Home Sources How Do I? Site Map What's New Help Search Terms: General Motors FOCUS™ Edit Search Document 1 of 2. Copyright 2004 Disclosure Incorporated, All Rights Reserved. GENERAL MOTORS ACCEPTANCE CORP DISCLO COMPANY NUMBER: G249900000 TICKER SYMBOL: N/A EXCHANGE: OTH 200 RENAISSANCE CENTER P O BOX 200 DETROIT, MI 482652000 313-556-5000 Financial Statements (.xls) INCORPORATION: DE COMPANY-NUMBER: FORTUNE NUMBER: NA FORBES NUMBER: NA CUSIP NUMBER: NA PRI-SIC: 6141 2ND-SIC: 6141, 6162, 6411, 9999 DESCRIPTION: THE GROUP'S PRINCIPAL ACTIVITIES ARE TO PROVIDE AUTOMOTIVE FINANCIAL SERVICES TO AND THROUGH FRANCHISED GENERAL MOTORS DEALERS THROUGHOUT THE WORLD. THE GROUP IS A WHOLLY OWNED SUBSIDIARY OF GENERAL MOTORS CORPORATION. THE GROUP'S OPERATIONS ARE CONDUCTED THROUGH THREE SEGMENTS: FINANCING, MORTGAGE AND INSURANCE. FINANCING SEGMENT OFFERS A WIDE VARIETY OF AUTOMOTIVE FINANCIAL SERVICES TO AND THROUGH GENERAL MOTORS AND OTHER AUTOMOBILE DEALERSHIPS. THE GROUP ALSO PROVIDES COMMERCIAL FINANCING AND FACTORING SERVICES TO BUSINESSES IN OTHER INDUSTRIES. MORTGAGE OPERATIONS INCLUDE ORIGINATION, PURCHASING, SERVICE AND SECURITIZE RESIDENTIAL AND COMMERCIAL MORTGAGE LOANS AND MORTGAGE RELATED PRODUCTS. INSURANCE SEGMENT INSURES AND REINSURES AUTOMOBILE SERVICE CONTRACTS, OFFERS PERSONAL AUTOMOBILE INSURANCE COVERAGES AND SELECTED COMMERCIAL INSURANCE COVERAGES. SHARE INFORMATION: CURRENT OUTSTANDING SHARES (SOURCE: 10-Q 09/30/2003)10 SHARES HELD BY OFFICERS AND DIRECTORSNA SHAREHOLDERSNA OWNERSHIP: NA SUBSIDIARIES: No subsidiaries reported. OFFICERS (NAME/AGE/TITLE/REMUNERATION): (SOURCE: 10K) FELDSTEIN, ERIC A./ NA/ CHAIRMAN OF THE BOARD, PRESIDENT, DIRECTOR / NA MUIR, WILLIAM F./ NA/ EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER, DIRECTOR / NA ZUKAUCKAS, LINDA K./ NA/ CONTROLLER / NA CLOUT, RICHARD J. S./ NA/ EXECUTIVE VICE PRESIDENT, DIRECTOR / NA GIBSON, JOHN E./ NA/ EXECUTIVE VICE PRESIDENT, DIRECTOR / NA DIRECTORS/NOMINEES (NAME/AGE/TITLE/REMUNERATION): (SOURCE PROXY NA ) FELDSTEIN, ERIC A./ NA/ CHAIRMAN OF THE BOARD, PRESIDENT, DIRECTOR (10-K 12-31-2002) / NA REED, W. ALLEN/ NA/ DIRECTOR (10-K 12-31-2002) / NA BORST, WALTER G./ NA/ DIRECTOR (10-K 12-31-2002) / NA DEVINE, JOHN M./ NA/ DIRECTOR (10-K 12-31-2002) / NA COWGER, GARY L./ NA/ DIRECTOR (10-K 12-31-2002) / NA SMITH, JOHN F., JR./ NA/ DIRECTOR (10-K 12-31-2002) / NA WAGONER, G. RICHARD, JR./ NA/ DIRECTOR (10-K 12-31-2002) / NA NUMBER OF EMPLOYEES: 31,936 (SOURCE: 10-K) FISCAL YEAR END: 12/31 LATEST ANNUAL FINANCIAL DATE: 12/31/2002 LATEST QUARTERLY FINANCIAL DATE: 09/30/2003 AUDITOR INFORMATION: AUDITOR CHANGE: NA AUDITOR: DELOITTE & TOUCHE (SOURCE: 10-K) AUDITOR'S REPORT: UNQUALIFIED;EXPLANATION, ADOPTION OF SFAS 142 AND CHANGEIN METHOD OF ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS IN 01-01-2002. The following text was taken directly from an EDGAR filing. Independent Auditors' Report General Motors Acceptance Corporation: We have audited the accompanying Consolidated Balance Sheet of General Motors Acceptance Corporation and subsidiaries as of December 31, 2002 and 2001, and the related Consolidated Statements of Income, Changes in Stockholder's Equity and Cash Flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of General Motors Acceptance Corporation and subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, effective January 1, 2002, General Motors Acceptance Corporation and subsidiaries changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. /s/ DELOITTE & TOUCHE LLP Deloitte & Touche LLP Detroit, Michigan January 16, 2003 LEGAL COUNSEL: NA STOCK TRANSFER AGENT: NA SEGMENT DATA 12/31/2002SALESOP INCOME NON-APPLICABLE ASSETS (in thousands) FISCAL YEAR END12/31/200212/31/200112/31/2000 CASH8,103,00010,100,7001,147,800 MARKETABLE SECURITIESNA10,587,1009,485,000 RECEIVABLES163,523,000106,267,30098,275,900 INVENTORIES14,563,00013,570,5007,653,600 RAW MATERIALSNANANA WORK IN PROGRESSNANANA FINISHED GOODSNANANA NOTES RECEIVABLENANANA OTHER CURRENT ASSETSNANANA TOTAL CURRENT ASSETS186,189,000140,525,600116,562,300 PROPERTY, PLANT & EQUIPMENTNANANA ACCUMULATED DEPRECIATIONNANANA NET PROPERTY & EQUIPMENTNANANA INVEST & ADVANCES TO SUBS14,605,00025,227,60029,311,100 OTHER NON-CURRENT ASSETSNA4,165,1005,434,000 DEFERRED CHARGES2,683,0007,099,6005,143,800 INTANGIBLESNANANA DEPOSITS & OTHER ASSETS24,193,00015,703,00012,021,000 TOTAL ASSETS227,670,000192,720,900168,472,200 LIABILITIES (in thousands) FISCAL YEAR END12/31/200212/31/200112/31/2000 NOTES PAYABLENANANA ACCOUNTS PAYABLE14,837,0001,797,2001,718,700 CURRENT LONG TERM DEBTNANANA CURRENT CAPITAL LEASESNANANA ACCRUED EXPENSES2,719,0002,380,5001,765,900 INCOME TAXESNA805,400805,500 OTHER CURRENT LIABILITIES3,497,0002,577,7002,151,100 TOTAL CURRENT LIABILITIES21,053,0007,560,8006,441,200 MORTGAGESNANANA DEFERRED CHARGES & INCOME3,555,0003,882,7003,574,300 CONVERTIBLE DEBTNANANA LONG TERM DEBT183,091,000152,033,200133,372,200 NON-CURRENT CAPITAL LEASESNANANA OTHER LONG TERM LIABILITIES2,140,00013,110,30011,044,400 TOTAL LIABILITIES209,839,000176,587,000154,432,100 MINORITY INTERESTNANANA PREFERRED STOCKNANANA COMMON STOCK NET5,641,0005,641,5005,127,900 CAPITAL SURPLUSNANANA RETAINED EARNINGS12,285,00010,814,4009,028,500 TREASURY STOCKNANANA OTHER LIABILITIES-95,000-322,000-116,300 SHAREHOLDERS' EQUITY17,831,00016,133,90014,040,100 TOTAL LIABILITIES & NET WORTH227,670,000192,720,900168,472,200 INCOME STATEMENT (in thousands) FISCAL YEAR END12/31/200212/31/200112/31/2000 NET SALES9,899,00025,475,80023,661,100 COST OF GOODS350,0009,310,5009,787,800 GROSS PROFIT9,549,00016,165,30013,873,300 R & D EXPENDTURESNANANA SELLING, GENERAL & ADMIN6,608,0007,296,1005,490,000 INCOME BEFORE DEPREC & AMORT2,941,0008,869,2008,383,300 DEPRECIATION & AMORTIZATIONNA6,070,5005,826,900 NON-OPERATING INCOMENANANA INTEREST EXPENSENANANA INCOME BEFORE TAX2,941,0002,798,7002,556,400 PROVISION FOR INCOME TAXES1,071,0001,047,100954,300 MINORITY INTERESTNANANA INVESTMENT GAINS (LOSSES)NANANA OTHER INCOMENANANA NET INCOME BEFORE EX-ITEMS1,870,0001,751,6001,602,100 EX-ITEM & DISCONTINUED OPNSNA34,300NA NET INCOME1,870,0001,785,9001,602,100 OUTSTANDING SHARES01,0001,000 CASH FLOW STATEMENT (in thousands) CASH FROM OPERATIONS12/31/200212/31/200112/31/2000 NET INCOME (LOSS)1,870,0001,785,9001,602,100 DEPRECIATION & AMORTIZATION9,008,0006,309,4006,011,100 NET INC(DEC) IN ASSETS & LIABS-239,000-103,256,3001,908,800 CASH FROM (USED IN) DISC OPSNA-34,300NA OTHER ADJUSTMENTS, NET-2,346,00099,906,300567,500 NET CASH FROM (USED IN) OPS8,293,0004,711,00010,089,500 CASH FROM INVESTMENTS12/31/200212/31/200112/31/2000 (INC) DEC PROP & PLANTNANANA ACQ (DISP) OF SUBS OR OTH BUS-182,000-541,500-3,160,800 INC (DEC) IN INVESTMENTS-32,019,000-14,395,000-19,336,100 OTHER CASH INFLOW (OUTFLOW)-1,539,000NA-2,021,100 NET CASH FROM (USED IN) INVESTING-33,740,000-14,936,500-24,518,000 CASH FROM FINANCING12/31/200212/31/200112/31/2000 ISSUANCES OF EQUITY SHARESNA500,000NA ISSUANCES (REPAYMENT) OF DEBT46,848,00058,497,70022,414,400 INC (DEC) IN BANK, OTH BORROWINGS-23,009,000-39,797,500-8,607,800 DIVIDENDS, OTHER DISTRIBUTIONS-400,000NA-1,377,400 OTHER CASH INFLOW (OUTFLOW)NANA2,448,800 NET CASH FROM FINANCING23,439,00019,200,20014,878,000 EFFECT OF EXCHG RATES ON CASH10,000-21,800-6,000 NET CHANGE CASH & EQUIVALENTS-1,998,0008,952,900443,500 CASH & EQUIVS AT START OF YEAR10,101,0001,147,800704,300 CASH & EQUIVS AT YEAR END8,103,00010,100,7001,147,800 RATIO ANALYSIS FISCAL YEAR END12/31/200212/31/200112/31/2000 QUICK RATIO8.1516.7916.91 CURRENT RATIO8.8418.5918.10 SALES/CASH1.221.232.23 SALES, GENERAL & ADMIN/SALES0.670.290.23 RECEIVABLES TURNOVER0.060.240.24 RECEIVABLES DAY SALES5946.891501.671495.25 INVENTORIES TURNOVER0.681.883.09 INVENTORIES DAY SALES529.62191.77116.45 NET SALES/WORKING CAPITAL0.060.190.21 NET SALES/PLANT & EQUIPMENTNANANA NET SALES/CURRENT ASSETS0.050.180.20 NET SALES/TOTAL ASSETS0.040.130.14 NET SALES/EMPLOYEES309,964866,819828,209 TOTAL LIAB/TOTAL ASSETS0.920.920.92 TOTAL LIAB/INVESTED CAPITAL1.041.051.05 TOTAL LIAB/COMMON EQUITY11.7710.9511.00 TIMES INTEREST EARNEDNANANA CURRENT DEBT/EQUITYNANANA LONG TERM DEBT/EQUITY10.279.429.50 TOTAL DEBT/EQUITY10.279.429.50 TOTAL ASSETS/EQUITY12.7711.9512.00 PRE-TAX INCOME/NET SALES0.300.110.11 PRE-TAX INCOME/TOTAL ASSETS0.010.010.02 PRE-TAX INCOME/INVESTED CAP0.010.020.02 PRE-TAX INCOME/COMM EQUITY0.160.170.18 NET INCOME/NET SALES0.190.070.07 NET INCOME/TOTAL ASSETS0.010.010.01 NET INCOME/INVESTED CAP0.010.010.01 NET INCOME/COMMON EQUITY0.100.110.11 R & D/NET SALESNANANA R & D/NET INCOMENANANA R & D/EMPLOYEESNANANA QUARTERLY ASSETS (in thousands) QUARTERLY REPORT FOR09/30/200306/30/200303/31/2003 CASH21,221,00012,352,0009,958,000 MARKETABLE SECURITIES13,327,000NANA RECEIVABLES188,926,000155,781,000171,142,000 INVENTORIES18,402,00015,927,00011,126,000 RAW MATERIALSNANANA WORK IN PROGRESSNANANA FINISHED GOODSNANANA NOTES RECEIVABLENANANA OTHER CURRENT ASSETSNANANA TOTAL CURRENT ASSETS241,876,000184,060,000192,226,000 PROPERTY, PLANT & EQUIPMENTNANANA ACCUMULATED DEPRECIATIONNANANA NET PROPERTY & EQUIPMENTNANANA INVEST & ADVANCES TO SUBSNA41,018,00013,537,000 OTHER NON-CURRENT ASSETS2,849,0002,656,0002,582,000 DEFERRED CHARGES3,258,0002,404,0002,680,000 INTANGIBLESNANANA DEPOSITS & OTHER ASSETS27,869,00028,430,00024,503,000 TOTAL ASSETS275,852,000258,568,000235,528,000 QUARTERLY LIABILITIES (in thousands) QUARTERLY REPORT FOR09/30/200306/30/200303/31/2003 NOTES PAYABLENANANA ACCOUNTS PAYABLE2,239,0002,191,0002,168,000 CURRENT LONG TERM DEBTNANANA CURRENT CAPITAL LEASESNANANA ACCRUED EXPENSES20,787,00019,122,00016,476,000 INCOME TAXESNANANA OTHER CURRENT LIABILITIES4,115,0003,941,0003,720,000 TOTAL CURRENT LIABILITIES27,141,00025,254,00022,364,000 MORTGAGESNANANA DEFERRED CHARGES & INCOME3,089,0003,353,0003,542,000 CONVERTIBLE DEBTNANANA LONG TERM DEBT225,408,000210,241,000191,030,000 NON-CURRENT CAPITAL LEASESNANANA OTHER LONG TERM LIABILITIESNANANA TOTAL LIABILITIES255,638,000238,848,000216,936,000 MINORITY INTERESTNANANA PREFERRED STOCKNANANA COMMON STOCK NET5,641,0005,641,0005,641,000 CAPITAL SURPLUSNANANA RETAINED EARNINGS14,448,00013,818,00012,984,000 TREASURY STOCKNANANA OTHER LIABILITIES125,000261,000-33,000 SHAREHOLDERS' EQUITY20,214,00019,720,00018,592,000 TOTAL LIABILITIES & NET WORTH275,852,000258,568,000235,528,000 QUARTERLY INCOME STATEMENT (in thousands) QUARTERLY REPORT FOR09/30/200306/30/200303/31/2003 NET SALES5,797,0005,871,0003,444,000 COST OF GOODS3,232,0002,422,0001,213,000 GROSS PROFIT2,565,0003,449,0002,231,000 R & D EXPENDTURESNANANA SELLING, GENERAL & ADMIN1,561,0002,119,0001,094,000 INCOME BEFORE DEPREC & AMORT1,004,0001,330,0001,137,000 DEPRECIATION & AMORTIZATIONNANANA NON-OPERATING INCOMENANANA INTEREST EXPENSENANANA INCOME BEFORE TAX1,004,0001,330,0001,137,000 PROVISION FOR INCOME TAXES374,000496,000438,000 MINORITY INTERESTNANANA INVESTMENT GAINS (LOSSES)NANANA OTHER INCOMENANANA NET INCOME BEFORE EX-ITEMS630,000834,000699,000 EX-ITEM & DISCONTINUED OPNSNANANA NET INCOME630,000834,000699,000 OUTSTANDING SHARES000 COMMENTS: NA FINANCIAL FOOTNOTES: Data provided only for NYSE and AMEX EDGAR companies. PRESIDENT'S LETTER: (FROM ANNUAL REPORT TO SHAREHOLDERS) The following text was taken directly from an EDGAR filing. REPORT FROM MANAGEMENT The Year in Review GMAC Financial Services posted record net income of nearly $ 1.9 billion in 2002, representing its eighth consecutive year of increased year-over-year earnings. This 2002 performance reflects continued earnings growth in GMAC's core financing operations and in its diversified businesses. FINANCING OPERATIONS North American financing operations, whose primary mission is to provide wholesale and retail financing for GM dealers and their customers, generated 2002 earnings of more than $ 1 billion for the second straight year. GMAC's share of GM dealer inventory financing (wholesale penetration) in the United States and Canada climbed to 78 percent - its highest level since 1993. GMAC's North American retail penetration remained strong at 49 percent, as GM/GMAC continued to promote vehicle sales in 2002 with various incentive financing programs. SmartAuction, GMAC's online remarketing channel for GM dealers, doubled its volume in 2002, to more than 315,000 units. GMAC also launched an initiative to allow select GM dealers to sell their own inventory on the SmartAuction site. In addition, GMAC saw its 2002 U.S. dealer satisfaction rating increase to the highest level it ever achieved. ERIC A. FELDSTEIN Chairman and President RICHARD J.S. CLOUT Executive Vice President International Operations Patrizia Venditti Rome, Italy Cleo Aldridge Bedford, TX Pram Singh Brisbane, Australia Thomas Kleis Ruesselsheim, Germany Cathy Clark Salt Lake City, UT Ramiro Garza Monterrey, Mexico Timothy Fraser Duluth, GA Shaundra Knight Troy, MI Troy Thompson Newcastle, Australia Erica Stoddard Troy, MI Carla Abracos Lisbon, Portugal Joe Garrity Horsham, PA MANAGEMENT DISCUSSION: The following text was taken directly from an EDGAR filing. Management's Discussion and Analysis Overview GMAC is a leading global financial services firm with over $ 200 billion of assets and operations in 41 countries. Founded in 1919 as a wholly-owned subsidiary of General Motors Corporation, GMAC was established to provide GM dealers with the automotive financing necessary for the dealers to acquire and maintain vehicle inventories and to provide retail customers means by which to finance vehicle purchases through GM dealers. GMAC products and services have expanded beyond automotive financing and GMAC currently operates in three primary business segments - Financing, Mortgage and Insurance operations. Net income for these segments is summarized as follows: (TABLE OMITTED) Financial Statements. GMAC earned net income of $ 1,870 million in 2002, a 7% increase from the $ 1,752 million earned in 2001, exclusive of the cumulative effect of accounting change due to the January 1, 2001 adoption of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. All annual comparisons within this MD&A exclude the cumulative effect of this accounting change. Despite operating in challenging economic and capital market environments, 2002 earnings are an annual record for GMAC; with 2002 net income representing the eighth consecutive year of increase. Net income from Financing operations totaled $ 1,239 million in 2002, an increase of $ 28 million from the $ 1,211 million earned in 2001. Increased earnings from higher asset levels more than offset higher credit loss provisions and wider borrowing spreads (in relation to United States Treasury securities) that have occurred primarily as a result of rating agency downgrades occurring in October 2001 and October 2002. GMAC's Mortgage operations earned a record $ 544 million in 2002, a 64% increase from the $ 332 million earned in 2001. The higher earnings reflect increased production volumes and higher servicing levels across each of GMAC's three Mortgage companies. The results also reflect improved hedging results, which partially offset a decrease in the value of mortgage servicing rights. Insurance operations generated net income of $ 87 million in 2002, a decrease of 58% from the $ 209 million earned in 2001. The overall reduction reflects a write-down of certain investment securities primarily due to the prolonged decline in equity markets, partially offset by improved underwriting results and a favorable income impact related to settlement with the IRS of closed tax years. As summarized in the Supplementary Financial Data appearing on page 70, GMAC's fourth quarter 2002 consolidated results totaled $ 524 million, representing a 20% increase from the $ 435 million earned in the fourth quarter of 2001 and a quarterly record. For the quarter, net income from Financing operations totaled $ 334 million, up from $ 251 million earned in the fourth quarter of 2001. Mortgage operations earned a quarterly record of $ 185 million in the fourth quarter, up from the $ 108 million earned in the fourth quarter of 2001. Insurance operations earned net income of $ 5 million in the fourth quarter of 2002, down from the $ 76 million earned in the same period of 2001. 9 Business Segments GMAC offers financing, mortgage and insurance products and services to customers throughout the world. CHART OMITTED Financing Operations GMAC's Financing operations offer a wide range of financial services and products (directly and indirectly) to retail automotive consumers, automotive dealerships, and other commercial businesses. These products and services include the purchase of installment sales contracts and leases, extension of term loans, floorplan financing and other lines of credit, and factoring of receivables. Consumer Automotive Financing GMAC provides vehicle financing to consumers through automotive dealerships around the world under the GMAC, GMAC Bank (formerly Opel Bank), Vauxhall Finance, Holden Financial Services, Saab Financial Services, On: Line Finance and Nuvell Credit brand names. The Company primarily deals with franchised General Motors dealers. In most cases, GMAC purchases retail installment sale contracts (retail contracts) and lease contracts (leases) for new and used vehicles from GM-affiliated dealers. In some markets outside the United States, GMAC is a direct lender to the consumer. For purposes of discussion in this Financing Operations section of this MD&A, the loans related to GMAC's direct automotive lending activities are referred to as retail contracts. The following discussion centers on the Company's operations in the United States, which are generally reflective of GMAC's global business practices; however, certain countries have unique statutory or regulatory requirements that impact business practices. The effects of such requirements are not significant to the Company's consolidated financial condition, results of operations or cash flows. 10 The following table summarizes GMAC's new vehicle consumer financing volume and the Company's share of GM retail sales. Share of GM (TABLE OMITTED) General Motors may elect to sponsor incentive programs (on both retail contracts and leases) by supporting financing rates below standard rates at which GMAC purchases retail contracts. Such purchase incentives are also referred to as rate support or subvention. General Motors pays the present value difference between the customer rate and GMAC's standard rates either directly or indirectly to GM dealers. GMAC purchases these contracts at a discount and recognizes the discount into income over the life of the contract. GM may also provide incentives on leases by supporting residual values (established at lease inception) in excess of GMAC's standard residual values and reimbursing the Company to the extent proceeds at termination are less than contract residual. Such lease incentives are also referred to as residual support, as further discussed in the Residual Risk Management portion of the Financing Operations section of this MD&A. The following table summarizes the percentage of the Company's annual retail contract and lease volume that included GM sponsored incentives. (TABLE OMITTED) GM's decisions to use rate and residual incentives for marketing purposes on consumer retail contracts and leases can have a significant effect on the business of the Company. For example, in the mid-1990s, GM's marketing efforts consisted primarily of rate and residual incentives on consumer leases. As a result, the Company's lease portfolio increased from $ 11 billion in 1993 to $ 30 billion at the end of 1999. More recently, GM has used rate subvention on retail contracts to market vehicles in the United States, which has increased the Company's consumer automotive retail contract portfolio by 64% over the past two years. Consumer Credit Approval Based on information provided by the dealer, the Company performs a credit review prior to purchasing a retail contract or lease from the dealer. As part of this process GMAC evaluates, among other things, the following factors: o The consumer's credit history, including any prior experience with GMAC o The asset value of the vehicle and the amount of equity (downpayment) in the vehicle o The term of the retail contract or lease GMAC uses a proprietary credit scoring system to support this credit approval process and to manage the credit quality of the portfolio. Credit scoring is used to differentiate credit applicants in terms of expected default rates. This enables the Company to properly evaluate credit applications for approval and to tailor the pricing and financing structure based on this assessment of credit risk. The credit scoring model is periodically reviewed and updated based on historical information and current trends. However, these actions by management do not eliminate credit risk. Improper evaluations of contracts for purchase could negatively affect the credit quality of the Company's receivables portfolio, resulting in credit losses. Prior to contract purchase, the Company verifies that: o Physical damage insurance is placed on the vehicle o A security interest is established in the vehicle (for retail contracts) o All required license fees, registration fees and initial taxes are paid Servicing The Company's servicing activities consist of collecting and processing customer payments, responding to customer inquiries, initiating contact with customers who are delinquent in a payment, maintaining a perfected security interest in the financed vehicle, and monitoring physical damage insurance coverage of the vehicle. In the event that the customer fails to comply with the terms of the retail contract or lease, GMAC, after satisfying local legal requirements, is generally able to repossess the vehicle. 11 Consumer Credit Risk Credit losses in the Company's consumer automotive retail contract and lease portfolio are influenced by general business and economic conditions, such as unemployment, bankruptcy filings and used vehicle prices. The two components of the Company's credit losses are frequency (i.e., the number of contracts that default) and severity (i.e., the magnitude of loss per occurrence of default). GMAC manages credit risk through its contract purchase policy and credit review process, including the proprietary credit scoring system. The following table summarizes pertinent delinquency and loss experience in the consumer automotive retail contract portfolio. Consistent with the presentation in the Consolidated Balance Sheet, retail contracts presented in the table represent the principal balance of the finance receivable discounted for the unearned rate support received from General Motors. GM's increased use of rate support in 2001 and 2002 has increased the effect that this discount has on losses when expressed as a percent of the net finance receivable balance. (TABLE OMITTED) (a) Managed includes both retail contracts held on-balance sheet for investment and retail contracts securitized and sold that the Company continues to service. The Company's allowance for credit losses is intended to cover management's estimate of probable incurred losses in the portfolio (refer to the Critical Accounting Estimates section of this MD&A and Note 1 to the Consolidated Financial Statements for further discussion). The following table summarizes the applicable allowance for credit losses as a percentage of total on-balance sheet consumer automotive retail contracts. (TABLE OMITTED) The Company's consumer automotive leases are operating leases and exhibit different loss performance as compared to consumer automotive retail contracts. Credit losses on the operating lease portfolio are not as significant as losses on retail contracts because lease losses are limited to past due payments, late charges, and fees for excess mileage and excessive wear and tear. Since some of these fees are not assessed until the vehicle is returned, credit losses on the lease portfolio are correlated with lease termination volume. As further described in the Critical Accounting Estimates section of this MD&A, credit risk is accounted for within the overall depreciation and valuation of the operating lease asset. North American operating lease accounts past due over 30 days were 1.95% and 2.01% of the total portfolio at December 31, 2002 and 2001, respectively. GMAC's losses on consumer automotive retail contracts and leases have increased over the past few years despite relatively stable delinquencies and loss frequencies during the same period. The increased losses arise from an increase in loss severity attributable to weaknesses in used vehicle prices (which is further described in the following Lease Residual Risk section). Weaker used vehicle prices increase the loss per occurrence as the Company realizes less upon repossession and disposal of the underlying vehicle. This increase in severity is illustrated by an increase in the average loss incurred per contract in the United States, from $ 5,820 in 2000 to $ 7,703 in 2002, as calculated on only those new vehicle retail contracts with a loss. Despite a more adverse economic environment, the overall credit quality of the consumer automotive portfolios has remained strong, primarily due to the higher quality of contracts purchased over the past few years because of management's decision to tighten the contract purchase policy in the late 1990s. In addition, the increased volume of GM rate supported contracts has further enhanced the portfolio credit quality. Typically, rate subvented contracts have stronger credit characteristics than non-incentivized contracts, as the former involve buyers who are more likely to have paid cash for the vehicles in the absence of the attractive financing rates. Lease Residual Risk With consumer leasing, GMAC purchases leases (and the associated vehicles) from dealerships. The purchase prices of the consumer leases are based on the negotiated price for the vehicle, 12 less vehicle trade-in or downpayment from the customer. Under the lease, the consumer is obligated to make payments in amounts equal to the purchase price, plus lease charges, less the projected residual value of the vehicle at lease maturity. The customer is also responsible for charges for past due payments, excess mileage, and excessive wear and tear. In a consumer lease, the Company assumes ownership of the vehicle from the dealers. Neither the consumer nor the dealer is responsible for the value of the vehicle at the time of lease maturity. Typically, the vehicle is returned to GMAC for remarketing. The following summarizes GMAC's methods of vehicle sale in the United States at lease termination, stated as a percentage of total lease vehicle disposals. (TABLE OMITTED) The Company primarily utilizes physical auctions and Internet auctions in disposing of vehicles. o Physical auctions - GMAC disposes of the majority of its off-lease vehicles, not purchased at termination, through official General Motors sponsored auctions. The Company is responsible for handling decisions at the auction, including arranging for inspections, authorizing repairs and refurbishment and determining whether bids received at auction should be accepted. o Internet auctions - In 2000, the Company began offering off-lease vehicles to GM dealers and affiliates through a proprietary Internet site. The Internet sales program was established to increase the net sales proceeds on off-lease vehicles by reducing the time between vehicle return and ultimate disposition (reducing holding costs) and broadening the number of prospective buyers (maximizing proceeds). GMAC maintains the Internet auction site, sets the pricing floors on vehicles, and administers the auction process. The Company earns a service fee for every sale. The Internet sales program has increased significantly since inception and was the remarketing channel for approximately 40% of 2002 off-lease vehicles disposed through auction in the United States. GMAC bears the risk of loss to the extent that the value of the vehicle upon remarketing is below the residual value estimated at contract inception. GMAC primarily uses published residual guidebook values (primarily Automotive Lease Guide or ALG, in the United States) in establishing residual values at contract inception. These projected values may be upwardly adjusted as a marketing incentive if General Motors considers an above-market residual appropriate to encourage consumers to lease vehicles. Such residual support by GM results in a lower monthly lease payment by the consumer. General Motors reimburses GMAC for its portion of these increased residual values to the extent remarketing sales proceeds are less than contract residual at termination. Residual Risk Management The Company is exposed to residual risk on vehicles in the consumer lease portfolio. This lease residual risk represents the possibility that the actual proceeds realized upon the sale of returned vehicles at lease termination will be lower than the projection of these values used in establishing the pricing at lease inception. The following factors most significantly influence lease residual risk: o Used vehicle market-The Company is at risk due to changes in used vehicle prices. General economic conditions, off-lease vehicle supply, and new vehicle market prices (of both GM and other manufacturers) most heavily influence used vehicle prices. o Initial residual value projections - As previously discussed, the Company establishes residual values at lease inception by consulting independently published guides. These values are projections of expected values in the future (typically between two to four years) based on current assumptions for the respective make and model. Actual realized values will likely differ. o GMAC's remarketing abilities - GMAC's ability to efficiently process and effectively market off-lease vehicles impacts the disposal costs and the proceeds realized from vehicle sales. o General Motors vehicle and marketing programs - GM influences lease residual results in the following ways: o GM reimburses GMAC for certain residual deficiencies on residual supported vehicles. o The brand image and consumer preference of GM products impact residual risk, as the Company's lease portfolio consists primarily of GM vehicles. o GM marketing programs that may influence the used vehicle market for GM vehicles, through programs such as incentives on new vehicles, programs designed to encourage lessees to terminate their leases early (in conjunction with the acquisition of a new GM vehicle), and special rate used vehicle programs. The following table summarizes the volume of lease terminations and resulting income impact in the United States (which represents approximately 70% of the Company's operating lease portfolio) for the years indicated. (TABLE OMITTED) GMAC's off-lease vehicle results have deteriorated as a result of lower than expected vehicle values at lease termination. As previously discussed, this is largely attributable to weak used vehicle prices due to deteriorating economic conditions, excess supply of off-lease vehicles, and intense price pressure in the new vehicle market. These factors have adversely affected GMAC's off-lease vehicle disposal results. These deteriorating results have been mitigated by GMAC's aggressive use of the Internet in remarketing off-lease vehicles. This initiative has improved efficiency, reduced costs, and ultimately increased the net proceeds on the sale of off-lease vehicles. Commercial Financing Automotive Wholesale Dealer Financing One of the most important aspects of GMAC's Financing operations is supporting the sale of GM vehicles through 'wholesale" or "floor plan" financing, primarily to finance purchases by dealers of new and used vehicles manufactured or distributed by General Motors and, less often, other vehicle manufacturers, prior to sale or lease to the ultimate customer. Wholesale represents the largest portion of the commercial financing business. Wholesale credit is arranged through lines of credit extended to individual dealers. In general, each wholesale credit line is secured by all vehicles owned by the dealer and, in some instances, by other assets owned by the dealer or the dealer's personal guarantee. The following table summarizes GMAC's wholesale financing of new vehicles and the Company's share of GM sales to dealers. (TABLE OMITTED) Credit Approval Prior to establishing a wholesale line of credit, GMAC performs a thorough credit analysis of the dealer. During this analysis, the Company: (TABLE OMITTED) Based on this analysis, the Company may approve the issuance of a credit line and determine the appropriate size. The credit lines represent guidelines, not limits, which dealers may exceed on occasion, an example being a dealer exceeding sales targets contemplated in the credit approval process. Generally, the size of the credit line is intended to be an amount sufficient to finance a 60-90 day supply of new vehicles and a 30-60 day supply of used vehicles. Servicing and Monitoring GMAC may demand payment of interest and principal on wholesale credit lines at any time. However, unless GMAC terminates the credit line or the dealer defaults, GMAC generally requires payment of the principal amount financed for a vehicle upon its sale or lease by the dealer to the customer. Ordinarily, a dealer has one to five days to satisfy the obligation based on risk and exposure of the account. Interest on floorplan financing is generally payable monthly. Most wholesale financing is structured to yield interest at a floating rate representing a reasonable spread relative to a benchmark interest rate. The spread for a particular dealer is based on, among other things, competitive factors, the amount and status of the dealer's creditworthiness and various incentive programs. A statement setting forth billing and account information is prepared by GMAC and distributed on a monthly basis to each dealer. Interest and other non-principal charges are billed in arrears and are required to be paid immediately upon receipt of the monthly billing statement. Dealers remit payments directly to a GMAC office, typically within geographic proximity to the dealer. Dealers are assigned a credit category based on various factors, including capital sufficiency, financial outlook, and credit history. The credit category impacts the amount of the line of credit, the determination of further advances, and the management of the account. GMAC monitors the level of borrowing under each dealer's account daily. When a dealer's balance exceeds the credit 14 line, GMAC may temporarily suspend the granting of additional credit, increase the dealer's credit line or modify the dealer's credit category, following evaluation and analysis of the dealer's financial condition and the cause of the excess. GMAC personnel periodically inspect and verify the existence of dealer vehicle inventories. The timing of the verifications varies and no advance notice is given to the dealer. Among other things, verifications are intended to determine dealer compliance with the financing agreement and confirm the status of GMAC's collateral. Other Commercial Financing GMAC provides other forms of financing for the automotive industry as well as for commercial companies in other industries. The following describes other financing markets and products of the Company: o Automotive dealer term loans - The Company makes loans to dealers to finance other aspects of the dealership business. These loans are typically secured by real estate, other dealership assets and occasionally the personal guarantees of the individual owner of the dealership. o Automotive fleet financing - Dealers, their affiliates and other companies may obtain financing to buy vehicles, which they lease or rent to others. These transactions represent GMAC's fleet financing activities. GMAC generally has a security interest in these vehicles and in the rental payments. However, competitive factors may occasionally limit the security interest in this collateral. As of January 1, 2002, General Motors terminated programs in which GM provided a limited payment guarantee to GMAC and other lenders as consideration for providing fleet financing. Volume acquired prior to 2002 continues to be covered under the payment guarantee. At December 31, 2002, approximately 61 percent of GMAC's fleet financing receivables were covered by the General Motors payment guarantee program. o Full service leasing - GMAC offers full service individual and fleet leasing products in Europe, Mexico and Australia. In addition to financing the vehicles, the Company offers maintenance, fleet, and accident management services, as well as fuel programs, short-term vehicle rental, title and licensing services. o Specialty lending - Through its Commercial Finance Group, the Company provides asset-based lending, equipment finance, structured finance and factoring services in the United States, United Kingdom and Canada to companies in the apparel, textile, automotive supplier and other industries. Commercial Credit Risk GMAC's credit risk on the commercial portfolio is markedly different than that of its consumer portfolio. Whereas the consumer portfolio represents a homogeneous pool of retail contracts and leases that exhibit fairly predictable and stable loss patterns, the commercial portfolio exposures are less predictable. In general, the credit risk of the commercial portfolio is tied to overall economic conditions in the countries in which the Company operates. Further, GMAC's credit exposure is concentrated in automotive dealerships (primarily GM dealerships), as approximately 70% of the commercial loan portfolio is related to this industry. Credit risk is managed and guided by policies and procedures that are designed to ensure that risks are accurately assessed, properly approved and continuously monitored. Individual business units approve significant transactions and are responsible for credit risk assessments (including the evaluation of the adequacy of the collateral). Individual business units also monitor the credit risk profile of individual borrowers and the aggregate portfolio of borrowers - either within a designated geographic region or a particular product or industry segment. Corporate approval is required for transactions exceeding business unit approval limits. Credit risk monitoring is supplemented at the corporate portfolio level through a periodic review performed by the Company's Chief Credit Officer. The table below summarizes pertinent credit quality information for the commercial portfolio. (TABLE OMITTED) The Company's allowance for credit losses is intended to cover management's estimate of probable incurred losses in the portfolio (refer to the Critical Accounting Estimates section of this MD&A and Note 1 to the Consolidated Financial Statements for further discussion). The following table summarizes the applicable allowance for credit losses as a percentage of on-balance sheet commercial loans. (TABLE OMITTED) Consistent with the overall deterioration in the United States economy, credit losses in the commercial portfolio and impaired loans have increased since 2000. The majority of the losses were concentrated in the Company's Commercial Finance Group, which was established and has grown through acquisitions. Despite the continued "soft" economic environment in the United States, the Company does not expect that commercial portfolio losses will continue at the levels experienced in 2002 and 2001. However, future charge-offs and credit quality in the commercial portfolio are subject to uncertainties that may cause actual results to differ from management's expectations. Securitization Activities The Company generally does not acquire retail contracts or originate commercial automotive finance loans with the original intent to sell or securitize such assets. Such intentions by management may subsequently change, as a part of the Company's overall funding strategy, as further discussed in the Funding and Liquidity and the Off-balance Sheet Activities sections of this MD&A. Results of Operations The following table summarizes the operating results of the Company's Financing operations for the periods indicated. The amounts presented are before the elimination of balances and transactions with the Company's other operating segments. (TABLE OMITTED) Despite challenging economic and capital market environments, GMAC's Financing operations experienced income growth in 2002. The continued use of GM sponsored special rate financing programs in the United States fueled asset growth in the consumer retail contract portfolio. The favorable income generated from this asset growth was partially offset by increased credit loss provisions in both the consumer retail contract and commercial loan portfolios. In addition, results were negatively impacted by wider borrowing spreads primarily caused by rating agency downgrades in October 2001 and October 2002, along with overall market pressure on corporate credit spreads. Total financing revenue decreased 1% as compared to 2001. Consumer revenue increased 17% due to an increase in the consumer retail contract portfolio as a result of GM sponsored retail incentive programs. Revenue from the commercial portfolio (which is primarily floating rate) decreased consistent with the general decrease in market interest rates during the period. Net operating lease revenue declined as the Company's operating lease portfolio decreased. The continued decline in the operating lease portfolio coincides with GM's marketing emphasis on rate incentives on retail contracts, as opposed to leasing incentives. The decrease in interest and discount expense was consistent with the general market decrease in interest rates. However, the favorable impact from this decrease in interest rates was offset by an overall increase in debt used to fund asset growth. Additionally, interest expense was negatively impacted by the widening of the Company's corporate credit spreads during 2002. As further discussed in the Funding and Liquidity section of this MD&A, the wider spreads resulted from a combination of rating agency downgrades and a weak corporate bond market. 16 In 2002, the provision for credit losses increased by 33%, reflecting growth in the consumer retail contract portfolio and a difficult economic environment. As previously discussed in the Consumer Credit Risk section, the consumer portfolio was adversely affected by an increase in loss severity due to the weak used vehicle market in the United States. The increase in the loss provision on the commercial portfolio related to the non-automotive dealer portion of the portfolio, as discussed in the Commercial Credit Risk section. Other income decreased 10% during the year. A portion of the decrease relates to a reduction in interest income on loans to GMAC subsidiaries, and to GM and affiliates, primarily caused by a reduction in interest rates. Additionally, decreases were caused by unfavorable market adjustments on the Company's derivative financial instruments that do not qualify for hedge accounting (i.e., primarily interest rate swaps used to facilitate securitization transactions). These negative impacts were offset by higher full service leasing revenues, as the Company's International Financing operations continued to expand this line of business, and higher income related to increased securitization activity and outstandings. In addition, during 2002 the Company adjusted tax-related accruals, resulting in a favorable income impact as open tax years were closed and settled with the IRS. Total noninterest expense increased by 7% year over year. Increased pension and postretirement allocations from GM resulted in an increase in compensation expense. Vehicle maintenance costs in the growing international full service leasing business also contributed to the increase in noninterest expense. Factors Affecting Future Results The profitability of the Company's Financing operations is impacted by general economic conditions in the countries where the Company conducts business (largely the United States). A downturn in economic conditions could result in a reduction of loan volume, and increases in portfolio credit losses, which would negatively affect profits. In addition, factors such as the liquidity of the global financial markets, interest rates, and the availability and cost of credit could impact the Company's ability to effectively fund new business. There are no material seasonal factors that affect the quarterly results of GMAC's Financing operations. As the financing of GM manufactured vehicles comprises a substantial portion of the Company's Financing operations, any protracted reduction or suspension of GM's production or sales resulting from a decline in demand, work stoppage, governmental action, adverse publicity or other event could have a substantial unfavorable effect on the Company's results of operations. Conversely, an increase in production or a significant marketing program could positively impact the Company's results. Information about GM's production and sales is disclosed in GM's Annual Report on Form 10-K for the year ended December 31, 2002, filed separately with the United States Securities and Exchange Commission. The Company's Financing operations operate in a highly competitive environment. The Company's principal competitors for consumer automotive financing are a large number of banks, commercial finance companies, savings and loan associations and credit unions. Commercial financing competitors are primarily comprised of other manufacturers' affiliated finance companies, independent commercial finance companies and banks. Mortgage Operations GMAC Mortgage Group, Inc. (the Mortgage Group) is comprised of three wholly-owned subsidiaries: GMAC Residential Holding Corp. (GMAC Residential) , GMAC Commercial Holding Corp. (GMAC Commercial Mortgage) and GMAC-RFC Holding Corp. (RFC). The principal activities of the Mortgage Group involve the origination, purchase, servicing and securitization of consumer (i.e., residential) and commercial mortgage loans and mortgage related products. Typically, mortgage loans are originated and sold to investors in the secondary market. Overview, Products and Services Consumer Consumer mortgage products include fixed-rate and adjustable-rate mortgages, including conforming and non-conforming products. Retail origination of consumer mortgage products includes conforming products acceptable to government agencies and government-sponsored enterprises (including Fannie Mae, Ginnie Mae and Freddie Mac) as well as non-conforming products such as high loan-to-value, home equity loans, lines of credit and loans in excess of the agency program caps (i.e., jumbos). In addition to retail origination, the Company acquires these and other products through broker and correspondent mortgage bankers. Retail origination of consumer mortgage products occurs primarily through GMAC Residential, which provides residential real estate services nationwide. These services primarily involve the origination, sale and servicing of first and second lien residential mortgage loans and high loan-to-value mortgage loans. GMAC Residential's products are offered to customers through retail and direct origination channels, which involve direct interaction with consumers through a retail branch network and direct lending centers. Mortgage loans are also originated through relationships 17 with third-party brokers and correspondent mortgage bankers. At December 31, 2002, GMAC Residential had approximately 1,100 retail loan officers (working through a network of origination offices located in 46 states) and relationships with approximately 1,900 third-party brokers and correspondent mortgage bankers. Loans originated by GMAC Residential through the retail, direct and broker channels are processed and underwritten using an automated mortgage origination platform. As part of the under-writing process, GMAC Residential ensures that the loan meets certain qualifications for sale in the secondary markets. For loans that are originated through a correspondent mortgage banker, loan origination activities are performed by that correspondent and the loan is acquired by GMAC Residential, subject to secondary market criteria acceptance procedures. GMAC Residential also provides bundled real estate services to consumers, including real estate brokerage services, full service relocation services, mortgage services and settlement services. Through GMAC Bank, which commenced operations in the United States in August 2001, GMAC Residential offers a variety of personal investment products to its customers, including consumer deposits, consumer loans and other investment services. The origination of consumer mortgage products through broker or correspondent mortgage banker channels occurs primarily at RFC. RFC is engaged in several interrelated business lines, including mortgage origination and acquisition, investing, securitization and lending operations. RFC originates and acquires residential mortgage loans from correspondent sellers and brokers in the United States and Europe, and sells loans to public and private investors in the secondary market via whole loan sales and securitizations. In 2002, RFC issued its highest annual volume of asset-and mortgage-backed securities, totaling $ 35 billion. Residential mortgage loans originated and purchased include both prime and subprime first mortgages, as well as mortgages with second liens on residential property, including closed-end second mortgage loans and home equity lines of credit. At December 31, 2002, RFC had relationships with approximately 3,200 third-party brokers and correspondent mortgage bankers, maintained 50 offices in the United States, and had operations in Europe, Canada and Latin America. Commercial Commercial mortgage products are offered primarily through GMAC Commercial Mortgage. GMAC Commercial Mortgage performs a number of domestic and international commercial mortgage banking activities, including originating, financing, servicing and selling commercial mortgage loans, as well as issuing, purchasing and selling commercial mortgage-backed securities. The lending activities of GMAC Commercial Mortgage include long-term, interim and construction financing for commercial real estate projects and specialized financing products for customers in the healthcare and hospitality industries. GMAC Commercial Mortgage also performs investment advisory services for third-party institutional investors, such as life insurance companies and public and private pension funds. In addition, through its wholly-owned subsidiary GMAC Commercial Holding Capital Markets Corp (a registered broker-dealer and member of the National Association of Securities Dealers, Inc.), GMAC Commercial Mortgage is engaged in the business of underwriting, private placement, trading and selling of various securities, including tax exempt municipal securities, taxable debt securities and equity securities. Finally, GMAC Commercial Mortgage is involved in direct and indirect real estate investment, real estate syndication activities and asset management services. At December 31, 2002, GMAC Commercial Mortgage provided services through 92 offices in the United States and had operations in Europe, Asia, Canada and Mexico. RFC also offers a number of commercial products and services. RFC's warehouse lending activities provide interim financing, secured principally by mortgage collateral, to mortgage companies for the purchase or origination of mortgage loans pending sale to third-party investors. RFC also acquires seasoned or distressed mortgage loans and other real estate for resolution or resale, and manages portfolios of asset-and mortgage-backed securities acquired from unrelated bond issuers. In addition, RFC provides direct financing to homebuilders, both for construction purposes and through model home acquisition and leaseback arrangements. Finally, RFC operates a registered broker-dealer that trades asset-and mortgage-backed securities and other fixed income securities with dealers, brokers and other institutional investors. Mortgage Loan Production, Sales and Servicing The following summarizes the Mortgage Group origination volume for the periods indicated. (TABLE OMITTED) Typically, the Mortgage Group originates or purchases consumer and commercial mortgage loans with the intent to sell the loans in 18 the secondary market. The Company uses several off-balance sheet facilities to accumulate both residential and commercial mortgage loans or senior beneficial interests in mortgage loans pending permanent sale or securitization, as further discussed in the Off-balance Sheet Activities section of this MD&A. Conforming consumer mortgage loans are generally sold through transactions with government agencies and government-sponsored enterprises, such as Fannie Mae, Freddie Mac and Ginnie Mae; non-conforming consumer prime and subprime loans, home equity loans and other residential mortgage-related products are generally sold through the issuance of asset-and mortgage-backed securities; and commercial mortgage loans are generally sold to private and public investors, often through the issuance of commercial mortgage-backed securities. In connection with the sale or securitization of certain consumer and commercial mortgage loans, the Company generally retains an investment in the assets sold through the purchase of interest-only, principal-only, investment grade, non-investment grade, unrated (subordinate) or other classes of asset-or mortgage-backed securities. Certain loans sold by the Company in the secondary market are subject to recourse in the event of borrower default on these mortgage loans. When the Company sells mortgage loans to investors in the secondary market, it generally retains the right to service the loans sold in exchange for a servicing fee. The servicing fee is normally expressed as an annual percentage of the unpaid principal balance of the loan and is collected over the life of the loan as payments are received from the borrower. Typically, a servicing agreement sets forth the loan servicing functions to be provided by the servicer, including billing and collecting borrowers' monthly payments; remitting amounts due to investors, insurers and taxing authorities; maintaining custodial bank accounts; default management and foreclosure procedures; and other related activities. The present value of the anticipated cash flows received for servicing the loan, net of the estimated costs of servicing the loan, is capitalized on the Company's Consolidated Balance Sheet as a mortgage servicing right asset. Refer to the Critical Accounting Estimates section of this MD&A for further discussion. The Company's mortgage servicing activities include primary servicing, master servicing and special servicing. Primary servicing involves the servicing of individual loans, which principally includes collecting payments from borrowers and passing these payments through to agents of the final investors in these loans. Master servicing involves the servicing of asset-and mortgage-backed securities, including the collection of loan payments in the aggregate from various primary servicers for distribution to the investors in the issued securities. Special servicing entails default management activities associated with sub-and non-performing residential loans or default management activities associated with collateral securities from commercial mortgage-backed securities transactions. The following summarizes the Mortgage Group servicing portfolio for the periods indicated. (TABLE OMITTED) Mortgage Banking Key Risks and Risk Management The major risks in mortgage banking are interest rate risk (including loan prepayment risk) and credit risk. These risks significantly affect the carrying amounts of mortgage loans, mortgage servicing rights and asset-and mortgage-backed securities. Interest Rate and Loan Prepayment Risk An interest rate lock commitment binds the Company to lend funds to the potential borrower at a future point in time at a set interest rate, regardless of whether market interest rates change prior to closing. As a result, the Company bears interest rate risk on locked loans during this period between rate-lock and closing (also known as the "pipeline" period). Additionally, fixed rate mortgage loans held in the mortgage warehouse facilities prior to sale are exposed to interest rate risk. As market interest rates fluctuate, the fair value of the loans in the pipeline and warehouse will increase or decrease. The Company also bears interest rate risk related to investments in certain asset-and mortgage-backed securities, which are carried at estimated fair value. To mitigate interest rate risk, the Company invests in derivative financial instruments that are expected to experience changes in fair value opposite to those of the hedged asset, thus minimizing earnings volatility. 19 The fair value of mortgage servicing rights is significantly affected by actual and anticipated borrower prepayment rates, which are primarily driven by changes in market interest rates, home price appreciation and other factors. Consumer mortgage loans typically allow the borrower to prepay their mortgage at any time without penalty. Generally, when market interest rates decline and other factors favorable to prepayments exist, an increase in borrower prepayments occurs, as customers refinance existing mortgages under more favorable interest rate terms. When a mortgage loan is prepaid, or when loans are expected to prepay earlier than originally expected, the anticipated cash flows associated with servicing such loans are terminated or reduced, resulting in a reduction, or impairment, to the fair value of the capitalized mortgage servicing right. The Company is also exposed to prepayment risk on investments in interest-only asset-and mortgage-backed securities, which are carried at estimated fair value. As with mortgage servicing rights, the anticipated cash flows associated with an interest-only security are terminated or reduced in a period of higher than expected mortgage prepayments, resulting in a reduction, or impairment, to the fair value of the security. To mitigate the prepayment risk inherent in both mortgage servicing rights and interest-only securities, and thus minimize earnings volatility, the Company invests in derivative financial instruments and a portfolio of securities designated as available for sale that are expected to experience opposite and largely offsetting changes in fair value in response to interest rate changes. To the extent that actual borrower prepayments do not occur as predicted by the Company's prepayment models, changes in hedge values may not closely correlate, giving rise to hedge ineffectiveness, which results in earnings volatility. The Company's mortgage loan origination and acquisition channels also serve to offset the impact associated with mortgage prepayments. The Company generally experiences increased loan production (and, therefore, increased loan sale and securitization activity) in periods of lower interest rates, which may result in increased recognition of gains on sale of mortgage loans and increased realized gains from the capitalization of mortgage servicing rights. Thus, production activity provides a "natural hedge" for the impairment in the carrying values of mortgage servicing rights and of interest-only securities. The Company's consumer mortgage replenishment rate (i.e., the ratio of loan principal originated to loan principal repaid) approximated 109% at December 31, 2002. Credit Risk As previously discussed, the Company generally sells mortgage loans to third parties in the secondary market subsequent to origination or purchase. While loans are held in mortgage inventory prior to sale in the secondary market, the Company is exposed to credit losses on the loans. In addition, the Company bears credit risk through investments in subordinate loan participations related to certain consumer and commercial mortgage loans sold to third parties through off-balance sheet financing arrangements. Management estimates credit losses for mortgage loans held for sale and subordinate loan participations and records a valuation allowance when losses are considered probable and estimable. The valuation allowance is included as a component of the estimated fair value and carrying amount of mortgage loans held for sale. As previously discussed, certain loans that are sold in the secondary market are subject to recourse in the event of borrower default. Management closely monitors historical experience, borrower payment activity, current economic trends and other risk factors, and establishes an allowance for foreclosure losses that it believes is sufficient to cover incurred foreclosure losses in the portfolio. The Company periodically acquires or originates certain loans held for investment purposes. Additionally, certain loans held as collateral for securitization transactions (treated as financings) are also classified as mortgage loans held for investment. The Company has the intent and ability to hold these loans for the foreseeable future. The Company bears all or a material portion of the risk of credit loss on mortgage loans held for investment throughout the holding period of the loan. Credit risk on mortgage loans held for investment is managed and guided by policies and procedures that are designed to ensure that risks are accurately assessed, properly approved and continuously monitored. Management closely monitors historical experience, borrower payment activity, current economic trends and other risk factors, and establishes an allowance for credit losses which is considered sufficient to cover probable incurred credit losses in the portfolio of mortgage loans held for investment. The Company also bears credit risk related to investments in certain asset-and mortgage-backed securities, which are carried at estimated fair value on the Company's Consolidated Balance Sheet. Typically, the Company's non-investment grade and unrated asset-and mortgage-backed securities provide credit support and are subordinate to the higher-rated senior certificates in a securitization transaction. The Company retained a substantial portion of the first loss position associated with collateral related to securitized mortgages, collateralized debt obligations and tax-exempt bonds totaling $ 36.9 billion, $ 63.2 billion and $ 1.2 billion, respectively, at December 31, 2002. The Company is also exposed to risk of default by banks and financial institutions that are counterparties to derivative financial instruments. These counterparties are typically rated single A or above. This credit risk is managed by limiting the maximum exposure to any individual counterparty. 20 Results of Operations The following table summarizes the operating results of the Company's Mortgage operations for the periods indicated. The amounts presented are before the elimination of balances and transactions with the Company's other operating segments. (TABLE OMITTED) Interest rates, including those on originated for 15-and 30-year residential mortgages, declined for most of the year ended December 31, 2002, leading to record mortgage industry refinancing and production volume. The Mortgage Group contributed to these records with production volume reaching a record of $ 142.8 billion. Consumer mortgage production increased 39% over 2001, to $ 122.0 billion, and commercial mortgage production (including investment banking) increased 7% to $ 20.7 billion. The strength of the residential real estate market in 2002 also benefited the Mortgage Group's franchised and company-owned real estate brokerage operations, which experienced significant net profit improvement. While positive for production volumes, the decline in interest rates adversely impacted the value of the Company's mortgage servicing rights. The decline in market interest rates increased actual and anticipated mortgage refinance activity, resulting in a reduction in the expected future cash flows that support the carrying value of the mortgage servicing rights. As a result, for the year ended December 31, 2002, the Company recognized amortization and impairment charges of $ 2,314 million, compared to $ 1,113 million for 2001. However, an improved hedging strategy implemented in 2002 resulted in recognized gains and net interest income of $ 961 million on related derivative financial instruments designated as hedges ($ 363 million) , derivatives held for mortgage servicing right risk mitigation ($ 110 million) or excluded from the hedge effectiveness determination ($ 212 million), and net gains realized on available for sale investment securities held to economically manage the interest rate risk associated with mortgage servicing rights ($ 276 million). Net losses of $ 121 million were recognized in 2001 related to the hedge strategy. The increased amortization and impairment, combined with hedge-related valuation reductions, reduced the fair value of mortgage servicing rights, net of purchases and sales, to $ 2,683 million at December 31, 2002, from $ 4,840 million at December 31, 2001. The $ 2,708 million increase in investment securities at December 31, 2002 over December 31, 2001 primarily reflects the addition of $ 2,128 million of United States Treasury securities held to economically manage the interest rate risk of the mortgage servicing rights. During the year ended December 31, 2002, the Mortgage Group structured $ 12.1 billion of securitizations that were accounted for as financing transactions instead of transactions qualifying as sales, as compared to $ 1.2 billion during 2001. The mortgage loans collateralizing the debt securities for these secured financings are included in finance receivables and loans in the Company's Consolidated Balance Sheet, and the debt securities payable to bondholders of these securitizations are included in debt. While the economic value to the Company of a transaction structured as an on-balance sheet financing is substantially the same as an off-balance sheet sale, the accounting treatment is significantly different. The secured financing treatment replaces the up-front gain recorded upon sale with interest revenue recognized over the life of the underlying loans, in general alignment with the interest payments on the debt. As a result, consumer financing revenue increased significantly to $ 631 million in 2002, compared to $ 68 million in 2001. Additional effects of this accounting treatment include significantly increased year-end balances for loans and debt, increased provision for credit losses (corresponding to the credit losses incurred on the loans) and increased interest expense on the debt securities. Commercial financing revenue also increased in 2002, primarily resulting from increased construction lending for real estate projects. The slight decrease in year-over-year interest expense in 2002 reflects the impact of lower market interest rates, offset by a significant increase in debt outstanding to fund asset growth, (including debt securities related to the secured financing transactions). The increase in non-interest expenses primarily reflects increased compensation costs corresponding to growth in the number of employees, commensurate with business growth. Loans held for sale increased by $ 4,376 million from December 31, 2001 to December 31, 2002, reflecting higher than expected December production volume, resulting in a temporary increase in loan inventory pending sale at year-end. Other assets also increased year-over-year, resulting from increases in 21 subordinate loan participations, servicing advances, and equity investments. Factors Affecting Future Results The Mortgage Group's earnings are sensitive to general business and macro-economic trends and conditions, including changes in short-and long-term interest rates, inflation, unemployment and bankruptcy rates. The Mortgage Group operates in a highly competitive environment and faces significant competition from commercial banks, savings institutions, mortgage companies, and other financial institutions. In addition, the Mortgage Group's earnings are subject to volatility due to seasonality inherent in the mortgage banking industry and volatility in interest rate markets. Finally, many of the Mortgage Group's core business activities are subject to state, local and federal regulations in a number of jurisdictions (both domestically and abroad). Changes in legislation and regulation may occur which could have an adverse impact on the Mortgage Group's business and future earnings. Insurance Operations GMAC Insurance Holdings, Inc. (GMAC Insurance), conducts operations in the United States, Canada, Mexico, Europe, Latin America and Asia-Pacific through Motors Insurance Corporation (MIC), the primary insurance company in the group, and other insurance and non-insurance subsidiaries. The subsidiaries operate and market under the GMAC Insurance common brand. GMAC Insurance insures and reinsures automobile service contracts, personal automobile insurance coverages (ranging from preferred to non-standard risks) and selected commercial insurance coverages. Overview, Products and Services GMAC Insurance is one of the world's largest underwriters of automotive extended service and maintenance contracts. Such contracts offer vehicle owners and lessees mechanical repair protection and extended roadside assistance for new and used vehicles beyond a manufacturer's new vehicle warranty. These contracts are marketed through automobile dealerships and on a direct response basis, covering virtually all vehicle makes and models. A significant portion of vehicle service contracts cover vehicles manufactured by General Motors. GMAC Insurance also sells Guaranteed Asset Protection (GAP) insurance which allows the insured recovery of a specified economic loss beyond insured value. GMAC Insurance assumes reinsurance primarily in the United States market through its subsidiary, GMAC RE, which underwrites diverse property and casualty risks. Reinsurance coverage is primarily insurance for insurance companies, designed to stabilize their results, protect against unforeseen events, and facilitate business growth. Commercial lines coverage is primarily insurance for dealer vehicle inventories. MIC also sells speciality products, such as collateral protection to GMAC on certain vehicles securing GMAC retail installment contracts. The personal lines operation primarily provides physical damage and liability insurance coverages for automobiles, recreational vehicles, and motorcycles. Personal lines policies are offered on a direct response basis through affinity groups, worksite programs, and the Internet, and through an extensive network of independent agencies. Automobile and motorcycle coverages are offered to non-standard, standard and preferred drivers. The personal lines group operates in 48 states and the District of Columbia in the United States, with a significant amount of business written in Michigan, North Carolina and Florida. International operations primarily in Europe, Mexico, South America, and the Asia-Pacific region offer insurance products and services through local subsidiaries, primarily Car Care Plan and ABA Seguros. Car Care Plan provides vehicle automobile mechanical protection programs to manufacturers and dealers, and is a leader in the extended service contract market in Europe. Car Care Plan also operates in Mexico, Brazil, and Australia. ABA Seguros, one of Mexico's largest automobile insurers, was acquired in January 2002, and underwrites personal automobile insurance and certain commercial business coverages exclusively in Mexico. MIC also sells auto insurance in Ontario and Quebec, Canada. Key Risks Associated with Insurance Operations The following are the significant business risks within the Insurance operations. Reserves for Losses and Loss Adjustment Expenses The most significant risks relate to the reserves for losses and loss adjustment expenses, which represents the accumulation of estimates for reported losses and a provision for losses incurred but not reported, including loss adjustment expenses. The risks relating to estimating losses apply to both business written on a current basis by GMAC Insurance, as well as policies written and fully earned in prior years, to the extent there continue to be outstanding and open claims in the process of resolution. These risks are generally mitigated by employing or engaging individuals with claim settlement experience to determine loss reserves, and using qualified actuaries to assist in establishing reserves for claims incurred but not reported, and expenses associated with reported claims. As the determination of the reserves for insurance losses and loss adjustment expenses constitutes a critical accounting estimate of the Company, it is further described in the Critical Accounting Estimates section of this MD&A, beginning on page 24. 22 Unearned Premium and Service Revenue The liability for unearned premium and service revenue represents the amount of premium and revenue written and in force applicable to the unexpired portion of the extended service contract and insurance policy term. The financial reporting risk inherent in these reserves is the adequacy of the reserves to cover future losses and expenses and premium refunds due to policy cancellation. This risk is associated with the original pricing and underwriting of the individual insurance policy. Pricing of a class of business is generally based on analysis of expected losses using historical experience and anticipated future trends. Underwriting is an assessment of a particular risk and determination of the acceptability of the risk, as well as a categorization of the risk for determining the applicable pricing. Pricing and underwriting are dependent on estimates and therefore involve risk that is mitigated through employing or engaging individuals with experience relating to the individual type of business or actuarial science training relating to insurance pricing. GMAC Insurance's products (excluding extended vehicle service contracts) are generally short-term policies (i.e., 6 or 12 months) with unearned premium and service revenue equivalent to the remaining pro rata portion of premiums and revenues written. For multi-year auto policies written by ABA Seguros, premiums are generally earned over the three-year policy period on a pro rata basis. Valuation of Investment Securities Proceeds from premiums and other revenue sources, are invested in a portfolio of equity and fixed income securities from which future claim payments will be made as claims are settled. Investment income related to the securities is recorded in earnings in the period during which it is earned. Investment securities are classified by GMAC Insurance management as available for sale and carried at estimated fair value, with unrealized gains or losses (excluding other than temporary impairments) included in other comprehensive income, a component of shareholder's equity. Fair value is estimated by management using available market information, various valuation methodologies and through consultation with investment managers. These estimates, including evaluating market declines as temporary or other than temporary, are subjective in nature and involve uncertainties and matters of judgment, including consideration of management's ability and intent to hold securities for the foreseeable future. Accordingly, the estimates of fair value are not necessarily indicative of the amounts GMAC Insurance could realize in a current market exchange. The use of different assumptions, judgments, and estimation methodologies may have a material effect on the estimated fair value. Results of Operations The following table summarizes the operating results of GMAC Insurance for the periods indicated. The amounts presented are before the elimination of balances and transactions with the Company's other operating segments. (TABLE OMITTED) Net income from Insurance operations totaled $ 87 million in 2002, $ 122 million (58%) lower than 2001 earnings of $ 209 million. The decrease was attributed mainly to net capital losses incurred in 2002, which included the writedown of certain investment securities, partially offset by improved underwriting results and a lower effective tax rate due to the adjustment of accruals related to certain tax issues. Insurance premiums and service revenue earned at GMAC Insurance and its subsidiaries totaled $ 2,695 million in 2002 compared with $ 2,254 million in 2001. The increase over 2001 is due primarily to increased volumes and revenue per contract in vehicle service contracts, rate increases in personal automobile policies and revenue derived from ABA Seguros. The reduction in investment income was attributable to net capital losses and other than temporary impairment in the investment portfolio. GMAC Insurance incurred net capital losses of $ 195 million in 2002, compared with net capital gains of $ 85 million in 2001. The net capital losses in 2002 are mainly attributable to the absence of security sales and the related gains historically realized, and recognition of other than temporary impairment of certain securities. During 2002, a significant number of securities in the portfolio had market values significantly below the cost basis for an extended period of time. Management performed analyses of individual securities and concluded that those for which recovery to cost was not foreseeable were other than temporarily impaired. The carrying values of these securities were written down to market value, with the resulting loss recognized in earnings. Impairment of securities, primarily equity securities, aggregated $ 192 million in 2002. Impairment of securities was not significant in 2001. 23 Total expenses amounted to $ 2,788 million in 2002 and $ 2,357 million in 2001. The increase in 2002 is primarily attributable to insurance losses and loss adjustment expenses, coupled with acquisition and underwriting expenses (including commissions). These components of expenses increased commensurately with higher business volumes. GMAC Insurance incurred losses in 2002 of $ 1 million related to asbestos and environmental exposures associated with an insurance pool participation that originated during the 1970s and other environmental claims. No similar losses were experienced in 2001. In 2002, GMAC Insurance began writing a majority of vehicle service contracts in its wholly owned non-insurance company as an obligor. This business practice change results in the use of the gross method of accounting. Accordingly, there is a prospective increase in unearned revenue, decrease in unearned premium, increase in deferred policy acquisition costs and related amortization, and associated deferred tax amounts. This trend will continue until service contracts under this new business practice reach a steady state and premiums are fully earned from contracts written prior to 2002. Factors Affecting Future Results GMAC Insurance's business and earnings are sensitive to general business and macro-economic trends and conditions, including changes in securities markets, new vehicle sales, changes in manufacturers' warranty programs and economic indicators such as unemployment and inflation rates, including industry segments which impact claim settlement costs such as vehicle repair parts prices and medical cost inflation in the United States and certain local economies in which it conducts business. GMAC Insurance owns a diversified portfolio of investment securities totaling $ 5.1 billion at December 31, 2002, with net unrealized gains of $ 222 million at December 31, 2002. Securities with unrealized losses are predominantly equity securities of companies in a variety of industries. To the extent that market values do not strengthen, unrealized losses may be assessed by management in future periods to be other than temporary, which could have an adverse effect on earnings. GMAC Insurance operates in a highly competitive environment and faces significant competition from insurance carriers, reinsurers, third party administrators, brokers, and other insurance-related companies. Competition in the property casualty markets in which GMAC Insurance operates consists of large multi-line companies and smaller specialty carriers. None of these companies, including GMAC Insurance, holds a dominant position overall in these markets. There are no material seasonal factors that affect the quarterly results of GMAC Insurance. GMAC Insurance operates in a highly regulated environment for most of its business lines, and its insurance subsidiaries are subject to regulation in the United States, Canada, Mexico and England. Changes in legislation and regulation may occur which could have an adverse impact on its business and future earnings. Critical Accounting Estimates Accounting Estimates Accounting policies are integral to understanding Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make certain judgments and assumptions, based on information available at the time of the financial statements in determining accounting estimates used in the preparation of such statements. GMAC's significant accounting policies are described in Note 1 to the Consolidated Financial Statements. Critical accounting estimates are described in this section. Accounting estimates are considered critical if the estimate requires management to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and if different estimates reasonably could have been used in the reporting period or changes in the accounting estimate are reasonably likely to occur from period to period that would have a material impact on the Company's financial condition, results of operations or cash flows. Management of the Company has discussed the development, selection and disclosure of these critical accounting estimates with the Audit Committee of the Board of Directors and the Audit Committee has reviewed the Company's disclosure relating to these estimates. Determination of the Allowance for Credit Losses The allowance for credit losses is management's estimate of probable incurred losses in the Company's consumer and commercial finance receivable and loan portfolios held for investment. Management periodically performs detailed reviews of these portfolios to determine if impairment has occurred and to assess the adequacy of the allowance for credit losses, based on historical and anticipated trends and other factors affecting credit losses. Additions to the allowance for credit losses are made by charges to the provision for credit losses; amounts deemed to be uncollectible are charged directly against the allowance for credit losses. Determination of the allowance for credit losses requires management to exercise significant judgment about the timing, frequency and severity of credit losses, which could materially affect the provision for credit losses and therefore, net income. The methodology for determining the amount of the allowance differs for consumer and commercial portfolios. The consumer portfolios consist of smaller-balance, homogeneous contracts and loans, divided into two broad categories - automotive retail contracts and residential mortgage loans. Each of these portfolios is further divided into several pools (based on contract type, underlying collateral, geographic location, etc.), which are collectively evaluated for impairment. The allowance for credit 24 losses is established through a process that begins with estimates of probable incurred losses in each pool, based upon analytics and various statistical analyses, including migration analysis, in which historical loss experience, believed by management to be indicative of the current environment, is applied to the portfolio to estimate incurred losses. In addition, management considers the overall portfolio size and other portfolio indicators (i.e., delinquencies, portfolio credit quality, etc.) as well as general economic and business trends that management believes are relevant to estimating incurred losses. The commercial loan portfolio is comprised of larger-balance, non-homogeneous exposures within both the Company's Financing and Mortgage operations. These loans are evaluated individually and are risk graded based upon borrower, collateral and industry-specific information that management believes is relevant to determining the occurrence of a loss event and measuring impairment. Management establishes specific allowances for commercial loans determined to be individually impaired. The allowance for credit losses is estimated by management based upon the borrower's overall financial condition, financial resources, payment history, and, when appropriate, the estimated realizable value of any collateral. In addition, management considers other factors such as economic, industry and geographic trends as well as industry concentrations in estimating the allowance for credit losses for the commercial loan portfolio. The determination of the allowance for credit losses is influenced by several assumptions. The critical assumptions underlying the allowance for credit losses include: (1) segmentation of loan pools based on common risk characteristics; (2) identification and estimation of portfolio indicators and other factors that management believes are key to estimating incurred credit losses; and (3) evaluation by management of borrower, collateral and geographic information. Management monitors the adequacy of the allowance for credit losses and makes adjustments as the assumptions in the underlying analyses change, to reflect an estimate of incurred credit losses as of the reporting date, based upon the best information available at that time. Management has consistently applied the estimation methodologies discussed above for each of the three years in the period ended December 31, 2002. At December 31, 2002, the allowance for credit losses was $ 3.1 billion, compared to $ 2.2 billion at December 31, 2001. The provision for credit losses was $ 2.0 billion for the year ended December 31, 2002, as compared to $ 1.5 billion for 2001 and $ 0.6 billion for 2000. The increases in the allowance for credit losses and related provision were attributable to overall growth in the portfolios, as well as an increase in expected credit losses related to the general decline in economic conditions in which the Company has portfolio exposures (most notably the United States), as well as an observed trend in the increase in loss severity in the consumer automotive retail contract portfolio largely attributable to continued weaknesses in used vehicle prices in the United States. The $ 3.1 billion allowance established for expected credit losses as of December 31, 2002 represents management's estimate of incurred credit losses in the portfolios based on assumptions management believes are reasonably likely to occur. However, since this analysis involves a high degree of judgment, the actual level of credit losses will vary depending on actual experiences in relation to these assumptions. Accordingly, management estimates a range of reasonably possible incurred credit losses within the consumer and commercial portfolios. Management maintains an allowance for credit losses that it believes represents the best estimate of the most likely outcome within that range. Valuation of Automotive Lease Residuals GMAC's Financing operations have significant investments in the residual values of vehicles in its operating lease portfolio. Residual value represents an estimate of the market value of the vehicle at the end of the lease term, which typically ranges from two to four years, using independently published residual values at contract inception (as further described in the Lease Residual Risk and Residual Risk Management discussions within the Financing Operations section of this MD&A) . The customer is obligated to make payments during the term of the lease down to contract residual. However, since the customer is not obligated to purchase the vehicle at the end of the contract, GMAC is exposed to a risk of loss to the extent that the value of the vehicle is below the residual value estimated at contract inception. Management periodically performs a detailed review of the estimated realizable value of leased vehicles to assess the appropriateness of the carrying value of lease residuals. To account for residual risk, the Company depreciates the automotive operating lease assets to estimated realizable value at the end of the lease on a straight-line basis over the lease term. The estimated realizable value is initially based on the residual value established at contract inception. Over the life of the lease, management evaluates the adequacy of its estimate of the realizable value and may make adjustments to the extent the expected value of the vehicle at lease termination changes. Any such adjustments would result in a change (acceleration) in the depreciation rate of the lease asset, thereby reducing the carrying value of the operating lease asset. Overall business conditions (including the used vehicle market) , GMAC's remarketing abilities, and GM's vehicle and marketing programs may cause management to adjust initial residual projections (as further described in the Residual Risk Management discussion in the Financing Operations section of this MD&A). Depreciation expense is adjusted to the extent there is a difference in the proceeds (including residual subvention payments from GM) realized at vehicle disposal and the carrying value of the lease asset. The Company's depreciation methodology on operating lease assets considers management's expectation of the value of the vehicles upon lease termination, which is based on numerous assumptions and factors influencing used automotive vehicle 25 values. The critical assumptions underlying the estimated carrying value of automotive lease assets include: (1) estimated market value information (e.g., ALG) obtained and used by management in estimating residual values, (2) proper identification and estimation of business conditions, (3) GMAC's remarketing abilities, and (4) GM's vehicle and marketing programs. Management has consistently applied this estimation methodology described above for each of the three years in the period ended December 31, 2002. GMAC's net investment in operating leases totaled $ 24.2 billion (net of accumulated depreciation of $ 7.3 billion) at December 31, 2002, as compared to $ 25.2 billion (net of accumulated depreciation of $ 7.7 billion) at December 31, 2001. Depreciation expense for the year ended December 31, 2002 was $ 4.8 billion, as compared to $ 4.9 billion for 2001 and $ 5.2 billion in 2000. The decrease in the automotive operating lease assets and related depreciation was primarily due to a general decline in the lease portfolio, as GM continued to shift marketing incentives away from leasing and toward retail sales. During the year, the Company did not make any material adjustments to the assumptions underlying the automotive operating lease depreciation methodology. However, the net gain realized upon disposal of off-lease vehicles in the United States decreased to $ 117 million for the year ended December 31, 2002, from $ 137 million in 2001 and $ 323 million in 2000, despite an increase in the volume of terminated vehicles. The decrease in the gain was caused by a combination of higher ALG residual value projections at contract inception than values actually realized upon remarketing, and a general observed weakening of used vehicle prices (which is further described in the Residual Risk Management discussion in the Financing Operations section of this MD&A). Net disposal gains are included in depreciation expense because such gains are contemplated in the depreciation policy. Valuation of Mortgage Servicing Rights Mortgage servicing rights represent the capitalized value of expected future cash flows associated with the servicing of mortgage loans. Mortgage servicing rights constitute a significant source of value derived from originating or acquiring mortgage loans. Because residential mortgage loans are more likely to prepay when interest rates decline (thus terminating the stream of cash flows generated from servicing), the fair value of mortgage servicing rights is very sensitive to changes in interest rates, and tends to decline as market interest rates decline. These adverse effects reverse as market interest rates rise. Generally accepted accounting principles in the United States require that the value of mortgage servicing rights be determined based upon market transactions for comparable servicing assets, or, in the absence of such benchmark trade information, based upon modeled market expectations of the present value of net cash flows that market participants would expect to be derived from servicing. When benchmark transaction data are not available, management relies on estimates of the timing and magnitude of cash inflows and outflows to derive an expected net cash flow stream, and then discounts this stream using an appropriate market discount rate. Management considers the best available information and exercises significant judgment in estimating and assuming values for key variables in the modeling and discounting process. The Company's approach to estimating the fair value of its mortgage servicing rights relies upon internal operating assumptions that it believes market participants would use, such as its specific cost to service a loan and other related cash flows, combined with market-based assumptions for interest rates, discount rates, anticipated yields and loan prepayment speed. Prepayment speed represents the rate at which borrowers repay the mortgage loans prior to scheduled maturity. When mortgage loans are prepaid sooner than originally estimated, the expected future cash flows associated with servicing the loans are reduced. The most significant modeling assumption in determining cash flows is the combination of the interest rate model and the prepayment model. GMAC uses a model developed by a third-party vendor to determine prepayment speeds and constantly monitors modeled versus actual performance. At a given point in time, the fair value of a mortgage servicing right is a function of the prepayment speed and other model variables. Future outcomes for prepayment speed and other variables may differ significantly from, prior expectations. Management continuously evaluates the validity of its assumptions against actual results, and periodically updates its models to incorporate more recent modeling parameters and calibration. To validate the results of its valuation model and to assess the need for prospective changes in model assumptions, the Company periodically: o Reconciles actual observed servicing cash flows to prior projections. o Reconciles actual prepayment activity to modeled prepayment activity. o Evaluates how individual assumptions used by management compare to assumptions used by other market participants. o Considers the value implications of any observed market bulk or flow servicing purchases. o Participates in third-party peer surveys to evaluate its servicing multiple (ratio of current mortgage servicing rights to annual servicing fee rate) and its valuation pricing (ratio of mortgage servicing rights to portfolio of unpaid principal balance) to those of peers. o For certain portfolios, obtains independent third-party valuations from reputable servicing brokers. 26 Mortgage servicing rights are included as an asset in the Company's Consolidated Balance Sheet, with changes in the estimated fair value of mortgage servicing rights included as a component of Mortgage Banking Income in the Company's Consolidated Statement of Income. During 2002, the Company updated numerous valuation assumptions and implemented updated versions of its prepayment model, resulting in a reduction of over $ 700 million in the carrying value of mortgage servicing rights. At December 31, 2002, based upon the market information obtained, the Company determined that its mortgage servicing rights valuations and assumptions were reasonable and consistent with what an independent market participant would use to value the asset. Determination of Reserves for Insurance Losses and Loss Adjustment Expenses GMAC's Insurance operations perform a wide array of insurance underwriting, including personal, mechanical and commercial coverages, that creates a liability for unpaid claims (which is further described in the Insurance Operations section of this MD&A). The reserve for insurance losses and loss adjustment expenses represents an estimate of the Company's liability for the unpaid cost of insured events that have occurred as of a point in time. More specifically, it represents the accumulation of estimates for reported losses and a provision for losses incurred but not reported, including claims adjustment expenses. The techniques and principles the Company uses in estimating insurance loss reserves are generally consistent with prior years and are based on a variety of actuarial methodologies. GMAC Insurance's actuarial staff assesses reserves for each business at the lowest meaningful level of homogeneous data within each type of insurance, such as general or product liability and auto physical damage. The selection of an actuarial reserving methodology is judgmental and depends on variables such as the type of insurance, its expected payout pattern, and the manner in which claims are processed. Special characteristics such as deductibles, reinsurance recoverable, or special policy provisions are considered in the reserve estimation process. Estimates for salvage and subrogation recoverable are recognized at the time losses are incurred and netted against the provision for losses. Loss adjustment expense reserves are generally established as a percentage of loss reserves. The Company's reserves recognize the actuarially indicated reserves and the degree of incremental volatility associated with the underlying risks for the types of insurance to determine the best estimate of the ultimate liability. Insurance liabilities are necessarily based on estimates, and the ultimate liability may vary from such estimates. The estimates are regularly reviewed and adjustments, which can be significant, are included in earnings in the period in which they arise. At December 31, 2002, the Company's reserve for insurance losses and loss adjustment expenses totaled $ 2.1 billion as compared to $ 1.8 billion at December 31, 2001. Insurance losses and loss adjustment expenses totaled $ 2.0 billion for the year ended December 31, 2002, an increase from $ 1.7 billion in 2001 and $ 1.5 billion in 2000. The increase in losses and loss adjustment expense (and the related reserve) is due to acquisitions and higher business volumes. As of December 31, 2002, the Company concluded that its insurance loss reserves were reasonable and appropriate based on the assumptions and data used in determining the estimate. However, as insurance liabilities are based on estimates, the actual liabilities may vary from such estimates. Valuation of Securitized Residual Interests When the Company securitizes automotive retail contracts, wholesale finance receivables, mortgage loans and other investments, it typically retains an interest in the receivables sold through an investment in asset-or mortgage-backed securities. Asset-and mortgage-backed securities include senior and subordinated interests in automotive retail and wholesale finance receivables, and residential and commercial asset-and mortgage-backed securities, including interest-only, principal-only, investment grade, non-investment grade and unrated securities. Asset-and mortgage-backed securities are accounted for as investments in debt securities pursuant to SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Company's estimate of the fair value of asset-and mortgage-backed securities requires management to exercise significant judgment about the timing and amount of future cash flows of the asset-and mortgage-backed securities. Asset-and mortgage-backed securities classified as trading or available for sale are valued on the basis of external dealer quotes, where available. External quotes are not available for a significant portion of these assets given the relative illiquidity of such assets in the market. In these circumstances, valuations are based on recent market transactions, experience with similar securities, current business conditions, analysis of the underlying collateral, third party market information (as available) and internal valuation models. At December 31, 2002 and 2001, trading and available for sale asset-and mortgage-backed securities approximated $ 6.7 billion and $ 4.3 billion, respectively. At December 31, 2002 and 2001, approximately $ 2.1 billion and $ 0.9 billion, respectively, were valued using dealer quotes, and approximately $ 4.6 billion and $ 3.4 billion, respectively, were valued by management using internal models and other information available. In conjunction with the performance of such valuations, management determined that the assumptions and the resulting valuations of asset- and mortgage-backed securities were reasonable and consistent with what an independent market participant would use to value the positions. Estimating the fair value of asset-and mortgage-backed securities requires management to make certain assumptions based upon current market information, including interest rates, prepayment speeds and expected credit losses. Similar to mortgage servicing rights, estimated prepayment speeds significantly impact the 27 valuation of the Company's interest-only securities because increases in actual and expected prepayment speed significantly reduces expected cash flows from these securities. For certain interest-only securities, management is able to obtain market information from parties involved in the distribution of such securities to estimate prepayment speeds. In other cases, management estimates prepayment speeds based upon historic and expected future prepayment rates. Expected credit losses on assets underlying the asset-and mortgage-backed securities also significantly impact the estimated fair value of the related residual interests retained by the Company. For certain securities, market information for similar investments is available to estimate credit losses and collateral defaults (e.g., dealer-quoted credit spreads). For other securities, future credit losses are estimated using internally developed credit loss models, which generate indicative credit losses on the basis of the Company's historical credit loss frequency and severity. Asset-and mortgage-backed securities are included as a component of investment securities in the Company's Consolidated Balance Sheet. Changes in the fair value of asset-and mortgage-backed securities held for trading are included as a component of investment income in the Company's Consolidated Statement of Income. For the years ended December 31, 2002 and 2001, net decreases in the fair value of asset-and mortgage-backed securities held for trading totaled $ 701 million and $ 579 million, respectively. The changes in the estimated fair value of asset-and mortgage-backed securities available for sale are included as a component of equity (other comprehensive income) in the Company's Consolidated Balance Sheet. In the event that management determines that other than temporary impairment should be recognized related to asset-and mortgage-backed securities available for sale, such amounts are recognized in investment income in the Company's Consolidated Statement of Income. Funding and Liquidity The Company's liquidity, as well as its ongoing profitability, 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 risk is the risk that the Company will be unable to replace maturing obligations when due or fund its assets at appropriate maturities and rates. Liquidity is managed to preserve stable, reliable, and cost-effective sources of cash to meet all current and future obligations. Funding Sources and Strategy GMAC's strategy in managing liquidity risk has been to develop diversified funding sources across a global investor base. The diversity of the Company's funding sources enhances funding flexibility, limits dependence on any one source of funds, and results in a more cost effective long-term strategy. In making funding decisions, management considers market conditions, prevailing interest rates, liquidity needs, and the desired maturity profile of its liabilities. This diversity helps the Company maintain liquidity during periods of weakness in the capital markets or changes in the Company's business. As part of this diversified funding strategy, GMAC regularly accesses the following sources of funds: o Commercial paper-These short-term promissory notes are senior obligations of the Company that are offered to institutional and commercial investors. GMAC has commercial paper programs worldwide in the United States, Canada, Europe, Latin America and Asia Pacific. o Institutional unsecured term debt - The Company issues debt obligations through underwritten bond offerings and medium term note programs to institutional investors. The underwritten offerings are typically large issuances sold in the capital markets through dealers acting as underwriters. Medium term notes are sold to institutional investors worldwide through dealer agents in book-entry form for any maturity ranging from nine months to thirty years. o Retail debt programs - Through the SmartNote program in the United States and the Demand Note programs in the United States and Canada, GMAC issues debt obligations generally to retail investors. SmartNotes securities range in maturity from 9 months to 30 years and are marketed through a national broker network. Demand Notes are short-term securities with features similar to money market investments. o Securitization programs - The Company securitizes consumer automotive finance retail contracts, wholesale loans and mortgage loans through various channels. These securitizations comprise either on-balance sheet secured financings or off-balance sheet fundings, as further described in the Securitization and Off-balance Sheet Activities section later in this MD&A and in Note 8 to the Consolidated Financial Statements. As an important part of its overall funding and liquidity strategy, the Company maintains substantial bank lines of credit. These bank lines of credit, which totaled $ 53 billion at December 31, 2002, provide "back-up" liquidity and represent additional funding sources if required. Refer to Note 13 to the Consolidated Financial Statements for further discussion of these liquidity lines. 28 The following summarizes GMAC's funding sources and weighted average borrowing costs for the periods indicated: (TABLE OMITTED) The Company was faced with unique funding challenges during 2002. A weak corporate bond market, combined with downgrades in certain of GMAC's credit ratings increased the Company's unsecured borrowing spreads to unprecedented levels. In light of the weaker capital market environment and significantly wider unsecured term spreads, GMAC placed greater emphasis on its securitization and retail debt programs. Management expects to continue to use a diverse set of funding sources to maintain its financial flexibility and expects that access to the capital markets will be sufficient to meet the Company's funding needs. Credit Ratings The cost and availability of unsecured financing is influenced by credit ratings, which are intended to be an indicator of the creditworthiness of a particular company, security, or obligation. Lower ratings generally result in higher borrowing costs as well as reduced access to capital markets. This is particularly true with respect to the Company's commercial paper ratings as certain institutional investors (money market funds in particular) are limited to investing only in securities carrying the two highest rating categories for short-term debt. Substantially all of the Company's debt has been rated by three nationally recognized statistical rating organizations. As of March 13, 2003, all GMAC ratings were within the investment grade category, as follows: (TABLE OMITTED) In October 2002, S&P downgraded the Company's corporate credit rating from BBB+ to BBB, while affirming the A-2 commercial paper rating. The BBB rating is assigned to bonds considered to have adequate capacity to pay interest and repay principal. S&P indicated that the downgrade was driven by cash flow and financial resource concerns at the Company's parent, General Motors. The ratings outlook was assessed by S&P as stable, meaning that the rating is not likely to change over the intermediate-to long-term. The S&P downgrade was preceded in October 2001 by down-grades of the Company's senior debt and commercial paper ratings by S&P and Fitch. In October 2002, both Fitch and Moody's confirmed their senior debt and commercial paper ratings on GMAC, while maintaining a negative outlook. Derivative Financial Instruments In managing the interest rate and foreign exchange exposures of a multinational finance company, GMAC and its subsidiaries utilize a variety of interest rate and currency derivative financial instruments. As an end-user of these financial instruments, GMAC is in a better position to expand its investor base and to minimize its funding costs, enhancing its ability to offer attractive, competitive financing rates to its customers. The Company's derivative financial instruments consist primarily of interest rate swaps, futures and options, currency swaps, and forwards used to hedge related assets or funding obligations. The use of these instruments is further described in Note 15 to the Consolidated Financial Statements. Derivative financial instruments involve, to varying degrees, elements of credit risk in the event a counterparty should default, and market risk, as the instruments are subject to rate and price fluctuations. Credit risk is managed through periodic monitoring and approval of financially sound counterparties and through limiting the potential credit exposures to individual counterparties to predetermined exposure limits. Market risk is inherently limited by the fact that the instruments are used for risk management purposes only, and therefore generally designated as hedges of assets or liabilities. Market risk is also managed on an ongoing basis by monitoring the estimated fair value of each financial instrument position and further by measuring and monitoring the volatility of such positions, as further described in the Market Risk section of this MD&A. 29 Off-balance Sheet Activities The Company uses off-balance sheet entities as part of its operating and funding activities. The following table summarizes assets carried off-balance sheet in these entities. (TABLE OMITTED) Securitization As part of its ongoing operations and overall funding and liquidity strategy, the Company securitizes consumer automotive finance retail contracts, wholesale loans and mortgage loans. Securitization of assets allows the Company to diversify funding sources and to support the core activities of the Mortgage operations relative to originating and purchasing mortgage loans to generate origination and servicing income. Termination of GMAC's securitization activities would reduce funding sources and disrupt the core mortgage banking activity, adversely impacting the Company's operating profit. The Company's securitization program is further described in Note 8 to the Consolidated Financial Statements. As a part of the program, automotive finance retail contracts, commercial loans and mortgage loans are generally sold to bankruptcy-remote subsidiaries of the Company. In turn, these subsidiaries establish separate trusts, representing qualifying special purpose entities (QSPEs), to which they transfer the assets in exchange for the proceeds from the sale of asset-or mortgage-backed securities issued by the trust. The trusts' activities are generally limited to acquiring the assets, issuing asset-or mortgage-backed securities, making payments on the securities, and periodically reporting to the investors. Due to the nature of the assets held by the trusts and the limited nature of each trust's activities, each represents a QSPE in accordance with SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. In accordance with SFAS No. 140, assets and liabilities of the QSPEs are not consolidated in the Company's Consolidated Balance Sheet. The Company may agree to service the transferred assets for a fee and may earn other related ongoing income. The Company also may retain a portion of senior and subordinated interests in the QSPEs; these interests are reported as investment securities in the Company's Consolidated Balance Sheet. Subordinate interests typically provide credit support to the more highly rated senior interests in a securitization transaction and may be subject to all or a portion of the first loss position related to the sold assets. The amount of the fees earned and the levels of retained interests that the Company maintains are disclosed in Note 8 to the Company's Consolidated Financial Statements. The Company also purchases derivative financial instruments in order to facilitate securitization activities, as further described in Note 15 to the Consolidated Financial Statements. No recourse provisions exist that allow holders of the QSPEs' asset-or mortgage-backed securities to put those securities back to the Company. Moreover, the Company does not guarantee any securities issued by the QSPEs. The Company's exposure related to the QSPEs is limited to cash reserves held for the benefit of investors in the QSPEs and retained interests. The QSPEs have a limited life and generally terminate upon final distribution of amounts owed to investors or upon exercise by GMAC, as servicer, of its cleanup call option when the servicing of the sold contracts becomes burdensome. In addition, the QSPEs do not invest in the equity of GMAC or any of its affiliates. Certain of the Company's securitization transactions, while similar in legal structure to the transactions described above (i.e., the assets are legally sold to a bankruptcy remote subsidiary), do not meet the isolation and control criteria of SFAS No. 140 and are therefore accounted for as secured financings. As secured financings, the underlying automotive finance retail contracts or mortgage loans remain on the balance sheet with the corresponding obligation (consisting of the debt securities issued) reflected as debt. The Company recognizes income on the finance receivables and loans and interest expense on the securities issued in the securitization and provides for credit losses as incurred over the life of the securitization. Approximately $ 21.2 billion and $ 1.3 billion of finance receivables and loans were related to secured financings at December 31, 2002 and 2001, respectively. Refer to Note 13 to the Consolidated Financial Statements for further discussion. GMAC's securitization program also includes the securitization of commercial mortgage securities, real estate investment trust debt, and commercial mortgage loans using special purpose entities (SPEs) that issue collateralized debt obligations (CDOs). In these transactions, GMAC and other unaffiliated parties each contribute a portion of the total collateral underlying the CDO investments. GMAC holds subordinated interests, including partial first loss positions in CDO investments, and also acts as collateral manager for the SPEs. The subordinated interests are carried as trading securities in the Company's Consolidated Balance Sheet. The face amount of collateral outstanding in these deals was $ 1.9 billion and $ 1.2 billion at December 31, 2002 and 2001, respectively. 30 Other Off-Balance Sheet Activities The Company also uses other off-balance sheet entities for operational and liquidity purposes other than securitization, as part of the transfer and servicing of financial assets under SFAS No. 140. The purposes and activities of these entities vary, with some entities classified as QSPEs under SFAS No. 140. The Company's SPEs, whose activities are not sufficiently limited to meet the QSPE criteria of SFAS No. 140, maintain substantive independent third-party equity, and therefore are not consolidated within the Company's Consolidated Balance Sheet. As further described in the Accounting and Reporting Developments section of this MD&A, the recent release of FASB Interpretation No. 46, Consolidation of Variable Interest Entities, creates new consolidation guidance for SPEs. As such, changes in the Company's historical method of accounting or changes in the legal structure of the Company's SPEs may occur. Note 8 to the Consolidated Financial Statements describes the potential impact of FASB Interpretation No. 46 on these SPEs and the Company's financial position. Interests in the off-balance sheet transactions that are retained by the Company (including consolidated subsidiaries) are included in the Consolidated Balance Sheet. Certain of the structures contain provisions that require the Company to purchase from the SPEs, or in some cases alternatively finance, specific assets that cease to satisfy eligibility requirements. Certain other structures contain a conditional call option that permits the Company to purchase assets upon the occurrence of specific events caused by third parties. When a purchase occurs, the Company records the assets in the Consolidated Balance Sheet. The Company may also act as a counterparty in derivative contracts with these SPEs to facilitate transactions. Although representing effective risk management techniques, these derivative positions do not qualify for hedge accounting treatment as the assets or liabilities that are economically hedged are carried off-balance sheet. As such, these derivative financial instruments are reported in the Company's Consolidated Balance Sheet at market value, with valuation adjustments reflected in the Consolidated Statement of Income on a current period basis. Included in the Company's derivative positions are put options held by third party banks covering $ 0.5 billion and $ 1.1 billion in mortgage loans at December 31, 2002 and 2001, respectively. In the event of a concurrent exercise of these puts by the holders, GMAC would need to obtain additional financing to satisfy its obligations. GMAC does not guarantee debt issued in connection with any of its off-balance sheet facilities, or guarantee the liquidity support (to the extent applicable) that is provided by third-party banks. Further, there are no recourse provisions that would permit holders to put debt obligations back to GMAC. In the event that liquidity banks fail to renew their commitment (which commitments may be subject to periodic renewal) and GMAC is unable to find replacement liquidity support or alternative financing, the outstanding commercial paper would be paid with loans from participating banks, and proceeds from the underlying assets would be used to repay the banks. Finally, none of these entities related to its off-balance sheet facilities owns stock of GMAC or any of its affiliates. The Company's more significant SPEs are described as follows: o Mortgage warehouse funding - GMAC uses several off-balance sheet warehouse funding vehicles to accumulate both residential and commercial mortgage loans, or senior beneficial interests in mortgage loans, pending permanent sale or securitization. Net assets in these facilities totaled $ 13.5 billion and $ 9.2 billion at December 31, 2002 and 2001, respectively. Funding for the assets is provided through the issuance of commercial paper by a GMAC-or bank-sponsored SPE, by a QSPE or by third-party financing. A number of the facilities aggregating $ 11.1 billion and $ 6.1 billion outstanding at December 31, 2002 and 2001, respectively, provide committed funding for the term of the facility agreement. Under the remaining facilities aggregating $ 2.4 billion and $ 3.1 billion outstanding at December 31, 2002 and 2001, respectively, funding is at the discretion of the sponsoring bank or third party. Failure of the committed facility providers to renew the commitments (which commitments may be subject to periodic renewal), or of the uncommitted facility providers to continue accepting loans, would require GMAC to find alternative financing sources for these assets. o Other mortgage funding - GMAC also uses off-balance sheet QSPEs and third-party facilities to finance mortgage-related products, primarily defaulted government-insured or guaranteed mortgage loans and warehouse and construction loans. Net assets in these facilities totaled $ 8.2 billion and $ 5.9 billion at December 31, 2002 and 2001, respectively. Funding for the assets is provided by either a GMAC-or bank-sponsored commercial paper conduit or by third party financing. Nearly all of these facilities ($ 8.1 billion and $ 5.8 billion outstanding at December 31, 2002 and 2001, respectively) are committed for the term of the agreement, with the balance at the discretion of the third party. Failure of the committed facility providers to renew the commitments, or of the uncommitted facility providers to continue accepting loans, would require GMAC to find alternative financing sources for these assets. o New Center Asset Trust (NCAT) - NCAT is a limited purpose trust that was established for the purpose of purchasing and holding privately issued asset-backed securities created in GMAC's automotive finance asset securitization program, as previously described. NCAT funds the activity through the issuance of asset-backed commercial paper and equity certificates. NCAT acquires the asset-backed securities from special purpose trusts established by the Company's limited purpose bankruptcy-remote subsidiaries. As of December 31, 2002, NCAT had $ 10.8 billion in asset-backed securities, which were supported by $ 10.4 billion in commercial paper and $ 0.4 billion in equity owned by investors not affiliated with the Company. The Company acts as administrator of NCAT to provide for the administration of the trust. NCAT maintains an $ 18.1 billion 31 revolving credit agreement characterized as a liquidity and receivables purchase facility to support its issuance of commercial paper. The assets underlying the NCAT securities are retail finance receivables and wholesale loans that are securitized as a part of GMAC's automotive finance funding strategies. As such, the $ 10.8 billion of NCAT securities outstanding at December 31, 2002 are considered in the non-mortgage securitization amounts presented in the foregoing table. NCAT's $ 18.1 billion liquidity and receivables purchase facility was increased by approximately $ 5.8 billion in October 2002, representing a transfer by GMAC of a portion of its syndicated multi-currency global credit facility. GMAC's syndicated multi-currency global credit facility is further described in Note 13 to the Consolidated Financial Statements. Central Originating Lease Trust (COLT) - COLT is a limited purpose trust that purchases vehicles and related consumer leases from GM franchised dealers. COLT funds these acquisitions through secured notes, which are sold to GMAC, and through the issuance of third-party equity. In addition to acting as the originating agent and servicer for COLT leases, GMAC has agreed to reimburse COLT's third-party insurance provider for any losses on the underlying leases (subject to a limit). While COLT is currently a non-consolidated entity (primarily due to the existence of third party equity), GMAC may be deemed to be the primary beneficiary of COLT and required to consolidate COLT under FIN 46. GMAC's exposure to loss on the COLT assets is indicated by its exposure under the insurance reimbursement agreement for which the Company has reserved $ 338 million as of December 31, 2002. In connection with the adoption of FIN 46 management is considering, among other things, purchasing the third-party equity of COLT. In the event of such a purchase, COLT will become a fully consolidated entity with the underlying COLT lease assets ($ 5 billion at December 31, 2002) being reflected as operating lease assets, replacing the secured notes ($ 4.6 billion at December 31, 2002) that are currently reported by GMAC as finance receivables and loans. The net increase to the Company's consolidated total assets would be the third-party equity ($ 188 million at December 31, 2002). Market Risk The Company's financing, mortgage, and insurance activities give rise to market risk, representing the potential loss in the fair value of assets or liabilities caused by movements in market variables, such as interest rates, foreign exchange rates, and equity prices. GMAC is primarily exposed to interest rate risk arising from changes in interest rates related to its financing, investing and cash management activities. More specifically, GMAC has entered into contracts to provide financing, to retain mortgage servicing rights and to retain various assets related to securitization activities all of which are exposed, in varying degrees, to changes in value due to movements in interest rates. Interest rate risk arises from the mismatch between assets and the related liabilities used for funding. GMAC enters into various financial instruments, including derivatives, to maintain the desired level of exposure to the risk of interest rate fluctuations. GMAC is exposed to foreign currency risk arising from the possibility that fluctuations in foreign exchange rates will impact future earnings or asset and liability values related to the Company's global presence. GMAC's most significant foreign currency exposures relate to the Euro, the Canadian dollar, the British pound sterling and the Australian dollar. GMAC is also exposed to price risk, primarily in its Insurance operations, which invests in equity securities that are subject to price risk influenced by capital market movements. While the diversity of the Company's activities from its complementary operating segments naturally mitigates market risk, GMAC also actively manages this risk. GMAC maintains risk management control systems to monitor interest rate, foreign currency exchange rate and equity price risks and related hedge positions. Positions are monitored using a variety of analytical techniques including market value, sensitivity analysis and value at risk models. Value at Risk One of the measures the Company uses to manage market risk is value at risk (VaR), which gauges the dollar amount of potential loss in fair value from adverse interest rate and currency movements in an ordinary market. The VaR model uses a distribution of historical changes in market prices to assess the potential for future losses. In addition, VaR takes into account correlations between risks and the potential for movements in one portfolio to offset movements in another. 32 GMAC measures VaR using a 95% confidence interval and an assumed one month holding period, meaning that the Company would expect to incur changes in fair value greater than those predicted by VaR in only one out of every 20 months. Currently, the Company's VaR measurements do not include all of GMAC's market risk sensitive positions. The VaR estimates encompass the majority (approximately 90%) of the Company's market risk sensitive positions which management believes are representative of all positions. The following table represents the maximum, average and minimum potential VaR losses measured for the years indicated. (TABLE OMITTED) While no single risk statistic can reflect all aspects of market risk, the VaR measurements provide an overview of the Company's exposure to changes in market influences. Less than 2% of GMAC's assets are accounted for as trading activities (with changes in fair value directly impacting income), as such the Company's VaR measurements are not indicative of the impact to current period earnings caused by potential market movements. The actual earnings impact would differ as the accounting for the Company's financial instruments is a combination of historical cost, lower of cost or market and fair value (as further described in the accounting policies in Note 1 to the Consolidated Financial Statements). Sensitivity Analysis While VaR reflects the risk of loss due to unlikely events in a normal market, sensitivity analysis captures the Company's exposure to isolated hypothetical movements in specific market rates. The following analyses are based on sensitivity analysis performed assuming instantaneous, parallel shifts in market exchange rates, interest rate yield curves and equity prices. (TABLE OMITTED) There are certain shortcomings inherent to the sensitivity analysis data presented. The models assume that interest rate and foreign exchange rate changes are instantaneous parallel shifts. In reality, changes are rarely instantaneous or parallel and therefore the sensitivities disclosed above may be overstated. Because they do not represent financial instruments, the Company's operating leases are not required to be included in the interest rate sensitivity analysis. This exclusion is significant to the overall analysis and any resulting conclusions. While the sensitivity analysis shows an estimated fair value change for the debt which funds GMAC's operating lease portfolio, a corresponding change for GMAC's operating lease portfolio (which had a carrying value of $ 24 billion and $ 25 billion at December 31, 2002 and 2001, respectively) was excluded from the above analysis. As a result, the overall impact to the estimated fair value of financial instruments from hypothetical changes in interest and foreign currency exchange rates is greater than GMAC would experience in the event of such market movements. Operational and Business Risk The Company defines operational risk as the risk of loss resulting from inadequate or failed processes or systems, human factors, or external events. Operational risk is an inherent risk element in each of the Company's businesses and related support activities. Such risk can manifest in various ways, including breakdowns, errors, business interruptions, and inappropriate behavior of employees, and can potentially result in financial losses and other damage to the Company. To monitor and control such risk, GMAC maintains a system of policies and a control framework designed to provide a sound and well-controlled operational environment. The goal is to maintain operational risk at appropriate levels in view of the Company's financial strength, the characteristics of the businesses and the markets in which GMAC operates, and the related competitive and regulatory environment. While each operating unit is responsible for risk management, the Company supplements this decentralized model with a centralized enterprise risk management function, headed by the Company's Chief Risk Officer. This risk management function is responsible for ensuring that each business unit has proper policies and procedures for managing risk and for identifying, measuring and monitoring risk across the GMAC enterprise. In addition, the Company has initiated an enterprise-wide control self-assessment process. The focus of the process is to identify key risks specific to the operating environment of each business, and for each business to assess the degree to which it 33 maintains internal controls appropriate for its operating environment. Notwithstanding these risk and control initiatives, the Company may incur losses attributable to operational risks from time to time, and there can be no assurance that such losses will not be incurred in the future. Accounting and Reporting Developments SFAS No. 146 - In June 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and establishes that fair value is the objective for initial measurement of the liability. In contrast, EITF 94-3 recognized a liability at the date of an entity's commitment to an exit plan. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company did not apply the provisions of this standard early and does not expect that it will have a material impact on the Company's financial position, results of operations or cash flows. FASB Interpretation No. 45 - In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45), which changes the accounting for, and disclosure of, guarantees. Beginning with transactions entered into after December 31, 2002, the Interpretation requires certain guarantees to be recorded at fair value, which is different from prior practice, which was generally to record a liability only when a loss was probable and reasonably estimable, as defined by SFAS No. 5, Accounting for Contingencies. In general, FIN 45 applies to contracts or indemnification agreements that contingently require GMAC to make payments to a guaranteed third-party based on changes in an underlying that is related to an asset, liability, or an equity security of the guaranteed party. The accounting provisions of FIN 45 apply only to new transactions entered into after December 31, 2002. FIN 45 immediately requires new disclosures effective immediately, which are presented in Notes 14 and 22 to the Consolidated Financial Statements. The adoption of FIN 45 does not have a material impact on the Company's financial position, results of operations or cash flows. FASB Interpretation No. 46 - In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, Consolidated Financial Statements. FIN 46 addresses consolidation by business enterprises of variable interest entities, representing those entities whose total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties. More specifically, FIN 46 defines variable interest entities as those entities in which the equity investment at risk is not greater than the expected losses of the entity. FIN 46 explains how to identify variable interest entities and how an enterprise assesses its interests in a variable interest entity, to decide whether to consolidate that entity. FIN 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. Variable interest entities that effectively disperse risks will not be consolidated unless a single party holds an interest or combination of interests that effectively recombines risks that were previously dispersed. FIN 46 does not impact the consolidation guidance for qualifying special purpose entities (QSPEs), as described in SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. FIN 46 is effective immediately for all enterprises with interests in variable interest entities created after January 31, 2003. For variable interest entities created before February 1, 2003, the consolidation provisions of the Interpretation shall be applied no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003. The Company has certain interests in variable interest entities and is in the process of analyzing the provisions of FIN 46 to determine the resulting impact to the Company's financial position, results of operations and cash flows. The Company adopted the disclosure provisions of FIN 46 effective December 31, 2002, as it relates to existing variable interest entities, as presented in Note 8 to the Consolidated Financial Statements. 34 Consolidated Operating Results Comparison of 2002 to 2001 The following section provides a discussion of GMAC's consolidated results of operations as displayed in the Consolidated Statement of Income presented on page 39. A further discussion of the operating results can be found within the foregoing individual business segment sections of this MD&A. Revenues Total financing revenue increased by 4% to $ 11,927 million in 2002. Most notable was a 28% increase in consumer financing revenue due to growth in the consumer automotive portfolio caused by GM sponsored special rate financing programs, and due to the increased use of secured financing structures in the Mortgage operations. Total financing revenue was adversely affected as a result of declining yields on the commercial portfolio (consistent with the decline in interest rates during the year), and a reduction in net operating lease revenue attributable to a continued decrease in the Company's operating lease portfolio. Interest and discount expense was favorably impacted by declining market interest rates, offset by increased debt (used to fund higher asset levels) and wider borrowing spreads, resulting in a net decrease of 11% or $ 847 million from 2001 to 2002. The provision for credit losses increased 38% from $ 1,472 million in 2001 to $ 2,028 million in 2002. Higher consumer assets levels, combined with incremental credit allowances in the non-automotive dealer portion of the commercial portfolio accounted for this increase. The 21% increase in insurance premiums and service revenue earned in 2002 was related to volume and rate increases at the Company's Insurance operations. Despite increased amortization and impairment charges of mortgage servicing rights, mortgage banking income increased by 11% in 2002. Record production volumes (resulting in higher servicing fees and other lending-related income) combined with improved mortgage servicing rights hedging results offset the increase in mortgage servicing rights charges. The reduction in investment income was attributable to net capital losses and other than temporary impairment in the Insurance operations' investment portfolio. Additional decreases in investment income were due to declines in the value of mortgage-related securities, such as asset-and mortgage-backed securities, interest-only strips, principal-only strips, and subprime residual interests. The losses on these securities were generally a result of higher than anticipated prepayments due to interest rate declines. Other income increased by $ 283 million during the year to $ 3,671 million and included the following significant items, contributing to the net change: o Increased automotive securitization revenues. o Favorable tax adjustments. o Decreased interest and service fees from GM, as a result of a decrease in interest rates and outstanding balances on amounts due GMAC under financing arrangements with GM. o Unfavorable market adjustments on the Company's non-hedge derivative positions. Expenses Compensation and benefits expense was $ 2,393 million in 2002 as compared to $ 1,973 million. The majority of this 21% increase was due to higher compensation costs at the Company's Mortgage operations commensurate with growth in their business. Additional increases in compensation benefits were incurred in the Financing operations due to increased pension and postretirement allocations from GM. The 19% increase in insurance losses and loss adjustment expenses was primarily due to higher written premium and service revenue volumes. Other operating expense increased $ 301 million, to $ 4,215 million in 2002. Contributing to this 8% increase were higher expenses associated with the Company's full service leasing business, consistent with the growth in that business, and other miscellaneous increases attributable to general growth in the Company. The Company's effective tax rate was 36.4% in 2002, compared to 37.4% in 2001. The change in the effective tax rate was primarily due to favorable tax adjustments. Comparison of 2001 to 2000 GMAC's net income was $ 1,786 million in 2001 compared with $ 1,602 million in 2000. Included in 2001 results is a $ 34 million cumulative effect of accounting change related to the adoption of SFAS No. 133. Revenues Total financing revenue was $ 11,450 million in 2001, an increase of $ 173 million (2%) from 2000. Financing revenues were favorably impacted by asset growth in the consumer automotive portfolio due to GM sponsored incentives. Most significantly, in the fourth quarter of 2001, GM launched the "Keep America Rolling" zero percent financing program, which contributed to the increase in retail contracts compared to 2000. Total financing revenue was adversely affected by decreases in commercial financing revenue primarily caused by a decline in average wholesale automotive receivables due to lower dealer inventory levels and a decline in yields on the commercial portfolio, consistent with the general reduction in market interest rates. Interest and discount expense decreased by $ 715 million (9%) to $ 7,580 million in 2001. The decrease in interest expense was mainly a result of a continued reduction in short-term market rates during the year that was somewhat offset by wider borrowing spreads and increased funding requirements. 35 The provision for credit losses totaled $ 1,472 million in 2001 as compared to $ 602 million in 2000. The increase in the provision was a combination of an increase in the consumer automotive retail contract portfolio and increases in loan losses in the non-automotive dealer portion of the commercial portfolio due primarily to deteriorating economic conditions. Insurance premiums and service revenue earned in 2001 rose 11% to $ 2,226 million. The increase was due to strong volume in vehicle service and maintenance contracts as a result of GM sponsored programs, combined with growth in assumed reinsurance business and dealer vehicle inventory insurance. Investment income decreased in 2001 mainly as a result of reduced capital gains realized in the Insurance operations investment portfolio as compared to gains realized in 2000. Mortgage banking income increased by $ 344 million, to $ 1,862 million in 2001. The 23% increase resulted from significantly stronger lending volumes, loan originations, securitizations and an increase in the servicing portfolio, reflecting significant refinancing activity prompted by the decline in market interest rates observed in 2001. In addition, acquisition activity increased revenues in Mortgage operations. These increases were offset by impairment charges recorded on mortgage servicing rights due to mortgage prepayments in excess of anticipated results. Other income increased by $ 901 million (36%) in 2001. Higher securitization volume, combined with a declining interest rate environment (which resulted in larger gains on sale) caused an increase in securitization-related income as compared to 2000. Other income was also favorably impacted by an increase in income from International automotive diversified operations and higher market adjustments on the Company's derivative portfolio. Expenses Compensation and benefits expense increased 6% in 2001, to $ 1,973 million from $ 1,866 million. The increase was primarily related to acquisitions and growth in Mortgage operations, along with higher employee benefit costs. Insurance losses and loss adjustment expenses totaled $ 1,711 million in 2001, a 15% increase over the $ 1,493 million in 2000. The increase was largely due to losses associated with increased vehicle repair costs in the personal lines unit and adverse weather-related losses in the commercial lines business unit. Increased volume in the mechanical and assumed reinsurance business also contributed to the expense increase. The 26% increase in other operating expenses in 2001 was primarily related to increased operating costs in the Mortgage operations due to continued growth and acquisitions. EXHIBITS: Index of Exhibits General Motors Acceptance Corporation Exhibit Description Method of Filing ------------------------------------------------------------------------ 3.1 Certificate of Incorporation Filed as Exhibit 3.1 to the of GMAC Financial Services Company's Quarterly Report on Corporation dated Form 10-Q for the period ended February 20, 1997 June 30, 2002 (File No. 1-3754), incorporated herein by reference. 3.2 Certificate of Merger of GMAC Filed as Exhibit 3.2 to the and GMAC Financial Services Company's Quarterly Report on Corporation dated Form 10-Q for the period ended December 17, 1997 June 30, 2002 (File No. 1-3754), incorporated herein by reference. 3.3 By-Laws of General Motors Filed as Exhibit 3.3 to the Acceptance Corporation as Company's Quarterly Report on amended through January 1, Form 10-Q for the period ended 1998 June 30, 2002 (File No. 1-3754), incorporated herein by reference. 4.1 Form of Indenture dated as of Filed as Exhibit 4(a) to the July 1, 1982 between the Company's Registration Statement Company and Bank of New York No. 2-75115, incorporated herein (Successor Trustee to Morgan by reference. Guaranty Trust Company of New York), relating to Debt Securities 4.1.1 Form of First Supplemental Filed as Exhibit 4(g) to the Indenture dated as of Company's Registration Statement April 1, 1986 supplementing No. 33-4653, incorporated herein the Indenture designated as by reference. Exhibit 4.1 4.1.2 Form of Second Supplemental Filed as Exhibit 4(h) to the Indenture dated as of Company's Registration Statement June 15, 1987 supplementing No. 33-15236, incorporated herein the Indenture designated as by reference. Exhibit 4.1 4.1.3 Form of Third Supplemental Filed as Exhibit 4(i) to the Indenture dated as of Company's Registration Statement September 30, 1996 No. 333-33183, incorporated herein supplementing the Indenture by reference. designated as Exhibit 4.1 4.1.4 Form of Fourth Supplemental Filed as Exhibit 4(j) to the Indenture dated as of Company's Registration Statement January 1, 1998 supplementing No. 333-48705, incorporated herein the Indenture designated as by reference. Exhibit 4.1 4.1.5 Form of Fifth Supplemental Filed as Exhibit 4(k) to the Indenture dated as of Company's Registration Statement September 30, 1998 No. 333-75463, incorporated herein supplementing the Indenture by reference. designated as Exhibit 4.1 4.2 Form of Indenture dated as of Filed as Exhibit 4 to the September 24, 1996 between Company's Registration Statement the Company and The Chase No. 333-12023, incorporated herein Manhattan Bank, Trustee, by reference. relating to SmartNotes 4.2.1 Form of First Supplemental Filed as Exhibit 4(a)(1) to the Indenture dated as of Company's Registration Statement January 1, 1998 supplementing No. 333-48207, incorporated herein the Indenture designated as by reference. Exhibit 4.2 4.3 Form of Indenture dated as of Filed as Exhibit 4 to the October 15, 1985 between the Company's Registration Statement Company and U.S. Bank Trust No. 2-99057, incorporated herein (Successor Trustee to by reference. Comerica Bank), relating to Demand Notes 4.3.1 Form of First Supplemental Filed as Exhibit 4(a) to the Indenture dated as of Company's Registration Statement April 1, 1986 supplementing No. 33-4661, incorporated herein the Indenture designated as by reference. Exhibit 4.3 4.3.2 Form of Second Supplemental Filed as Exhibit 4(b) to the Indenture dated as of Company's Registration Statement June 24, 1986 supplementing No. 33-6717, incorporated herein the Indenture designated as by reference. Exhibit 4.3 4.3.3 Form of Third Supplemental Filed as Exhibit 4(c) to the Indenture dated as of Company's Registration Statement February 15, 1987 No. 33-12059, incorporated herein supplementing the Indenture by reference. designated as Exhibit 4.3 4.3.4 Form of Fourth Supplemental Filed as Exhibit 4(d) to the Indenture dated as of Company's Registration Statement December 1, 1988 No. 33-26057, incorporated herein supplementing the Indenture by reference. designated as Exhibit 4.3 6 ------------------------------------------------------------------------ 12 Computation of ratio of Filed herewith. earnings to fixed charges 23.1 Independent Auditors' Consent Filed herewith. 99.1 Certification of Principal Filed herewith. Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification of Principal Filed herewith. Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 7 ------------------------------------------------------------------------ to Comerica Bank), relating to Demand Notes 4.3.1 Form of First Filed as Supplemental Exhibit 4(a) to the Indenture dated as Company's of April 1, 1986 Registration supplementing the Statement Indenture No. 33-4661, designated as incorporated herein Exhibit 4.3 by reference. 4.3.2 Form of Second Filed as Supplemental Exhibit 4(b) to the Indenture dated as Company's of June 24, 1986 Registration supplementing the Statement Indenture No. 33-6717, designated as incorporated herein Exhibit 4.3 by reference. 4.3.3 Form of Third Filed as Supplemental Exhibit 4(c) to the Indenture dated as Company's of February 15, Registration 1987 supplementing Statement the Indenture No. 33-12059, designated as incorporated herein Exhibit 4.3 by reference. 4.3.4 Form of Fourth Filed as Supplemental Exhibit 4(d) to the Indenture dated as Company's of December 1, Registration 1988 supplementing Statement the Indenture No. 33-26057, designated as incorporated herein Exhibit 4.3 by reference. 4.3.5 Form of Fifth Filed as Supplemental Exhibit 4(e) to the Indenture dated as Company's of October 2, 1989 Registration supplementing the Statement Indenture No. 33-31596, designated as incorporated herein Exhibit 4.3 by reference. 28 Table of Contents Index of Exhibits General Motors Acceptance Corporation Exhibit Description Method of Filing ------- -------------------- -------------------- 4.3.6 Form of Sixth Filed as Supplemental Exhibit 4(f) to the Indenture dated as Company's of January 1, 1998 Registration supplementing the Statement Indenture No. 333-56431, designated as incorporated herein Exhibit 4.3 by reference. 99.1 Certification of Filed herewith. Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification of Filed herewith. Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 29 Table of Contents Index of Exhibits General Motors Acceptance Corporation Exhibit Description Method of Filing ------ --------------------------------- -------------------------------- 3.1 Certificate of Incorporation of Filed as Exhibit 3.1 to the GMAC Financial Services Company's Quarterly Report on Corporation dated February 20, Form 10-Q for the period ended 1997 June 30, 2002 (File No. 1-3754), incorporated herein by reference. 3.2 Certificate of Merger of GMAC and Filed as Exhibit 3.2 to the GMAC Financial Services Company's Quarterly Report on Corporation dated December 17, Form 10-Q for the period ended 1997 June 30, 2002 (File No. 1-3754), incorporated herein by reference. 3.3 By-Laws of General Motors Filed as Exhibit 3.3 to the Acceptance Corporation as amended Company's Quarterly Report on through March 17, 2003 Form 10-Q for the period ended March 31, 2003 (File No. 1-3754), incorporated herein by reference. 4.1 Form of Indenture dated as of Filed as Exhibit 4(a) to the July 1, 1982 between the Company Company's Registration Statement and Bank of New York (Successor No. 2-75115, incorporated herein Trustee to Morgan Guaranty Trust by reference. Company of New York), relating to Debt Securities 4.1.1 Form of First Supplemental Filed as Exhibit 4(g) to the Indenture dated as of April 1, Company's Registration Statement 1986 supplementing the Indenture No. 33-4653, incorporated herein designated as Exhibit 4.1 by reference. 4.1.2 Form of Second Supplemental Filed as Exhibit 4(h) to the Indenture dated as of June 15, Company's Registration Statement 1987 supplementing the Indenture No. 33-15236, incorporated designated as Exhibit 4.1 herein by reference. 4.1.3 Form of Third Supplemental Filed as Exhibit 4(i) to the Indenture dated as of September Company's Registration Statement 30, 1996 supplementing the No. 333-33183, incorporated Indenture designated as Exhibit herein by reference. 4.1 4.1.4 Form of Fourth Supplemental Filed as Exhibit 4(j) to the Indenture dated as of January 1, Company's Registration Statement 1998 supplementing the Indenture No. 333-48705, incorporated designated as Exhibit 4.1 herein by reference. 4.1.5 Form of Fifth Supplemental Filed as Exhibit 4(k) to the Indenture dated as of September Company's Registration Statement 30, 1998 supplementing the No. 333-75463, incorporated Indenture designated as Exhibit herein by reference. 4.1 4.2 Form of Indenture dated as of Filed as Exhibit 4 to the September 24, 1996 between the Company's Registration Statement Company and The Chase Manhattan No. 333-12023, incorporated Bank, Trustee, relating to herein by reference. SmartNotes 4.2.1 Form of First Supplemental Filed as Exhibit 4(a)(1) to the Indenture dated as of January 1, Company's Registration Statement 1998 supplementing the Indenture No. 333-48207, incorporated designated as Exhibit 4.2 herein by reference. 4.3 Form of Indenture dated as of Filed as Exhibit 4 to the October 15, 1985 between the Company's Registration Statement Company and U.S. Bank Trust No. 2-99057, incorporated herein (Successor Trustee to Comerica by reference. Bank), relating to Demand Notes 4.3.1 Form of First Supplemental Filed as Exhibit 4(a) to the Indenture dated as of April 1, Company's Registration Statement 1986 supplementing the Indenture No. 33-4661, incorporated herein designated as Exhibit 4.3 by reference. 4.3.2 Form of Second Supplemental Filed as Exhibit 4(b) to the Indenture dated as of June 24, Company's Registration Statement 1986 supplementing the Indenture No. 33-6717, incorporated herein designated as Exhibit 4.3 by reference. 4.3.3 Form of Third Supplemental Filed as Exhibit 4(c) to the Indenture dated as of February Company's Registration Statement 15, 1987 supplementing the No. 33-12059, incorporated Indenture designated as Exhibit herein by reference. 4.3 4.3.4 Form of Fourth Supplemental Filed as Exhibit 4(d) to the Indenture dated as of December 1, Company's Registration Statement 1988 supplementing the Indenture No. 33-26057, incorporated designated as Exhibit 4.3 herein by reference. 27 Table of Contents Index of Exhibits General Motors Acceptance Corporation Exhibit Description Method of Filing ------ --------------------------------- -------------------------------- 4.3.5 Form of Fifth Supplemental Filed as Exhibit 4(e) to the Indenture dated as of October 2, Company's Registration Statement 1989 supplementing the Indenture No. 33-31596, incorporated designated as Exhibit 4.3 herein by reference. 4.3.6 Form of Sixth Supplemental Filed as Exhibit 4(f) to the Indenture dated as of January 1, Company's Registration Statement 1998 supplementing the Indenture No. 333-56431, incorporated designated as Exhibit 4.3 herein by reference. 4.3.7 Form of Seventh Supplemental Filed as Exhibit 4(g) to the Indenture dated as of June 15, Company's Registration Statement 1998 supplementing the Indenture No. 333-56431, incorporated designated as Exhibit 4.3 herein by reference. 12 Computation of ratio of earnings Filed herewith. to fixed changes 31.1 Certification of Principal Filed herewith. Executive Officer pursuant to Rule 13a - 14(a)/15d - 14(a) 31.2 Certification of Principal Filed herewith. Financial Officer pursuant to Rule 13a - 14(a)/15d - 14(a) 32.1 Certification of Principal Filed herewith. Executive Officer pursuant to 18 U.S.C. Section 1350 32.2 Certification of Principal Filed herewith. Financial Officer pursuant to 18 U.S.C. Section 1350 28 27 ---------------------------------------------------------------------------- ---- Table of Contents Index of Exhibits General Motors Acceptance Corporation Exhibit Description Method of Filing ------ ------------------------------------- ---------------------------------- 3.1 Certificate of Incorporation of GMAC Filed as Exhibit 3.1 to the Financial Services Corporation dated Company's Quarterly Report on Form February 20, 1997 10-Q for the period ended June 30, 2002 (File No. 1-3754), incorporated herein by reference. 3.2 Certificate of Merger of GMAC and Filed as Exhibit 3.2 to the GMAC Financial Services Corporation Company's Quarterly Report on Form dated December 17, 1997 10-Q for the period ended June 30, 2002 (File No. 1-3754), incorporated herein by reference. 3.3 By-Laws of General Motors Acceptance Filed as Exhibit 3.3 to the Corporation as amended through March Company's Quarterly Report on Form 17, 2003 10-Q for the period ended March 31, 2003 (File No. 1-3754) , incorporated herein by reference. 4.1 Form of Indenture dated as of July 1, Filed as Exhibit 4(a) to the 1982 between the Company and Bank of Company's Registration Statement New York (Successor Trustee to Morgan No. 2-75115, incorporated herein Guaranty Trust Company of New York), by reference. relating to Debt Securities 4.1.1 Form of First Supplemental Indenture Filed as Exhibit 4(g) to the dated as of April 1, 1986 Company's Registration Statement supplementing the Indenture No. 33-4653, incorporated herein designated as Exhibit 4.1 by reference. 4.1.2 Form of Second Supplemental Indenture Filed as Exhibit 4(h) to the dated as of June 15, 1987 Company's Registration Statement supplementing the Indenture No. 33-15236, incorporated herein designated as Exhibit 4.1 by reference. 4.1.3 Form of Third Supplemental Indenture Filed as Exhibit 4(i) to the dated as of September 30, 1996 Company's Registration Statement supplementing the Indenture No. 333-33183, incorporated herein designated as Exhibit 4.1 by reference. 4.1.4 Form of Fourth Supplemental Indenture Filed as Exhibit 4(j) to the dated as of January 1, 1998 Company's Registration Statement supplementing the Indenture No. 333-48705, incorporated herein designated as Exhibit 4.1 by reference. 4.1.5 Form of Fifth Supplemental Indenture Filed as Exhibit 4(k) to the dated as of September 30, 1998 Company's Registration Statement supplementing the Indenture No. 333-75463, incorporated herein designated as Exhibit 4.1 by reference. 4.2 Form of Indenture dated as of Filed as Exhibit 4 to the September 24, 1996 between the Company's Registration Statement Company and The Chase Manhattan Bank, No. 333-12023, incorporated herein Trustee, relating to SmartNotes by reference. 4.2.1 Form of First Supplemental Indenture Filed as Exhibit 4(a)(1) to the dated as of January 1, 1998 Company's Registration Statement supplementing the Indenture No. 333-48207, incorporated herein designated as Exhibit 4.2 by reference. 4.3 Form of Indenture dated as of October Filed as Exhibit 4 to the 15, 1985 between the Company and U.S. Company's Registration Statement Bank Trust (Successor Trustee to No. 2-99057, incorporated herein Comerica Bank), relating to Demand by reference. Notes 4.3.1 Form of First Supplemental Indenture Filed as Exhibit 4(a) to the dated as of April 1, 1986 Company's Registration Statement supplementing the Indenture No. 33-4661, incorporated herein designated as Exhibit 4.3 by reference. 4.3.2 Form of Second Supplemental Indenture Filed as Exhibit 4(b) to the dated as of June 24, 1986 Company's Registration Statement supplementing the Indenture No. 33-6717, incorporated herein designated as Exhibit 4.3 by reference. 4.3.3 Form of Third Supplemental Indenture Filed as Exhibit 4(c) to the dated as of February 15, 1987 Company's Registration Statement supplementing the Indenture No. 33-12059, incorporated herein designated as Exhibit 4.3 by reference. 4.3.4 Form of Fourth Supplemental Indenture Filed as Exhibit 4(d) to the dated as of December 1, 1988 Company's Registration Statement supplementing the Indenture No. 33-26057, incorporated herein designated as Exhibit 4.3 by reference. 28 Table of Contents Index of Exhibits General Motors Acceptance Corporation Exhibit Description Method of Filing ------ ------------------------------------- ---------------------------------- 4.3.5 Form of Fifth Supplemental Indenture Filed as Exhibit 4(e) to the dated as of October 2, 1989 Company's Registration Statement supplementing the Indenture No. 33-31596, incorporated herein designated as Exhibit 4.3 by reference. 4.3.6 Form of Sixth Supplemental Indenture Filed as Exhibit 4(f) to the dated as of January 1, 1998 Company's Registration Statement supplementing the Indenture No. 333-56431, incorporated herein designated as Exhibit 4.3 by reference. 4.3.7 Form of Seventh Supplemental Filed as Exhibit 4(g) to the Indenture dated as of June 15, 1998 Company's Registration Statement supplementing the Indenture No. 333-56431, incorporated herein designated as Exhibit 4.3 by reference. 4.4 Form of Indenture dated as of Filed as Exhibit 4 to the December 1, 1993 between the Company Company's Registration Statement and Citibank, N.A., Trustee, relating No. 33-51381, incorporated herein to Medium-Term Notes by reference. 4.4.1 Form of First Supplemental Indenture Filed as Exhibit 4(a)(1) to the dated as of January 1, 1998 Company's Registration Statement supplementing the Indenture No. 333-59551, incorporated herein designated as Exhibit 4.4 by reference. 12 Computation of ratio of earnings to Filed herewith. fixed charges 31.1 Certification of Principal Executive Filed herewith. Officer pursuant to Rule 13a-14(a) /15d-14(a) 31.2 Certification of Principal Financial Filed herewith. Officer pursuant to Rule 13a-14(a)/15d-14(a) The following exhibit shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that Section. In addition Exhibit No. 32 shall not be deemed incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. 32 Certification of Principal Executive Officer and Principal Filed herewith. Financial Officer pursuant to 18 U.S.C. Section 1350 29 FILINGS: PRSPCT 02/19/2004 PRSPCT 02/17/2004 PRSPCT 02/12/2004 8-K 5 02/11/2004 PRSPCT 02/09/2004 PRSPCT 02/02/2004 PRSPCT 01/30/2004 PRSPCT 01/26/2004 PRSPCT 01/20/2004 8-K 01/20/2004 PRSPCT 01/15/2004 PRSPCT 01/12/2004 PRSPCT 01/06/2004 PRSPCT 12/22/2003 REGST S-3 12/19/2003 PRSPCT 12/18/2003 PRSPCT 12/12/2003 PRSPCT 12/09/2003 PRSPCT 12/08/2003 8-K 5 12/02/2003 PRSPCT 12/01/2003 PRSPCT 11/25/2003 PRSPCT 11/17/2003 PRSPCT 11/10/2003 PRSPCT 11/03/2003 PRSPCT 10/27/2003 PRSPCT 10/24/2003 PRSPCT 10/22/2003 PRSPCT 10/17/2003 8-K 10/15/2003 PRSPCT 10/14/2003 PRSPCT 10/06/2003 REGST S-3 09/30/2003 10-Q 09/30/2003 PRSPCT 09/29/2003 REGST S-3 A00 09/29/2003 PRSPCT 09/22/2003 REGST S-3 09/17/2003 PRSPCT 09/15/2003 PRSPCT 09/08/2003 PRSPCT 09/05/2003 REGST S-3 09/05/2003 PRSPCT 09/02/2003 PRSPCT 08/29/2003 PRSPCT 08/22/2003 PRSPCT 08/20/2003 PRSPCT 08/19/2003 PRSPCT 08/14/2003 PRSPCT 08/11/2003 PRSPCT 08/04/2003 PRSPCT 07/28/2003 PRSPCT 07/21/2003 8-K 9 07/17/2003 PRSPCT 07/14/2003 PRSPCT 07/03/2003 PRSPCT 07/01/2003 PRSPCT 06/30/2003 10-Q 06/30/2003 PRSPCT 06/23/2003 PRSPCT 06/20/2003 8-K 5 06/19/2003 PRSPCT 06/17/2003 8-K 5 06/16/2003 8-K 5 06/13/2003 PRSPCT 06/11/2003 PRSPCT 06/10/2003 PRSPCT 06/02/2003 PRSPCT 05/23/2003 PRSPCT 05/19/2003 PRSPCT 05/16/2003 PRSPCT 05/09/2003 PRSPCT 05/08/2003 PRSPCT 05/05/2003 PRSPCT 04/29/2003 8-K 5 04/22/2003 PRSPCT 04/17/2003 8-K 9 04/15/2003 PRSPCT 04/14/2003 8-K 5 04/09/2003 PRSPCT 04/08/2003 PRSPCT 04/01/2003 10-Q 03/31/2003 PRSPCT 03/24/2003 PRSPCT 03/18/2003 PRSPCT 03/11/2003 8-K 5 03/06/2003 PRSPCT 03/05/2003 PRSPCT 03/04/2003 PRSPCT 03/03/2003 PRSPCT 02/21/2003 PRSPCT 02/18/2003 PRSPCT 02/07/2003 PRSPCT 02/06/2003 PRSPCT 01/31/2003 REGST 8-A 01/31/2003 PRSPCT 01/30/2003 PRSPCT 01/29/2003 PRSPCT 01/24/2003 PRSPCT 01/21/2003 8-K 5 01/16/2003 PRSPCT 01/10/2003 PRSPCT 01/03/2003 ARS 12/31/2002 10-K 12/31/2002 PRSPCT 12/20/2002 PRSPCT 12/13/2002 PRSPCT 12/10/2002 PRSPCT 12/09/2002 PRSPCT 12/06/2002 PRSPCT 12/02/2002 PRSPCT 11/22/2002 PRSPCT 11/21/2002 PRSPCT 11/19/2002 PRSPCT 11/18/2002 PRSPCT 11/14/2002 PRSPCT 11/13/2002 REGST S-3 11/08/2002 PRSPCT 11/06/2002 8-K 5 11/03/2002 PRSPCT 10/25/2002 PRSPCT 10/21/2002 PRSPCT 10/15/2002 8-K 5 10/15/2002 PRSPCT 10/09/2002 PRSPCT 10/01/2002 10-Q 09/30/2002 PRSPCT 09/23/2002 PRSPCT 09/13/2002 PRSPCT 09/06/2002 PRSPCT 09/03/2002 PRSPCT 08/27/2002 PRSPCT 08/26/2002 LOAD-DATE: February 24, 2004 Document 1 of 2. Terms & Conditions Privacy Copyright © 2004 LexisNexis, a division of Reed Elsevier Inc. All Rights Reserved.