Mercedes 1999 Annual Report Download - page 109

(in millions of €, except per share amounts)
OTHER NOTES
103
sortium under certain customer finance programs. When entering
into such customer financing commitments, the Airbus consortium
has generally established a secured position in the aircraft being
financed. The Airbus consortium and DA believe that the estimated
fair value of the aircraft securing such commitments would sub-
stantially offset any potential losses from the commitments. Based
on experience, the probability of material losses from such cus-
tomer financing commitments is considered remote.
DA’s obligations under the foregoing financing commitments of the
Airbus consortium are joint and several with its other partners in
the consortium. In the event that Airbus, despite the underlying
collateral, should be unable to honor its obligations, each consor-
tium partner would be jointly and severally liable to third parties
without limitation. Between the consortium partners, the liability
is limited to each partner’s proportionate share in Airbus.
In 1989, the Group acquired Messerschmitt-Bölkow-Blohm GmbH
(“MBB”), which included DaimlerChrysler Aerospace Airbus GmbH
(then known as Deutsche Airbus GmbH) which was and continues
to be the German participant in Airbus Industrie. In connection
with this acquisition, the Government of the Federal Republic of
Germany undertook responsibility for certain financial obligations
of MBB and DaimlerChrysler Aerospace Airbus GmbH and agreed
to provide certain ongoing limited financial assistance for develop-
ment programs and other items. Such undertakings, advances and
assistance were to be repaid by DaimlerChrysler Aerospace Airbus
GmbH on a contingent basis equal to 40% of the prior year´s
pretax profit, as defined in the agreement with the Government,
beginning in 2001, and royalty payments based on sales of air-
craft.
During 1998 and 1997, DaimlerChrysler Aerospace Airbus GmbH
settled these contingent obligations with the Federal Republic of
Germany for payments of €895 and €716, respectively. The 1998
settlement, which resulted in the complete discharge of all remain-
ing obligations to the German Federal Government, related to the
Airbus A300/310 and A330/340 series aircraft as well as to finan-
cial assistance not related to development, while the 1997 settle-
ment related primarily to the A320 aircraft and its derivatives. Of
the foregoing settlement payments, €229 and €369 were expensed
in 1998 and 1997, respectively. The remainder of the settlement
payments were capitalized and are being amortized over those air-
craft to be delivered in the future to which the settlements related.
In connection with certain production programs the Group has
committed to certain levels of outsourced manufactured parts and
components over extended periods at market prices. The Group
may be required to compensate suppliers in the event the commit-
ted volumes are not purchased.
Total rentals under operating leases, charged as an expense in the
statement of income, amounted to €964 (1998: €984; 1997: €910).
Future minimum lease payments under rental and lease agree-
ments which have initial or remaining terms in excess of one year
at December 31, 1999 are as follows:
Operating
leases
2000
2001
2002
2003
2004
thereafter
676
452
341
252
217
904
29. INFORMATION ABOUT FINANCIAL INSTRUMENTS
a) Use of financial instruments
In the course of day-to-day financial management, DaimlerChrysler
purchases financial instruments, such as financial investments,
variable- and fixed-interest bearing securities, equity securities,
forward exchange contracts and currency options. The Group also
issues financial instruments such as eurobonds, commercial paper
and medium-term-notes. As a consequence of purchasing and issu-
ing these types of financial instruments, the Group may be ex-
posed to risks from changes in interest and currency exchange
rates as well as share prices. Additionally, the Group conducts
business on a global basis in numerous major international curren-
cies and is, therefore, exposed to adverse movements in foreign
currency exchange rates. DaimlerChrysler uses derivative financial
instruments to reduce such risks. Without the use of these instru-
ments the Group’s market risks would be higher.
Based on regulations issued by regulatory authorities for financial
institutions, the Group has established guidelines for risk assess-
ment procedures and controls for the use of financial instruments,
including a clear segregation of duties with regard to operating fi-
nancial activities and settlement, accounting and controlling.
Market risk in portfolio management is quantified according to the
“value-at-risk” method which is commonly used among banks. Us-
ing historical variability of market values, potential changes in
value resulting from changes of market prices are calculated on
the basis of statistical methods. The maximum acceptable market
risk is established by senior management in the form of risk capi-
tal, approved for a period not exceeding one year. Adherence to
risk capital limitations is regularly monitored.
b) Notional amounts and credit risk
The contract or notional amounts shown below do not always rep-
resent amounts exchanged by the parties and, thus, are not neces-
sarily a measure for the exposure of DaimlerChrysler through its
use of derivatives.