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Ford Motor Credit Company

ANNUAL REPORT

for the year ended

Filed pursuant to Section 13

TABLE OF CONTENTS

UNITED STATES

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2002

For the transition period from                           to                          

Commission file number 1-6368

Ford Motor Credit Company

Registrant’s telephone number, including area code (313) 322-3000

Securities registered pursuant to Section 12(b) of the Act:

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   ü         No        

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes                    No   ü  

     As of March 17, 2003, the registrant had outstanding 250,000 shares of Common Stock. No voting stock of the registrant is held by non-affiliates of the registrant.

DOCUMENTS INCORPORATED BY REFERENCE

     This Report incorporates by reference into Items 1 and 3 hereof Sections of Items 1, 3, 6, 7 and 7A of Ford Motor Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

     The registrant meets the condition set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format.

Overview

      We are the world’s largest automotive finance company based on the dollar value of the portfolio of finance receivables we own and manage. We provide vehicle and dealer financing in 36 countries to more than 11 million customers and more than 12,500 automotive dealers. We were incorporated in Delaware in 1959 and are an indirect wholly-owned subsidiary of Ford Motor Company (Ford). Our principal executive offices are located at One American Road, Dearborn, Michigan 48126, and our telephone number is (313) 322-3000.

      All of our periodic report filings with the Securities and Exchange Commission (SEC) pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended, are made available, free of charge, through our website located at www.fordcredit.com/investorcenter/, including our annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and any amendments to those reports. These reports and amendments are available through our website as soon as reasonably practicable after we electronically file such report or amendment with the SEC.

      Products and Services. We offer a wide variety of automotive financing products to and through automotive dealers throughout the world. Our primary financing products fall into three categories:

	•	Retail financing  — purchasing retail installment sale contracts and retail lease contracts from dealers, and offering financing to commercial customers, primarily vehicle leasing companies and fleet purchasers, to purchase or lease vehicle fleets.
	•	Wholesale financing  — making loans to dealers to finance the purchase of vehicle inventory, also known as floorplan financing.
	•	Other financing  — making loans to dealers for working capital, improvements to dealership facilities, and to purchase and finance dealership real estate.

We also service the finance receivables and leases we originate and purchase, make loans to Ford affiliates, purchase certain receivables of Ford and its subsidiaries and provide insurance services related to our financing programs.

      We earn our revenue primarily from the following:

	•	Payments made under retail installment sale contracts and retail leases that we purchase, including interest supplements and other support payments from Ford on special-rate retail financing programs;
	•	Investment and other income related to sold receivables; and
	•	Payments made under wholesale and other dealer loan financing programs.

See Item 6 for quantitative information concerning the amount of revenue generated by the different types of services we provide.

      Geographic Scope of Operations and Segment Information. We conduct our financing operations directly or through our subsidiaries and affiliates. We offer substantially similar products and services throughout many different regions, subject to local legal restrictions and market conditions. We divide our business segments based on geographic regions: Ford Credit North America (North America Segment) and Ford Credit International (International Segment). The North America Segment includes our operations in the United States and Canada. The International Segment includes our operations in all other countries in which we do business directly and indirectly. Additional financial information regarding our operations by business segments and operations by geographic regions are shown in Note 17 of our Notes to Financial Statements and see Item 7A for a discussion of currency exchange rate risks and of our hedging strategy.

North America Segment

      We do business in all 50 states of the United States through about 165 dealer automotive financing branches and 7 regional service centers. We do business in all provinces in Canada through 16 dealer automotive financing branches and 2 regional service centers. Our United States operations accounted for 76% and 80% of our total managed receivables in 2002 and 2001, respectively, and our Canadian operations accounted for about 5% and 4% of our total managed receivables in 2002 and 2001, respectively.

      In the United States and Canada, under the Ford Credit brand name, we provide financing services to and through dealers of Ford, Lincoln and Mercury brand vehicles and non-Ford vehicles also sold by these dealers. We provide similar financial services under the Jaguar, Land Rover and Mazda brand names to and through Jaguar, Land Rover and Mazda dealers, respectively. Under the PRIMUS label, we provide financing services to Aston Martin and non-Ford dealers in the United States and Canada. Volvo dealers in the United States obtain financing services from our U.S. Volvo financing subsidiary.

      To a limited extent, we also offer financing products through dealers to consumers who generally would not qualify for traditional financing provided by commercial banks or other automobile manufacturers’ captive finance companies. Our Fairlane Credit financing division offered non-prime financing through Ford, Lincoln and Mercury dealers by purchasing retail installment sale contracts, mainly for used vehicles. Our wholly-owned indirect subsidiary, Triad Financial Corporation (Triad), offers similar services primarily to non-Ford dealerships. As part of the Revitalization Plan announced by Ford and Ford Credit on January 11, 2002, we indicated that we would renew our focus on supporting primarily new vehicle financing of Ford’s brands. Consistent with our renewed focus, we dissolved our Fairlane Credit financing division. We largely completed this dissolution by July of 2002 and we did not incur significant transition costs. Triad remains a separate operation, which, at December 31, 2002, had $3.2 billion in managed receivables, representing 2% of our total managed receivables.

International Segment

      Our International Segment includes operations in three main regions: Europe, Asia/ Pacific and Latin America. Our Europe region is our largest international operation, accounting for 14% and 12% of our total managed receivables in 2002 and 2001, respectively. Within the International Segment, our Europe region accounted for 74% and 70% of our managed receivables in 2002 and 2001, respectively. Most of our European operations are managed through a U.K.-based subsidiary, FCE Bank plc (FCE), which operates in the United Kingdom and on a branch basis in all member states of the European Union and in Norway and Switzerland. In addition, FCE has subsidiaries in the United Kingdom, The Netherlands, Finland, Italy, Hungary, Poland and the Czech Republic that provide wholesale, leasing and retail vehicle financing. In our largest European markets, Germany and the United Kingdom, FCE offers most of our products and services under the Ford Credit/ Bank, Volvo Car Finance, Land Rover Financial Services, Jaguar Financial Services and Mazda Credit/ Bank brands, except for Volvo-branded products in Germany, which we offer through a different subsidiary. FCE generates most of our European revenue and contract volume from Ford Credit/ Bank brand products and services. FCE also has entered into cooperation agreements with financial institutions to permit dealers to offer financing under a variety of our brands in Croatia, Slovenia, Russia and Romania. Through FCE, we also manage Ford’s vehicle financing operations in countries where Ford and FCE do not have local operations but still sell and finance vehicles to dealers. In addition to offering financing products in Europe through FCE, Ford Credit offers financing in Sweden for our Volvo brand vehicles through a joint venture with Swedish Volvo dealers.

      In the Asia/ Pacific region, we operate in Australia, Japan, Taiwan, Thailand and New Zealand. We have joint ventures with local financial institutions in India, Indonesia and the Philippines. We maintain a limited presence in China through a representative office. In the Latin America region, we presently operate in Mexico, Puerto Rico, Brazil, Chile, Venezuela, and Argentina.

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      Our business model and the structure of our operations throughout the International Segment have evolved as a result of implementation of the Revitalization Plan and local economic and political factors. Consistent with our focus on our core business of supporting Ford brands, during 2002 we agreed to sell our all-makes fleet leasing operations in Europe, Australia and New Zealand, which did business in some jurisdictions under the name Axus or Hertz Leasing, that was managed by an affiliate of Ford. We completed the sale of our all-makes fleet leasing operations in Australia and New Zealand in December of 2002 and we completed the sale of our all-makes fleet leasing operations in Europe in February of 2003.

      In addition, during 2002 we completed our private label partnering arrangements in Brazil with local financial institutions. These arrangements involved the sale of the majority of our existing retail receivables and our leasing business to local financial institutions and granting such financial institutions the right to finance and service retail receivables we continue to originate in Brazil. These financial institutions also act as an alternative distribution network for our products and services. As a result of the economic crisis in Argentina, we suspended new financing activity in Argentina in the first quarter of 2002. Similarly, as a result of the political and economic crisis in Venezuela, during the fourth quarter of 2002 we also suspended new financing activity in Venezuela.

      Competition. The automotive financing business is highly competitive. Our principal competitors for retail and wholesale financing are:

      We compete mainly on the basis of service and financing rates. A key foundation of our service is providing broad and consistent purchasing policies for retail installment sale and lease contracts and consistent support for dealer financing requirements across economic cycles. These policies have built strong relationships with Ford’s dealer network that enhance our competitiveness. Our ability to provide competitive financing rates depends on effectively and efficiently originating, purchasing and servicing our receivables, and accessing the capital markets. We routinely monitor the capital markets and develop funding alternatives to maximize our competitive position. The integration of our financing services with Ford’s vehicle production and marketing plans gives us a competitive advantage in providing financing to Ford dealers and their customers. In addition, our size allows us to take advantage of economies of scale in both purchasing and servicing our receivables and leases.

      No single company is a dominant force in the industry. Recently, some of our bank competitors have developed credit aggregation systems that permit dealers to send, through a single standard system, retail credit applications to multiple finance sources and to evaluate different financing options offered by these finance sources. This process has resulted in greater competition based on financing rates. We, along with other automobile manufacturers’ affiliated finance companies, have formed a joint venture, RouteOne LLC, that is developing a similar credit aggregation system. RouteOne LLC will also provide special rate and other incentive program information only offered by automobile manufacturers.

      Seasonal Variations. As a finance company, we own and manage a large portfolio of finance receivables and operating leases that are generated throughout the year and are collected over a number of years, primarily in fixed monthly payments. As a result, our overall financing revenues do not exhibit seasonal variations. However, throughout the automotive financing industry, credit losses are typically higher in the first and fourth quarters of the year due to competing financial demands on customers and lower vehicle resale values.

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Dependence on Ford Motor Company

      The financing of Ford vehicles and support of Ford dealers account for the predominant share of our business. Any extended reduction or suspension of Ford’s production or sale of vehicles due to a decline in consumer demand, work stoppage, governmental action, negative publicity or other event, or significant changes to marketing programs sponsored by Ford could have an effect on our business. A description of Ford’s business is included as an exhibit to this Report and incorporated by this reference. Additional information about Ford’s business, operations, production, sales and risks can be found in Ford’s Annual Report on Form 10-K for the year ended December 31, 2002, filed separately with the SEC.

      Ford has periodically sponsored special-rate financing programs available only through us. Similar programs may be offered in the future. Under these programs, Ford makes interest supplement or other support payments to us. These programs may increase our financing volume and share of Ford vehicles. Worldwide payments from Ford for interest supplements and other support costs totaled about $4.7 billion and $4.8 billion in 2002 and 2001, respectively. We recorded $3.7 billion and $4.1 billion in interest supplements and other support payments from Ford in 2002 and 2001, respectively, as financing revenues, including about $3.1 billion and $3.8 billion for receivables and leases purchased in the United States and Canada. At December 31, 2002, Ford has accrued approximately $4.7 billion of interest supplements and other support payments for receivables and leases, in the United States and Canada, about the same as of December 31, 2001. We will receive this amount over the term of the related contracts. For further discussion regarding interest supplement and other support payments see Note 13 of our Notes to Financial Statements.

Retail Financing

     Overview and Purchasing Process

      We provide financing services to retail customers through automotive dealers that have established relationships with us. Our primary business consists of purchasing retail installment sale and lease contracts for new and used vehicles mainly through dealers of Ford vehicles. Worldwide in 2002, we financed about 3.3 million vehicles through installment sales and finance leases, and we financed about 800,000 vehicles through operating leases. We report in our financial statements the receivables from customers under installment sale contracts and certain leases with fleet customers as finance receivables. We report in our financial statements most of our retail leases as operating leases with the capitalized cost of the vehicles recorded as depreciable assets, and we report these assets in our financial statements as net investment in operating leases. At December 31, 2002, worldwide, our retail finance receivables net of allowances for credit losses totaled $68.4 billion and our net investment in operating leases was $31.6 billion.

      In general, we purchase from dealers retail installment sale contracts and lease contracts that meet our credit standards. Most of these contracts relate to the purchase of new vehicles, but some are for used vehicles. Dealers typically submit applications electronically to one of our branch offices. Some of the applications are automatically evaluated and either approved or rejected based on our origination scorecard and credit policy criteria. In other cases, our credit analysts evaluate applications using our written guidelines. As part of the judgmental process, we generally conduct a credit investigation prior to purchasing a retail installment sale contract or lease contract. This investigation includes a review of the applicant’s credit report supplied from a national credit bureau and an internal review and verification process. Typically, we are able to determine whether or not we will purchase a retail installment sale contract or lease contract within two hours of receipt of an application. We utilize electronic data imaging of documentation related to our consumer retail contracts to increase our accuracy, efficiency and as part of our comprehensive disaster recovery plan. In evaluating loan applications from commercial customers, we consider the borrower’s financial condition, collateral, debt servicing capacity, and numerous other financial and qualitative factors.

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     Installment Sale Contracts

      The amount we pay for a retail installment sale contract is based on a negotiated vehicle purchase price agreed to between the dealer and the retail customer, plus any additional products, such as insurance and extended service plans, that are included in the contract, less any vehicle trade-in allowance or down payment from the customer applied to the purchase price. The net purchase price owed by the customer typically is paid over a specified number of months with interest at a fixed rate negotiated between the dealer and the retail customer. The dealer may retain a portion of the finance charge.

      We offer a variety of retail installment sale financing products. We generally purchase retail installment sale contracts with terms ranging from 12 to 60 months. During 2002, in response to actions taken by retail banks and other finance companies, we began to purchase retail installment sale contracts with terms up to 72 months in the United States. The average original term of our retail installment sale contracts was 55 months in the United States in 2002, compared with 54 months in 2001.

      In the United States, the average amount financed for new Ford, Lincoln, and Mercury brand vehicles under retail installment sale contracts was $25,130 in 2002, compared with $23,595 in 2001 and $21,205 in 2000. The corresponding average monthly payment was about $520 in 2002, $505 in 2001, and $495 in 2000.

      Some of our retail installment sale contracts have non-uniform payment periods and payment amounts to accommodate special cash flow situations such as those of recent college graduates. We also offer a Red Carpet Option (RCO) program under which the retail customer may finance their vehicle with an installment sale contract with a series of relatively lower monthly payments followed by paying the amount owed in a single balloon payment. The RCO customer can satisfy the balloon payment obligation by payment in full of the amount owed, by refinancing the amount owed, or by returning the vehicle to us and paying additional charges for mileage and excess wear and use, if any. Customers who choose our RCO program may also qualify for special-rate financing offers from Ford. Through the end of 2002, our RCO program was only available in Texas. During 2003, we are expanding our RCO program to Connecticut, New Jersey, New York, Rhode Island and Pennsylvania, and we will consider offering this product instead of lease financing in other states.

      We hold a security interest in the vehicles purchased through retail installment sale contracts. This security interest provides us certain rights and protections. As a result, if our collection efforts fail to bring a delinquent customer’s payments current, we generally can repossess the customer’s vehicle, after satisfying local legal requirements, and sell it at auction. The customer typically remains liable for any deficiency between net auction proceeds and the defaulted contract obligations. We require retail customers to carry fire, theft and collision insurance on financed vehicles.

     Retail Lease Plans

      We offer leasing plans to retail customers through our dealers. Our highest volume retail leasing plan is called Red Carpet Lease, which is offered in the United States and Canada through dealers of Ford, Lincoln and Mercury brands. We offer similar lease plans through dealers of other Ford brands (Jaguar, Land Rover, Mazda and Volvo) and through a limited number of non-Ford dealers under the PRIMUS brand. Under these plans, dealers originate the leases and offer them to us for purchase. Upon our purchase of a lease, we take ownership of the lease and title to the leased vehicle from the dealer. After we purchase a lease from a dealer, that dealer generally has no further obligation to us in connection with the lease. The customer is responsible for properly maintaining the vehicle and is obligated to pay for excess wear and use as well as excess mileage, if any. At the end of the lease, the customer has the option to purchase the vehicle for the customer purchase option price specified in the lease contract or return the vehicle to the dealer. If the customer returns the vehicle to the dealer, the dealer may buy the vehicle from us for the specified lease-end value or return it to us. We sell vehicles returned to us to other Ford and non-Ford dealers through the same auction process that we use for repossessed vehicles.

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      The amount we pay to a dealer for a retail lease, also called the acquisition cost, is based on the negotiated price for the vehicle plus any additional products, such as insurance and extended service plans, that are included in the contract, less any vehicle trade-in allowance or down payment from the customer. The customer makes monthly lease payments, in an amount equal to the acquisition cost less the estimated residual value of the vehicle at the lease end, plus lease charges. Some of our lease programs, such as our Red Carpet Lease Advance Payment Plan, provide certain pricing advantages to customers who make all or some monthly payments at lease inception or purchase refundable higher mileage allowances. We require lease customers to carry fire, theft, liability and collision insurance on leased vehicles.

      In the United States, retail operating lease terms for new Ford, Lincoln and Mercury brand vehicles range primarily from 12 to 48 months. In 2002, the average original lease term was 33 months compared with 32 months in 2001; the average monthly payment was about $445 in 2002, $420 in 2001, and $395 in 2000.

      Several states have vicarious liability laws that hold the lessor of a vehicle liable for accidents involving the leased vehicle. Partly in response to these laws, we are expanding our RCO program and discontinuing our purchase of lease contracts in some of these states. As a retail installment sale, the RCO program eliminates the risk of vicarious liability for us, while providing customers many of the payment benefits associated with leasing.

     Other Retail Financing

      We also offer vehicle financing programs to commercial customers, which includes leasing companies, daily rental companies, government entities and fleet customers. These financings include both lease plans and installment purchase plans and are generally for terms of 12 to 84 months. The financing obligations are collateralized by perfected liens on financed vehicles in almost all instances and, where appropriate, an assignment of rentals under any related leases. At the end of the finance term, a lease customer may be required to pay us any shortfall between the fair market value and the specified end of term value of the vehicle. If the fair market value of the vehicle at the end of the finance term exceeds the specified end of term value, we may pay the lease customer the excess amount. In the United States, these financings totaled about $4.5 billion as of December 31, 2002, and are included in retail finance receivables and net investment in operating leases in our financial statements.

Wholesale Financing

      We offer a wholesale financing program for qualifying dealers to purchase new and used vehicles held in inventory. We generally finance 100% of the vehicle’s wholesale price for new vehicles and up to 100% of the vehicle’s auction price for used vehicles. Dealers generally pay a floating interest rate on wholesale receivables based on the prime rate. The dealer pays off each wholesale receivable as the related vehicle is sold or leased. In the United States in 2002, the average wholesale receivable was outstanding for 71 days, including the time the vehicle was in transit from the assembly plant to the dealership. In 2002, we financed about 5 million vehicles worldwide through wholesale financing. At December 31, 2002, our wholesale portfolio totaled $16.4 billion net of allowance for credit losses. Our wholesale financing program includes financing of large multi-brand national dealer groups that are some of our largest wholesale customers based on the amount financed.

      When a dealer uses our wholesale financing program to purchase vehicles from Ford, another manufacturer or other vehicle source, we obtain a security interest in the vehicles and, in many instances, other assets of the dealer. We generally are able to repossess the financed vehicles if the dealer does not make timely payments or meet its obligations under the financing program. However, once a vehicle is sold or leased to a retail customer, our right to repossess the vehicle to satisfy wholesale obligations is no longer effective. Our subsidiary, The American Road Insurance Company, provides insurance for vehicle damage and theft of vehicles held in dealer inventory.

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      Since 1998, we have provided more than 83% of the wholesale financing on new Ford, Lincoln and Mercury brand vehicles acquired by dealers in the United States and more than 95% of the wholesale financing on new Ford brand vehicles acquired by dealers in Europe.

Other Financing

      We make loans to vehicle dealers for facilities improvements, working capital and to enable them to purchase and finance dealership real estate. For dealers in the United States and Canada, these loans totaled about $3.8 billion at December 31, 2002 and were included in other finance receivables in our financial statements. These loans typically are secured by liens on real estate, other dealership assets and sometimes personal guarantees of the individual owners of the dealership.

      We also purchase certain receivables generated by divisions and affiliates of Ford, primarily in connection with the delivery of vehicle inventories from Ford vehicle assembly plants in the United States to dealers and the sale of parts and accessories by Ford to dealers. At December 31, 2002, these purchased receivables totaled about $3.5 billion, of which about $1.6 billion was included in wholesale finance receivables and $1.9 billion was included in other finance receivables.

Marketing and Special Programs

      We actively market our financing products and services to automotive dealers and customers. Through personal sales contacts, targeted advertisements in trade publications, participation in dealer-focused conventions and organizations and support from manufacturers, we seek to demonstrate to dealers the value of entering into business relationships with us. We base our marketing strategy on our belief that we can better assist dealers in achieving their sales, financial and customer satisfaction goals by being a stable committed finance source with knowledgeable automotive and financial professionals offering accessible personal care and interaction. We demonstrate our commitment to dealer relationships with a variety of materials, measurements and analyses showing the advantages of a full range of automotive financing products that allows consistent and predictable single source financing. In addition, from time to time, we promote increased dealer transactions through incentives, bonuses, contests and selected program and rate adjustments.

      We promote our retail financing products primarily through pre-approved credit offers to prospective customers, point-of-sale information, ongoing communications and contacts with existing customers and sponsorships of selected racing teams. Our communications to these customers promote the advantages of our financing products, the availability of special plans and programs and the benefits of affiliated products, such as extended warranties, service plans, insurance coverage gap protection and excess wear and use waivers. In addition, we emphasize the quality of our customer service and the ease of making payments and transacting business with us. For example, through the Ford Credit North America web site, a customer can make inquiries, review an account balance, examine current incentives, schedule an electronic payment or qualify for a pre-approved credit offer. We also market our non-consumer financial services described above in “Other Retail Financing” with a specialized group of employees who make direct sales calls on dealers, and, often at the request of such dealers, on potential high-volume commercial customers. This group also uses various materials and venues to explain our flexible programs and services specifically directed at the needs of commercial and fleet vehicle customers.

Servicing

      General. After we purchase retail installment sale contracts and leases from dealers and other customers, we manage the receivables during their contract terms. This management process is called servicing. We service both our owned and sold receivables. Our servicing duties include the following:

	•	applying monthly payments from customers;
	•	contacting delinquent customers for payment;

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	•	maintaining the security interest in the financed vehicle;
	•	monitoring insurance coverage for selected lease vehicles;
	•	providing billing statements to customers;
	•	responding to customer inquiries;
	•	releasing liens on paid-off finance contracts;
	•	arranging for the repossession of vehicles; and
	•	selling repossessed and returned vehicles at auction.

      Service Center Locations. In June of 1999, we began to centralize our servicing functions, which were previously conducted at each branch office, to improve servicing processes and better leverage our technology and economies of scale. This process was completed in the United States and Canada in May of 2001 and will be completed by the end of 2003 in the United Kingdom and Germany. Centralization of our servicing functions has resulted in 9 regional service centers in North America (7 – United States; 2 – Canada) and will result in 3 regional service centers in Europe.

      Our North American regional service centers are located in:

Each of these service centers generally services customers located in their region, but all of our North American service centers are electronically linked and workload can be allocated across service centers.

      We also have four specialty service centers in North America that focus on specific servicing activities:

	•	Customer Service Center — Omaha, Nebraska;
	•	Volvo Customer Service Center — Richardson, Texas;
	•	National Bankruptcy Service Center — Livonia, Michigan; and
	•	National Recovery Center — Mesa, Arizona.

      Within Europe, we have centralized our servicing activities in St. Albans and Watford, England to support our U.K. operations and customers, and in Cologne, Germany to support our German operations and customers. In smaller countries, we provide servicing through our local branch network.

      Customer Payment Operations. In the United States and Canada, customers are directed in their monthly billing statements to mail payments to a bank for deposit in a lockbox account. Customers may also make payments through electronic payment services, a direct debit program or a telephonic payment system.

      Servicing Activities — Consumer Credit. We design our collection strategies and procedures to keep accounts current and to collect on delinquent accounts. We employ a combination of proprietary and non-proprietary tools to assess the probability and severity of default for all of our receivables and leases and implement our collection efforts based on our determination of the credit risk associated with each customer. As each customer develops a payment history, we use an internally developed behavioral model to assist in determining the best collection strategies. Based on data from this scoring model, we group contracts by risk category for collection. Our centralized collection operations are supported by state-of-the-art auto-dialing technology and proprietary collection and workflow operating systems. Our U.S. systems also employ a web-based network of outside contractors who support the repossession process. Through our auto-dialer program

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and our monitoring and call log systems, we target our efforts to contact customers about missed payments and developing satisfactory solutions to bring accounts current.

      Outsourced Operations. We engage third-party vendors to perform several of our servicing processes. These processes include applying monthly payments from customers, monitoring the perfection of security interests in financed vehicles, monitoring insurance coverage on lease vehicles, imaging of contracts and electronic data file maintenance, generation of retail and lease billing statements, telephonic payment systems for retail customers, the handling of some inbound customer service calls and the recovery of deficiencies in selected accounts. In addition, certain collection activities related to contracts purchased by Fairlane Credit are handled by third party vendors.

      Payment Extensions. At times, we offer payment extensions to customers who have encountered temporary financial difficulty that limits their ability to pay as contracted. A payment extension allows the customer to move a delinquent payment to the end of the term of the contract, usually by paying a fee that is calculated in a manner specified by applicable law. Before agreeing to a payment extension, the service representative reviews the customer’s past payment history, current financial situation and assesses the customer’s desire and capacity to make future payments. The service representative considers whether the proposed payment extension complies with our policies and guidelines. Higher levels of service center management review, and generally must approve, payment extensions.

     Repossessions and Auctions

      We view repossession of a financed or leased vehicle as a final step that we undertake only after all other collection efforts have failed or if the customer otherwise defaults under the retail installment sale or lease contract. We sell repossessed vehicles at auction and apply the proceeds to the amount owed on the customer’s account. At our National Recovery Center, we continue to attempt collection of any remaining amounts after repossession until the account is paid in full, we obtain mutually satisfactory payment arrangements with the debtor or we determine that the account is uncollectible.

      Ford’s Vehicle Remarketing Department, in conjunction with our regional service centers and our National Recovery Center, manage the sale of repossessed vehicles and returned leased vehicles. We attempt to maximize net auction proceeds by selling vehicles in geographic markets that will result in the highest resale value, net of transportation, reconditioning and auction costs. The determination of the sale location is based on an analysis of historical auction price data and market trends. We inspect and recondition the vehicle to maximize the net auction value of the vehicle. Vehicles are then offered for sale through open auctions, in which any licensed dealer can participate, and closed auctions, in which only Ford, Lincoln and Mercury dealers may participate. Our open auctions are mainly physical auctions, while our closed auctions are both physical auctions and on-line auctions. We decide to use an open or closed auction based upon factors such as vehicle age, mileage, and condition. In 2002, two-thirds of all of the vehicles sold through auctions were returned leased vehicles and one-third of all vehicles sold through auctions were repossessed vehicles. In 2002, we took, on average, 39 days to dispose of vehicles sold at auction, compared with 45 days in 2001. Repossessed vehicles are reported in other assets on our balance sheet and are valued at expected auction values.

      Wholesale and Commercial. We require most dealers to submit monthly financial statements, and we monitor for potential credit deterioration. We assign an evaluation rating to each dealer and we perform physical audits of vehicle inventory periodically, with more frequent audits for higher risk dealers. In addition, we monitor dealer inventory financing payoffs daily to detect adverse deviations from typical repayment patterns, in which case we take appropriate actions. Within the United States and Canada, eight commercial lending offices provide services to fleet purchasers, leasing companies and daily rental companies including administration and collections. We generally review our exposure under these credit arrangements at least annually. In our international markets, this business is managed within the head office of the local market area.

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Insurance

      We conduct insurance operations primarily through The American Road Insurance Company (TARIC) and its subsidiaries in the United States and Canada and through various other insurance subsidiaries outside the United States and Canada. TARIC offers a variety of products and services, including:

	•	Extended service plan contracts, mainly through Ford dealers for new and used vehicles,
	•	Physical damage insurance covering vehicles and equipment financed by us at wholesale, and
	•	Physical damage/liability coverage on Ford dealer daily rental vehicles.

      We also offer various Ford branded insurance products throughout the world underwritten by non-affiliated insurance companies from which we receive fee income but do not retain the underwriting risk. In addition, in December 2002, Ford and its subsidiaries (other than TARIC) began to use TARIC to provide various types of surety bonds, including bonds generally required as part of any appeals of litigation, financial guarantee bonds and self-insurance workers’ compensation bonds. Previously, Ford had met all of its surety bond requirements with bonds issued by third party insurance companies. Our insurance business generated less than 1% of our total revenues in 2002 and 2001.

OUR EMPLOYEE RELATIONS

      At December 31, 2002, we had about 20,000 full-time employees, and 2,000 part-time and agency personnel. Most of our employees are salaried, and most are not represented by a union. We consider employee relations to be satisfactory.

OUR GOVERNMENTAL REGULATIONS

      As a finance company, we are highly regulated by the governmental authorities in the locations where we operate.

          United States

      Within the United States, our operations are subject to regulation, supervision and licensing under various federal, state and local statutes, ordinances and regulations.

      Federal Regulation. We are subject to extensive federal regulation, including the Truth-in-Lending Act, the Equal Credit Opportunity Act and the Fair Credit Reporting Act. These laws require us to provide certain disclosures to prospective borrowers and lessees in consumer retail and lease financing transactions and prohibit discriminatory credit practices. The principal disclosures required under the Truth in Lending Act for retail finance transactions include the terms of repayment, the amount financed, the total finance charge and the annual percentage rate. For retail lease transactions, we are required to disclose the amount of payments at consummation of the lease, the terms for payment, and information about lease charges, insurance, excess mileage and liability on early termination. The Equal Credit Opportunity Act prohibits creditors from discriminating against credit applicants on a variety of factors, including race, color, sex, age or marital status. Pursuant to Regulation B promulgated under the Equal Credit Opportunity Act, creditors are required to make certain disclosures regarding consumer rights and advise consumers whose credit applications are not approved of the reasons for being denied. In addition, any of the credit scoring systems we use during the application process or other processes must comply with the requirements for such systems as set forth in the Equal Credit Opportunity Act and Regulation B. The Fair Credit Reporting Act requires us to provide certain information to consumers whose credit applications are not approved on the basis of a consumer credit report obtained from a national credit bureau. We are also subject to the Soldiers’ and Sailors’ Civil Relief Act, that requires us to reduce the interest rate charged on transactions with customers who subsequently enter into full-time service with the military. In addition, we are subject to other federal regulation, including the Gramm-Leach-Bliley Act, which requires us to maintain privacy with respect to certain consumer data in our possession and to communicate periodically with consumers on privacy matters.

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      State Regulation — Licensing. In most states, a consumer credit regulatory agency regulates and enforces laws relating to finance companies. Such rules and regulations generally provide for licensing of finance companies, limitations on the amount, duration and charges, including interest rates, that can be included in finance contracts, requirements as to the form and content of finance contracts and other documentation, and restrictions on collection practices and creditors’ rights. We must renew these licenses periodically. In certain states, we are subject to periodic examination by state regulatory authorities. Moreover, several states have laws that limit interest rates on consumer financing generally. In periods of high interest rates, these rate limitations can have an adverse effect on our operations if we are unable to purchase retail installment sale contracts with finance charges that reflect our increased costs. In some other states, we are not required to obtain special licenses and are not subject to extensive regulation of our business.

      State Regulation — Repossessions. To mitigate our credit losses, sometimes we must repossess a financed or leased vehicle. Repossessions are subject to prescribed legal procedures, including peaceful repossession, one or more customer notifications, a prescribed waiting period prior to disposition of the repossessed vehicle and return of personal items to the customer. Some states provide the customer with reinstatement or redemption rights. Our ability to sell a repossessed vehicle is restricted if a customer declares bankruptcy. The independent repossession firms we use to repossess vehicles for us also are subject to regulatory requirements.

          International

      In some countries outside the United States, certain of our subsidiaries, including FCE, are regulated banking institutions and are required, among other things, to maintain minimum capital reserves. FCE is regulated by the U.K. Financial Services Authority as an institution authorized as a deposit taking business under the Financial Services Market Act of 2000. FCE also holds a standard license under the U.K. Consumer Credit Act of 1974. Since 1993, FCE has obtained authorizations from the Bank of England (which role is now undertaken by the Financial Services Authority) pursuant to the Banking Consolidation Directive entitling it to operate on a branch basis in all member states of the European Union. In many of the other locations where we operate, governmental authorities require us to obtain licenses to conduct our financing business.

          Our Regulatory Compliance Status

      We believe that we maintain all material licenses and permits required for our current operations and are in substantial compliance with all applicable U.S. local, state and federal regulations, as well as regulations in non-U.S. jurisdictions. However, we can provide no assurance that we, dealers who sell us contracts, or repossession firms that we engage, will be able to maintain all requisite licenses and permits. Failure to satisfy those and other regulatory requirements could have a material adverse effect on our operations, financial condition and liquidity. Further, the adoption of new laws or regulations, or the revision of existing laws and regulations, could have a material adverse effect on our operations, financial condition and liquidity.

      We actively monitor proposed changes to relevant legal and regulatory requirements in order to maintain our compliance. Through our governmental relations efforts, we also attempt to participate in the legislative and administrative rule-making process on regulatory initiatives that impact finance companies. Our ongoing compliance efforts have not had a material adverse effect on our operations, financial condition or liquidity.

OUR TRANSACTIONS WITH FORD AND AFFILIATES

      We have a profit maintenance agreement with Ford that requires Ford to make payments to us to maintain our earnings at specified minimum levels. In addition, we have an agreement to maintain a minimum control interest in FCE and to maintain FCE’s net worth above a minimum level, and we have included a copy of this agreement as an exhibit to this Report. No payments were made under these agreements.

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      We also formally documented our long-standing business practices with Ford in an agreement dated October 18, 2001, a copy of which was filed with the SEC on that date. The principal terms of this agreement include the following:

	•	Any extension of credit from us to Ford and any of Ford’s automotive affiliates will be on arm’s length terms and will be enforced in a commercially reasonable manner.
	•	We will not be required to guarantee the indebtedness or make equity investments in Ford or any of Ford’s automotive affiliates.
	•	We and Ford agree to maintain our stockholder’s equity at a commercially reasonable level to support the amount, quality and type of receivables in light of prevailing economic circumstances.
	•	We will not be required to accept credit or residual risk beyond what we would be willing to accept acting in a prudent and commercially reasonable manner.
	•	We and Ford are separate, legally distinct companies and will continue to maintain separate books, accounts, assets and liabilities.

      More information about transactions between us and Ford and other affiliates, is contained in Note 13 of our Notes to Financial Statements, “Our Business — Overview”, “Our Business — Retail Financing”; “Our Business — Other Financing” and the description of Ford’s business included as an exhibit to this report.

      We own our world headquarters in Dearborn, Michigan and our PRIMUS offices in Nashville, Tennessee. FCE leases its corporate offices in Brentwood, England from an affiliate of Ford. Most of our automotive finance branches and service centers are located in leased properties. The continued use of any of these leased properties is not material to our operations. At December 31, 2002, our total obligation under leases of real property was about $211 million.

      We are subject to legal actions, governmental investigations and other proceedings and claims relating to state and federal laws concerning finance and insurance, employment-related matters and other contractual relationships. Some of these matters are class actions or are seeking class action status. Some of these matters may involve compensatory, punitive or treble damage claims and attorneys’ fees in very large amounts, or other requested relief which, if granted, would require very large expenditures. Our significant pending matters are summarized below:

      Lease Residual Class Action. In January 1998, in connection with a case pending in Illinois state court, we and Ford were served with a summons and intervention counterclaim complaint relating to our leasing practices (Higginbotham v. Ford Credit). The counterclaim plaintiff, Carla Higginbotham, is a member of a class that has been conditionally certified for settlement purposes in Shore v. Ford Credit. In the Shore case, we commenced an action for deficiency against Virginia Shore, our lessee. Shore counterclaimed for purported violations of the Truth-in-Leasing Act (alleging that certain lease charges were excessive) and the Truth-in-Lending Act (alleging that the lease lacked clarity). Shore purported to represent a class of all similarly situated lessees. Ford was not a party to the Shore case. Higginbotham objected to the proposed settlement of the Shore case, intervened as a named defendant, filed separate counterclaims against us, and joined Ford as an additional counterclaim defendant. Higginbotham asserts claims against us for violations of the Consumer Leasing Act, seeks a declaratory judgment concerning the enforceability of early termination provisions in our leases, and asserts fraud. She also asserts a claim against us and Ford for conspiracy to violate the Truth-in-Lending Act. The Higginbotham counterclaims allege that we inflate the residual values of our leased vehicles, which results in lower monthly lease payments but higher termination fees for lessees who exercise their right of early termination. Higginbotham claims that the early termination fees were not adequately

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disclosed on the lease form and that the fees are excessive and illegal because of the allegedly inflated residual values. She also alleges that Ford dictated the residual values to us and thereby participated in an unlawful conspiracy. This case was stayed pending the approval or rejection of the settlement in Shore. We have reached individual settlements with the Shore plaintiffs.

      The Illinois court in Higginbotham found that the lease end residual value of Ms. Higginbotham’s vehicle was properly valued and, as a result, Ms. Higginbotham was an inadequate representative for the class. Subsequently, Ms. Higginbotham voluntarily dismissed her intervention counterclaim without prejudice in the Illinois state court and has reactivated her initial suit in the Florida federal court, pursuing substantially similar claims on behalf of herself and others similarly situated. Consequently, the Higginbotham case is proceeding in Florida. In addition, we have filed a response to plaintiff’s motion for class certification and have renewed our motion for summary judgment based on information obtained in discovery. Plaintiffs have filed a Request for Judicial Notice of Newly Discovered Evidence to support their motion for class certification and to oppose our motions for summary judgment.

      Fair Lending Class Action. A purported class action in federal court in New York (Jones) alleges that our pricing practices discriminate against African-Americans. Specifically, plaintiffs allege, “although Ford Credit’s initial analysis applies objective criteria to calculate the risk-related ’Buy Rate,’ Ford Credit then authorizes a subjective component in its credit pricing system — the Mark-up Policy — to impose additional non-risk charges.” A second case, pending in federal court in Nashville (Claybrook v. PRIMUS), contains similar allegations concerning PRIMUS accounts. A third case was filed in the Pennsylvania federal district court (Ceiba, Inc. v. Ford Credit, et al.) in which a Latino community-based organization, Ceiba, Inc., has made similar allegations on behalf of Latino Americans. We are only one of several defendants in the Pennsylvania case.

      Litigation is subject to many uncertainties and the outcome is not predictable. It is reasonably possible that some of the matters described above could be decided unfavorably to us. Although the amount of liability at December 31, 2002 with respect to these matters cannot be ascertained, we believe that any resulting liability should not materially affect our consolidated financial position or results of operations.

      In addition, any litigation, investigation, proceeding or claim against Ford that results in Ford incurring significant liability, expenditures or costs could also have a material adverse affect on our business, results of operations and financial condition. For a discussion of pending cases against Ford see Item 3 in Ford’s Annual Report on Form 10-K for the year ended December 31, 2002, filed with the SEC and included as an exhibit to our Report and incorporated by this reference.

ITEM 5.	MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      At December 31, 2002, all shares of our common stock were owned by Ford FSG, Inc., a wholly-owned subsidiary of Ford. We did not issue or sell any equity securities during 2002, 2001 or 2000. There is no market for our stock. In January 2002, we received a capital contribution of $700 million. In the second half of 2002, we paid cash dividends of $1.15 billion, resulting in a net dividend of $450 million for 2002. During 2001, we paid cash dividends of $400 million. We also paid dividends in 2000, 1999, and 1998. We may pay additional dividends from time to time depending on the amount and mix of our receivables, capital requirements, and profitability.

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FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES

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ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

      The principal factors that influence our earnings are the amount and mix of different types of finance receivables and net investment in operating leases and financing margins. The performance of these receivables and leases over time, mainly through credit losses and variations in the residual value of leased vehicles, also affects our earnings.

      The amount of our finance receivables and net investment in operating leases depends on:

	•	The number of new and used vehicle sales and leases;
	•	The extent to which we purchase retail installment sale and lease contracts and the extent to which we provide wholesale financing;
	•	The cost of vehicles financed;
	•	The level of dealer inventories;
	•	Ford-sponsored special financing programs available exclusively through us; and
	•	The availability of cost-effective funding for the purchase of retail installment sale and lease contracts and to provide wholesale financing.

      For finance receivables, financing margins equal the difference between revenue earned on finance receivables and the cost of borrowed funds. For operating leases, financing margins equal revenue earned on operating leases, less depreciation expense and the cost of borrowed funds. Interest rates earned on most receivables and rental charges on operating leases generally are fixed at the time the contracts are originated. On some receivables, primarily wholesale financing, we charge interest at a floating rate that varies with changes in short-term interest rates. We borrow funds at various maturities at both fixed and floating interest rates. External market conditions and our debt ratings affect these interest rates. As an alternative source of funding, we sell finance receivables in securitizations, retaining an interest in the sold receivables and continuing to service such receivables for a fee. Securitization provides us a stable source of funding at lower cost than our debt funding sources. During 2002, we also began selling receivables in whole-loan sale transactions.

      We review our business performance on an owned basis, a managed basis and a serviced basis. The owned basis includes only the receivables we own and report on our balance sheet. The managed basis includes owned receivables and receivables that we sold in securitizations and continue to service. The serviced basis includes managed receivables and our serviced-only receivables, which are receivables that we sold in whole-loan sale transactions where we retained no interest and continue to service.

      We analyze our performance primarily on an owned and managed basis. We retain interests in receivables sold in securitizations, and with respect to subordinated retained interests, we have credit risk. As a result, we evaluate credit losses, receivables and leverage on a managed basis as well as an owned basis. In contrast, we do not have the same financial interest in the performance of receivables sold in whole-loan sale transactions, and as a result we generally review the performance of our serviced portfolio only to evaluate the effectiveness of our origination and collection activities. We do not believe that balance sheet measures of serviced-only receivables are as meaningful in analyzing our financial performance because we are not exposed to credit losses associated with serviced-only receivables and we only derive on-going revenue related to these receivables in our capacity as servicer.

Results of Operations

      Revitalization Plan. On January 11, 2002, Ford announced a Revitalization Plan. Included in the Revitalization Plan charges identified by Ford were costs related to us. We recorded charges to our earnings in the fourth quarter of 2001 for the cost of strategic partnering actions in Brazil, including losses related to the

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disposition of businesses and the write-down of certain assets ($126 million), government initiatives in Argentina related to currency devaluation and consumer debt ($65 million) and voluntary employee separation costs in North America ($13 million). In addition, we announced we would renew our focus on supporting vehicle financing of Ford’s brands. During 2002, we implemented a number of initiatives that contributed to a reduction in the amount of our receivables, and a shift in our product mix. These initiatives included the dissolution of Fairlane Credit financing division discussed in Item 1 and the sale of our all makes fleet leasing business as discussed below.

      SFAS No. 133. Our financial results include the effects of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (SFAS No. 133), that we adopted on January 1, 2001, requiring us to recognize all derivative instruments on our balance sheet at fair value. Further information on SFAS No. 133 and its impact on our results is contained in Notes 1 and 15 of our Notes to Financial Statements.

      Discontinued Operations. Consistent with our focus on the core business of supporting Ford’s brands, during 2002 we agreed to sell our all-makes fleet leasing operations in Europe, Australia and New Zealand, which did business in some jurisdictions under the name Axus or Hertz Leasing, that was managed by an affiliate of Ford. We completed the sale of our all-makes fleet leasing operations in Australia and New Zealand in December of 2002 and we completed the sale of our all-makes fleet leasing operations in Europe in February of 2003. The following discussion of our results in Item 7 and 7A excludes the results of these discontinued and held-for-sale operations, as defined by SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which are described in Note 9 of the Notes to our Financial Statements.

Fourth Quarter 2002 Compared with Fourth Quarter 2001

      Our consolidated income from continuing operations in the fourth quarter of 2002 was $372 million, up $673 million compared with a loss of $301 million a year ago. Excluding the Revitalization Plan charges in the fourth quarter of 2001 and the continuing effects of SFAS No. 133, our operating income from continuing operations in the fourth quarter of 2002 was $400 million compared with $2 million, up $398 million from a year ago.

      Results of our operations by business segment for the fourth quarter of 2002 and 2001 are shown below:

      Ford Credit North America operating income from continuing operations in the fourth quarter of 2002 was $298 million, up $351 million compared with a loss of $53 million a year ago. This improvement reflected

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primarily a lower provision for credit losses due to the non-recurrence of a substantial increase in our allowance for credit losses in 2001 and the net favorable impact of receivable sales, offset partially by lower net financing margins.

      Ford Credit International operating income from continuing operations in the fourth quarter of 2002 was $97 million, up $38 million from earnings of $59 million a year ago. This increase reflected primarily higher net financing margins due to our reduced focus on relatively lower margin fleet financing products, as well as a lower provision for credit losses.

Full Year 2002 Compared with Full Year 2001

      Our consolidated income from continuing operations in 2002 was $1,235 million, up $404 million or 49% from 2001. Excluding the charges associated with the Revitalization Plan in 2001 and the continuing effects of SFAS No. 133, our operating income from continuing operations in 2002 was $1,376 million, up $184 million or 15% from a year ago.

      Results of our operations by business segment for 2002 and 2001 are shown below:

      Ford Credit North America operating income from continuing operations in 2002 was $1,025 million, up $67 million or 7% compared with 2001. This increase reflected primarily a lower provision for credit losses due to the non-recurrence of a substantial increase in our allowance for credit losses late in 2001, offset partially by the net unfavorable impact of receivable sales and lower net financing margins.

      Ford Credit International operating income from continuing operations in 2002 was $351 million, up $97 million or 38% compared with 2001. This increase resulted primarily from higher net financing margins, due to our reduced focus on relatively lower margin fleet financing products, as well as a lower provision for credit losses, and the favorable impact of higher amounts of receivables.

Full Year 2001 Compared with Full Year 2000

      Our consolidated income from continuing operations in 2001 was $831 million, down $711 million compared with 2000. Our 2001 results included unusual charges related to the Revitalization Plan, which totaled $204 million, and the full year impact of SFAS No. 133, which totaled $157 million. Together, these charges reduced income from continuing operations by $361 million in 2001.

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ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

      Results of our operations by business segment for 2001 and 2000 are shown below:

      Ford Credit North America operating income from continuing operations in 2001 was $958 million, down $411 million or about 30% compared with 2000. This decline reflected primarily a higher provision for credit losses, offset partially by favorable earnings effects related to securitizations, higher placement volumes of finance receivables and operating leases and improved financing margins. We significantly increased our allowance for credit losses based on weakened economic conditions in the United States following the events of September 11, 2001.

      Ford Credit International operating income from continuing operations in 2001 was $254 million, up $42 million or about 20% compared with 2000. This increase resulted primarily from higher retail financing placement volumes and improved financing margins in Europe.

Financial Condition

Placement Volume and Financing Share

      Total worldwide financing contract placement volumes for new and used vehicles are shown below: