against DIRECTV, Inc.
and Hughes in Los Angeles County Superior Court asserting the same
chargeback/commissions claims and a Consumer Legal Remedies Act claim. On April
17, 2002, the Los Angeles County Superior Court entered an order compelling
plaintiffs in the purported class action of retailers to pursue their individual
claims in arbitration, but the court's order purported to retain jurisdiction to
determine whether the prerequisites for class treatment of dealer claims within
an arbitration are met. DIRECTV, Inc. and Hughes appealed the order, which
appeal was denied. DIRECTV and Hughes then petitioned the California Supreme
Court for review of the order, which was also denied. In June 2003, however, the
United States Supreme Court issued a decision in the case Bazzle v. Green Tree
Financial, finding that whether an agreement to arbitrate permits class action
arbitration is a decision for the arbitrator, not a trial court, to make.
DIRECTV and Hughes filed a writ of certiorari with the United States Supreme
Court requesting that it vacate the state court decisions and remand the Garcia
case for further proceedings consistent with the Bazzle decision. On October 6,
2003, the United States Supreme Court granted DIRECTV's writ of certiorari and
all relief requested by DIRECTV.
* * * *
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
a) In connection with proposed transactions that would result in the split-off
of GM's subsidiary, Hughes Electronics Corp. (Hughes), and the acquisition of 34
percent of Hughes common stock by The News Corporation Limited, on August 21,
2003, GM filed definitive materials with the Securities and Exchange Commission,
including a Definitive Consent Solicitation Statement of GM on Schedule 14A.
The matters relating to the transactions that GM shareholders were asked to
approve constituted five proposals, all of which required shareholder approval
in order for the transactions to be completed. An additional proposal, approval
of which was not required in order to complete the transactions, was also
submitted for shareholder approval.
Each proposal required all of the following shareholder approvals:
- a majority of the shares of GM $1-2/3 par value common stock outstanding
as of August 1, 2003 (the "record date"), voting as a separate class;
- a majority of the shares of GM Class H common stock outstanding as of the
record date, voting as a separate class; and
- a majority of the voting power of the shares of GM $1-2/3 par value common
stock and GM Class H common stock outstanding as of the record date,
voting together as a single class based on their respective per share
voting power pursuant to the provisions set forth in the GM restated
certificate of incorporation.
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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS (continued)
In total, the holders of approximately 65 percent of GM $1-2/3 par value
common stock, approximately 79 percent of GM Class H stock and approximately 69
percent of the combined voting power of both classes voting together as a single
class, based on their respective per share voting power, participated in the
consent solicitation. As reflected below, an overwhelming percentage of both
classes of GM stock that voted on these matters was in support of the
transactions. Of the votes cast in response to the consent solicitation,
approximately 94 percent of the GM $1-2/3 par value common stock and
approximately 95 percent of the GM Class H common stock voted was in support of
each of the proposals. With respect to the combined vote of both classes of
stockholders, more than 94 percent of the votes cast were in support of each of
the proposals.
As of October 3, 2003 the following unrevoked written consents of the holders
of the following shares of GM common stock regarding the proposals had been
received by GM:
Proposal Voting Results
--------------------------------------------------------------
GM $1-2/3 par
value GM Class H Total as a
common stock common stock single class
--------------------------------------------------------------
Votes Percent Votes Percent Votes Percent
(1) (2) (1) (2) (3) (4)
Proposal No. 1
Approval of the first Consent 341,298,702 60.9% 825,183,098 74.5% 506,335,321 64.7%
GM charter amendment in Withold consent 13,007,803 2.3% 35,699,050 3.2% 20,147,613 2.6%
order to provide GM Abstain 8,957,970 1.6% 14,814,310 1.3% 11,920,832 1.5%
the ability to Not voted 197,453,957 35.2% 232,640,252 21.0% 243,982,007 31.2%
implement the Hughes
split-off share
exchange
Proposal No. 2
Ratification of the Consent 343,734,998 61.3% 853,261,237 77.0% 514,387,246 65.8%
new Hughes certificate Withhold consent 10,582,101 1.9% 7,601,785 0.7% 12,102,458 1.5%
of incorporation, Abstain 8,947,376 1.6% 14,833,437 1.3% 11,914,063 1.5%
including the Not voted 197,453,957 35.2% 232,640,252 21.0% 243,982,007 31.2%
excess stock provision
Proposal No. 3
Ratification of the Consent 344,626,533 61.5% 854,492,505 77.1% 515,525,034 65.9%
Hughes split-off, Withhold consent 9,770,615 1.7% 6,429,300 0.6% 11,056,475 1.4%
including the special Abstain 8,867,327 1.6% 14,774,654 1.3% 11,822,258 1.5%
dividend Not voted 197,453,957 35.2% 232,640,252 21.0% 243,982,007 31.2%
Proposal No. 4
Ratification of the Consent 344,360,937 61.4% 836,589,032 75.5% 511,678,743 65.4%
GM/News stock sale Withhold consent 9,840,134 1.8% 24,227,029 2.2% 14,685,539 1.9%
Abstain 9,063,405 1.6% 14,880,398 1.3% 12,039,484 1.5%
Note voted 197,453,957 5.2% 232,640,252 21.0% 243,982,007 31.2%
Proposal No. 5
Ratification of the Consent 344,310,353 61.4% 836,582,955 75.5% 511,626,944 65.4%
News stock acquisition Withhold consent 9,854,247 1.8% 24,232,701 2.2% 14,700,787 1.9%
Abstain 9,099,875 1.6% 14,880,803 1.3% 12,076,036 1.5%
Not voted 197,453,957 35.2% 232,640,252 21.0% 243,982,007 31.2%
Proposal No. 6
Approval of the second Consent 342,855,073 61.2% 836,665,474 75.5% 510,188,168 65.2%
GM charter amendment Withhold consent 11,086,152 2.0% 24,126,054 2.2% 15,911,363 2.0%
to eliminate certain Abstain 9,323,250 1.6% 14,904,931 1.3% 12,304,236 1.6%
provisions Not voted 197,453,957 35.2% 232,640,252 21.0% 243,982,007 31.2%
relating to the GM
class H common stock
after completion of
the transactions
See notes on next page.
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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS (concluded)
1) Numbers represent shares of each class of GM common stock as held as of the
record date.
2) Percentages represent the percentage of the total of each class of GM common
stock as held as of the record date.
3) Numbers represent the aggregate voting power of all shares as held as of the
record date, 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.
4) Percentages represent the aggregate voting power of both classes of GM common
stock as of the record date.
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 39
(31.2) Section 302 Certification of the Chief Financial Officer 40
(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 41
(32.2) Certification of the Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 42
(99) Hughes Electronics Corporation Financial Statements and
Management's Discussion and Analysis of Financial Condition
and Results of Operations 43
(b) Reports on Form 8-K
Nine reports on Form 8-K, were filed July 2, 2003, July 16, 2003, July 17,
2003*, July 23, 2003*, July 24, 2003, August 1, 2003, September 3, 2003,
September 12, 2003 and September 29, 2003* during the quarter ended September
30, 2003 reporting matters under Item 5, Other Events, reporting certain
agreements under Item 7, Financial Statements, Pro Forma Financial Information,
and Exhibits.
- --------------------------
* This asterisk indicates Reports submitted to the Securities and Exchange
Commission which include information "furnished" pursuant to Items 9 and 12 of
Form 8-K, which pursuant to General Instruction B of Form 8-K is not deemed to
be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934.
The information furnished pursuant to Items 9 and 12 in such reports is not
subject to the liabilities of Section 18 of the Securities Exchange Act of 1934,
is not incorporated into this Report on Form 10-Q and GM does not intend to
incorporate these reports by reference into any filing under the Securities
Act or the Exchange Act.
* * * * * *
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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
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: November 13, 2003 By: /s/PETER R. BIBLE.
--- ------------------
(Peter R. Bible,
Chief Accounting Officer)
38