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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 1-6368
FORD MOTOR CREDIT COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 38-1612444
(State of incorporation) (I.R.S. employer identification no.)
THE AMERICAN ROAD, DEARBORN, MICHIGAN 48121
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (313) 322-3000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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6 3/8% Notes due November 5, 2008 New York Stock Exchange
8 3/4% Senior Notes due December 1, 2001 The American Stock Exchange
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 X No
---- ----
As of February 28, 1998, the registrant had outstanding 250,000 shares of
Common Stock. No voting stock of the registrant is held by non-affiliates of the
registrant.
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.
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PART I
ITEM 1. BUSINESS
The registrant, Ford Motor Credit Company, was incorporated in Delaware in
1959 and is an indirect wholly owned subsidiary of Ford Motor Company (the
"Company" or "Ford"). As used herein "Ford Credit" refers to Ford Motor Credit
Company and its subsidiaries unless the context otherwise requires.
Ford Credit and its subsidiaries provide wholesale financing and capital
loans to Ford Motor Company retail dealerships and associated non-Ford
dealerships throughout the world, most of which are privately owned and
financed, and purchase retail installment sale contracts and retail leases from
them. Ford Credit also makes loans to vehicle leasing companies, the majority of
which are affiliated with such dealerships. In addition, subsidiaries of Ford
Credit provide these financing services in the United States, Europe, Canada and
Australia to non-Ford dealerships. A substantial majority of all new vehicles
financed by Ford Credit are manufactured by Ford and its affiliates. Ford Credit
also provides retail financing for used vehicles built by Ford and other
manufacturers. In addition to vehicle financing, Ford Credit makes loans to
affiliates of Ford and finances certain receivables of Ford and its
subsidiaries.
In both 1997 and 1996, United States operations, conducted in all 50
states, the District of Columbia and Puerto Rico, accounted for 79% of Ford
Credit's total revenue. European operations, conducted by Ford Credit Europe plc
("Ford Credit Europe"), accounted for 12% and 13%, respectively, of Ford
Credit's total revenue in these periods. The balance was in Canada, Australia,
Japan, Mexico, New Zealand, Indonesia, Thailand, Taiwan, India and Argentina. In
addition, Ford Credit manages the vehicle financing operations of Ford in other
foreign countries which are conducted through other subsidiaries of Ford.
Outside the United States, Ford Credit Europe is Ford Credit's largest
operation. Ford Credit Europe, which was originally incorporated in 1963 in
England as a private limited company, is owned by Ford Credit (70.4%), Ford
Werke AG (19.6%) and Ford (10.0%). Ford Credit Europe's primary business is to
support the sale of Ford vehicles in Europe through the Ford dealer network. A
variety of retail, leasing and wholesale finance plans is provided in most
countries in which it operates. Retail financing is provided by means of a
number of title retention plans, including conditional sale and hire purchase
agreements, and personal loans. Operating and finance leases are provided to
individual, corporate and other institutional customers, covering individual
vehicles and large and small fleets. Wholesale financing is provided to Ford
dealers for the stocking of new and used vehicles. In addition, Ford Credit
Europe provides loans to dealers for working capital and property acquisitions
and for a variety of finance plans.
Ford Credit also conducts insurance operations through The American Road
Insurance Company ("American Road") and its subsidiaries in the United States
and Canada. American Road's business consists of extended service plan contracts
for new and used vehicles manufactured by affiliated and nonaffiliated
companies, primarily originating from Ford dealers, physical damage insurance
covering vehicles and equipment financed at wholesale by Ford Credit, and the
reinsurance of credit life and credit disability insurance for retail purchasers
of vehicles and equipment.
The business of Ford Credit is substantially dependent upon Ford Motor
Company. See "Vehicle Financing" and "Borrowings and Other Sources of Funds"
under the caption "Business of Ford Credit". Also see Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations". Any
protracted reduction or suspension of Ford's production or sale of vehicles,
resulting from a decline in demand, a work stoppage, governmental action,
adverse publicity, or other event, could have a substantial adverse effect on
Ford Credit. For additional information concerning Ford's results of operations,
see Ford Motor Company's Annual Report on Form 10-K for the year ended December
31, 1997 filed with the Securities and Exchange Commission.
The mailing address of Ford Credit's executive offices is The American
Road, Dearborn, Michigan 48121. The telephone number of such offices is (313)
322-3000.
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SEGMENT INFORMATION
Segment information called for by Item 1 is set forth in Note 16 of Notes
to Financial Statements and is incorporated herein by reference.
BUSINESS OF FORD CREDIT
Ford Credit accounts for its financing business in three categories --
retail (which consists of vehicle installment sale financing and vehicle lease
financing), wholesale and other. Total net finance receivables, retained
interest in sold receivables and net investment in operating leases outstanding
in these three categories and geographic regions were as follows at the end of
the years indicated:
1997 1996 1995
---- ---- ----
(IN MILLIONS)
Retail
Installment sale/finance lease....................... $ 54,545.3 $ 52,352.1 $ 47,087.0
Operating Lease...................................... 34,746.0 30,645.2 25,680.2
Wholesale.............................................. 21,519.7 22,621.9 22,043.8
Other.................................................. 5,247.6 5,874.0 7,245.9
---------- ---------- ----------
Finance receivables, net.......................... $116,058.6 $111,493.2 $102,056.9
Retained interest in sold receivables.................. 998.6 1,124.1 1,149.2
---------- ---------- ----------
Finance receivables, net and retained interest in sold
receivables.......................................... $117,057.2 $112,617.3 $103,206.1
========== ========== ==========
United States.......................................... $ 88,721.0 $ 85,387.6 $ 79,801.5
Europe................................................. 17,148.1 18,099.9 16,202.3
Other international.................................... 11,188.1 9,129.8 7,202.3
---------- ---------- ----------
Finance receivables, net and retained interest in sold
receivables.......................................... $117,057.2 $112,617.3 $103,206.1
========== ========== ==========
VEHICLE FINANCING
Retail. Retail financing consists primarily of installment sale financing
and retail lease financing of new and used vehicles and loans to vehicle leasing
companies, most of which are affiliated with franchised Ford Motor Company
dealerships. The number of installment sale and lease vehicles financed by Ford
Credit was as follows during the years indicated:
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
Installment sale/finance lease.............................. 2,574 2,740 2,557
Operating lease............................................. 1,246 1,063 965
----- ----- -----
Total retail........................................... 3,820 3,803 3,522
===== ===== =====
United States............................................... 2,549 2,674 2,499
Europe...................................................... 727 720 723
Other international......................................... 544 409 300
----- ----- -----
Total retail........................................... 3,820 3,803 3,522
===== ===== =====
The levels of Ford Credit's retail financing volumes and outstanding
finance receivables and net investment in operating leases are dependent on
several factors, including new and used vehicle sales and leases, Ford Credit's
share of those vehicle sales and leases and the average cost of vehicles
financed. See "Competition in Vehicle Financing". In addition, receivables
levels may vary depending on sales of receivables.
Installment sale and retail lease financing consist principally of
purchasing and servicing installment sale contracts and leases covering the sale
or lease of new and used vehicles by vehicle dealers to retail customers. The
amount paid by Ford Credit to the dealer for an installment sale contract or
lease generally represents a negotiated amount agreed to between the dealer and
the customer, less any trade-in or downpayment. In addition, a portion of the
finance charge or lease charge is paid or credited to the dealer. Ford Credit
requires a
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retail purchaser or lessee to carry fire, theft and collision insurance on the
vehicle. In addition, retail lessees are required to carry liability insurance.
Installment sales contract terms range up to 60 months. In the U.S., the
average repayment obligation for new vehicles covered by installment sale
contracts purchased by Ford Credit in 1997 was $21,307. The corresponding
average monthly payment was $412 and the average original term was 54 months.
The monthly lease payment equals the amount paid to the dealer for the
vehicle and lease (the "acquisition cost") less the residual value of the
vehicle established by Ford Credit, amortized over the lease term, plus the
lease charge. The acquisition cost to Ford Credit of the vehicle, less the
residual value, is depreciated on a straight line basis over the life of the
lease. Residual values are determined by Ford Credit after analyzing published
residual values and Ford Credit's own historical experience in the used vehicle
market. In addition, joint marketing programs with Ford's sales divisions can
affect established residual values. At lease termination, Ford Credit either
sells the vehicle to the dealer for the established residual value or sells the
vehicle at auction for the market price.
Retail lease terms range from 12 to 48 months. In the U.S., the average
monthly payment of retail lease contracts purchased by Ford Credit in 1997 was
$390 and the average original term was 27 months.
Ford Credit extends financing to leasing companies and daily rental
companies. Financing charges in connection with such lease financing either are
fixed or floating based on short-term interest rates in effect at the time
financing is extended. These rates may be supplemented by payments from Ford
whenever the rate payable is less than the specified minimum rate agreed between
Ford Credit and Ford.
Wholesale. Wholesale financing consists of loans, under approved lines of
credit, to dealers to assist them in carrying inventories of new and used
vehicles. Ford Credit generally finances 100% of the wholesale price. Vehicles
are insured against fire, theft and other risks under policies issued to Ford
Credit. Ford Credit's United States car and truck wholesale receivables that
liquidated were outstanding an average of about 77 days in both 1997 and 1996.
The levels of Ford Credit's wholesale financing volume and outstanding
wholesale receivables are dependent on several factors, including sales by Ford
to dealers, the level of dealer inventories, Ford Credit's share of Ford's sales
to dealers, vehicle prices and sales of wholesale receivables.
Competition In Vehicle Financing. The vehicle financing business is highly
competitive. Ford Credit's principal competitors are banks, credit unions and
leasing companies.
Ford Credit financed the following percentages of new Ford cars and trucks
sold or leased at retail and sold at wholesale in the United States and Europe
during each of the years indicated:
1997 1996 1995
---- ---- ----
United States
Retail*........................................... 37.5% 37.6% 36.9%
Wholesale......................................... 79.8 79.5 79.7
Europe
Retail*........................................... 29.1 29.3 30.2
Wholesale......................................... 95.0 90.8 89.2
- -------------------------
* As a percentage of total sales and leases, including cash sales
OTHER FINANCING ACTIVITIES
Ford Credit makes capital loans to vehicle dealers for facilities expansion
and working capital and to enable them to purchase dealership real estate. Such
loans totaled $2,268.6 million at December 31, 1997. From time to time, Ford
Credit purchases accounts receivable of certain divisions and affiliates of
Ford. At December 31, 1997, such receivables totaled $3,664.4 million, all of
which represent accounts receivable
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purchased by Ford Credit from Ford pursuant to agreements under which Ford
Credit may purchase such receivables.
As a part of Ford's sale of certain diversified assets of Ford Credit
managed by USL Capital Corporation ("USL Capital") during 1996, the majority of
such assets (except leveraged leases) was sold. Ford Credit formed a partnership
with Bank of America to manage a significant portion of the leveraged lease
portfolio and certain leveraged leases were transferred to the partnership. On
December 31, 1997, Ford Credit sold its partnership interest to Ford Leasing
Corporation, an affiliated company.
In early 1997, Ford Credit completed the sale of its majority interest in
Ford New Holland Credit Company to FiatAllis North America, Inc. and its
affiliates.
CREDIT LOSS EXPERIENCE
The following table sets forth information concerning Ford Credit's credit
loss experience with respect to the various categories and geographic regions of
financing during the years indicated:
1997 1996 1995
---- ---- ----
(DOLLAR AMOUNTS IN MILLIONS)
Net credit losses/(recoveries)
Retail*.................................................. $1,004.4 $803.6 $466.7
Wholesale................................................ (1.1) 18.6 9.9
Other.................................................... 3.8 7.8 9.3
-------- ------ ------
Total................................................. $1,007.1 $830.0 $485.9
======== ====== ======
United States............................................ $ 900.4 $707.0 $371.6
Europe................................................... 66.5 95.5 92.0
Other international...................................... 40.2 27.5 22.3
-------- ------ ------
Total................................................. $1,007.1 $830.0 $485.9
======== ====== ======
- -------------------------
* Includes net credit losses on operating leases
Net losses as a percent of average net receivables*
Retail................................................... 1.17% 1.03% 0.68%
Total finance receivables................................ 0.89 0.78 0.51
Provision for credit losses................................ $1,338.2 $ 993.3 $ 480.4
Allowance for credit losses................................ 1,471.4 1,217.6 1,054.9
As percent of net receivables*........................... 1.27% 1.09% 1.03%
- -------------------------
* Includes net investment in operating leases
Allowances for estimated credit losses are established as required based on
historical experience. Other factors that affect collectibility also are
evaluated and additional allowances may be provided. The provision for credit
losses generally varies with changes in the amount of loss exposure and the
absolute level of financing. Ford Credit's retail loss experience is dependent
upon the number of repossessions, the unpaid balance outstanding at the time of
repossession, and the net resale value of repossessed vehicles. Wholesale losses
generally reflect the financial condition of dealers. For additional information
regarding credit losses, see Notes 1 and 6 of Notes to Financial Statements and
see Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
SECURITY
Ford Credit generally either holds security interests in or is the title
owner of the vehicles which it finances or leases and generally is able to
repossess a vehicle in the event of a default. The right to repossess under a
security interest securing wholesale obligations generally is ineffectual, as a
matter of law, against a retail buyer of a vehicle from a dealer. Under the
wholesale installment sale plan, dealers are permitted to
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delay payment of up to 10% of a vehicle's financed balance for up to 60 days
after the dealer sells the vehicle. A portion of such delayed payments may,
under certain circumstances, be unsecured. Obligations arising from lease
financing extended to leasing companies are collateralized to the extent
practicable by assignments of rentals under the related leases and, in almost
all instances, by liens on the vehicles (which liens are not perfected against
third parties in some cases).
BORROWINGS AND OTHER SOURCES OF FUNDS
Ford Credit relies heavily on its ability to raise substantial amounts of
funds. These funds are obtained primarily by the sale of commercial paper, the
issuance of term debt and, in the case of Ford Credit Europe, the issuance of
certificates of deposit. Funds also are provided by retained earnings and sales
of receivables. The level of funds can be affected by certain transactions with
Ford, such as capital contributions, interest supplements and other support
costs from Ford for vehicles financed and leased by Ford Credit under Ford-
sponsored special financing and leasing programs, and dividend payments, and the
timing of payments for the financing of dealers' wholesale inventories and for
income taxes. Ford Credit's ability to obtain funds is affected by its debt
ratings, which are closely related to the outlook for, and financial condition
of, Ford, and the nature and availability of support facilities. The long-term
senior debt of Ford, Ford Credit and Ford Credit Europe are rated "A1" and "A"
and the commercial paper of Ford Credit and Ford Credit Europe are rated
"Prime-1" and "A-1" by Moody's Investors Service and Standard & Poor's Ratings
Group, respectively. For additional information regarding Ford Credit's
association with Ford, see "Certain Transactions with Ford and Affiliates".
Ford Credit's outstanding debt at the end of each of the last three years
was as follows:
1997 1996 1995
---- ---- ----
(IN MILLIONS)
Commercial paper and STBAs(a)............................... $ 42,311 $38,774 $40,419
Other short-term debt(b).................................... 3,897 4,243 1,781
Long-term debt (including current portion)(c)............... 54,517 55,007 49,980
-------- ------- -------
Total debt................................................ $100,725 $98,024 $92,180
======== ======= =======
United States............................................... 78,443 $76,635 $73,178
Europe...................................................... 12,491 14,028 13,013
Other international......................................... 9,791 7,361 5,989
-------- ------- -------
Total debt................................................ $100,725 $98,024 $92,180
======== ======= =======
Memo:
Total support facilities (billions) as of December 31:
Ford Credit............................................ $ 26.6 $ 27.2 $ 27.4
Ford Credit Europe..................................... 5.2 5.7 4.7
- -------------------------
(a) Short-term borrowing agreements with bank trust departments
(b) Includes $831 million, $2,478 million and $176 million with affiliated
companies at December 31, 1997, December 31, 1996 and December 31, 1995,
respectively
(c) Includes $3,547 million, $4,237 million, and $1,174 million with affiliated
companies at December 31, 1997, December 31, 1996, and December 31, 1995,
respectively
Outstanding commercial paper totaled $40.9 billion at December 31, 1997, up
$2.7 billion from a year earlier. In 1997, long-term debt placements were $11.8
billion compared with maturities and early redemptions of $10.3 billion.
Long-term debt placements in 1996 were $13.4 billion. In 1997, Ford Credit also
received $4.0 billion from sales of receivables and operating leases compared
with $4.7 billion in 1996.
Support facilities represent additional sources of funds, if required. At
December 31, 1997, Ford Credit had approximately $19.2 billion of contractually
committed facilities. In addition, $7.4 billion of Ford bank
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lines may be used by Ford Credit at Ford's option. The lines have various
maturity dates through June 30, 2002 and may be used, at Ford Credit's option,
by any of its direct or indirect majority-owned subsidiaries. Any such
borrowings will be guaranteed by Ford Credit. Banks also provide $1.6 billion of
contractually committed liquidity facilities to support Ford Credit's asset
backed commercial paper program.
Additionally, at December 31, 1997, there was approximately $4.6 billion of
contractually committed facilities available for Ford Credit Europe's use. In
addition, $615 million of Ford bank lines may be used by Ford Credit Europe at
Ford's option. The lines have various maturity dates through June 30, 2002 and
may be used, at Ford Credit Europe's option, by any of its direct or indirect
majority-owned subsidiaries. Any such borrowing will be guaranteed by Ford
Credit Europe.
FORD CREDIT EMPLOYEE RELATIONS
At December 31, 1997, Ford Credit and its subsidiaries had 14,730
employees. All such employees are salaried, and none is represented by a union.
Ford Credit considers its employee relations to be satisfactory.
FORD CREDIT GOVERNMENTAL REGULATIONS
Various aspects of Ford Credit's U.S. financing operations are regulated in
the various jurisdictions in which it operates. Many jurisdictions require
licenses to conduct retail financing. Interest rates, particularly those with
respect to consumer financing, generally are limited by law and, in periods of
high interest rates, these limitations can have a substantial adverse effect on
operations in certain jurisdictions if Ford Credit is unable to pass on its
increased interest costs to its customers.
During the past several years, legislative, judicial, and administrative
authorities have evidenced a growing concern for the protection of the interest
of consumers, especially in connection with consumer financing transactions. As
a result, significant changes have been made in the methods by which Ford Credit
and the financing industry conduct business, and many proposals have been made
which would require further changes. None of the changes to date has had a
substantial adverse effect on the operations of Ford Credit.
CERTAIN TRANSACTIONS WITH FORD AND AFFILIATES
For information concerning transactions between Ford Credit and Ford or
affiliates, see Note 12 of Notes to Financial Statements, "Business of Ford
Credit -- Other Financing Activities", "Business of Ford Credit -- Borrowings
and Other Sources of Funds" and Item 6 -- "Selected Financial Data -- Selected
Income Statement Data." The profit maintenance agreement referred to in the
first paragraph of Note 12 of Notes to Financial Statements, under which Ford
has agreed to maintain the income of Ford Credit at certain minimum levels,
expires at the end of 1998. In addition, Ford has agreed to maintain a minimum
ownership interest in Ford Credit Europe and has agreed to maintain or cause
Ford Credit to maintain Ford Credit Europe's net worth at a minimum level.
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BUSINESS OF FORD
Ford Motor Company was incorporated in Delaware in 1919 and acquired the
business of a Michigan company, also known as Ford Motor Company, incorporated
in 1903 to produce automobiles designed and engineered by Henry Ford. Ford is
the world's largest producer of trucks and the second largest producer of cars
and trucks combined. Ford and its subsidiaries also engage in automotive-related
businesses, such as, financing and renting vehicles and manufacturing automotive
components and systems.
GENERAL
The Company's two principal business segments are Automotive and Financial
Services. The activities of the Automotive segment consist of the design,
manufacture, assembly and sale of cars and trucks and related parts and
accessories. Substantially all of Ford's automotive products are marketed
through retail dealerships, most of which are privately owned and financed.
The primary activities of the Financial Services segment consist of
financing operations, vehicle and equipment leasing and rental operations, and
insurance operations. These activities are conducted primarily through the
Company's subsidiaries, Ford Motor Credit Company ("Ford Credit") and The Hertz
Corporation ("Hertz"). Ford also owns an 80.7% economic interest in Associates
First Capital Corporation ("The Associates"), which, as Ford has recently
announced, will be spun-off on April 7, 1998 to holders of Ford's Common and
Class B Stock.
AUTOMOTIVE OPERATIONS
The worldwide automotive industry is affected significantly by a number of
factors over which the industry has little control, including general economic
conditions.
In the United States, the automotive industry is a highly-competitive,
cyclical business characterized by a wide variety of product offerings. The
level of industry demand (retail deliveries of cars and trucks) can vary
substantially from year to year. In any year, demand is dependent to a large
extent on general economic conditions, the cost of purchasing and operating cars
and trucks and the availability and cost of credit and of fuel. Industry demand
also reflects the fact that cars and trucks are durable items, the replacement
of which can be postponed.
The automotive industry outside of the United States consists of many
producers, with no single dominant producer. Certain manufacturers, however,
account for the major percentage of total sales within particular countries,
especially their respective countries of origin. Most of the factors that affect
the U.S. automotive industry and its sales volumes and profitability are equally
relevant outside the United States.
The worldwide automotive industry also is affected significantly by a
substantial amount of costly government regulation. In the United States and
Europe, for example, government regulation has arisen primarily out of concern
for the environment, for greater vehicle safety and for improved fuel economy.
Many governments also regulate local content and/or impose import requirements
as a means of creating jobs, protecting domestic producers or influencing their
balance of payments.
Unit sales of Ford vehicles vary with the level of total industry demand
and as a result of Ford's share of industry sales. Ford's share is influenced by
the quality, price, design, driveability, safety, reliability, economy and
utility of its products compared with those offered by other manufacturers, as
well as by the timing of new model introductions and capacity limitations.
Ford's ability to satisfy changing consumer preferences with respect to type or
size of vehicle and its design and performance characteristics can affect Ford's
sales and earnings significantly.
The profitability of vehicle sales is affected by many factors, including
unit sales volume, the mix of vehicles and options sold, the level of
"incentives" (price discounts) and other marketing costs, the costs for customer
warranty claims and other customer satisfaction actions, the costs for
government-mandated safety, emission and fuel economy technology and equipment,
the ability to control costs and the ability to recover
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cost increases through higher prices. Further, because the automotive industry
is capital intensive, it operates with a relatively high percentage of fixed
costs which can result in large changes in earnings from relatively small
changes in unit volume.
UNITED STATES
Sales Data. The following table shows U.S. industry demand for the years
indicated:
U. S. INDUSTRY RETAIL DELIVERIES
(MILLIONS OF UNITS)
YEARS ENDED DECEMBER 31,
------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Cars........................................................ 8.3 8.6 8.6 9.0 8.5
Trucks...................................................... 7.2 6.9 6.5 6.4 5.7
---- ---- ---- ---- ----
Total....................................................... 15.5 15.5 15.1 15.4 14.2
==== ==== ==== ==== ====
Ford classifies cars by small, middle, large and luxury segments and trucks
by compact pickup, compact bus/van/utility, full-size pickup, full-size
bus/van/utility and medium/heavy segments. The large and luxury car segments and
the compact bus/van/utility, full-size pickup and full-size bus/van/utility
truck segments include the industry's most profitable vehicle lines. The term
"bus" as used herein refers to vans designed to
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carry passengers. The following tables show the proportion of retail car and
truck sales by segment for the industry (including Japanese and other
foreign-based manufacturers) and Ford for the years indicated:
U. S. INDUSTRY VEHICLE SALES BY SEGMENT
-----------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
CARS
Small.................................................... 18.1% 19.1% 19.6% 20.1% 19.8%
Middle................................................... 24.7 25.6 26.4 26.8 28.8
Large.................................................... 3.9 3.9 4.3 4.8 5.0
Luxury................................................... 6.7 6.7 6.8 6.6 6.4
----- ----- ----- ----- -----
Total U.S. Industry Car Sales............................ 53.4 55.3 57.1 58.3 60.0
----- ----- ----- ----- -----
TRUCKS
Compact Pickup........................................... 6.4 6.2 6.8 7.7 7.6
Compact Bus/Van/Utility.................................. 20.0 19.0 18.0 16.9 16.5
Full-Size Pickup......................................... 12.0 12.6 11.5 11.0 9.9
Full-Size Bus/Van/Utility................................ 6.1 5.0 4.4 4.1 4.2
Medium/Heavy............................................. 2.1 1.9 2.2 2.0 1.8
----- ----- ----- ----- -----
Total U.S. Industry Truck Sales.......................... 46.6 44.7 42.9 41.7 40.0
----- ----- ----- ----- -----
Total U.S. Industry Vehicle Sales........................ 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
FORD VEHICLE SALES BY SEGMENT IN U.S.
-----------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
CARS
Small.................................................... 12.7% 13.4% 15.1% 17.5% 15.1%
Middle................................................... 19.6 22.1 22.3 22.7 26.9
Large.................................................... 5.6 5.3 4.9 5.2 5.1
Luxury................................................... 4.1 4.1 4.4 4.7 4.9
----- ----- ----- ----- -----
Total Ford U.S. Car Sales................................ 42.0 44.9 46.7 50.1 52.0
----- ----- ----- ----- -----
TRUCKS
Compact Pickup........................................... 7.7 7.4 8.0 8.9 9.5
Compact Bus/Van/Utility.................................. 18.9 20.0 20.1 16.7 15.6
Full-Size Pickup......................................... 19.3 20.0 17.9 16.7 15.6
Full-Size Bus/Van/Utility................................ 11.0 6.6 5.9 6.2 6.0
Medium/Heavy*............................................ 1.1 1.1 1.4 1.4 1.3
----- ----- ----- ----- -----
Total Ford U.S. Truck Sales.............................. 58.0 55.1 53.3 49.9 48.0
----- ----- ----- ----- -----
Total Ford U.S. Vehicle Sales............................ 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
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* In May 1997, Ford and Freightliner Corporation ("Freightliner") entered into
an agreement for the sale to Freightliner of Ford's heavy truck business in
North America and Australia. Ford ceased production of heavy trucks in North
America in December 1997. The transfer of the North American heavy truck
business is expected to be completed by the end of the first quarter of 1998,
and the transfer of the Australian business is expect to be completed by
year-end 1998.
As shown in the tables above, since 1993 there has been a steady shift from
cars to trucks for both industry sales and Ford sales. Most of the shift
reflects fewer sales of cars in the middle and large segments for the industry
and in the small and middle segments for Ford, as well as increased sales of
trucks in all segments with the exception of compact pickups and medium/heavy
trucks.
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Market Share Data. The following tables show changes in car and truck
market shares of U.S. and foreign-based manufacturers for the years indicated:
U.S. CAR MARKET SHARES*
-------------------------------------------------
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
U.S. Manufacturers (Including Imports)
Ford...................................................... 19.7% 20.6% 20.9% 21.8% 22.3%
General Motors............................................ 32.2 32.3 33.9 34.0 34.1
Chrysler.................................................. 8.9 9.8 9.1 9.0 9.8
----- ----- ----- ----- -----
Total U.S. Manufacturers................................ 60.8 62.7 63.9 64.8 66.2
Foreign-Based Manufacturers**
Japanese.................................................. 30.9 30.0 29.7 29.6 29.1
All Other................................................. 8.3 7.3 6.4 5.6 4.7
----- ----- ----- ----- -----
Total Foreign-Based Manufacturers....................... 39.2 37.3 36.1 35.2 33.8
----- ----- ----- ----- -----
Total U.S. Car Retail Deliveries........................ 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
U.S. TRUCK MARKET SHARES*
-------------------------------------------------
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
U.S. Manufacturers (Including Imports)
Ford...................................................... 31.2% 31.1% 31.9% 30.1% 30.5%
General Motors............................................ 28.8 29.0 29.9 30.9 31.4
Chrysler.................................................. 21.7 23.4 21.3 21.7 21.4
Navistar International.................................... 1.3 1.3 1.4 1.3 1.3
All Other................................................. 1.8 1.8 2.0 1.8 1.6
----- ----- ----- ----- -----
Total U.S. Manufacturers................................ 84.8 86.6 86.5 85.8 86.2
Foreign-Based Manufacturers**
Japanese.................................................. 14.2 12.7 12.7 13.5 13.2
All Other................................................. 1.0 0.7 0.8 0.7 0.6
----- ----- ----- ----- -----
Total Foreign-Based Manufacturers....................... 15.2 13.4 13.5 14.2 13.8
----- ----- ----- ----- -----
Total U.S. Truck Retail Deliveries...................... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
U.S. COMBINED CAR AND TRUCK MARKET SHARES*
-------------------------------------------------
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
U.S. Manufacturers (Including Imports)
Ford...................................................... 25.0% 25.2% 25.6% 25.2% 25.5%
General Motors............................................ 30.6 30.8 32.2 32.7 33.1
Chrysler.................................................. 14.8 15.9 14.3 14.3 14.7
Navistar International.................................... 0.6 0.6 0.6 0.5 0.5
All Other................................................. 0.9 0.7 0.9 0.8 0.7
----- ----- ----- ----- -----
Total U.S. Manufacturers................................ 71.9 73.2 73.6 73.5 74.2
Foreign-Based Manufacturers**
Japanese.................................................. 23.2 22.4 22.6 22.9 22.8
All Other................................................. 4.9 4.4 3.8 3.6 3.0
----- ----- ----- ----- -----
Total Foreign-Based Manufacturers....................... 28.1 26.8 26.4 26.5 25.8
----- ----- ----- ----- -----
Total U.S. Car and Truck Retail Deliveries.............. 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
- -------------------------
* All U.S. retail sales data are based on publicly available information from
the American Automobile Manufacturers Association, the media and trade
publications.
** Share data include cars and trucks assembled and sold in the U.S. by
Japanese-based manufacturers selling through their own dealers as well as
vehicles imported by them into the U.S. "All Other" includes primarily
companies based in various European countries and in Korea.
Japanese Competition. The market share of Ford and other domestic
manufacturers in the United States is affected by sales from Japanese
manufacturers. As shown in the table above, the share of the U.S. combined car
and truck industry held by the Japanese manufacturers decreased from 22.8% in
1993 to 22.4% in 1996. This trend reflected in part the effects of a
strengthening Japanese yen, which put an upward pressure on the
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prices of vehicles produced by Japanese manufacturers, as well as the overall
market shift from cars to trucks and improvements in vehicles produced by U.S.
manufacturers. During 1997, however, the share of the U.S. combined car and
truck market held by Japanese manufacturers increased to 23.2% as the Japanese
yen weakened against the dollar. The recent disruption in Asian financial
markets and associated further weakening of the yen creates additional
competitive pressures in the United States by Japanese manufacturers.
In the 1980s and continuing in the 1990s, Japanese manufacturers added
assembly capacity in North America (frequently referred to as "transplants") in
response to a variety of factors, including export restraints, movements in the
exchange rate between the Japanese yen and the U.S. dollar, the significant
growth of Japanese car sales in the United States and international trade
considerations. Ford estimates that production in the United States by Japanese
transplants was approximately 2.3 million units in 1997.
Marketing Incentives and Fleet Sales. As a result of intense competition
from new product offerings (from both domestic and foreign manufacturers) and
the desire to maintain economic production levels, automotive manufacturers that
sell vehicles in the United States have provided marketing incentives (price
discounts) to retail and fleet customers (i.e., daily rental companies,
commercial fleets, leasing companies and governments). Marketing incentives are
particularly prevalent during periods of economic downturns, when excess
capacity in the industry tends to increase.
Ford's marketing costs in the United States as a percentage of gross sales
revenue for each of 1997, 1996, and 1995 were 8.7%, 8.0%, and 8.2%,
respectively. "Marketing costs" include (i) marketing incentives on vehicles
such as retail rebates and costs for special financing rates, (ii) reserves for
residual support on retail vehicle leases, (iii) reserves for costs and/or
losses associated with obligatory repurchases of certain vehicles sold to daily
rental companies and (iv) costs for advertising and sales promotions for
vehicles.
Sales by Ford to fleet customers were as follows for the years indicated:
FORD FLEET SALES
---------------------------------------------------
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Units sold..................................... 923,000 936,000 971,000 924,000 881,000
Percent of Ford's total U.S. car and truck
sales........................................ 24% 24% 25% 24% 25%
Fleet sales generally are less profitable than retail sales, and sales to
daily rental companies generally are less profitable than sales to other fleet
purchasers. The mix between sales to daily rental companies and other fleet
sales has been about evenly split in recent years.
Warranty Coverage. Ford presently provides warranty coverage for defects in
factory-supplied materials and workmanship on all vehicles (other than
medium/heavy trucks) sold by it in the United States that extends for at least
36 months or 36,000 miles (whichever occurs first) and covers all components of
the vehicle, other than tires which are warranted by the tire manufacturers. In
general, different warranty coverage is provided on medium/heavy trucks and on
vehicles sold outside the United States. In addition, as discussed below under
"Governmental Standards -- Mobile Source Emissions Control", the Federal Clean
Air Act requires a useful life of 10 years or 100,000 miles (whichever occurs
first) for emissions equipment on most light duty vehicles sold in the United
States. As a result of the coverage of these warranties and the increased
concern for customer satisfaction, costs for warranty repairs, emissions
equipment repairs and customer satisfaction actions ("warranty costs") can be
substantial. Estimated warranty costs for each vehicle sold by Ford are accrued
at the time of sale. Such accruals, however, are subject to adjustment from time
to time depending on actual experience.
EUROPE
Europe is the largest market for the sale of Ford cars and trucks outside
the United States. The automotive industry in Europe is intensely competitive;
for the past 12 years, the top six manufacturers have each achieved a car market
share in about the 10% to 17% range. (Manufacturers' shares, however, vary
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considerably by country.) This competitive environment is expected to intensify
further as Japanese manufacturers, which together had a European car market
share of 11% for 1997, increase their production capacity in Europe and import
restrictions on Japanese built-up vehicles gradually are removed in total by
December 31, 1999. Ford estimates that in 1997 the European automotive industry
had excess capacity of approximately 5.5 million units (based on a comparison of
European domestic demand and capacity).
In 1997, European car industry sales were 13.2 million units, up 5% from
1996 levels. Truck sales were 1.8 million units, up 6% from 1996 levels. Ford's
European car share for 1997 was 11.2%, down 3/10 of a point from 1996, and its
European truck share for 1997 was 12.2%, down 9/10 of a point from 1996.
For Ford, Great Britain and Germany are the most important markets within
Europe, although the Southern European countries are becoming increasingly
significant. Any adverse change in the British or German market has a
significant effect on total automotive profits. For 1997 compared with 1996,
total industry sales were up 7% in Great Britain and up 7% in Germany.
A single currency called the euro will be introduced in Europe on January
1, 1999. The increased price transparency resulting from the use of a single
currency may affect the ability of Ford and other companies to price their
products differently in the various European markets. A possible result of this
price harmonization is lower average prices for products sold in these markets.
OTHER FOREIGN MARKETS
Mexico and Canada. Mexico and Canada also are important markets for Ford.
In 1997, industry sales of cars and trucks in Canada were 1.4 million units, up
18% from 1996 levels. The increase reflected economic growth and low Canadian
interest rates. Mexico had been a growing market until late 1994. However,
substantial devaluation of the Mexican peso in late 1994 created a high level of
uncertainty regarding economic activity in Mexico. In 1996 and 1997, the Mexican
economy recovered. In 1997, industry volume was 496,000 units, up 50% from 1996
levels.
South America. Brazil and Argentina are the principal markets for Ford in
South America. The economic environment in those countries has been volatile in
recent years, leading to large variations in profitability. Results also have
been influenced by government actions to reduce inflation and public deficits,
and improve the balance of payments. Industry sales in 1997 were 1.9 million
units in Brazil, up 11% from 1996, and 426,000 units in Argentina, up 13% from
1996. Brazilian government austerity measures in late 1997 adversely impacted
industry vehicle sales in that country and are expected to continue to affect
industry sales in 1998.
Asia Pacific. In the Asia Pacific region, Australia, Taiwan and Japan are
the principal markets for Ford products. Industry volumes in 1997 in this region
were as follows: 722,000 units in Australia (up 11.1% from 1996), 482,000 units
in Taiwan (up 2.3% from 1996) and 6.7 million units in Japan (down 5% from
1996). In 1997, Ford was the market share leader in Australia with an 18%
combined car and truck market share. In Taiwan (where sales of built-up vehicles
manufactured in Japan are prohibited), Ford had a combined car and truck market
share in 1997 of 16.1%. Ford's combined car and truck market share in Japan has
never exceeded 1%. Ford's principal competition in the Asia Pacific region has
been the Japanese manufacturers. It is anticipated that the continuing
relaxation of import restrictions (including duty reductions) in Australia and
Taiwan will intensify competition in those markets.
The financial crisis that began in Thailand in mid-year 1997, and spread to
the neighboring Southeast Asian nations, particularly Indonesia, has resulted in
a significant reduction of vehicle sales for the region. These markets had been
expanding, but economic growth is now expected to remain subdued during a period
of restructuring. Ford is positioning itself to actively participate in these
markets in recognition of their long-term growth opportunities.
Africa. Ford operates in the South African market through South African
Motor Corporation (Pty.) Limited ("SAMCOR") in which Ford has a 45% equity
interest. SAMCOR is an assembler of Ford and other manufacturers' vehicles in
South Africa. In 1997, industry volume in South Africa was 367,000 units, down
7% from 1996 levels.
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FINANCIAL SERVICES OPERATIONS
FORD MOTOR CREDIT COMPANY
For information regarding the businesses of Ford Credit, see "Business of
Ford Credit."
THE HERTZ CORPORATION
Hertz and its affiliates and independent licensees operate what Hertz
believes is the largest car rental business in the world based upon revenues and
volume of rental transactions and the largest industrial and construction
equipment rental business in the United States based upon revenues. Hertz,
together with its affiliates and independent licensees, rents and leases cars,
rents industrial and construction equipment and operates its other businesses
from approximately 5,500 locations throughout the United States and in
approximately 140 foreign countries and jurisdictions. In April 1997, Hertz
completed an initial public offering of common stock representing a 19.1%
economic interest in Hertz.
ASSOCIATES FIRST CAPITAL CORPORATION
The Associates is a leading, diversified consumer and commercial finance
organization which provides finance, leasing and related services to individual
consumers and businesses in the United States and internationally. On March 2,
1998, Ford's Board of Directors approved the spin-off of The Associates by
declaring a dividend pursuant to which all of Ford's 279.5 million shares of The
Associates will be distributed to Ford Common and Class B stockholders in
proportion to their ownership of Common and Class B Stock. The distribution will
be made on April 7, 1998 to holders of record on March 12, 1998.
In 1996 and 1997, The Associates contributed 16.8% and 12%, respectively,
to Ford's consolidated earnings. Generally, the earnings of The Associates have
been retained by The Associates to fund its growth.
GOVERNMENTAL STANDARDS
A number of governmental standards and regulations relating to safety,
corporate average fuel economy ("CAFE"), emissions control, noise control,
damageability and theft prevention are applicable to new motor vehicles,
engines, and equipment manufactured for sale in the United States, Europe and
elsewhere. In addition, manufacturing and assembly facilities in the United
States, Europe and elsewhere are subject to stringent standards regulating air
emissions, water discharges and the handling and disposal of hazardous
substances. Such facilities in the United States also are subject to a
comprehensive federal-state permit program relating to air emissions.
Mobile Source Emissions Control -- U.S. Requirements. The Federal Clean Air
Act (the "Clean Air Act" or the "Act") imposes stringent limits on the amount of
regulated pollutants that lawfully may be emitted by new motor vehicles and
engines produced for sale in the United States. Concurrently, most light duty
vehicles sold in the United States must comply with these standards for 10 years
or 100,000 miles, whichever first occurs. More stringent emissions standards
will become effective as early as the 2004 model year, unless the U.S.
Environmental Protection Agency (the "EPA") decides otherwise.
Pursuant to the Act, California has received a waiver from the EPA to
establish unique emissions control standards. New vehicles and engines sold in
California must be certified by the California Air Resources Board (the "CARB").
The CARB's emissions requirements (the "California program") for model years
1994 through 2003 require manufacturers to meet a non-methane organic gasses
fleet average requirement and are significantly more stringent than those
prescribed by the Act for the corresponding periods of time. California
initially required that a specified percentage of each manufacturer's vehicles
produced for sale in California, beginning at 2% in 1998 and increasing to 10%
in 2003, must be zero-emission vehicles ("ZEVs"), which produce no emissions of
regulated pollutants. In 1996, however, the CARB eliminated the ZEV mandate
until the 2003 model year. Around the same time, vehicle manufacturers
voluntarily entered into an agreement with CARB to provide air quality benefits
for California equivalent to a 49 state program (i.e., equivalent to providing
vehicles certified to the California low emission vehicle standard nationwide
beginning with the 2001
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model year), to continue research and development of ZEV technology and to
provide specific numbers of advanced technology battery vehicles through
demonstration programs in California.
Electric vehicles are the only presently known type of zero-emission
vehicles. However, despite intensive research activities, technologies have not
been identified that would allow manufacturers to produce an electric vehicle
that either meets most customers' expectations or is commercially viable.
Compliance with the ZEV mandate may require manufacturers to curtail the sale of
non-electric vehicles or to offer substantial discounts on electric vehicles,
selling them well below cost, while increasing the price on non-electric
vehicles. The California program and ZEV mandates present significant
technological challenges to manufacturers and compliance may require costly
actions that would have a substantial adverse effect on Ford's sales volume and
profits.
The Act also permits other states which do not meet national ambient air
quality standards to adopt the California program no later than two years before
the affected model year. Under the Act, twelve northeastern states and the
District of Columbia formed a group known as the Ozone Transport Commission (the
"OTC"). Based on an OTC recommendation, the EPA required each OTC jurisdiction
to adopt the California program. The OTC jurisdictions also may adopt
California's ZEV mandates, if any, but were not required to do so by the EPA. In
March 1997, the Circuit Court of Appeals for the District of Columbia vacated
the EPA's rule requiring the OTC jurisdictions to adopt the California program.
That decision did not affect California programs, including ZEV mandates,
already adopted by individual states. There are major problems with transferring
California standards to the Northeast -- many dealers sell vehicles in
neighboring states and the driving range of present ZEVs is greatly diminished
(by more than 50 percent) in cold weather. Also, the Northeast states have
refused to adopt the California reformulated gasoline requirement, which makes
the task of meeting standards even more difficult.
The California program was adopted in New York and Massachusetts and is
currently in effect for model years 1996 and beyond. In addition, these two
states adopted ZEV mandates beginning with model year 1998. New York's mandate
retains the now rescinded California ZEV requirements. The automotive industry
is seeking to have New York's pre-2003 model year ZEV mandate declared invalid,
and the case is now pending before the U.S. Court of Appeals for the Second
Circuit. Massachusetts has attempted to adopt as a standard the ZEV obligations
relating to California to which the auto manufacturers voluntarily agreed with
CARB. A federal district court has invalidated these regulations, but
Massachusetts has appealed the decision to the U.S. Court of Appeals for the
First Circuit. Connecticut adopted the California program beginning with model
year 1998. Rhode Island and Vermont have adopted the California program
beginning in model year 1999 (with a ZEV mandate to be required in Vermont after
certain determinations with respect to the advancement of ZEV technology have
been made). Maine has adopted the California program beginning with the 2001
model year. Maryland and New Jersey have laws requiring adoption of the
California program and ZEV mandates after certain conditions, relating to
actions which may be taken by other OTC jurisdictions, have been met.
In response to OTC actions, the automotive industry proposed a National Low
Emissions Vehicle (NLEV) program, which the EPA promulgated as a rule and which
has been agreed to by all manufacturers and all OTC jurisdictions except Maine,
Massachusetts, New York and Vermont. This NLEV program will require
manufacturers to sell low emission vehicles in the participating OTC
jurisdictions beginning with the 1999 model year, and throughout the remainder
of the country beginning with the 2001 model year. The OTC jurisdictions which
have agreed to the NLEV program will for its duration substitute the NLEV
program for any of their other emissions programs for passenger cars and light
duty gasoline trucks. California and the non-participating OTC jurisdictions
will retain their California-based programs. A petition seeking judicial review
of the EPA's rule establishing NLEV has been filed by a coalition of
environmental groups. The petition alleges that the rule violates the Clean Air
Act.
Under the Act, the EPA and CARB can require manufacturers to recall and
repair non-conforming vehicles. The EPA, through its testing of production
vehicles, can also halt the shipment of non-conforming vehicles. Ford may be
required to recall, or may voluntarily recall, vehicles for such purposes in the
future. The costs of related repairs or inspections associated with such recalls
can be substantial.
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The Act generally prohibits the introduction of new fuel additives unless a
waiver is granted by the EPA. In 1995, the EPA was ordered by a federal court to
grant such a waiver to Ethyl Corporation for the additive MMT. Ford and other
manufacturers believe that the use of MMT will impair the performance of current
emissions systems and onboard diagnostics systems. Widespread use of MMT could
increase Ford's future warranty costs and necessitate changes in the Company's
warranties for emission control devices.
In January 1998, Ford announced that it would voluntarily re-engineer all
of its 1999 model year sports utility vehicles and its 1999 model year Windstar
minivan to emit 70% less pollutants than the level required by the Clean Air
Act. Ford is certifying those vehicles under the Act's Clean Fuel Fleet Program.
European Requirements. European Union directives and related legislation
limit the amount of regulated pollutants that may be emitted by new motor
vehicles and engines sold in the European Union. In June 1996, the European
Commission published a draft proposal for new more stringent European emissions
standards for 2000 (the "Stage III Directive"). That draft includes a new
framework for emission-related fiscal incentives for the early introduction of
vehicles capable of meeting Stage III standards before 2000 and vehicles capable
of meeting newly proposed and even more stringent standards before 2005. The
common position of the European Council of Environment Ministers (the
"Environment Council") published in November 1997 provides that the European
Commission should propose mandatory standards for 2005 by June 30, 1999 based on
a study that would address air quality needs, vehicle and engine technology
developments, the need for and availability of clean fuels, and other issues.
The European Parliament has proposed various amendments to the Environment
Council's common position that would make the proposed Stage III Directive even
more stringent. The Environment Council and the European Parliament are expected
to convene a conciliation committee to agree on the final form for the Stage III
Directive.
Certain European countries are conducting in-use emissions testing to
ascertain compliance of motor vehicles with applicable emissions standards.
These actions could lead to recalls of vehicles; the future costs of related
inspection or repairs could be substantial.
Motor Vehicle Safety -- The National Traffic and Motor Vehicle Safety Act
of 1966 (the "Safety Act") regulates motor vehicles and motor vehicle equipment
in two primary ways. First, the Safety Act prohibits the sale in the United
States of any new vehicle or equipment that does not conform to applicable motor
vehicle safety standards established by the National Highway Traffic Safety
Administration (the "Safety Administration"). Meeting or exceeding many safety
standards is costly because they tend to conflict with the need to reduce
vehicle weight in order to meet emissions and fuel economy standards. Second,
the Safety Act requires that defects related to motor vehicle safety be remedied
through safety recall campaigns. There currently are pending before the Safety
Administration a number of investigations relating to alleged safety defects in
Ford vehicles. A manufacturer is also obligated to recall vehicles if it
determines they contain a defect relating to motor vehicle safety or do not
comply with a safety standard. Should Ford or the Safety Administration
determine that either a safety defect or a noncompliance exists with respect to
certain of Ford's vehicles, the costs of such recall campaigns could be
substantial.
In 1997, the Safety Administration amended a standard to permit vehicle
manufacturers to reduce the inflation power in air bags in future models to
further reduce the risk of air bag deployment-related injuries. Ford will
incorporate lower output air bags in its 1998 and later model year vehicles. In
1997, the Safety Administration also adopted a rule permitting vehicle owners
meeting certain criteria to have their air bags deactivated or have "on-off"
switches installed in their vehicles. In June 1998, the Safety Administration is
expected to initiate rulemaking relating to advanced air bags.
The issue of truck-to-car compatibility in relation to collisions has
received significant media attention recently and has been the subject of a
Safety Administration report. Ford and its suppliers are continuing to work on
this complex issue, and Ford will participate with the Safety Administration in
a conference on this subject in early summer 1998. Government regulation to
address vehicle compatibility also is possible.
Canada, the European Union, individual member countries within the European
Union and other countries in Europe, South America and the Asia Pacific markets
also have safety standards applicable to motor vehicles and are likely to adopt
additional or more stringent standards in the future.
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Motor Vehicle Fuel Economy -- U.S. Requirements. Under the Motor Vehicle
Information and Cost Savings Act (the "Cost Savings Act") vehicles must meet
minimum CAFE standards set by the Safety Administration. A manufacturer is
subject to potentially substantial civil penalties if it fails to meet the CAFE
standard in any model year, after taking into account all available credits for
the preceding three model years and expected credits for the three succeeding
model years.
The Cost Savings Act established a passenger car CAFE standard of 27.5 mpg
for the 1985 and later model years, which the Safety Administration believes it
has the authority to amend to a level it determines to be the maximum feasible
level. The Safety Administration has established a 20.7 mpg CAFE standard
applicable to light trucks.
Ford expects to be able to comply with the foregoing CAFE standards, in
some cases using credits from prior or succeeding years. However, a continued
increase in demand for larger vehicles coupled with a decline in demand for
small and middle-size vehicles could jeopardize its ability to comply.
It is anticipated that efforts may be made to raise the CAFE standard
because of concerns for carbon dioxide ("CO2") emissions, energy security or
other reasons. President Clinton's Climate Change Action Plan ("CCAP") sets a
goal to improve new vehicle fuel efficiency in an amount equivalent to at least
2% per year over a 10 to 15 year period. In addition, international concerns
over global warming due to the emission of "greenhouse gasses" have given rise
to strong pressures to increase fuel economy. During the December 1997 meeting
of the parties to the United Nations Climate Change Convention in Kyoto, Japan,
the United States agreed to reduce greenhouse gas emissions by 7% below their
1990 levels during the 2008-2012 period (the "Kyoto Protocol"). The Kyoto
Protocol is not yet binding on the United States, pending signature by the
President and ratification by the Senate. If the CCAP or Kyoto Protocol goals
are partially or fully implemented through increases in the CAFE standard, or if
significant increases in car or light truck CAFE standards for subsequent model
years otherwise are imposed, Ford would find it necessary to take various costly
actions that would have substantial adverse effects on its sales volume and
profits. For example, Ford might have to curtail or eliminate production of
larger family-size and luxury cars and full-size light trucks, restrict
offerings of engines and popular options, and continue or increase market
support programs for its most fuel-efficient cars and light trucks.
Foreign Requirements. The European Union is also a party to the Kyoto
Protocol and has agreed to reduce greenhouse gas emissions by 8% below their
1990 levels during the 2008-2012 period. In December 1997, the Environment
Council reaffirmed its goal to reduce average CO2 emissions from new cars to 120
grams per kilometer by 2010 (at the latest) and invited European motor vehicle
manufacturers to negotiate further with the European Commission on a
satisfactory voluntary environmental agreement to help achieve this goal. In
addition, the Environment Council directed the European Commission to propose
legislation with binding CO2 limit values if such an agreement is determined to
be unachievable. On March 10, 1998, representatives of the European automotive
manufacturers association met with the European Environment Commissioner to
present an industry proposal that would (among other things) reduce the average
CO2 emissions of new cars sold in the European Union to 140 grams per kilometer
by 2008, review in 2002-2003 the feasibility of further reductions for 2012, and
offer for sale by 2000 vehicles that produce no more than 120 grams of CO2 per
kilometer. This proposal assumes (among other things) that no negative measures
will be implemented against diesel-fueled cars and the full availability of
improved fuels with low sulphur content by 2005. The European Environment
Commissioner will review the proposal with the member countries at a forthcoming
Environment Council meeting. The European Parliament has considered even more
stringent proposals for reducing CO2 emissions from new cars. If adopted,
certain of the proposals being considered could have substantial adverse effects
on Ford's sales volumes and profits in Europe.
In 1995, members of the German Automobile Manufacturers Association
(including Ford Werke AG) made a voluntary pledge to reduce by 2005 the average
fuel consumption of new cars sold in Germany by 25% from 1990 levels, to review
before the year 2000 the need for and feasibility of further reductions in
average fuel consumption, to make regular reports on fuel consumption, and to
increase industry research and development efforts toward this end.
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Other initiatives for reducing CO2 emissions from motor vehicles are being
considered by other European countries. Taken together such proposals could have
substantial adverse effects on Ford's sales volumes and profits in Europe.
Japan has adopted automobile fuel consumption goals that manufacturers must
attempt to achieve by the 2000 model year. The consumption levels apply only to
gasoline-powered vehicles, vary by vehicle weight, and range from 5.8 km/I to
19.2 km/l.
U.S. Stationary Source Air Pollution Control -- The Clean Air Act limits
various emissions into the atmosphere from stationary sources as well as mobile
sources, and allows states to adopt even more stringent standards. The Act
imposes comprehensive permit requirements for manufacturing facilities in
addition to those required by various states. Regulations continue to be
promulgated under the Act, and the costs to comply with the Act could be
substantial. In addition, the enormous complexity and time-consuming nature of
the comprehensive permit program provided for by the Act may reduce operational
flexibility and may interfere with future competitive upgrading of Ford's U.S.
production facilities.
U.S. Water Pollution Control -- Pursuant to the Federal Water Pollution
Control Act (the "Clean Water Act"), Ford is required to obtain permits for its
manufacturing facilities that regulate the facilities' discharge of wastewater
into public waters and municipal sewerage systems. The EPA also requires
management standards and, in some cases, permits for the discharge of storm
water. The standards under the Clean Water Act are established by the EPA and by
the state where a facility is located. Many states have requirements that go
beyond those established under the Clean Water Act.
The EPA also adopted regulations, pursuant to the Great Lakes Critical
Programs Act of 1990, that require more restrictive standards for discharges
into waters that impact the Great Lakes. These regulations may require the
addition of costly control equipment.
U.S. Hazardous Substance and Waste Control -- Pursuant to the Federal
Resource Conservation and Recovery Act ("RCRA"), the EPA has issued regulations
establishing certain procedures and standards for persons who generate,
transport, treat, store, or dispose of hazardous wastes and requiring corrective
action for prior releases. States may adopt even more extensive requirements.
The Federal Comprehensive Environmental Response, Compensation, and Liability
Act ("CERCLA") requires notification regarding certain releases into the
environment, and creates potential liability for remediation costs and for
damage to natural resources at sites where Ford waste was taken for treatment or
disposal. A number of states have enacted separate laws of this type. In
addition, under the Federal Toxic Substances Control Act ("TSCA"), the EPA
evaluates environmental and health effects of existing chemicals and new
substances. Pursuant to TSCA, the EPA regulates the use of polychlorinated
biphenyls in transformers, capacitors and other equipment that may be located at
Ford's U.S. facilities.
European Stationary Source Environmental Control -- The European Union and
individual member countries impose requirements on waste and hazardous wastes,
incineration, packaging, landfill, soil pollution, integrated pollution control,
air emissions standards, import/export and use of dangerous substances, air and
water quality standards, noise, environmental management systems, energy
efficiency, emissions reporting, and planning and permitting. Additional or more
stringent requirements (including tax measures and civil liability schemes for
cleaning polluted sites) are likely to be adopted in the future. The cost of
complying with these standards could be substantial.
The European Commission has published a draft proposal to introduce an
obligation for motor vehicle manufacturers to take back end-of-life vehicles on
a cost-free basis beginning in 2003, to impose requirements on the proportion of
the vehicle that may be disposed of in landfills and the proportion that must be
reused or recycled beginning in 2005, and to ban the use of certain substances
in vehicles beginning in 2003. Such proposals could, if adopted, impose a
substantial cost on manufacturers. The German Automobile Association (including
Ford Werke AG) and the German Automobile Importers Association made a voluntary
pledge to establish a nationwide infrastructure network to take back passenger
cars that are at least 12 years old (and meet certain other requirements) on a
cost-free basis to their owners.
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Pollution Control Costs -- During the period 1998 through 2002, Ford
expects that approximately $550 million will be spent on its North American and
European facilities to comply with air and water pollution and hazardous waste
control standards which now are in effect or are scheduled to come into effect.
Of this total, Ford estimates that approximately $100 million will be spent in
1998 and $120 million will be spent in 1999.
Worldwide Regulatory Compatibility -- Ford's efforts to develop new markets
and increase imports are impeded by incompatible automotive safety,
environmental and other product regulatory standards. At present, differing
standards either restrict the vehicles Ford can export to serve new markets or
increase the cost and complexity to do so.
LEGAL PROCEEDINGS
Various legal actions, governmental investigations and proceedings and
claims are pending or may be instituted or asserted in the future against the
Company and its subsidiaries, including those arising out of alleged defects in
the Company's products; governmental regulations relating to safety, emissions
and fuel economy; financial services; employment-related matters; intellectual
property rights; product warranties; and environmental matters. Certain of the
pending legal actions are, or purport to be, class actions. Some of the
foregoing matters involve or may involve compensatory, punitive or antitrust or
other treble damage claims in very large amounts, or demands for recall
campaigns, environmental remediation programs, sanctions or other relief which,
if granted, would require very large expenditures. Included among the foregoing
matters are the following:
PRODUCT LIABILITY MATTERS
Occupant Restraint Systems. Ford is a defendant in various actions for
damages arising out of automobile accidents where plaintiffs claim that the
injuries resulted from (or were aggravated by) alleged defects in the occupant
restraint systems in vehicle lines of various model years. The damages specified
by the plaintiffs in these actions, including both actual and punitive damages,
aggregated approximately $1 billion at December 31, 1997.
Bronco II. Ford is a defendant in various actions involving the alleged
propensity of Bronco II utility vehicles to roll over. The damages specified in
these actions, including both actual and punitive damages, aggregated
approximately $979 million at December 31, 1997.
In most of the actions described in the foregoing paragraphs no dollar
amount of damages is specified or the specific amount referred to is only the
jurisdictional minimum. It has been Ford's experience that in cases that allege
a specific amount of damages in excess of the jurisdictional minimum, such
amounts, on average, bear little relation to the actual amounts of damages paid
by Ford in such cases, which generally are, on average, substantially less than
the amounts originally claimed. In addition to the pending actions, accidents
have occurred and claims have arisen which also may result in lawsuits in which
such a defect may be alleged.
Asbestos. Ford is a defendant in various actions for injuries claimed to
have resulted from alleged contact with certain Ford parts and other products
containing asbestos. Damages specified by plaintiffs in complaints in these
actions, including both actual and punitive damages, aggregated approximately
$1.4 billion at December 31, 1997. (In some of these actions no dollar amount of
damages is specified or the specific amount referred to is only the
jurisdictional minimum.) As distinguished from most lawsuits against Ford, in
most of these asbestos-related cases, Ford is but one of many defendants, and
many of these co-defendants have substantial resources.
ENVIRONMENTAL MATTERS
General. Ford has received notices from government environmental
enforcement agencies concerning four matters which potentially involve monetary
sanctions exceeding $100,000. The agencies believe that Ford facilities may have
violated regulations relating to the management of certain materials or relating
to certain emissions from facility operations. In Ford's prior reports, Ford
included another environmental matter that
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related to certain emissions from one of its facilities. That matter was
resolved in February 1998, with Ford paying a civil penalty of $135,000.
Ford has received notices under RCRA, CERCLA and applicable state laws that
it (along with others) may be a potentially responsible party for the costs
associated with remediating numerous hazardous substance storage, recycling or
disposal sites in many states and, in some instances, for natural resource
damages. Ford also may have been a generator of hazardous substances at a number
of other sites. The amount of any such costs or damages for which Ford may be
held responsible could be substantial. Contingent losses expected to be incurred
by Ford in connection with many of these sites have been accrued and are
reflected in Ford's financial statements in accordance with generally accepted
accounting principles. However, for many sites the remediation costs and other
damages for which Ford ultimately may be responsible are not reasonably
estimable because of uncertainties with respect to factors such as Ford's
connection to the site or to materials there, the involvement of other
potentially responsible parties, the application of laws and other standards or
regulations, site conditions, and the nature and scope of investigations,
studies and remediation to be undertaken (including the technologies to be
required and the extent, duration and success of remediation). As a result, Ford
is unable to determine or reasonably estimate the amount of costs or other
damages for which it is potentially responsible in connection with these sites,
although it could be substantial.
CCA Lawsuit. The Corporation for Clean Air, Inc., a California non-profit
group ("CCA"), filed a lawsuit in California against Ford and numerous other
engine and vehicle manufacturers and owners of vehicle fleets, under
California's Safe Drinking Water and Toxic Enforcement Act ("Proposition 65").
Under Proposition 65 any business that knowingly and intentionally exposes any
person to certain carcinogens and reproductive toxins must provide that person
with an advance clear and reasonable warning, unless the business can prove that
the exposures are insignificant. CCA's complaint alleges that manufacturers and
fleet owners of diesel powered vehicles are exposing California's citizens to
diesel exhaust in violation of Proposition 65. Maximum penalties under
Proposition 65 are $2,500 per vehicle per day of violation.
Bridgend Plant. In November 1997, the Cardiff Crown Court imposed a fine of
10,000 Pounds Sterling on Ford's British subsidiary, Ford Motor Company, Limited
("Ford Britain"), for the discharge of certain pollutants into the River Ewenny
by Ford Britain's Bridgend plant in September 1995. Ford Britain was also
required to pay the United Kingdom Environmental Agency's costs of approximately
11,000 Pounds Sterling and to pay for the restocking of fish in the river.
CLASS ACTIONS
Described below are various class action lawsuits in which Ford has been
named a defendant. Class action lawsuits can involve very large classes of
plaintiffs, such as statewide or nationwide classes, if plaintiffs persuade the
court to grant class certification. Ford believes it has valid defenses in each
of these cases; however, if plaintiffs were to prevail in any of these lawsuits,
Ford could be required to pay substantial damages.
Paint. Pending against the Company are five purported class actions
alleging defects in the paint processes used on more than nine million vehicles
manufactured by the Company in model years 1984 through 1993. One case (Landry)
is nationwide in scope and is pending in the U.S. District Court for the Eastern
District of Louisiana. In January 1998, plaintiffs in Landry filed a motion for
class certification, which Ford opposed. Of the five cases that were
consolidated with Landry for pretrial proceedings, two were dismissed, and the
plaintiffs in the other three did not file motions for class certification
within the court-ordered deadline. In the remaining case (Sheldon), a Texas
state court certified two subclasses of Texas residents for trial. The Texas
Court of Appeals affirmed the class certification order. In its opinion, the
Court of Appeals approved of a bifurcated trial process that would require class
members to prove causation and damages in separate trials following a classwide
trial on the existence of a defect and the Company's knowledge thereof. Ford
will appeal the class certification to the Texas Supreme Court. In each pending
lawsuit, the plaintiffs seek unspecified compensatory damages, as well as
punitive damages, attorneys' fees and costs.
Bronco II. Currently pending against Ford are two state and one federal
purported class actions filed by Bronco II owners seeking recovery for economic
injury attributable to the alleged rollover propensity of these
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vehicles. Each lawsuit expressly excludes personal injury claimants, whose
claims are discussed above. Some of the lawsuits also seek recovery of
unspecified punitive damages and an order requiring the Company to recall and
retrofit these vehicles. Seven federal Bronco II cases had originally been
consolidated for pretrial purposes in a Louisiana federal court. After the court
denied plaintiffs' motion for class certification in these cases, six of the
cases were dismissed either by the court or voluntarily by the plaintiffs.
Plaintiffs in these cases have appealed the court's dismissal orders and denial
of class certification to the U.S. Court of Appeals for the Fifth Circuit.
Ford's motion for summary judgment is pending in the remaining federal case. The
two state court cases are pending in Alabama and Texas. The Texas case is
dormant. In October 1997, the Alabama court denied Ford's motion to dismiss
plaintiffs' fraud claims and certified a class consisting of Alabama residents
who owned a Bronco II vehicle any time between August 26, 1993 and May 31, 1997.
The Alabama Supreme Court agreed to hear Ford's interlocutory appeal of the
trial court's denial of Ford's motion to dismiss, but it has not yet ruled on
Ford's petition to appeal the trial court's class certification order. The trial
court proceedings are stayed pending the Supreme Court's decision on Ford's
interlocutory appeal.
A separate purported class action involving the Bronco II (Goff) is pending
against Ford in federal court in the Southern District of West Virginia. The
lawsuit purports to represent a class of former plaintiffs in Bronco II personal
injury cases that have been settled or tried. Plaintiffs allege that Ford and a
Ford expert on the design history of the Bronco II conspired to fraudulently
conceal documents that would establish (a) that Ford paid the expert to offer
false testimony in favor of Ford regarding the design of the Bronco II, and (b)
that Ford knew the design of the Bronco II rendered the vehicle unstable and
prone to rollover under normal driving conditions. Plaintiffs seek compensatory
and punitive damages, prejudgment interest, costs and attorneys' fees.
Plaintiffs also seek to prevent Ford from using as a defense in this case
releases obtained in settled Bronco II personal injury lawsuits and defense
verdicts in tried Bronco II personal injury lawsuits. Plaintiffs' motion for
class certification and Ford's motion to dismiss are pending.
Ignition Switch. In 1996, the Company was served with fourteen purported
class action lawsuits alleging that certain 1983 to 1993 model year vehicles
were equipped with defective ignition switches that could cause an electrical
short circuit, resulting in smoke and fire damage. Most of the suits were
brought on behalf of plaintiffs who have not experienced a problem, but who
claim that their vehicles have diminished value because of the allegedly
defective switches. Some of the lawsuits were purportedly brought on behalf of
plaintiffs who claim to have suffered fire or smoke damage to their vehicles.
Plaintiffs seek unspecified compensatory damages, punitive damages, attorneys'
fees and costs, as well as injunctive relief requiring, among other things, that
Ford replace the allegedly defective ignition switch in all affected vehicles.
All fourteen lawsuits were consolidated for pretrial proceedings in federal
court in New Jersey. In August 1997, the court denied plaintiffs' motion for
class certification. In September 1997, the court dismissed all of the claims
brought by the non-incident class members except the implied warranty claims
brought under Louisiana law and the breach of contract claims. In October 1997,
plaintiffs filed a motion with the court to remand all of the lawsuits to state
courts and to vacate the court's ruling denying nationwide class certification
and dismissing most of the underlying claims. The court deferred ruling on the
matter pending additional discovery in the case.
In a related matter, State Farm Mutual Automobile Insurance Company ("State
Farm") filed a lawsuit in federal court in California in January 1998 against
Ford and United Technologies Automotive, Inc. State Farm seeks damages for
insurance claims it paid to cover vehicle damage caused by allegedly defective
ignition switches, the deductible amounts paid by its insureds, other
compensatory damages, and attorney's fees and costs. Ford has moved to dismiss
State Farm's claims. Upon Ford's notice of the State Farm action, the Judicial
Panel on Multidistrict Litigation conditionally transferred the action to the
New Jersey federal court where the ignition switch class actions are pending.
State Farm opposed the transfer.
TFI Module. Six purported class actions are pending in state courts on
behalf of owners and lessees of 1983 through 1995 model year Ford vehicles
containing a distributor-mounted thick film ignition (TFI) module. The
plaintiffs allege that distributor-mounted TFI modules are defective because
they have a high propensity to fail due to exposure to engine heat, causing the
engine to stumble, stall, or not start. The plaintiffs in these cases seek pre-
and post-judgment interest, attorneys' fees, disgorgement of profits,
compensatory damages, punitive damages, notice to the public, and the recall and
retrofit of all vehicles with
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the allegedly defective TFI modules. The cases are pending in Alabama,
California, Illinois, Maryland, Tennessee and Washington. The Alabama and
Tennessee cases were conditionally certified as nationwide class actions
(excluding California). The cases in Illinois, Maryland and Washington purport
to be regional class actions, and the California case is statewide in scope. The
California case is the "lead" case and proceedings in the other cases are
stayed. The California court has certified a class of California residents who
currently own or lease the subject vehicles and California residents who
purchased such vehicles when they were new. The court also certified a sub-class
of consumers pursuing Consumer Legal Remedies Act claims. In February 1998, the
court ordered Ford to produce at its expense a mailing list for purposes of
class notification. The court reserved final decision on all other aspects of
class notice, but has indicated its intention to order the parties to share the
costs of notice. Ford estimates the costs of such notice to be approximately $1
million to $2 million. Ford appealed the California court's class certification
and class notice orders, but the appellate court has declined to hear Ford's
appeals. Ford has filed a motion for leave to appeal these orders to the
California Supreme Court. If leave to appeal is denied, Ford will have the right
to appeal those orders after entry of any final judgment in the case.
In related developments, Ford urged the Safety Administration to review
allegations by plaintiffs and the Safety Administration's former chief
investigator that Ford improperly withheld information and documents during
prior Safety Administration investigations into this matter. In September 1997,
the Safety Administration issued a Special Order requiring Ford to respond to
those allegations under oath, and Ford did so.
Air Bag. Three purported class action lawsuits were filed in Alabama,
Louisiana and Texas state courts alleging that air bags are defective because
they can cause injury, particularly to children and small adults. The Alabama
action appears to be nationwide in scope and purports to represent owners of
1993 through 1996 (and some 1997) model year cars and light trucks with
passenger air bags. The Louisiana and Texas actions purport to represent
residents who purchased vehicles with driver and/or passenger air bags, and
nonresidents who purchased such vehicles in those states. The Alabama action
names as defendants Ford, General Motors Corporation, Chrysler Corporation, and
an Alabama automobile dealership. The Louisiana action was brought against the
same manufacturers, as well as Volvo of North America, Inc., Nissan Motor
Corporation, Toyota Motor Corporation, Honda Motor Company, Ltd. and various
dealerships. The Texas action was brought against Ford, General Motors, Chrysler
and Volvo. However, in February 1998, plaintiffs in the Texas case filed an
amended complaint that did not name Ford as a defendant. The Louisiana and Texas
actions were removed to federal court and consolidated for pretrial proceedings.
Plaintiffs allege that their vehicles are unsuitable for transporting children
and small adults and, therefore, are not worth the purchase price they paid.
They seek compensatory damages, including the alleged diminution in value of
their vehicles and in the Alabama and Louisiana cases, the cost to disable the
air bags or "repair" the vehicles.
Ford/Citibank Visa. Following the June 1997 announcement of the termination
of the Ford/Citibank credit card rebate program, five purported nationwide class
actions and one purported statewide class action were filed against Ford;
Citibank is also a defendant in some of these actions. The actions allege
damages in an amount up to $3,500 for each cardholder who obtained a
Ford/Citibank credit card in reliance on the rebate program and who is precluded
from accumulating discounts toward the purchase or lease of new Ford vehicles
after December 1997 as a result of the termination of the rebate program.
Plaintiffs contend that defendants deceptively breached their contract by
unilaterally terminating the program, that defendants have been unjustly
enriched as a result of the interest charges and fees collected from
cardholders, and further, that defendants conspired to deprive plaintiffs of the
benefits of their credit card agreement. Plaintiffs seek compensatory damages,
or alternatively, reinstatement of the rebate program, and punitive damages,
costs, expenses and attorneys' fees. The five purported nationwide class actions
were filed in state courts in Alabama, Illinois, New York, Oregon and
Washington, and the purported statewide class action was filed in a California
state court. The Alabama court has conditionally certified a class consisting of
Alabama residents. Ford removed all of the cases to federal court and requested
that the Judicial Panel on Multidistrict Litigation consolidate and transfer the
cases to federal court in Washington for pretrial proceedings. Five of the cases
were consolidated and transferred to federal court in Washington. Ford's request
to consolidate and transfer the remaining case is pending. The plaintiff in the
Oregon case has moved to remand the case to state court.
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Flat Glass. The Company has been named as a defendant in thirteen purported
class actions brought on behalf of purchasers of flat glass alleging that Ford
and other manufacturers fixed prices and allocated markets in violation of
federal and state antitrust laws. Eleven of the class actions are nationwide in
scope and are pending in federal court and the other two class actions are
statewide in scope and are pending in state courts. The other defendants include
Pilkington plc; Libbey-Owens Ford Co., Inc.; AFG Industries; PPG Industries,
Inc.; Asahi Glass Co., Ltd.; and Guardian Industries Corp. There are nineteen
similar purported class actions pending in various courts in which the Company
is not currently named as a defendant. A total of 27 federal cases have been
consolidated in a single federal court in Pennsylvania for pretrial proceedings
under the multidistrict litigation rules. In the actions involving Ford, the
plaintiffs are seeking economic and treble damages.
Lease Residual. In January 1998 in connection with a case pending in
Illinois state court, Ford and Ford Credit were served with a summons and
intervention counterclaim complaint relating to Ford Credit's 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, Ford Credit commenced an
action for deficiency against Virginia Shore, a Ford Credit 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 Ford Credit, and
joined Ford as an additional counterclaim defendant. Higginbotham asserts claims
against Ford Credit for violations of the Consumer Leasing Act, declaratory
judgment concerning the enforceability of early termination provisions in Ford
Credit's leases, and fraud. She also asserts a claim against Ford Credit and
Ford for conspiracy to violate the Truth-in-Lending Act. The Higginbotham
counterclaims allege that Ford Credit inflates the residual values of its 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 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 Ford Credit and thereby participated in an unlawful conspiracy.
OTHER MATTERS
Patents--General. A number of claims have been made or may be asserted in
the future against Ford alleging infringement of patents held by others. Ford
believes that it has valid defenses with respect to the claims that have been
asserted. If some of such claims should lead to litigation, however, and if the
claimant were to prevail, Ford could be required to pay substantial damages.
Lemelson Patent Case. In 1992, Ford was sued in federal court in Nevada by
an individual patent owner (Lemelson) seeking damages and an injunction for
alleged infringement of four U.S. patents characterized by Lemelson as covering
machine vision inspection technologies, including bar code reading. Ford filed a
declaratory judgment action in the same court to have these four patents as well
as others of Lemelson's patents directed to machine vision and laser uses
declared invalid, unenforceable and not infringed. Lemelson filed a counterclaim
alleging infringement of the patents added by Ford and several additional
patents. In 1995, Ford filed twelve summary judgment motions to dispose of large
portions of the case. One motion to have the case dismissed was granted in 1996
and reversed in 1997. The U.S. Court of Appeals refused to hear Ford's appeal of
the 1997 reversal until the case is tried. Ford and Lemelson then filed opposing
motions for further proceedings. Lemelson requested that the case be scheduled
for an immediate trial. Ford moved to have the case sent back to the magistrate
judge for consideration of Ford's eleven pending motions for summary judgment.
Mr. Lemelson died in October 1997. In January 1998 the court permitted the
Lemelson Medical, Education & Research Foundation, Limited Partnership to be
substituted as party to the lawsuit. The court also granted Ford's motion to
have the case remanded back to the magistrate judge for further proceedings to
recommend disposition of Ford's remaining summary judgment motions. If Lemelson
were to prevail in this lawsuit, Ford could be required to pay substantial
damages of an as yet indeterminate amount
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and could become subject to an injunction preventing future use of any process
or product found to be covered by a valid patent.
OFCCP Proceeding. In April 1997, Ford became the subject of a Department of
Labor administrative enforcement proceeding challenging Ford's compliance with
obligations imposed by Executive Order 11246, which prohibits employment
discrimination and requires affirmative action by government contractors and
subcontractors. The Office of Federal Contract Compliance Programs ("OFCCP")
claims that Ford's Kentucky Truck Plant used a hiring process in 1993 for
entry-level hourly laborer positions that discriminated against female
applicants. OFCCP further claims that Ford failed to make available required
records and otherwise cooperate with the agency during a 1993 compliance review.
OFCCP seeks to cancel Ford's government contracts and to bar Ford from obtaining
future government contracts and seeks an order awarding back pay to the
"affected class of women." If OFCCP prevails, Ford's results of operations could
be substantially adversely effected. Ford believes that, although the offer rate
for women at the Kentucky Truck Plant was less than the percentage of female
applicants in the 1993 interview process, there are sound gender-neutral
explanations for this difference. The Department of Labor has indicated it has
similar concerns about the hourly hiring practices at other Ford facilities and
would like to resolve those concerns as part of a resolution of the Kentucky
Truck proceeding.
FTC Investigation. The Federal Trade Commission and the Department of
Justice are continuing their investigation, commenced in 1995, of the retail
vehicle financing credit practices of Ford Credit for compliance with the Equal
Credit Opportunity Act and Regulation B.
EMPLOYMENT DATA
Substantially all hourly employees of Ford in the United States are
included in collective bargaining units represented by unions. Approximately 99%
of these unionized hourly employees are represented by the United Automobile
Workers (the "UAW"). Approximately 3% of salaried employees are represented by
unions. Most hourly employees and many nonmanagement salaried employees of
subsidiaries outside the United States also are represented by unions.
Affiliates of Ford also are parties to collective bargaining agreements in
Britain, France, Germany and Spain. Collective bargaining agreements between
Ford and the UAW and between Ford of Canada and the Canadian Automobile Workers
were entered into in 1996 and are scheduled to expire in September 1999.
Ford has not experienced significant work stoppages at its facilities in
recent years, but work stoppages have occurred in supplier facilities. Any
protracted work stoppages in the future, whether in Ford's facilities or those
of certain suppliers, could substantially adversely affect Ford's results of
operations.
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SELECTED FINANCIAL DATA AND OTHER DATA OF FORD MOTOR COMPANY
The following tables set forth selected financial data and other data
concerning Ford for each of the last eleven years (dollar amounts in millions
except per share amounts):
SUMMARY OF OPERATIONS 1997 1996 1995 1994 1993 1992
- --------------------- ---- ---- ---- ---- ---- ----
AUTOMOTIVE
Sales............................. $122,935 $118,023 $110,496 $107,137 $ 91,568 $ 84,407
Operating income/(loss)........... 6,946 2,516 3,281 5,826 1,432 (1,775)
Income/(loss) before income taxes
and cumulative effects of
changes in accounting
principles...................... 7,082 2,571 3,166 5,997 1,291 (1,952)
Income/(loss) before cumulative
effects of changes in accounting
principles(a)(c)................ 4,714 1,655 2,056 3,913 1,008 (1,534)
-------- -------- -------- -------- -------- --------
Net income/(loss)................. 4,714 1,655 2,056 3,913 1,008 (8,628)
-------- -------- -------- -------- -------- --------
FINANCIAL SERVICES
Revenues.......................... $ 30,692 $ 28,968 $ 26,641 $ 21,302 $ 16,953 $ 15,725
Income before income taxes and
cumulative effects of changes in
accounting principles........... 3,857 4,222 3,539 2,792 2,712 1,825
Income before cumulative effects
of changes in accounting
principles (b)(d)(e)............ 2,206 2,791 2,083 1,395 1,521 1,032
-------- -------- -------- -------- -------- --------
Net income........................ 2,206 2,791 2,083 1,395 1,521 1,243
-------- -------- -------- -------- -------- --------
TOTAL COMPANY
Income/(loss) before income taxes
and cumulative effects of
changes in accounting
principles...................... $ 10,939 $ 6,793 $ 6,705 $ 8,789 $ 4,003 $ (127)
Provision/(credit) for income
taxes........................... 3,741 2,166 2,379 3,329 1,350 295
Minority interests in net income
of subsidiaries................. 278 181 187 152 124 80
-------- -------- -------- -------- -------- --------
Income/(loss) before cumulative
effects of changes in accounting
principles(a)(b)(c)(d)(e)....... 6,920 4,446 4,139 5,308 2,529 (502)
Cumulative effects of changes in
accounting principles........... -- -- -- -- -- (6,883)
-------- -------- -------- -------- -------- --------
Net income/(loss)................. $ 6,920 $ 4,446 $ 4,139 $ 5,308 $ 2,529 $ (7,385)
======== ======== ======== ======== ======== ========
TOTAL COMPANY DATA PER SHARE OF
COMMON AND CLASS B STOCK(F)
Income/(loss) before cumulative
effects of changes in accounting
principles...................... $ 5.75 $ 3.73 $ 3.58 $ 4.97 $ 2.27 $ (0.73)
Income/(loss)
Basic........................... 5.75 3.73 3.58 4.97 2.27 (7.81)
Diluted......................... 5.62 3.64 3.33 4.44 2.10 (7.81)
Cash dividends.................... 1.645 1.47 1.23 0.91 0.80 0.80
Common stock price range (NYSE)
High............................ 50 1/4 37 1/4 32 7/8 35 33 1/16 24 7/16
Low............................. 30 27 1/4 24 3/4 25 5/8 21 1/2 13 7/8
Average number of shares of Common
and Class B stock outstanding
(in millions)................... 1,195 1,179 1,071 1,010 986 972
TOTAL COMPANY BALANCE SHEET DATA
AT YEAR-END
Assets
Automotive...................... $ 85,079 $ 79,658 $ 72,772 $ 68,639 $ 61,737 $ 57,170
Financial Services.............. 194,018 183,209 170,511 150,983 137,201 123,375
-------- -------- -------- -------- -------- --------
Total assets.................. $279,097 $262,867 $243,283 $219,622 $198,938 $180,545
Long-term debt
Automotive...................... $ 7,047 $ 6,495 $ 5,475 $ 7,103 $ 7,084 $ 7,068
Financial Services.............. 73,198 70,641 68,259 58,104 47,900 42,369
Stockholders' equity(g)........... 30,734 26,762 24,547 21,659 15,574 14,753
SUMMARY OF OPERATIONS 1991 1990 1989 1988 1987
- --------------------- ---- ---- ---- ---- ----
AUTOMOTIVE
Sales............................. $ 72,051 $ 81,844 $ 82,879 $ 82,193 $ 71,797
Operating income/(loss)........... (3,769) 316 4,252 6,612 6,256
Income/(loss) before income taxes
and cumulative effects of
changes in accounting
principles...................... (4,052) 275 5,156 7,312 6,499
Income/(loss) before cumulative
effects of changes in accounting
principles(a)(c)................ (3,186) 99 3,175 4,609 3,767
-------- -------- -------- -------- --------
Net income/(loss)................. (3,186) 99 3,175 4,609 3,767
-------- -------- -------- -------- --------
FINANCIAL SERVICES
Revenues.......................... $ 16,235 $ 15,806 $ 13,267 $ 10,253 $ 8,096
Income before income taxes and
cumulative effects of changes in
accounting principles........... 1,465 1,220 874 1,031 1,386
Income before cumulative effects
of changes in accounting
principles (b)(d)(e)............ 928 761 660 691 858
-------- -------- -------- -------- --------
Net income........................ 928 761 660 691 858
-------- -------- -------- -------- --------
TOTAL COMPANY
Income/(loss) before income taxes
and cumulative effects of
changes in accounting
principles...................... $ (2,587) $ 1,495 $ 6,030 $ 8,343 $ 7,885
Provision/(credit) for income
taxes........................... (395) 530 2,113 2,999 3,226
Minority interests in net income
of subsidiaries................. 66 105 82 44 34
-------- -------- -------- -------- --------
Income/(loss) before cumulative
effects of changes in accounting
principles(a)(b)(c)(d)(e)....... (2,258) 860 3,835 5,300 4,625
Cumulative effects of changes in
accounting principles........... -- -- -- -- --
-------- -------- -------- -------- --------
Net income/(loss)................. $ (2,258) $ 860 $ 3,835 $ 5,300 $ 4,625
======== ======== ======== ======== ========
TOTAL COMPANY DATA PER SHARE OF
COMMON AND CLASS B STOCK(F)
Income/(loss) before cumulative
effects of changes in accounting
principles...................... $ (2.40) $ 0.93 $ 4.11 $ 5.48 $ 4.53
Income/(loss)
Basic........................... (2.40) 0.93 4.11 5.48 4.53
Diluted......................... (2.40) 0.92 4.06 5.40 4.46
Cash dividends.................... 0.98 1.50 1.50 1.15 0.79
Common stock price range (NYSE)
High............................ 18 7/8 24 9/16 28 5/16 27 1/2 28 5/32
Low............................. 11 11/16 12 1/2 20 11/16 19 1/32 14 7/32
Average number of shares of Common
and Class B stock outstanding
(in millions)................... 952 926 934 968 1,022
TOTAL COMPANY BALANCE SHEET DATA
AT YEAR-END
Assets
Automotive...................... $ 52,397 $ 50,824 $ 45,819 $ 43,128 $ 39,734
Financial Services.............. 122,032 122,839 115,074 100,239 76,260
-------- -------- -------- -------- --------
Total assets.................. $174,429 $173,663 $160,893 $143,367 $115,994
Long-term debt
Automotive...................... $ 6,539 $ 4,553 $ 1,137 $ 1,336 $ 2,058
Financial Services.............. 43,680 40,779 37,784 30,777 26,009
Stockholders' equity(g)........... 22,690 23,238 22,728 21,529 18,493
- -------------------------
(a) 1989 includes an after-tax loss of $424 million from the sale of Rouge Steel
Company.
(b) 1994 includes an after-tax loss of $440 million from the sale of Granite
Savings Bank (formerly First Nationwide Bank).
(c) 1995 includes a gain of $230 million from the dissolution of Autolatina, the
Company's joint venture with Volkswagen AG in Brazil and Argentina.
(d) 1996 includes gains of $650 million on the sale of The Associates' common
stock and $95 million on the sale of USL Capital's assets, offset partially
by a net write-down of $233 million for Budget Rent a Car Corporation.
(e) 1997 includes a gain of $269 million on the sale of Hertz common stock.
(f) Share data have been adjusted to reflect stock dividends and stock splits.
(g) The cumulative effects of changes in accounting principles reduced equity by
$6,883 million in 1992.
24
26
SUMMARY OF
- ---------------------------------
OPERATIONS, CONT. 1997 1996 1995 1994 1993 1992 1991 1990 1989
- --------------------------------- ---- ---- ---- ---- ---- ---- ---- ---- ----
TOTAL COMPANY FACILITY AND
TOOLING DATA
Capital expenditures for
facilities (excluding special
tools)......................... $ 5,695 $ 5,362 $ 5,455 $ 5,236 $ 4,339 $ 3,613 $ 3,611 $ 4,702 $ 4,412
Depreciation..................... 10,404 9,519 8,954 7,207 5,456 4,658 3,956 3,185 2,720
Expenditures for special tools... 3,022 3,289 3,542 3,310 2,475 2,177 2,236 2,556 2,354
Amortization of special tools.... 3,179 3,272 2,765 2,129 2,012 2,097 1,822 1,695 1,509
TOTAL COMPANY EMPLOYEE DATA --
WORLDWIDE
Payroll.......................... $ 17,187 $ 17,616 $ 16,567 $ 15,853 $ 13,750 $ 13,754 $ 12,850 $ 14,014 $ 13,327
Total labor costs................ 25,546 25,689 23,758 22,985 20,065 19,850 17,998 18,962 18,152
Average number of employees...... 363,892 371,702 346,989 337,728 321,925 325,333 331,977 369,547 366,641
TOTAL COMPANY EMPLOYEE DATA --
U.S. OPERATIONS
Payroll.......................... $ 10,840 $ 10,961 $ 10,488 $ 10,381 $ 8,899 $ 8,019 $ 7,393 $ 8,313 $ 8,654
Average number of employees...... 189,787 189,718 186,387 180,861 166,995 158,501 156,203 180,228 188,402
Average hourly labor costs(h)
Earnings....................... $ 22.97 $ 22.30 $ 21.79 $ 21.81 $ 20.94 $ 19.92 $ 19.10 $ 18.44 $ 17.77
Benefits....................... 20.48 19.47 18.66 19.13 18.12 19.24 17.97 14.12 13.21
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total hourly labor costs..... $ 43.45 $ 41.77 $ 40.45 $ 40.94 $ 39.06 $ 39.16 $ 37.07 $ 32.56 $ 30.98
======== ======== ======== ======== ======== ======== ======== ======== ========
SUMMARY OF VEHICLE UNIT SALES(I)
(IN THOUSANDS)
NORTH AMERICA
United States
Cars......................... 1,614 1,656 1,767 2,036 1,925 1,820 1,588 1,870 2,201
Trucks....................... 2,402 2,241 2,226 2,182 1,859 1,510 1,253 1,416 1,517
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total United States........ 4,016 3,897 3,993 4,218 3,784 3,330 2,841 3,286 3,718
Canada......................... 319 258 254 281 256 237 259 257 326
Mexico......................... 97 67 32 92 91 126 112 89 87
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total North America........ 4,432 4,222 4,279 4,591 4,131 3,693 3,212 3,632 4,131
EUROPE
Britain........................ 466 516 496 520 464 420 471 607 739
Germany........................ 460 436 409 386 340 407 501 361 326
Italy.......................... 248 180 193 179 172 266 301 219 153
Spain.......................... 155 155 160 163 117 165 128 155 173
France......................... 153 194 165 180 150 194 190 185 192
Other countries................ 318 339 286 281 250 270 296 289 296
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Europe............... 1,800 1,820 1,709 1,709 1,493 1,722 1,887 1,816 1,879
OTHER INTERNATIONAL
Brazil......................... 214 190 201 164 151 117 137 137 157
Argentina...................... 143 64 48 54 49 49 26 18 25
Australia...................... 132 138 139 125 120 105 104 134 154
Taiwan......................... 79 86 106 97 122 119 107 115 115
Japan.......................... 40 52 57 50 53 64 83 99 82
Other countries................ 103 81 67 63 65 71 67 72 65
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total other
international............ 711 611 618 553 560 525 524 575 598
TOTAL WORLDWIDE CARS AND
TRUCKS......................... 6,943 6,653 6,606 6,853 6,184 5,940 5,623 6,023 6,608
TOTAL WORLDWIDE TRACTORS(J)...... -- -- -- -- -- -- 13 66 72
-------- -------- -------- -------- -------- -------- -------- -------- --------
TOTAL WORLDWIDE VEHICLE UNIT
SALES.......................... 6,943 6,653 6,606 6,853 6,184 5,940 5,636 6,089 6,680
======== ======== ======== ======== ======== ======== ======== ======== ========
SUMMARY OF
- ---------------------------------
OPERATIONS, CONT. 1988 1987
- --------------------------------- ---- ----
TOTAL COMPANY FACILITY AND
TOOLING DATA
Capital expenditures for
facilities (excluding special
tools)......................... $ 3,148 $ 2,415
Depreciation..................... 2,458 2,107
Expenditures for special tools... 1,634 1,343
Amortization of special tools.... 1,335 1,353
TOTAL COMPANY EMPLOYEE DATA --
WORLDWIDE
Payroll.......................... $ 13,010 $ 11,670
Total labor costs................ 18,108 16,567
Average number of employees...... 358,939 350,320
TOTAL COMPANY EMPLOYEE DATA --
U.S. OPERATIONS
Payroll.......................... $ 8,477 $ 7,765
Average number of employees...... 185,651 180,944
Average hourly labor costs(h)
Earnings....................... $ 17.39 $ 16.50
Benefits....................... 13.07 12.38
-------- --------
Total hourly labor costs..... $ 30.46 $ 28.88
======== ========
SUMMARY OF VEHICLE UNIT SALES(I)
(IN THOUSANDS)
NORTH AMERICA
United States
Cars......................... 2,364 2,176
Trucks....................... 1,537 1,480
-------- --------
Total United States........ 3,901 3,656
Canada......................... 349 349
Mexico......................... 63 35
-------- --------
Total North America........ 4,313 4,040
EUROPE
Britain........................ 753 628
Germany........................ 332 328
Italy.......................... 98 93
Spain.......................... 158 159
France......................... 168 162
Other countries................ 290 285
-------- --------
Total Europe............... 1,799 1,655
OTHER INTERNATIONAL
Brazil......................... 154 129
Argentina...................... 30 33
Australia...................... 132 128
Taiwan......................... 88 55
Japan.......................... 60 49
Other countries................ 86 82
-------- --------
Total other
international............ 550 476
TOTAL WORLDWIDE CARS AND
TRUCKS......................... 6,662 6,171
TOTAL WORLDWIDE TRACTORS(J)...... 77 64
-------- --------
TOTAL WORLDWIDE VEHICLE UNIT
SALES.......................... 6,739 6,235
======== ========
- -------------------------
(h) Per hour worked (in dollars). Excludes data for subsidiary companies.
(i) Vehicle unit sales are reported worldwide on a "where sold" basis and
include sales of all Ford-badged units, as well as units manufactured by
Ford and sold to other manufacturers.
(j) Ford's tractor operation, Ford New Holland, was sold on May 6, 1991.
25
27
FINANCIAL REVIEW OF FORD MOTOR COMPANY RESULTS
OVERVIEW
Ford's worldwide net income was a record $6,920 million in 1997, or $5.62
per diluted share of Common and Class B Stock, compared with $4,446 million, or
$3.64 per diluted share in 1996.
Ford's earnings in 1997 were up $2,474 million or 56% from 1996, reflecting
primarily improved Automotive operating results in North America, South America
and Europe, offset partially by lower earnings in Financial Services. The
Company's worldwide sales and revenues were a record $153.6 billion in 1997, up
$6.6 billion or 5% from 1996. Vehicle unit sales of cars and trucks were a
record 6,943,000, up 290,000 units or 4% from a year ago. Stockholders' equity
was $30.7 billion at December 31, 1997, compared with $26.8 billion at December
31, 1996.
In 1997, Automotive capital expenditures for new products and facilities
totaled $8.1 billion, down $67 million from 1996. Automotive cash and marketable
securities were a record $20.8 billion at December 31, 1997, up $5.4 billion
from December 31, 1996. Automotive debt at December 31, 1997 totaled $8.1
billion, unchanged from a year ago. Automotive net cash was a record $12.7
billion at December 31, 1997.
Fourth Quarter 1997
In fourth quarter 1997, Ford earned a record $1,796 million, or $1.45 per
diluted share of Common and Class B Stock, compared with $1,204 million, or
$0.99 per diluted share in fourth quarter 1996.
Ford's net income for fourth quarter 1997 and 1996 was as follows (in
millions):
NET INCOME/(LOSS)
------------------
FOURTH FOURTH
QUARTER QUARTER
1997 1996
------- -------
U.S. Automotive............................................. $1,193 $ 628
Automotive Outside U.S.
- - Europe.................................................... 158 (88)
- - South America............................................. (71) (287)
- - Other..................................................... 61 137
------ ------
Total Automotive Outside U.S................................ 148 (238)
------ ------
Total Automotive............................................ 1,341 390
Financial Services.......................................... 455 814
------ ------
Total Company............................................. $1,796 $1,204
====== ======
Earnings for Automotive operations in the U.S. improved in fourth quarter
1997, compared with fourth quarter 1996, primarily as a result of cost
reductions (at constant volume and mix).
Automotive operations in Europe earned a profit in fourth quarter 1997,
compared with a loss a year ago. The improvement reflected primarily increased
volume and nonrecurrence of 1996 separation costs. Lower losses in South America
in fourth quarter 1997 reflected primarily nonrecurrence of 1996 separation
costs, improved volume and mix, and cost reductions.
Lower earnings for Financial Services operations reflected nonrecurrence of
1996 one-time actions and a higher effective tax rate.
26
28
RESULTS OF OPERATIONS
Ford's full year net income for worldwide Automotive operations in 1997,
1996 and 1995, was as follows (in millions):
NET INCOME/(LOSS)
--------------------------
1997 1996 1995
---- ---- ----
U.S. Automotive....................................... $3,706 $2,007 $1,843
Automotive Outside U.S.
- - Europe.............................................. 273 (291) 116
- - South America....................................... 40 (642) (94)
- - Other............................................... 695 581 191
------ ------ ------
Total Automotive Outside U.S.......................... 1,008 (352) 213
------ ------ ------
Total Automotive.................................... $4,714 $1,655 $2,056
====== ====== ======
Ford's full year net income for worldwide Financial Services operations in
1997, 1996 and 1995, was as follows (in millions):
NET INCOME/(LOSS)
--------------------------
1997 1996 1995
---- ---- ----
Ford Credit........................................... $1,031 $1,441 $1,579
The Associates........................................ 1,032 857 723
USL Capital........................................... -- 191 135
Hertz................................................. 202 159 105
One-Time Actions
- - Gain on sale of Common Stock of The Associates and
Hertz............................................... 269 650 --
- - Sale of USL Capital assets.......................... -- 95 --
- - Budget Rent a Car write-down........................ -- (233) --
Minority Interests, Eliminations and Other............ (328) (369) (459)
------ ------ ------
Total Financial Services............................ $2,206 $2,791 $2,083
====== ====== ======
Memo: Ford's share of earnings in
The Associates........................................ $ 832 $ 745 $ 723
Hertz................................................. 168 159 105
1997 RESULTS OF OPERATIONS
Automotive Operations
Earnings for Automotive operations in the U.S. were a record $3,706
million, up $1,699 million in 1997 compared with a year ago. The increase
reflected higher margins from ongoing cost, quality, and vehicle mix
improvements. The after-tax return on sales was 4.6% in 1997, up 1.9 points from
a year ago.
The U.S. economy continued on a path of strong growth, low unemployment,
and moderate inflation in 1997. Car and truck industry volumes totaled 15.5
million units in 1997, about the same level as 1996. Ford's combined U.S. car
and truck share was 25%, down 2/10 of a point from 1996.
Automotive operations in Europe returned to profitability in 1997 with
earnings of $273 million compared with a loss of $291 million a year ago. The
improvement reflected primarily lower operating costs (at constant volume and
mix), offset partially by lower volume.
European car and truck industry volumes totaled 15 million units in 1997,
compared with 14.3 million units in 1996. Ford's combined European car and truck
share was 11.4%, down 4/10 of a point from 1996.
27
29
Automotive operations in South America returned to profitability, earning
$40 million in 1997 compared with a loss of $642 million a year ago. Higher
earnings reflected primarily improved volume and mix, and lower material costs
(at constant volume and mix). In 1997, car and truck industry volumes in Brazil
(the largest market in South America) totaled 1.9 million units. Ford's combined
car and truck market share in Brazil was 14.5% in 1997, up 3.8 points from 1996.
Automotive Sales and Total Costs
Automotive sales totaled $123 billion in 1997, up 4.2% from 1996. Sales in
the U.S. were $81 billion in 1997 compared with $76 billion in 1996; sales
outside the U.S. totaled $42 billion in 1997, unchanged from 1996. Total costs
and expenses were $116 billion in 1997, up $482 million or 4/10 of one percent
from 1996. The increases in sales and total costs and expenses were attributable
to the effects of higher unit volume and a richer sales mix. Adjusted for
constant volume and mix, total automotive costs declined $3 billion in 1997.
Financial Services Operations
Earnings for Financial Services operations in 1997 were down $585 million,
compared with a year ago. Excluding the one-time actions in 1997 and 1996 shown
above, results from operations were down $342 million from a year ago.
See Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for the discussion of Ford Credit's 1997 results of
operations.
Record earnings at The Associates reflected primarily higher levels of
earning assets and improved net interest margins, offset partially by higher
credit losses. Credit losses as a percent of average net finance receivables
were 2.40% in 1997, compared with 2.03% in 1996.
Record earnings at Hertz reflected continued strong performance in the U.S.
car rental market both in terms of increased transaction volume and more
favorable pricing.
LIQUIDITY AND CAPITAL RESOURCES
Automotive Operations
Automotive cash and marketable securities were $20.8 billion at December
31, 1997, up $5.4 billion from December 31, 1996. Ford paid $2 billion in cash
dividends on its Common Stock, Class B Stock and Preferred Stock during 1997.
Automotive capital expenditures totaled $8.1 billion in 1997, down $67
million from 1996. Capital expenditures were 6.6% of sales in 1997, down 4/10 of
a point from 1996. Ford's spending in 1998 for product change is expected to be
at lower levels.
Automotive debt at December 31, 1997 totaled $8.1 billion, which was 21% of
total capitalization (stockholders' equity and Automotive debt), down from 23%
of total capitalization a year ago.
Financial Services Operations
The Financial Services operations rely heavily on their ability to raise
substantial amounts of funds in the capital markets in addition to collections
on loans and retained earnings. The levels of funds for certain Financial
Services operations are affected by transactions with Ford, such as capital
contributions, dividend payments and the timing of payments for income taxes.
The ability to obtain funds also is affected by debt ratings which, for certain
operations, are closely related to the financial condition and outlook for Ford
and the nature and availability of support facilities, such as revolving credit
and receivables sales agreements.
Outstanding commercial paper at December 31, 1997 totaled $40.9 billion at
Ford Credit, $19.5 billion at The Associates, and $1.4 billion at Hertz, with an
average remaining maturity of 24 days, 28 days, and 18 days, respectively.
Support facilities represent additional sources of funds, if required.
28
30
SPIN-OFF OF THE ASSOCIATES
On March 2, 1998, the Board of Directors of Ford approved the spin-off of
The Associates by declaring a dividend on Ford's outstanding shares of Common
and Class B Stock consisting in the aggregate of Ford's 80.7% interest (279.5
million shares) in The Associates. The Board of Directors also declared a
dividend in cash on shares of Ford stock held in employee savings plans equal to
the market value of The Associates stock to be distributed per share of Ford's
Common and Class B Stock. Both the spin-off dividend and the cash dividend are
payable on April 7, 1998 to stockholders of record on March 12, 1998.
Holders of Ford Common and Class B Stock on the record date will be
entitled to receive 0.262085 shares of The Associates common stock for each
share of Ford stock. Based on the closing sale price of The Associates stock of
$81.25 per share on March 2, 1998, the total value of the distribution
(including the cash dividend) will be $25.8 billion or $21.30 per share of Ford
stock. The actual value of the total distribution will depend on the market
value of The Associates stock on the distribution date.
As a result of the spin-off of The Associates, Ford will realize a
one-time, non-taxable gain of about $16.5 billion in first quarter 1998.
In 1996 and 1997, The Associates contributed 16.8% and 12%, respectively,
to Ford's consolidated earnings. Generally, the earnings of The Associates have
been retained by The Associates to fund its growth.
YEAR 2000 DATE CONVERSION
An issue affecting Ford and most other companies is whether computer
systems and applications will recognize and process the year 2000 and beyond.
Ford has a central office to coordinate the identification, evaluation and
implementation of changes to systems and applications to achieve compliance with
the year 2000 date conversion. Ford is in the process of assessing and
implementing necessary changes for all areas of Ford's business which could be
impacted; these include such areas as business computer systems, technical
infrastructure, dealership systems, plant floor equipment, building
infrastructure, end-user computing, affiliates, suppliers and vehicle
components.
Ford has investigated the impact of the year 2000 issue on its vehicle
components and does not anticipate any effect on the operational safety or
performance of its vehicles. The electronic functionality of such components
generally is based on engine cycles or the time elapsed since the vehicle was
started, not any particular date. While Ford will continue to investigate its
vehicle components, at present it does not anticipate any significant exposure
related to the year 2000 issue for its current or future products.
Ford has established accelerated conversion centers in various regions of
the world, and is using these centers, as well as external resources, to address
the year 2000 issue. Ford plans to have necessary modifications made to most of
its critical systems and applications by the end of 1998 and to complete testing
during 1999. Ford, however, has little to no control over whether its suppliers
or dealers will make the appropriate modifications to their systems and
applications on a timely basis. Ford is working actively through the Automotive
Industry Action Group with other manufacturers in assessing and monitoring
supplier readiness. In addition, Ford will rely to a certain extent on equipment
suppliers for the modifications that must be made to certain Ford manufacturing
equipment.
Based on assessments completed to date and compliance plans in process,
Ford does not expect that the year 2000 issue, including the cost of making its
critical systems and applications compliant, will have a material effect on its
business operations, consolidated financial condition, cash flows, or results of
operations. However, if appropriate modifications are not made by Ford's
suppliers or dealers on a timely basis, or if Ford's actual costs or timing for
the year 2000 date conversion differ materially from its present estimates,
Ford's operations and financial results could be significantly adversely
affected.
29
31
NEW ACCOUNTING STANDARDS AND INTERPRETATIONS
New Standards
Statement of Financial Accounting Standards No. 128, "Earnings per Share,"
was issued by the Financial Accounting Standards Board in February 1997. Ford
adopted this Standard effective with the 1997 financial statements.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," was issued by the Financial Accounting Standards Board in
June 1997. This Statement requires all items that must be recognized under
accounting standards as components of comprehensive income to be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Ford will adopt this Standard for 1998.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," was issued by the Financial
Accounting Standards Board in June 1997. This Statement establishes standards
for reporting information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. Ford will adopt this Standard for 1998.
Management is evaluating the impact, if any, the Standard will have on Ford's
present segment reporting.
Interpretations
Brazil has been considered a highly inflationary economy since the
implementation of Statement of Financial Accounting Standards No. 52 ("SFAS
52"), "Foreign Currency Translation," for fiscal years beginning on or after
December 15, 1982. The instability of the local currency in a hyperinflationary
economy precludes its use as the functional currency for the measurement of
business operations. Ford has used the U.S. dollar as the functional currency
for its Brazilian operations during this hyperinflationary period.
Beginning January 1, 1998, Brazil no longer is considered a highly
inflationary economy under SFAS 52. The U.S. dollar will continue to be the
designated functional currency for Ford's Brazilian operations in 1998 because
business transactions primarily are U.S. dollar based. Therefore, the change to
a non-highly inflationary designation will have no effect on Ford's consolidated
financial statements in 1998.
The designated functional currency for Ford Brazil will be reviewed
periodically.
OUTLOOK
Industry Sales Volumes
Ford's outlook for car and truck industry sales in 1998 in its major
markets is as follows:
United States -- Ford expects car and truck industry sales in the U.S. in
1998 to be slightly lower than the 15.5 million units in
1997.
Europe -- European car and truck industry sales in 1998 are expected
to be about equal to 1997, or about 15 million units.
Brazil -- Fiscal austerity measures implemented in late 1997 by the
Brazilian government are expected to adversely impact 1998
car and truck industry sales in the region.
30
32
1998 Financial Targets
Ford's management has set and communicated certain Automotive financial
targets for 1998. While Ford hopes to achieve these goals, they should not be
interpreted as projections, expectations or forecasts of 1998 results. The
Automotive financial targets for 1998 are as follows:
AUTOMOTIVE 1998 TARGET
---------- -----------
North America 5% return on sales
Europe Profitable
South America Breakeven (present status is a
loss)
Total costs Down $1 billion from 1997 (at
constant volume and mix)
Capital spending Lower than 1997
Risk Factors
Statements included in this report may constitute "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements involve a number of risks, uncertainties, and other
factors that could cause actual results to differ materially from those stated,
including, without limitation: greater price competition in the U.S. and Europe
resulting from further weakening of Asian currencies or industry overcapacity; a
significant decline in U.S. or European industry sales resulting from slowing
economic growth; economic difficulties in South America resulting from Brazilian
government austerity programs; a market shift from truck sales in the U.S.;
lower-than-anticipated residual values for leased vehicles; increased safety or
emissions regulation resulting in higher costs and/or sales restrictions; work
stoppages at key Ford or supplier facilities; and the discovery of defects in
vehicles resulting in recall campaigns or litigation.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Ford is exposed to a variety of market risks, including the effects of
changes in foreign currency exchange rates, interest rates and commodity prices.
For Automotive operations, purchases and sales of finished vehicles and
production parts, debt and other payables, subsidiary dividends, and investments
in subsidiaries are frequently denominated in foreign currencies, thereby
creating exposures to changes in exchange rates. In addition, Ford also is
exposed to changes in prices of commodities used in its Automotive operations.
To ensure funding over business and economic cycles and to minimize overall
borrowing costs, Financial Services operations issue debt and other payables
with various maturity and interest rate structures. The maturity and interest
rate structures frequently differ from the invested assets. Exposures to
fluctuations in interest rates are created by the difference in maturities of
liabilities versus the maturities of assets.
These financial exposures are monitored and managed by Ford as an integral
part of its overall risk management program, which recognizes the
unpredictability of financial markets and seeks to reduce the potentially
adverse effect on Ford's results. The effect of changes in exchange rates,
interest rates and commodity prices on Ford's earnings generally has been small
relative to other factors that also affect earnings, such as unit sales and
operating margins.
Ford's interest rate risk and its foreign currency exchange rate risk
(risks related to commodity derivative positions are not material) is quantified
as follows.
Interest Rate Risk -- Interest rate swaps (including those with a
currency swap component) are used by Ford, primarily in its Financial
Services operations, to mitigate the effects of interest rate fluctuations
on earnings by changing the characteristics of debt to match the
characteristics of assets. Ford uses a model to assess the sensitivity of
its earnings to changes in market interest rates. The model recalculates
earnings by adjusting the rates associated with variable rate instruments
on the repricing date and adjusting the rates on fixed rate instruments
scheduled to mature in the subsequent twelve months, effective on their
scheduled maturity date. Interest income and interest expense are then
recalculated
31
33
based on the revised rates. Assuming an instantaneous increase or decrease
of one percentage point in interest rates applied to all financial
instruments and leased assets, Ford's after-tax earnings would change by
$30 million over a 12-month period.
Foreign Currency Risk -- Ford principally uses derivative financial
instruments to hedge assets, liabilities and firm commitments denominated
in foreign currencies. Ford uses a value-at-risk (VAR) analysis to assess
its exposure to changes in foreign currency exchange rates. The primary
assumptions used in the VAR analysis are as follows:
- A Monte Carlo simulation was used to calculate changes in the value of
currency derivative instruments (forwards and options) and all
significant underlying exposures. The simulation generated currency
rate scenarios over an 18-month exposure horizon and a one-month
holding period.
- The VAR analysis calculates the potential risk, with a 99% confidence
level, on firm commitment exposures (cash flows), including the
effects of foreign currency derivatives. (Translation exposures were
not included in the VAR analysis.) The model assumes currency prices
are generally normally distributed and draws volatility data from the
currency markets.
- Estimates of correlations of market factors primarily are drawn from
the JP Morgan RiskMetrics(TM) dataset as of December 31, 1997.
Based on the overall Ford currency exposure at December 31, 1997, including
derivative positions, currency movements are projected to affect pre-tax cash
flow by less than $250 million, with a 99% confidence level.
ITEM 2. FORD CREDIT PROPERTIES
Substantially all of Ford Credit's branch operations presently are being
conducted from leased properties. At December 31, 1997, Ford Credit's aggregate
obligation under leases of real property was $63.3 million.
ITEM 3. FORD CREDIT LEGAL PROCEEDINGS
Various legal actions, governmental proceedings, and other claims are
pending or may be instituted or asserted in the future against Ford Credit and
its subsidiaries.
Ford Credit is a defendant in actions alleging violations of various state
and federal regulatory laws concerning financing and insurance, based upon
technical interpretations of their requirements. Some of these matters involve
or may involve class actions, 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.
The Federal Trade Commission and the Department of Justice are continuing
their investigation, commenced in 1995, of the retail financing credit practices
of Ford Credit for compliance with the Equal Credit Opportunity Act and
Regulation B.
For a discussion of a pending case against Ford and Ford Credit regarding
Ford Credit's leasing practices, see "Business of Ford -- Legal Proceedings --
Lease Residual."
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All shares of the registrant's Common Stock at December 31, 1997 were owned
by Ford FSG, Inc., a wholly owned subsidiary of Ford, and, accordingly, there
was no market for such stock. During 1997, Ford Credit declared and paid cash
dividends of $595.5 million. Dividends also were paid in 1996, 1995, 1994 and
1993. Ford Credit may pay additional dividends from time to time depending on
Ford Credit's receivables levels, capital requirements, and profitability.
32
34
ITEM 6. SELECTED FINANCIAL DATA
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
SELECTED INCOME STATEMENT (IN MILLIONS)
Financing revenue
Operating leases.......................................... $ 8,895 $ 8,224 $ 7,301 $ 5,596 $3,829
Retail.................................................... 5,227 5,001 4,523 4,042 4,120
Wholesale................................................. 1,588 1,646 1,875 1,329 1,071
Other..................................................... 392 477 507 411 381
------- ------- ------- ------- ------
Total finance revenue....................................... 16,102 15,348 14.206 11,378 9,401
Interest expense............................................ 6,527 6,260 5,998 4,209 3,675
Depreciation on operating leases............................ 6,188 5,538 5,235 4,083 2,835
------- ------- ------- ------- ------
Net financing margin........................................ 3,387 3,550 2,973 3,086 2,891
Insurance premiums earned................................... 298 226 -- -- --
Investment and other income................................. 1,202 1,077 791 469 403
------- ------- ------- ------- ------
Total financing margin and revenue.......................... 4,887 4,853 3,764 3,555 3,294
------- ------- ------- ------- ------
Operating expenses.......................................... 1,477 1,468 1,211 1,159 1,025
Provision for credit losses................................. 1,338 993 480 294 319
Other insurance expenses.................................... 267 207 -- -- --
------- ------- ------- ------- ------
Total expenses.............................................. 3,082 2,668 1,691 1,453 1,344
------- ------- ------- ------- ------
Equity in net income of affiliated companies................ 1 55 255 233 198
------- ------- ------- ------- ------
Income before income taxes.................................. 1,806 2,240 2,328 2,335 2,148
Provision for income taxes.................................. 727 731 683 789 778
Minority interests in net income of subsidiaries............ 48 68 66 59 45
------- ------- ------- ------- ------
Net income.............................................. $ 1,031 $ 1,441 $ 1,579 $ 1,487 $1,325
======= ======= ======= ======= ======
Net income from financing operations........................ $ 1,030 $ 1,386 $ 1,324 $ 1,254 $1,127
Net income from affiliated companies........................ 1 55 255 233 198
Cash dividends.............................................. 596 949 816 389 413
Return on equity............................................ 10.8% 16.1% 19.3% 20.6% 21.4%
Earnings-to-fixed charges ratio............................. 1.3 1.3 1.3 1.5 1.5
SELECTED BALANCE SHEET (IN BILLIONS)
Finance Receivables
Retail.................................................... $ 55.6 $ 53.1 $ 47.7 $ 43.5 $ 39.0
Wholesale................................................. 21.6 22.7 22.1 19.8 15.4
Other..................................................... 5.3 5.9 7.4 6.7 5.9
------- ------- ------- ------- ------
Total finance receivables, net of unearned income........... 82.5 81.7 77.2 70.0 60.3
Deduct: Allowance for credit losses....................... (1.2) (0.9) (0.8) (0.8) (0.8)
------- ------- ------- ------- ------
Finance receivables, net.................................... $ 81.3 $ 80.8 $ 76.4 $ 69.2 $ 59.5
Retained interest in sold receivables....................... 1.0 1.1 1.1 0.9 0.7
------- ------- ------- ------- ------
Finance receivables, net and retained interest in sold
receivables............................................... $ 82.3 $ 81.9 $ 77.5 $ 70.1 $ 60.2
======= ======= ======= ======= ======
Operating leases, net....................................... $ 34.8 $ 30.7 $ 25.7 $ 20.8 $ 13.2
======= ======= ======= ======= ======
Assets
Financing operations...................................... $ 122.0 $ 121.7 $ 109.5 $ 95.4 $ 78.3
Equity in net assets of affiliated companies.............. -- -- 1.7 1.3 1.2
------- ------- ------- ------- ------
Total assets................................................ $ 122.0 $ 121.7 $ 111.2 $ 96.7 $ 79.5
======= ======= ======= ======= ======
CAPITALIZATION (IN BILLIONS)
Debt payable within one year................................ $ 55.8 $ 52.2 $ 49.6 $ 45.4 $ 39.2
Debt payable after one year
Senior.................................................... 44.8 45.5 42.3 35.6 27.6
Subordinated and other.................................... 0.1 0.3 0.3 -- --
------- ------- ------- ------- ------
Total debt payable after one year........................... 44.9 45.8 42.6 35.6 27.6
------- ------- ------- ------- ------
Total debt.................................................. 100.7 98.0 92.2 81.0 66.8
Stockholder's equity........................................ 9.6 9.2 8.7 7.7 6.7
------- ------- ------- ------- ------
Total capital............................................... $ 110.3 $ 107.2 $ 100.9 $ 88.7 $ 73.5
======= ======= ======= ======= ======
Debt-to-equity ratio (to 1)................................. 10.5 10.6 10.6 10.5 10.0
Debt payable within one year as percent of total capital.... 50.6% 48.7% 49.2% 51.1% 53.3%
33
35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The principal factors that influence the earnings of Ford Credit are
interest margins and the levels of finance receivables and net investment in
operating leases.
Net interest margins reflect the difference between interest rates earned
on finance receivables, including operating leases net of depreciation
("yields"), and the rates paid on borrowed funds. Yields on most receivables and
operating leases generally are fixed at the time the contracts are acquired. On
some receivables, primarily wholesale financing, yields vary with changes in
short-term interest rates. Borrowed funds include short-term debt, the cost of
which reflects changes in short-term interest rates, and long-term debt, the
cost of which generally is fixed at the time of the debt placement.
The levels of finance receivables and net investment in operating leases
depend primarily on the volume of Ford Motor Company vehicle sales, the extent
to which Ford Credit provides the wholesale and retail financing of those sales,
and sales of receivables. Ford periodically sponsors special financing programs
that are available exclusively through Ford Credit which provide payments to
Ford Credit for interest supplements and other support costs on certain
financing and leasing transactions. These programs can increase Ford Credit's
financing volume of Ford Motor Company vehicles.
RESULTS OF OPERATIONS
1997 COMPARED WITH 1996
Ford Credit's consolidated net income in 1997 was $1,031 million, down $410
million or 28% from 1996. Compared with results from a year ago, the decrease
primarily reflects lower net margins, higher credit losses and loss reserve
requirements, and higher taxes. Lower operating costs and higher levels of
earning assets were a partial offset.
The deterioration in net financing margins reflects higher depreciation on
operating leases. Higher depreciation resulted from higher residual losses on
off-lease vehicles and higher residual reserves. These factors have continued to
adversely affect Ford Credit's earnings in 1998.
Credit losses as a percent of average net finance receivables including net
investment in operating leases increased to 0.89% in 1997 compared with 0.78% in
1996 reflecting higher losses per repossession partially offset by a decrease in
repossession rates. The increase in loss per repossession reflects a weaker used
vehicle market resulting in Ford Credit realizing lower prices for repossessed
units sold at auction.
Total net finance receivables and net investment in operating leases at
December 31, 1997 were $116.1 billion, up $4.6 billion or 4% from a year
earlier.
During 1997, Ford Credit financed 38% of all new cars and trucks sold by
Ford Motor Company dealers in the U.S., unchanged from 1996. In Europe, Ford
Credit financed 29% of all new vehicles sold by Ford Motor Company, also
unchanged from 1996. Ford Credit provided retail customers with financing for
2.5 million new and used vehicles in the United States and 0.7 million in
Europe. In 1997, Ford Credit provided wholesale financing for 80% of Ford Motor
Company factory sales in the U.S. and 95% of Ford Motor Company factory sales in
Europe compared with 80% for the U.S. and 91% for Europe in 1996.
For the fourth quarter of 1997, Ford Credit's consolidated net income was
$218 million, down $167 million from 1996. The deterioration primarily reflects
lower net interest margins and higher taxes, partially offset by lower operating
costs. Credit losses did not materially increase in the fourth quarter of 1997
compared to the same period a year earlier. Ford Credit believes that credit
losses have stabilized and may not continue to increase in 1998.
1996 COMPARED WITH 1995
Ford Credit's consolidated net income in 1996 was $1,441 million, down $138
million or 9% from 1995. Ford Credit's 1996 financial results include a majority
ownership (78%) of Ford Credit Europe and results for
34
36
1995 and prior years have been restated to reflect this ownership change.
Compared with record results from a year earlier, the decrease primarily
reflects the effects of the first quarter restructuring of Ford's Financial
Services Group ("FSG"), higher credit losses and higher loss reserve
requirements. Higher levels of earning assets and improved net interest margins
were a partial offset.
The FSG restructuring reflects lower income resulting from the repurchase
in the first quarter of 1996 by Ford Holdings of substantially all the shares of
Ford Holdings' common stock owned by Ford Credit, offset partially by the
addition of American Road and interest on a note receivable from Ford Holdings.
Credit losses as a percent of average net finance receivables including net
investment in operating leases increased to 0.78% in 1996 compared with 0.51% in
1995 reflecting an increase in repossession rates and higher losses per
repossession. The increased repossession ratio reflects an increased mix of used
vehicle financing and expanded purchase policies to generate financing volume.
The increase in loss per repossession reflects a weaker used vehicle market
resulting in Ford Credit realizing lower prices for repossessed units sold at
auction.
Improved net interest margins reflect a reduction in portfolio borrowing
rates to 6.5% in 1996, down from 6.9% in 1995, partially offset by a reduction
in portfolio yields on finance receivables and operating leases. The increase in
earning assets reflects a higher level of operating leases and retail
installment sale receivables. Total net finance receivables and net investment
in operating leases at December 31, 1996 were $111.5 billion, up $9.4 billion or
9% from a year earlier.
For 1996, Ford Credit financed 38% of all new cars and trucks sold by Ford
Motor Company dealers in the U.S. compared with 37% in 1995. In Europe, Ford
Credit financed 29% of all new vehicles sold by Ford Motor Company dealers in
1996 compared with 30% in 1995. Ford Credit provided retail customers with
financing for 2.7 million new and used vehicles in the United States and 0.7
million in Europe. In 1996, Ford Credit provided wholesale financing for 80% of
Ford Motor Company U.S. factory sales and 91% of Ford Motor Company Europe
factory sales compared with 80% for the U.S. and 89% for Europe in 1995.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," is effective for fiscal years beginning after December
15, 1997. This statement requires all items that are required to be recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. This new accounting standard is not expected to have a
material impact on Ford Credit's financial statements. Ford Credit adopted this
standard on January 1, 1998 as required.
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information," is effective for periods
beginning after December 15, 1997. This statement establishes standards for
reporting information about operating segments in annual financial statements
and requires that enterprises report selected information about operating
segments in interim financial reports. This new accounting standard is not
expected to have a material impact on Ford Credit's financial statements. Ford
Credit adopted this standard on January 1, 1998 as required.
YEAR 2000 DATE CONVERSION
An issue affecting Ford Credit and most other companies is whether computer
systems and applications will recognize and process the year 2000 and beyond.
Ford Credit has a Year 2000 Program Office to coordinate the identification,
evaluation, and implementation of changes to systems and applications globally
to achieve compliance with the year 2000 date conversion. Ford Credit is in the
process of assessing and implementing necessary changes for all areas of its
business that could be impacted, such as business computer applications,
technical infrastructure, end-user computing, building facilities, and
vendor-supplied applications and services.
Ford Credit has investigated the impact of the year 2000 issue on all
critical business applications and many are already compliant. Those which are
not will be modified or replaced. Plans have been established to
35
37
complete all necessary modifications to critical applications by the end of
1998. Ford Credit, however, has little or no control over whether its vendors
will make the appropriate modifications to applications on a timely basis. Ford
Credit is working actively through the Automotive Industry Action Group with
other financial services companies in assessing and monitoring supplier
readiness. In addition, all vendors will be expected to ensure compliance of
business applications and technical services they supply.
Based on assessments completed to date and compliance plans in process,
Ford Credit does not expect that the year 2000 issue, including the cost of
making its critical systems and applications compliant on a timely basis, will
have a material adverse effect on its business operations, consolidated
financial condition, cash flows, or results of operations. However, if
appropriate modifications are not made by Ford Credit's vendors, or if Ford
Credit's actual costs or timing for the year 2000 date conversion differ
materially from its present estimates, Ford Credit's operations and financial
results could be significantly adversely affected.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Ford Credit is exposed to a variety of market risks, including the effects
of changes in foreign currency exchange rates and interest rates. To ensure
funding over business and economic cycles and to minimize overall borrowing
costs, Ford Credit issues debt and other payables with various maturity and
interest rate structures. The maturity and interest rate structures frequently
differ from the invested assets. Exposures to fluctuations in interest rates are
created by the differences in maturities of liabilities versus the maturities of
assets.
These financial exposures are monitored and managed by Ford Credit as an
integral part of the overall risk management program, which recognizes the
unpredictability of financial markets and seeks to reduce the potentially
adverse effects on Ford Credit's operating results. The effect of changes in
exchange rates and interest rates on Ford Credit's results generally has been
small relative to other factors.
The following quantifies Ford Credit's interest rate risk and foreign
currency exchange rate risk.
Interest Rate Risk
Interest rate swaps (including those with a currency swap component) are
used by Ford Credit to mitigate the effects of interest rate fluctuations on
earnings by changing the characteristics of its debt to match the
characteristics of its assets. Ford Credit uses a model to assess the
sensitivity of its earnings to changes in market interest rates. The model
recalculates earnings by adjusting the rates associated with variable rate
instruments on the repricing date and adjusting the rates on fixed rate
instruments scheduled to mature in the subsequent twelve months, effective on
their scheduled maturity date. Interest income and interest expense are then
recalculated based on the revised rates. Assuming an instantaneous decrease of
one percentage point in interest rates applied to all financial instruments and
leased assets, Ford Credit's after-tax earnings would have declined by $30
million over the ensuing twelve month period.
Foreign Currency Risk
Ford Credit's foreign currency risk is substantially reduced by the natural
hedging process of both borrowing and lending in the local currencies of the
home countries. Additionally, Ford Credit uses foreign currency agreements to
hedge specific debt instruments and intercompany loans. Ford Credit's earnings
in the ensuing twelve month period would not be materially affected by an
instantaneous 10% change in foreign currency exchange rates.
Additional information called for by Item 7 and Item 7A is incorporated
herein by reference from Item 1 -- Business -- "Business of Ford Credit --
Credit Loss Experience", "Business of Ford Credit -- Borrowings and Other
Sources of Funds", and "Certain Transactions with Ford and Affiliates", and Item
8 -- "Financial Statements and Supplementary Data".
36
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by Item 8 is set forth at pages FC-1 through
FC-24 of this Form 10-K Report, is incorporated herein by reference and is
listed in the Index to Financial Statements as set forth in Item 14(a)(1) and
14(a)(2).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Report of Independent Accountants
Ford Motor Credit Company and Subsidiaries
Consolidated Statement of Income for the Years Ended December 31, 1997,
1996 and 1995.
Consolidated Balance Sheet, December 31, 1997 and 1996.
Consolidated Statement of Stockholder's Equity, 1997, 1996 and 1995.
Consolidated Statement of Cash Flows for the Years Ended December 31, 1997,
1996 and 1995.
Notes to Financial Statements.
The financial statements and notes to financial statements listed above and
the schedule listed below are incorporated by reference in Item 8 of this Report
from pages FC-1 through FC-24 of this Form 10-K Report.
Information regarding significant restrictions on the ability of
subsidiaries to transfer funds to the registrant, and condensed financial
information of the registrant are omitted because the amounts related to such
restrictions are not sufficient to require submission.
(a) 2. Financial Statement Schedules
Schedules have been omitted because the subject matter is disclosed
elsewhere in the financial statements and notes thereto, is not required,
is not present, or is not present in amounts sufficient to require
submission.
(a) 3. Exhibits
DESIGNATION DESCRIPTION METHOD OF FILING
----------- ----------- ----------------
Exhibit 3-A Restated Certificate of Incorporation Filed as Exhibit 3-A to Ford Motor
of Ford Motor Credit Company. Credit Company Report on Form 10-K
for the year ended December 31, 1987
and incorporated herein by reference.
File No. 1-6368.
Exhibit 3-B By-Laws of Ford Motor Credit Company as Filed as Exhibit 3-B to Ford Motor
amended through March 2, 1988. Credit Company Report on Form 10-K
for the year ended December 31, 1987
and incorporated herein by reference.
File No. 1-6368.
Exhibit 4-A Form of Indenture dated as of August 1, Filed as Exhibit 4-A to Ford Motor
1984 between Ford Motor Credit Company Credit Company Registration Statement
and The Chase Manhattan Bank (National No. 2-92561 and incorporated herein
Association) relating to Debt by reference.
Securities.
37
39
DESIGNATION DESCRIPTION METHOD OF FILING
----------- ----------- ----------------
Exhibit 4-A-1 Form of First Supplemental Indenture Filed as Exhibit 4-C to Ford Motor
dated August 15, 1986 between Ford Credit Company Registration Statement
Motor Credit Company and The Chase No. 33-8126 and incorporated herein
Manhattan Bank (National Association) by reference.
supplementing the Indenture designated
as Exhibit 4-A.
Exhibit 4-A-2 Form of Second Supplemental Indenture Filed as Exhibit 4-B to Ford Motor
dated as of October 15, 1986 between Credit Company Current Report on Form
Ford Motor Credit Company and The Chase 8-K dated October 17, 1986 and
Manhattan Bank (National Association) incorporated herein by reference.
supplementing the Indenture designated File No. 1-6368.
as Exhibit 4-A.
Exhibit 4-B Form of Indenture dated as of February Filed as Exhibit 4-A to Ford Motor
1, 1985 between Ford Motor Credit Credit Company Registration Statement
Company and Manufacturers Hanover Trust No. 2-95568 and incorporated herein
Company relating to Debt Securities. by reference.
Exhibit 4-B-1 Form of First Supplemental Indenture Filed as Exhibit 4-B to Ford Motor
dated as of April 1, 1986 between Ford Credit Company Current Report on Form
Motor Credit Company and Manufacturers 8-K dated April 29, 1986 and
Hanover Trust Company supplementing the incorporated herein by reference.
Indenture designated as Exhibit 4-B. File No. 1-6368.
Exhibit 4-B-2 Form of Second Supplemental Indenture Filed as Exhibit 4-B to Ford Motor
dated as of September 1, 1986 between Credit Company Current Report on Form
Ford Motor Credit Company and 8-K dated August 28, 1986 and
Manufacturers Hanover Trust Company incorporated herein by reference.
supplementing the Indenture designated File No. 1-6368.
as Exhibit 4-B.
Exhibit 4-B-3 Form of Third Supplemental Indenture Filed as Exhibit 4-E to Ford Motor
dated as of March 15, 1987 between Ford Credit Company Registration Statement
Motor Credit Company and Manufacturers No. 33-12928 and incorporated herein
Hanover Trust Company supplementing the by reference.
Indenture designated as Exhibit 4-B.
Exhibit 4-B-4 Form of Fourth Supplemental Indenture Filed as Exhibit 4-F to
dated as of April 15, 1988 between Ford Post-Effective Amendment No. 1 to
Motor Credit Company and Manufacturers Ford Motor Credit Company
Hanover Trust Company supplementing the Registration No. 33-20081 and
Indenture designated as Exhibit 4-B. incorporated herein by reference.
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40
DESIGNATION DESCRIPTION METHOD OF FILING
----------- ----------- ----------------
Exhibit 4-B-5 Form of Fifth Supplemental Indenture Filed as Exhibit 4-G to Ford Motor
dated as of September 1, 1990 between Credit Company Registration Statement
Ford Motor Credit Company and No. 33-36946 and incorporated hereby
Manufacturers Hanover Trust Company by reference.
supplementing the Indenture designated
as Exhibit 4-B.
Exhibit 4-C Indenture dated as of November 1, 1987 Filed as Exhibit 4-A to Ford Motor
between Ford Motor Credit Company and Credit Company Current Report on Form
Continental Bank, National Association 8-K dated December 10, 1990 and
relating to Debt Securities. incorporated herein by reference.
File No. 1-6368.
Exhibit 4-D Indenture dated as of August 1, 1994 Filed as Exhibit 4-A to Ford Motor
between Ford Motor Credit Company and Credit Company Registration Statement
First Union National Bank relating to No. 33-55237.
Debt Securities.
Exhibit 10-J Copy of Amended and Restated Profit Filed as Exhibit 10-J to Ford Motor
Maintenance Agreement dated as of July Credit Company Report on Form 10-K
1, 1993 between Ford Motor Credit for the year ended December 31, 1993
Company and Ford Motor Company. and incorporated herein by reference.
File No. 1-6368.
Exhibit 10-X Copy of Agreement dated as of February Filed as Exhibit 10-X to Ford Motor
1, 1980 between Ford Motor Company and Credit Company Report on Form 10-K
Ford Motor Credit Company. for the year ended December 31, 1980
and incorporated herein by reference.
File No. 1-6368.
Exhibit 12-A Calculation of Ratio of Earnings to Filed with this Report.
Fixed Charges of Ford Credit.
Exhibit 12-B Calculation of Ratio of Earnings to Filed with this Report.
Combined Fixed Charges and Preferred
Stock Dividends of Ford.
Exhibit 23 Consent of Independent Accountants. Filed with this Report.
Exhibit 24 Powers of Attorney. Filed with this Report.
Instruments defining the rights of holders of certain issues of long-term
debt of the registrant have not been filed as exhibits to this Report because
the authorized principal amount of any one of such issues does not exceed 10% of
the total assets of the registrant. The registrant agrees to furnish a copy of
each of such instruments to the Commission upon request.
(b) Reports on Form 8-K
Ford Credit filed the following Reports on Form 8-K during the quarter
ended December 31, 1997, none of which contained financial statements:
DATE OF REPORT ITEM
- -------------- ----
October 8, 1997........................................ Item 5 -- Other Events
October 9, 1997........................................ Item 5 -- Other Events
October 11, 1997....................................... Item 5 -- Other Events
39
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SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Ford Motor Credit Company
By KENNETH WHIPPLE*
------------------------------------
(Kenneth Whipple, Chairman of the
Board of Directors)
Date: March 19, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
KENNETH WHIPPLE* Chairman of the Board of Directors and March 19, 1998
- --------------------------------------------- Director (principal executive officer)
(Kenneth Whipple)
KENNETH J. COATES* Director and Executive Vice President March 19, 1998
- --------------------------------------------- --Finance and Administration
(Kenneth J. Coates)
ELIZABETH S. ACTON* Vice President -- Finance and Chief March 19, 1998
- --------------------------------------------- Financial Officer
(Elizabeth S. Acton)
JOHN G. CLISSOLD* Director March 19, 1998
- ---------------------------------------------
(John G. Clissold)
EDSEL B. FORD II* Director March 19, 1998
- ---------------------------------------------
(Edsel B. Ford II)
JOHN M. DEVINE* Director March 19, 1998
- ---------------------------------------------
(John M. Devine)
GREGORY C. SMITH* Director March 19, 1998
- ---------------------------------------------
(Gregory C. Smith)
MALCOLM S. MACDONALD* Director March 19, 1998
- ---------------------------------------------
(Malcolm S. Macdonald)
DAVID C. FLANIGAN* Director March 19, 1998
- ---------------------------------------------
(David C. Flanigan)
*By RICHARD P. CONRAD
---------------------------
(Richard P. Conrad,
Attorney-in-Fact)
40
42
INDEX TO FINANCIAL STATEMENTS
Ford Motor Credit Company and Subsidiaries
Report of Independent Accountants........................... FC-1
Consolidated Statement of Income............................ FC-2
Consolidated Balance Sheet.................................. FC-3
Consolidated Statement of Stockholder's Equity.............. FC-4
Consolidated Statement of Cash Flows........................ FC-5
Notes to Financial Statements............................... FC-6
43
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Ford Motor Credit Company:
We have audited the consolidated balance sheets of Ford Motor Credit
Company and Subsidiaries at December 31, 1997 and 1996, and the related
consolidated statements of income, stockholder's equity and cash flows for each
of the three years in the period ended December 31, 1997. 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 generally accepted auditing
standards. 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, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Ford Motor
Credit Company and Subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Detroit, Michigan
January 26, 1998
FC-1
44
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31
---------------------------------
1997 1996 1995
---- ---- ----
Financing revenue
Operating leases.......................................... $ 8,895.2 $ 8,223.6 $ 7,300.8
Retail.................................................... 5,226.9 5,000.7 4,522.7
Wholesale................................................. 1,588.4 1,645.8 1,875.2
Other..................................................... 391.4 477.5 507.1
--------- --------- ---------
Total financing revenue.............................. 16,101.9 15,347.6 14,205.8
Interest expense............................................ (6,527.1) (6,259.7) (5,998.3)
Depreciation on operating leases............................ (6,188.2) (5,537.6) (5,235.1)
--------- --------- ---------
Net financing margin................................. 3,386.6 3,550.3 2,972.4
Other Revenue
Insurance premiums earned................................. 298.3 225.7 --
Investment and other income............................... 1,202.8 1,076.9 791.4
--------- --------- ---------
Total financing margin and revenue................... 4,887.7 4,852.9 3,763.8
Expenses
Operating expenses........................................ 1,477.4 1,467.4 1,211.0
Provision for credit losses............................... 1,338.2 993.3 480.4
Other insurance expenses.................................. 267.1 207.3 --
--------- --------- ---------
Total expenses....................................... 3,082.7 2,668.0 1,691.4
--------- --------- ---------
Equity in net income of affiliated companies................ 1.0 55.3 255.4
--------- --------- ---------
Income before income taxes.................................. 1,806.0 2,240.2 2,327.8
Provision for income taxes.................................. 726.8 731.6 682.9
--------- --------- ---------
Income before minority interests............................ 1,079.2 1,508.6 1,644.9
Minority interests in net income of subsidiaries............ 48.4 68.0 65.5
--------- --------- ---------
Net income.................................................. $ 1,030.8 $ 1,440.6 $ 1,579.4
========= ========= =========
The accompanying notes are an integral part of the financial statements.
FC-2
45
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN MILLIONS)
DECEMBER 31
-----------------------
1997 1996
---- ----
ASSETS
Cash and cash equivalents................................. $ 689.5 $ 2,716.0
Investments in securities................................. 887.9 1,324.8
Finance receivables, net and retained interest in sold
receivables............................................ 82,311.2 81,972.1
Net investment, operating leases.......................... 34,746.0 30,645.2
Notes and accounts receivable from affiliated companies... 734.2 1,133.0
Equity in net assets of affiliated companies.............. 49.6 44.4
Other assets.............................................. 2,554.9 3,860.9
---------- ----------
Total assets...................................... $121,973.3 $121,696.4
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Accounts payable
Trade, customer deposits, and dealer reserves........ $ 2,835.0 $ 3,362.6
Affiliated companies................................. 2,815.7 2,315.2
---------- ----------
Total accounts payable.......................... 5,650.7 5,677.8
Debt................................................... 100,725.0 98,024.3
Deferred income taxes.................................. 2,732.2 4,260.4
Other liabilities and deferred income.................. 2,803.2 2,929.9
---------- ----------
Total liabilities............................... 111,911.1 110,892.4
Minority interests in net assets of subsidiaries.......... 477.7 1,313.8
Preferred stockholder's equity in a subsidiary company.... -- 286.5
Stockholder's Equity
Capital stock, par value $100 a share, 250,000 shares
authorized, issued and outstanding.................... 25.0 25.0
Paid-in surplus (contributions by stockholder)......... 3,891.6 3,747.6
Note receivable from affiliated company................ (1,517.0) (1,517.0)
Unrealized gain on investments in securities available
for sale, net of taxes................................ 46.9 56.9
Foreign currency translation adjustments............... (189.4) (0.9)
Earnings retained for use in the business.............. 7,327.4 6,892.1
---------- ----------
Total stockholder's equity...................... 9,584.5 9,203.7
---------- ----------
Total liabilities and stockholder's equity...... $121,973.3 $121,696.4
========== ==========
The accompanying notes are an integral part of the financial statements.
FC-3
46
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(IN MILLIONS)
1997 1996 1995
---- ---- ----
Capital stock
Common stock:
Balance, beginning of year............................. $ 25.0 $ 25.0 $ 25.0
-------- --------- --------
Balance, end of year.............................. 25.0 25.0 25.0
Paid in surplus
Balance, beginning of year................................ 3,747.6 1,904.5 917.3
Contributions from Parent................................. 144.0 1,843.1 987.2
-------- --------- --------
Balance, end of year.............................. 3,891.6 3,747.6 1,904.5
Note receivable from affiliated company
Balance, beginning of year................................ (1,517.0) -- --
Addition.................................................. -- (2,949.0) --
Payments.................................................. -- 1,432.0 --
-------- --------- --------
Balance, end of year.............................. (1,517.0) (1,517.0) --
Unrealized gain on investments in securities available for
sale, net of taxes
Balance, beginning of year................................ 56.9 30.9 (70.0)
Change in unrealized gain................................. (10.0) 26.0 100.9
-------- --------- --------
Balance, end of year.............................. 46.9 56.9 30.9
Foreign currency translation adjustments
Balance, beginning of year................................ (0.9) (14.2) (58.3)
Translation adjustments during year....................... (188.5) 13.3 44.1
-------- --------- --------
Balance, end of year.............................. (189.4) (0.9) (14.2)
Earnings retained for use in the business
Balance, beginning of year................................ 6,892.1 6,724.5 5,961.4
Net income................................................ 1,030.8 1,440.6 1,579.4
Dividends
Cash................................................... (595.5) (949.0) (816.3)
Other.................................................. -- (324.0) --
-------- --------- --------
Balance, end of year.............................. 7,327.4 6,892.1 6,724.5
-------- --------- --------
Total stockholder's equity........................ $9,584.5 $ 9,203.7 $8,670.7
======== ========= ========
The accompanying notes are an integral part of the financial statements.
FC-4
47
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31
--------------------------------------
1997 1996 1995
---- ---- ----
Cash flows from operating activities
Net income............................................. $ 1,030.8 $ 1,440.6 $ 1,579.4
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for credit losses......................... 1,338.2 993.3 480.4
Depreciation and amortization....................... 6,398.9 5,870.4 5,294.4
Gain on sales of finance receivables................ (64.5) (55.9) (69.2)
Equity in net income of affiliates.................. (1.0) (55.3) (255.4)
Deferred income taxes............................... (92.8) 1,105.6 560.7
Decrease/(increase) in assets....................... 452.6 (1,410.1) (725.4)
Increase in liabilities............................. 155.0 1,467.8 785.2
Other............................................... 302.6 (272.1) 218.0
---------- ---------- ----------
Net cash provided by operating activities...... 9,519.8 9,084.3 7,868.1
---------- ---------- ----------
Cash flows from investing activities
Purchase of finance receivables (other than
wholesale).......................................... (38,396.0) (38,895.3) (35,761.3)
Collection of finance receivables (other than
wholesale).......................................... 32,207.8 33,477.7 28,293.0
Net change in wholesale receivables.................... (1,759.1) (2,127.6) (4,035.5)
Proceeds from sales of finance receivables and
operating leases.................................... 3,850.4 4,668.7 5,422.6
Purchase of operating lease vehicles................... (22,917.6) (21,264.0) (18,102.6)
Liquidation of operating lease vehicles................ 12,164.0 10,340.5 7,342.3
Proceeds from sale/maturity of investment securities... 3,169.9 5,767.4 76.4
Purchase of investment securities...................... (2,732.3) (4,730.1) --
Other.................................................. (148.9) 110.4 (440.7)
---------- ---------- ----------
Net cash used in investing activities.......... (14,561.8) (12,652.3) (17,205.8)
---------- ---------- ----------
Cash flows from financing activities
Proceeds from issuance of long-term debt............... 11,826.6 13,433.5 15,528.4
Principal payments on long-term debt................... (10,340.8) (8,322.4) (7,189.1)
Change in short-term debt, net......................... 2,212.2 816.9 2,338.7
Cash dividends paid.................................... (595.5) (949.0) (816.3)
Other.................................................. (57.5) (169.0) 562.8
---------- ---------- ----------
Net cash provided by financing activities...... 3,045.0 4,810.0 10,424.5
Effect of exchange rate changes on cash and cash
equivalents............................................ (29.5) (4.1) 7.9
---------- ---------- ----------
Net change in cash and cash equivalents........ (2,026.5) 1,237.9 1,094.7
Cash and cash equivalents, beginning of year............. 2,716.0 1,478.1 383.4
---------- ---------- ----------
Cash and cash equivalents, end of year................... $ 689.5 $ 2,716.0 $ 1,478.1
========== ========== ==========
Supplementary cash flow information
Interest paid.......................................... $ 6,117.3 $ 5,207.7 $ 5,618.2
Taxes paid/(received).................................. 520.2 (291.9) 169.6
The accompanying notes are an integral part of the financial statements.
FC-5
48
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Ford Motor
Credit Company and its majority owned domestic and foreign subsidiaries and
joint ventures ("Ford Credit"). Affiliates that are 20-50 percent owned are
included in the consolidated financial statements on an equity basis. Ford
Credit is an indirect wholly owned subsidiary of Ford Motor Company ("Ford").
Use of estimates as determined by management is required in the preparation of
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from these estimates and
assumptions. Certain amounts in prior years' financial statements have been
reclassified to conform with current year presentations.
NATURE OF OPERATIONS
Ford Credit operates in many locations around the world, the most
significant of which are the United States and Europe.
Ford Credit's financing operations primarily consist of: the purchase from
franchised Ford vehicle dealers of retail installment sale contracts and retail
leases; wholesale financing and capital loans to franchised Ford vehicle dealers
and other franchises associated with such dealers; and loans to vehicle leasing
companies. In addition, certain subsidiaries of Ford Credit provide these
financing services in the United States, Europe, Canada, and Australia to
non-Ford dealerships. Ford Credit conducts insurance operations through its
wholly owned subsidiary, The American Road Insurance Company ("TARIC"). See also
Note 2 for information regarding Ford Credit's ownership changes in TARIC.
REVENUE RECOGNITION
Revenue from finance receivables is recognized using the interest
(actuarial) method. Certain loan origination costs are deferred and amortized to
financing revenue over the life of the related loans using the interest method.
Rental revenue on operating leases is recognized on a straight-line basis over
the term of the lease. Initial direct costs, net of acquisition fees, related to
leases are deferred and amortized over the term of the lease. The accrual of
interest on loans is discontinued at the time a loan is determined to be
impaired. Subsequent amounts of interest collected are recognized in income only
if full recovery of the remaining principal is expected. Other amounts collected
are generally recognized first as a reduction of principal. Any remaining
amounts are treated as a recovery.
Agreements with Ford and other affiliates provide for interest supplements
and other support payments to Ford Credit on certain financing and leasing
transactions. These payments are recognized as income over the period that the
related finance receivables and leases are outstanding.
Insurance premiums are earned over the policy periods on bases related to
amounts at risk. Premiums from extended service plan contracts are earned over
the life of the policy based on historical loss experience. Physical damage
insurance premiums covering vehicles and equipment financed at wholesale by Ford
Credit and its finance subsidiaries are recognized as income on a monthly basis
as billed; other physical damage, credit life, and credit disability premiums
are earned over the life of the related policies, primarily on the sum-
of-the-digits basis. Certain costs of acquiring new business are deferred and
amortized over the terms of the related policies on the same basis on which
premiums are earned.
SALE OF RECEIVABLES AND OPERATING LEASES
Statement of Financial Accounting Standards No. 125 ("SFAS 125"),
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities", was adopted prospectively effective January 1, 1997 and did not
have any material effect on the consolidated financial statements.
FC-6
49
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 1. ACCOUNTING POLICIES -- CONTINUED
Ford Credit periodically sells finance receivables through special purpose
subsidiaries, retains the servicing rights, and receives a servicing fee which
is recognized as collected over the remaining term of the related sold finance
receivables. Estimated gains or losses from the sale of finance receivables are
recognized in the period in which the sale occurs. In determining the gain or
loss on each qualifying sale of finance receivables, the investment in the sold
receivable pool is allocated between the portion sold and the portion retained
based on their relative fair values at the date of sale (see Note 4). The
retained interest includes servicing rights, interest only (IO) strips, and
subordinated certificates. Excess servicing assets related to sales occurring
prior to 1997 were reclassified as IO strips in connection with the adoption of
SFAS 125. These financial instruments are recorded at market.
Ford Credit also periodically sells vehicles subject to operating leases to
special purpose subsidiaries under sale-leaseback arrangements. The leaseback
arrangements are structured as operating leases. Pursuant to these transactions,
the vehicles sold are removed from the balance sheet and any gain on sale is
deferred and amortized over the period of the leaseback arrangement. Ford Credit
continues to service the leases and is paid a servicing fee which is recognized
as received. Ford Credit also retains certain residual value and credit risk
which is considered in the calculation of the gain on sale.
DEPRECIATION
Depreciation expense on operating leases is provided on a straight-line
basis over the term of the lease in an amount necessary to reduce the leased
vehicle to its estimated residual value at the end of the lease term. Gains or
losses upon disposal and adjustments to reflect impairment of the vehicle's
residual value are also included in depreciation expense.
RESIDUAL VALUES
The Company has significant investments in the residual values of its
leasing portfolios. Residual values represent estimates of the value of the
assets at the end of the contract terms and are initially calculated based on
appraisals and estimates. Residual values are reviewed on a regular basis to
determine that recorded amounts are appropriate. Estimated reserves for residual
values are based on assumptions as to used car prices at lease termination and
the number of vehicles that will be returned to the Company. These assumptions
and the related reserve may change based on changing market conditions.
ALLOWANCE FOR CREDIT LOSSES
An allowance for estimated credit losses is established during the period
in which receivables or vehicles leased are acquired and is based on historical
experience and other factors that affect collectibility. The allowance for
estimated credit losses includes a provision for certain non-homogenous,
impaired loans. Impaired loans are measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate.
Finance receivables and lease investments are charged to the allowance for
credit losses when an account is deemed to be uncollectible, taking into
consideration the financial condition of the borrower or lessee, the value of
the collateral, recourse to guarantors and other factors. Collateral held for
resale included in other assets is carried at its estimated fair value at the
date of repossession net of estimated disposal costs. Recoveries on finance
receivables and lease investments previously charged off as uncollectible are
credited to the allowance for credit losses.
INSURANCE LIABILITIES
A liability for reported insurance claims and an estimate of unreported
insurance claims is provided for based on past experience and is included in
other liabilities and deferred income.
FC-7
50
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 1. ACCOUNTING POLICIES -- CONTINUED
DERIVATIVE FINANCIAL INSTRUMENTS
Ford Credit operates in many countries worldwide, and is exposed to market
risks, including the effects of changes in interest rates and foreign currency
exchange rates. Ford Credit issues debt and other payables with various
maturities, interest rate structures and in various currencies, to ensure
funding over business and economic cycles and to minimize overall borrowing
costs. The maturity and interest rate structures frequently differ from the
invested assets. Exposures to fluctuations in interest rates are created by the
difference in maturities of liabilities versus the maturities of assets. The
financial exposures are monitored and managed in accordance with Ford Credit's
established policies and procedures.
Ford Credit has entered into agreements to manage exposures to fluctuations
in interest rates and foreign exchange. These agreements are used to hedge
interest rate exposure and to hedge debt denominated in foreign currencies. All
such instruments are classified as "held for purposes other than trading";
company policy specifically prohibits the use of derivatives for speculative
purposes.
Interest rate swap agreements are used to manage the effects of interest
rate fluctuations by changing the interest rate characteristics of Ford Credit's
debt to match the interest rate characteristics of related assets. All interest
rate swap agreements are designated to hedge either a specific debt issue or
pool of debt. The differential paid or received on interest rate swap agreements
is recognized on an accrual basis as an adjustment to interest expense. Gains
and losses on terminated interest rate swaps are amortized and reflected in
interest expense over the remaining term of the underlying debt.
Foreign currency agreements including swaps and forward contracts are used
to manage foreign exchange exposure. All currency swaps and forward contracts
are designated to hedge specific foreign currency denominated debt instruments
or intercompany loans. The differential paid or received on these contracts is
recognized on an accrual basis as an adjustment to interest expense. Unrealized
gains or losses are recognized concurrently with foreign currency translation
gains and losses on the underlying debt.
FOREIGN CURRENCY TRANSLATION
Revenues, costs and expenses of foreign subsidiaries are translated to U.S.
dollars at average-period exchange rates. Assets and liabilities of foreign
subsidiaries are translated to U.S. dollars at year-end exchange rates with the
effects of these translation adjustments being reported in a separate component
of stockholder's equity. The change in this account results from translation
adjustments recorded during the year.
CASH EQUIVALENTS
Ford Credit considers investments purchased with a maturity of three months
or less to be cash equivalents.
NOTE 2. ACQUISITIONS AND DIVESTITURES
During 1997 and 1996, the following significant actions were completed:
- Effective January 1, 1997, Ford Credit sold its interest in Ford New
Holland Credit Company to FiatAllis North America, Inc. ("Fiat") and New Holland
(Canada) Credit Holding Ltd. ("Fiat Canada").
- In December 1996, Ford, FSG, Inc. ("FFSGI") contributed ownership of Ford
Credit Europe to Ford Credit.
- During 1996, the majority of Ford Credit's diversified assets managed by
USL Capital Corporation was sold.
FC-8
51
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 2. ACQUISITIONS AND DIVESTITURES -- CONTINUED
- In March 1996, Ford Holdings, Inc. ("FHI") contributed ownership of TARIC
to Ford Credit.
- In February 1996, Ford Credit exchanged substantially all of its common
stock interest in FHI for a promissory note.
These actions are further discussed in the following sections.
SALE OF FORD NEW HOLLAND CREDIT COMPANY
Ford Credit sold its 51% majority ownership of Ford New Holland Credit
Company to Fiat and Fiat Canada. The sale was effective January 1, 1997 and was
not material to Ford Credit's financial statements.
CONTRIBUTION OF FORD CREDIT EUROPE
During the fourth quarter 1996, FFSGI contributed its ownership interest in
Ford Credit Europe (approximately 78% ownership) to Ford Credit. The transaction
was recorded at book value. Prior years' financial statements were restated to
include Ford Credit Europe. The preferred stock of Ford Credit Europe was owned
by Ford.
In November 1997, Ford Credit Europe converted the Ford-held preferred
stock to common stock and issued additional common stock to Ford. Ford Credit's
ownership in Ford Credit Europe is approximately 70% at December 31, 1997.
INVESTMENT IN LEASING PARTNERSHIP
As a part of Ford's sale of USL Capital Corporation's assets during 1996,
the majority of Ford Credit's diversified assets (except leveraged leases)
managed by USL Capital Corporation was sold. The sale of the diversified assets
did not have a material impact on Ford Credit's 1996 financial statements. Also,
Ford Credit formed a partnership with Bank of America to manage a significant
portion of the leveraged lease portfolio and certain leveraged leases were
transferred to the partnership.
On December 31, 1997, Ford Credit sold its partnership interest to Ford
Leasing Corporation, an affiliate company. The transaction was recorded at book
value.
CONTRIBUTION OF TARIC
FHI contributed TARIC to Ford Credit on March 29, 1996. The transaction was
recorded by Ford Credit at TARIC's book value as a credit to paid-in surplus.
INVESTMENT IN FHI
FHI is a holding company whose principal asset at December 31,1996 was an
equity investment in FFSGI. FFSGI is a holding company which owns substantially
all of Ford's financial services activities.
On February 28, 1996, FHI purchased substantially all of Ford Credit's
common stock interest in FHI for $2,949 million. FHI issued a promissory note to
Ford Credit for the purchase amount. The excess of the value received over the
book value of the FHI investment ($1,296.2 million) was credited to Ford
Credit's paid-in surplus. On April 2, 1996 and December 11, 1996, Ford Credit
received cash payments on the note of $1,032 million and $400 million,
respectively. The unpaid portion of the promissory note ($1,517 million at
December 31, 1997) is reflected as a reduction to stockholder's equity. Ford
Credit's investment in FHI at December 31, 1997 is $62.7 million. Prior to this
transaction, Ford Credit owned 45% of Ford Holdings' common stock and accounted
for its investment in FHI under the equity method. Ford owned the remaining
common stock in FHI representing 55% of the voting power.
FC-9
52
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 2. ACQUISITIONS AND DIVESTITURES -- CONTINUED
Assuming the sale of Ford Credit's common stock interest in FHI had taken
place on January 1, 1995, Ford Credit's unaudited pro forma net income would
have been lower by approximately $27 million and $136 million in 1996 and 1995,
respectively. The pro forma results are not necessarily indicative of future
operating results or the results that might have occurred had the transaction
taken place on January 1, 1995.
Condensed income statement information of FHI for the year ended December
31, 1995 and the two months ended February 29, 1996 was as follows:
TWO MONTHS
ENDED
FEBRUARY 29, 1996 1995
----------------- ----
(IN MILLIONS)
INCOME STATEMENT
Revenue................................................... $350.4 $7,047.4
Income before income taxes................................ 120.9 1,107.1
Net income................................................ 106.5 690.0
Preferred stock dividend requirements..................... -- 129.8
Income available for common stockholders.................. 106.5 560.2
NOTE 3. MARKETABLE AND OTHER SECURITIES
Available-for-sale securities are recorded at fair value with unrealized
gains and losses excluded from income and reported, net of tax, as a separate
component of stockholder's equity. Held-to-maturity securities are recorded at
amortized cost. Equity securities which do not have readily determinable fair
values are recorded at cost. The basis of cost used in determining realized
gains and losses is specific identification.
The fair value of substantially all securities was estimated based on
quoted market prices. For securities for which there were no quoted market
prices, the estimate of fair value was based on similar types of securities that
are traded in the market.
The amortized cost and fair value of investments in available-for-sale
securities and held-to-maturity securities at December 31, 1997, by contractual
maturity, were as follows:
AVAILABLE-FOR-SALE HELD-TO-MATURITY
------------------- ------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- ----- --------- -----
(IN MILLIONS)
Due in one year or less................................... $ 0.7 $ 0.7 $13.9 $13.9
Due after one year through five years..................... 242.7 245.0 9.7 9.8
Due after five years through ten years.................... 136.2 139.1 0.6 0.7
Due after ten years....................................... 114.1 116.8 0.7 0.8
Mortgage-backed-securities................................ 238.4 239.7 -- --
Equity securities......................................... 53.0 116.0 -- --
------ ------ ----- -----
Total................................................ $785.1 $857.3 $24.9 $25.2
====== ====== ===== =====
Proceeds from sales of available-for-sale securities were $3.2 billion and
$5.8 billion in 1997 and 1996, respectively. Gross realized gains and losses for
1997 were $95.1 million and $7.4 million, respectively. Gross realized gains and
losses for 1996 were not material.
FC-10
53
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 3. MARKETABLE AND OTHER SECURITIES -- CONTINUED
Investments in securities at December 31, 1997 were as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
(IN MILLIONS)
Available-for-sale securities
Corporate debt securities.............................. $265.2 $ 6.0 $(0.1) $271.1
Mortgage-backed securities............................. 238.4 1.9 (0.6) 239.7
Debt securities issued by U.S. government and
agencies............................................. 194.1 2.0 (0.1) 196.0
Equity securities...................................... 53.0 65.1 (2.1) 116.0
Debt securities issued by foreign government........... 21.4 0.1 -- 21.5
Municipal securities................................... 13.0 0.1 (0.1) 13.0
------ ----- ----- ------
Total available-for-sale securities............... 785.1 75.2 (3.0) 857.3
------ ----- ----- ------
Held-to-maturity securities
Corporate debt securities.............................. 15.3 -- -- 15.3
Debt securities issued by U.S. government and
agencies............................................. 6.4 0.3 -- 6.7
Other debt securities.................................. 3.2 -- -- 3.2
------ ----- ----- ------
Total held-to-maturity securities................. 24.9 0.3 -- 25.2
------ ----- ----- ------
Total investments in securities with readily
determinable fair values........................ 810.0 75.5 (3.0) 882.5
Other non-marketable equity securities................. 5.7 -- -- 5.7
------ ----- ----- ------
Total investments in securities................... $815.7 $75.5 $(3.0) $888.2
====== ===== ===== ======
Investments in securities at December 31, 1996 were as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
(IN MILLIONS)
Available-for-sale securities
Corporate debt securities............................ $ 218.5 $ 1.5 $(1.2) $ 218.8
Mortgage-backed securities........................... 207.1 1.7 (2.1) 206.7
Debt securities issued by U.S. government and
agencies........................................... 154.3 1.3 (0.7) 154.9
Equity securities.................................... 104.2 89.4 (3.4) 190.2
Debt securities issued by foreign government......... 26.0 0.9 -- 26.9
Municipal securities................................. 14.4 -- -- 14.4
-------- ----- ----- --------
Total available-for-sale securities............. 724.5 94.8 (7.4) 811.9
-------- ----- ----- --------
Held-to-maturity securities
Corporate debt securities............................ 13.4 -- -- 13.4
Debt securities issued by U.S. government and
agencies........................................... 8.6 0.3 -- 8.9
Other debt securities................................ -- -- -- --
-------- ----- ----- --------
Total held-to-maturity securities............... 22.0 0.3 -- 22.3
-------- ----- ----- --------
Total investments in securities with readily
determinable fair values...................... 746.5 95.1 (7.4) 834.2
Other non-marketable equity securities............... 490.9 -- -- 490.9
-------- ----- ----- --------
Total investments in securities................. $1,237.4 $95.1 $(7.4) $1,325.1
======== ===== ===== ========
FC-11
54
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 4. FINANCE RECEIVABLES AND RETAINED INTEREST IN SOLD RECEIVABLES
Net finance receivables at December 31 were as follows:
1997 1996
---- ----
(IN MILLIONS)
Retail...................................................... $55,601.0 $53,140.6
Wholesale................................................... 21,605.5 22,706.3
Other....................................................... 5,275.9 5,901.2
--------- ---------
Total finance receivables, net of unearned income......... 82,482.4 81,748.1
Less: Allowance for credit losses........................... (1,169.8) (900.1)
--------- ---------
Finance receivables, net.................................. 81,312.6 80,848.0
Retained interest in sold receivables....................... 998.6 1,124.1
--------- ---------
Finance receivables, net and retained interest in sold
receivables............................................ $82,311.2 $81,972.1
========= =========
The retained interest in sold receivables is comprised of IO strips ($293.3
million and $231.0 million at December 31, 1997 and 1996 respectively),
subordinated amounts ($790.4 million and $975.8 million at December 31, 1997 and
1996 respectively), and allowance for credit losses ($85.1 million and $82.7
million at December 31, 1997 and 1996 respectively).
Ford Credit's servicing portfolio relating to these finance receivables
sales amounted to $10.0 billion and $8.9 billion at December 31, 1997 and 1996,
respectively.
At December 31, 1997 finance receivables include $1.0 billion owed by three
customers with the largest receivable balances.
The contractual maturities of total finance receivables net of unearned
income outstanding at December 31, 1997 were as follows:
DUE IN YEAR
ENDING DECEMBER 31 DUE
---------------------------------- AFTER
1998 1999 2000 2000 TOTAL
---- ---- ---- ----- -----
(IN MILLIONS)
Retail.................................... $25,870.8 $15,711.7 $8,542.9 $5,475.6 $55,601.0
Wholesale................................. 21,599.9 2.2 1.4 2.0 21,605.5
Other..................................... 3,372.1 122.2 124.0 1,657.6 5,275.9
--------- --------- -------- -------- ---------
Total................................ $50,842.8 $15,836.1 $8,668.3 $7,135.2 $82,482.4
========= ========= ======== ======== =========
It is Ford Credit's experience that a substantial portion of finance
receivables are repaid before contractual maturity dates. The above table,
therefore, is not to be regarded as a forecast of future cash collections.
The aggregate receivable balances related to accounts past due 60 days or
more were as follows:
DECEMBER 31,
----------------
1997 1996
---- ----
(IN MILLIONS)
Retail...................................................... $496.8 $806.4
Wholesale................................................... 35.4 53.3
Other....................................................... 58.6 86.2
------ ------
Total.................................................. $590.8 $945.9
====== ======
FC-12
55
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 4. FINANCE RECEIVABLES AND RETAINED INTEREST IN SOLD RECEIVABLES --
CONTINUED
Included in retail and other receivables are investments in direct
financing leases related to the leasing of motor vehicles.
1997 1996
---- ----
(IN MILLIONS)
Net investment in direct financing leases
Minimum lease rentals..................................... $2,743.9 $2,307.5
Estimated residual values................................. 2,527.0 2,618.4
Less: Allowance for credit losses...................... (42.5) (37.6)
-------- --------
Net investment in direct financing leases......... $5,228.4 $4,888.3
======== ========
Minimum direct financing lease rentals, net of interest payments, for each
of the five succeeding years are as follows (in millions): 1998 -- $1,231.0;
1999 -- $800.3; 2000 -- $485.0; 2001 -- $186.4; 2002 -- $39.6; thereafter --
$1.6.
NOTE 5. NET INVESTMENT, OPERATING LEASES
Operating leases at December 31 were as follows:
1997 1996
---- ----
(IN MILLIONS)
Investment in operating leases
Vehicles, at cost......................................... $41,925.5 $36,951.2
Lease origination costs................................... 64.9 60.1
Less: Accumulated depreciation......................... (6,942.8) (6,048.6)
Allowance for credit losses...................... (301.6) (317.5)
--------- ---------
Net investment in operating leases................... $34,746.0 $30,645.2
========= =========
Future minimum rentals on operating leases are as follow (in millions):
1998 -- $12,073.3; 1999 -- $8,647.2; 2000 -- $1,156.3; 2001 -- $55.3; 2002 --
$2.9.
Ford Credit periodically sells vehicles subject to operating leases to
special purpose subsidiaries under sale-leaseback arrangements. Ford Credit's
servicing portfolio related to these sales amounted to $947.5 million and
$1,388.7 million at December 31, 1997 and 1996, respectively.
FC-13
56
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 6. ALLOWANCE FOR CREDIT LOSSES
Following is an analysis of the allowance for credit losses relating to
finance receivables and operating leases for the years ended December 31:
1997 1996 1995
---- ---- ----
(IN MILLIONS)
Balance, beginning of year.................................. $1,217.6 $1,054.9 $1,084.4
Additions................................................. 1,338.2 993.3 480.4
Deductions
Losses................................................. 1,239.1 1,020.7 686.6
Recoveries............................................. (232.0) (190.7) (200.7)
-------- -------- --------
Net losses........................................... 1,007.1 830.0 485.9
Other changes, principally amounts relating to finance
receivables and operating leases sold.................. 77.3 0.6 24.0
-------- -------- --------
Net deductions....................................... 1,084.4 830.6 509.9
-------- -------- --------
Balance, end of year........................................ $1,471.4 $1,217.6 $1,054.9
======== ======== ========
Ford Credit retains limited credit risk related to finance receivables
sold. Reserves for estimated losses related to these receivables are separately
provided based principally on historical loss experience. These reserves totaled
$85.1 million and $82.7 million at December 31, 1997 and 1996, respectively, and
are netted against the retained interest in sold receivables (see Note 4).
NOTE 7. OTHER ASSETS
Other assets consist of:
DECEMBER 31
-------------------
1997 1996
---- ----
(IN MILLIONS)
Investment in leasing partnership........................... $ -- $1,451.5
Investment in used vehicles held for resale, at estimated
fair value................................................ 1,042.3 1,145.1
Deferred charges and other assets........................... 937.4 706.6
Collateral held for resale.................................. 419.4 407.6
Property and equipment, net of accumulated depreciation of
$105.1 in 1997 and $103.5 in 1996......................... 155.8 150.1
-------- --------
Total.................................................. $2,554.9 $3,860.9
======== ========
FC-14
57
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 8. DEBT
Debt at December 31 was as follows:
WEIGHTED-
AVERAGE(A)**
INTEREST RATES BOOK VALUE
------------------ -------------------------
1997 1996 1997 1996
---- ---- ---- ----
(IN MILLIONS)
PAYABLE WITHIN ONE YEAR
Commercial paper(B)........................... $ 40,856.8 $38,228.3
Other short-term debt(C)...................... 5,351.0 4,788.7
---------- ---------
Total short-term debt................. 5.83% 5.52% 46,207.8 43,017.0
Senior notes payable within one year(D)(E).... 6.64% 6.49% 9,572.6 9,178.0
---------- ---------
Total payable within one year......... 5.97% 5.69% 55,780.4 52,195.0
---------- ---------
PAYABLE AFTER ONE YEAR
Secured indebtedness.......................... 18.63% 17.64% 13.5 9.9
Unsecured senior indebtedness Notes(F)........ 6.64% 6.63% 43,584.1 44,273.6
Debentures................................. 4.50% 4.56% 1,247.6 1,228.3
Unamortized discount....................... (3.0) (7.5)
---------- ---------
Total secured and unsecured senior
indebtedness........................ 44,842.2 45,504.3
Unsecured long-term subordinated notes..... 8.29% 6.15% 102.4 325.0
---------- ---------
Total payable after one year(E)....... 44,944.6 45,829.3
---------- ---------
Total debt............................ 6.25% 6.12% $100,725.0 $98,024.3
========== =========
- -------------------------
(A) Excludes the effect of interest rate swap agreements.
(B) The average remaining maturities of commercial paper was 24 days at
December 31, 1997 and 34 days at December 31, 1996.
(C) Includes $830.5 million and $2,477.7 million with affiliated companies at
December 31, 1997 and 1996, respectively.
(D) Includes $1,716.0 million and $653 million with an affiliated company at
December 31, 1997 and 1996, respectively.
(E) Secured and unsecured senior notes and debentures mature at various dates
through 2048. Maturities are as follows (in millions): 1998 -- $9,572.6;
1999 -- $9,617.8; 2000 -- $9,142.2; 2001 -- $7,721.4; 2002 -- $8,020.6;
thereafter -- $10,442.6.
(F) Includes $1,830.6 million and $3,584.4 million with affiliated companies at
December 31, 1997 and 1996, respectively.
FC-15
58
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 8. DEBT -- CONTINUED
1997 1996
---- ----
(IN MILLIONS)
PAYABLE AFTER ONE YEAR(A)
Fixed interest rates...................................... $30,602.9 $31,254.7
Variable interest rates (generally based on LIBOR or other
short-term rates)...................................... 14,341.7 14,574.6
--------- ---------
Total payable after one year........................... $44,944.6 $45,829.3
========= =========
- -------------------------
(A) Excludes the effect of interest rate swap agreements.
Ford Credit and certain of its subsidiaries have entered into interest rate
swap agreements to manage exposures to fluctuations in interest rates. The
agreements decreased the overall weighted-average interest rate on total debt
from 6.25% to 6.17% as of December 31, 1997 and decreased the overall
weighted-average interest rate on total debt from 6.12% to 6.08% as of December
31, 1996. In addition, the agreements increased the Company's overall
weighted-average effective interest rates for full year 1997 from 6.50% to 6.54%
and increased full year 1996 from 6.42% to 6.43%. The agreements decreased the
long-term obligations payable after one year subject to variable interest rates
as of December 31, 1997 and 1996 to $9,741.6 and $13,627.5 million,
respectively. The effect of these agreements is to reduce the effect of interest
rate changes on profitability. Approximately 31% of Ford Credit's interest rate
swaps mature in 1998 and approximately 90% mature by 2002.
Certain of these obligations are denominated in currencies other than the
currency of the country of the issuer. Foreign currency swap and forward
agreements are used to hedge exposure to changes in exchange rates of certain of
these obligations.
NOTE 9. SUPPORT FACILITIES
Support facilities represent additional available sources of funds. At
December 31, 1997, Ford Credit had approximately $19.2 billion of contractually
committed facilities. In addition, $7.4 billion of Ford bank lines may be used
by Ford Credit at Ford's option. The lines have various maturity dates through
June 30, 2002 and may be used, at Ford Credit's option, by any of its direct or
indirect majority-owned subsidiaries. Any such borrowings will be guaranteed by
Ford Credit. Banks also provide $1.6 billion of contractually committed
liquidity facilities to support Ford Credit's asset-backed commercial paper
program.
Additionally, at December 31, 1997, there were approximately $4.6 billion
of contractually committed facilities available for Ford Credit Europe plc's
use. In addition, $615 million of Ford bank lines may be used by Ford Credit
Europe plc at Ford's option. The lines have various maturity dates through June
30, 2002 and may be used, at Ford Credit Europe plc's option, by any of its
direct or indirect majority-owned subsidiaries. Any such borrowings will be
guaranteed by Ford Credit Europe plc.
NOTE 10. INCOME TAXES
Ford Credit and certain of its domestic subsidiaries join Ford in filing
consolidated United States federal and state income tax returns. During 1997,
Ford and Ford Credit changed their intercompany tax sharing agreement. The
change resulted in a net additional current tax payment to Ford of $516.5
million but had no effect on the total provision. Pursuant to this arrangement
with Ford, United States income tax liabilities or credits are allocated to Ford
Credit generally on a separate return basis.
FC-16
59
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 10. INCOME TAXES -- CONTINUED
The provision for income taxes was estimated as follows:
1997 1996 1995
---- ---- ----
(IN MILLIONS)
Currently payable/(refundable)
U.S. federal.............................................. $ 572.1 $ (501.7) $(45.0)
Foreign................................................... 231.9 138.1 196.9
State and local........................................... 15.3 (10.4) (29.7)
------- -------- ------
Total currently payable/(refundable)................... 819.3 (374.0) 122.2
Deferred tax (benefit)/liability
U.S. federal.............................................. (136.3) 1,050.3 490.0
Foreign................................................... 32.8 56.2 (22.1)
State and local........................................... 11.0 (0.9) 92.8
------- -------- ------
Total deferred......................................... (92.5) 1,105.6 560.7
------- -------- ------
Total provision........................................ $ 726.8 $ 731.6 $682.9
======= ======== ======
A reconciliation of the provision for income taxes as a percentage of
income before income taxes, excluding equity in net income of affiliated
companies and minority interest in net income of a joint venture, with the
United States statutory tax rate for the last three years is shown below:
1997 1996 1995
---- ---- ----
U.S. statutory tax rate..................................... 35.0% 35.0% 35.0%
Effect of (in percentage points)
Taxes attributable to foreign source income............... 3.7 1.5 (1.9)
State and local income taxes.............................. 1.7 1.5 2.0
Investment income not subject to tax or subject to tax at
reduced rates.......................................... (0.2) (0.9) (1.3)
Rate adjustments on deferred taxes........................ (0.7) (1.9) --
Other..................................................... 0.8 (1.4) (0.6)
----- ----- -----
Effective tax rate..................................... 40.3% 33.8% 33.2%
===== ===== =====
FC-17
60
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 10. INCOME TAXES -- CONTINUED
Deferred income taxes reflect the estimated tax effect of temporary
differences between the bases of assets and liabilities for financial reporting
purposes and those amounts as measured by tax laws and regulations. The
components of deferred income tax assets and liabilities as of December 31 were
as follows:
1997 1996
---- ----
(IN MILLIONS)
DEFERRED TAX LIABILITIES
Leasing transactions........................................ $3,560.3 $4,536.0
Purchased tax benefits...................................... 293.0 294.1
Finance receivables......................................... 225.5 125.0
Sales of receivables........................................ 87.6 105.2
Other....................................................... 272.3 104.8
-------- --------
Total deferred tax liabilities............................ 4,438.7 5,165.1
DEFERRED TAX ASSETS
Provision for credit losses................................. 749.9 662.6
Alternative minimum tax..................................... 289.9 46.0
Foreign tax credits......................................... 234.5 --
Employee benefit plans...................................... 120.6 113.6
Retail contract earnings method............................. 48.5 48.5
Other....................................................... 263.1 34.0
-------- --------
Total deferred tax assets................................. 1,706.5 904.7
-------- --------
Net deferred tax liabilities........................... $2,732.2 $4,260.4
======== ========
NOTE 11. POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
Ford Credit and certain of its subsidiaries provide selected health care
and life insurance benefits for retired employees under unfunded plans sponsored
by Ford and certain of its subsidiaries. Ford Credit's U.S. and Canadian
employees may become eligible for those benefits if they retire while working
for Ford Credit; however, benefits and eligibility rules may be modified from
time to time. The estimated cost for postretirement health care benefits is
accrued on an actuarially determined basis.
Net postretirement benefit expense included the following:
1997 1996
---- ----
(IN MILLIONS)
Benefits attributed to employees' service................... $ 7.8 $ 8.3
Interest on accumulated benefit obligation.................. 14.6 14.4
Net amortization/other...................................... (0.2) (1.7)
----- -----
Net postretirement benefit expense..................... $22.2 $21.0
===== =====
Retiree benefit payments.................................... $ 5.7 $ 4.7
FC-18
61
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 11. POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS -- CONTINUED
The status of these plans, reconciled with the amounts recognized in Ford
Credit's balance sheet at December 31, was as follows:
1997 1996
---- ----
(IN MILLIONS)
Accumulated Postretirement Benefit Obligation
Retirees.................................................. $ 84.3 $ 60.6
Active employees eligible to retire....................... 30.2 29.5
Other active employees.................................... 124.9 120.6
------ ------
Total accumulated obligation......................... 239.4 210.7
Unamortized amendments...................................... 1.2 1.2
Unamortized net gain........................................ 14.6 32.1
------ ------
Accrued liability.................................... $255.2 $244.0
====== ======
Assumptions:
Discount rate at year-end................................. 7.0% 7.5%
Present health care cost trend rate....................... 6.6% 6.6%
Ultimate trend rate in ten years.......................... 5.0% 5.0%
Weighted-average trend rate............................... 5.5% 5.7%
Changing the assumed health care cost trend rates by one percentage point
would change the aggregate service and interest cost components of net periodic
postretirement benefit cost for 1997 by $3.4 million and the accumulated
postretirement benefit obligation at December 31, 1997 by $36.3 million. The
accumulated postretirement benefit obligation at December 31, 1997 has been
reduced by $5.3 million due to the sale of Ford New Holland Credit Company.
NOTE 12. TRANSACTIONS WITH AFFILIATED COMPANIES
An agreement with Ford provides for payments by Ford to Ford Credit that
would maintain Ford Credit's consolidated income before income taxes and net
income at specified minimum levels. No payments were required under the
agreement during 1997, 1996, or 1995.
Ford Credit and its subsidiaries, from time to time, purchase accounts
receivable of certain divisions and subsidiaries of Ford. The amount of such
receivables outstanding was $3,664.4 million at December 31, 1997 and $4,043.4
million at December 31, 1996. Agreements with Ford and other affiliates also
provide for payments to Ford Credit for interest supplements and other support
costs on certain financing and leasing transactions. Amounts included in the
income statement for these and other transactions with Ford were as follows (in
millions): 1997 -- $1,778.5; 1996 -- $1,432.7; 1995 -- $1,279.0. Ford Credit and
its subsidiaries purchase from Ford and affiliates certain vehicles which were
previously acquired by Ford principally from its fleet and rental car customers.
The fair value of these vehicles held for resale and included in other assets at
December 31 was as follows (in millions): 1997 -- $636.9; 1996 -- $789.2. Ford
Credit also has entered into a sale-leaseback agreement with Ford for vehicles
leased to employees of Ford and its subsidiaries. The net investment in these
vehicles included in operating leases at December 31 was as follows (in
millions): 1997 -- $731.2; 1996 -- $764.4.
Ford Credit and Ford revised their intercompany tax sharing agreement in
1997 effective for years ended after December 31, 1994. Ford Credit recorded a
deferred tax asset for amounts due from Ford under the revised agreement. Ford
compensates Ford Credit for the temporary use of these funds. The interest
income earned and included in income was $41.6 million in 1997.
FC-19
62
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 12. TRANSACTIONS WITH AFFILIATED COMPANIES -- CONTINUED
In 1996, Ford Credit transferred Budget Rent-A-Car ("BRAC") preferred stock
to FFSGI as a dividend. In 1997, Ford sold its ownership of BRAC to Team Rental
Group, Inc. As part of that sales agreement, Ford Credit received full payment
of their loans to BRAC. Dividends and interest received from BRAC and included
in income were as follows (in millions): 1997 -- $23.6; 1996 -- $85.8; 1995 --
$109.4.
On April 21, 1997, Ford Credit sold its preferred stock in The Hertz
Corporation to FFSGI. Ford Credit received dividends on the preferred stock
which are included in investment and other income as follows (in millions): 1997
- -- $11.9; 1996 -- $28.7; 1995 -- $40.7.
Ford Credit holds a promissory note from FHI for $1,517 million which is
classified against stockholder's equity. Interest income earned on the
promissory note was $91.6 million in 1997 and $93.5 million in 1996.
Ford Credit and its subsidiaries receive technical and administrative
advice and services from Ford and its subsidiaries, occupy office space
furnished by Ford and its subsidiaries and utilize data processing facilities
maintained by Ford. Payments to Ford and its subsidiaries for such advice and
services are charged to operating expenses and were as follows (in millions):
1997 -- $120.7; 1996 -- $113.9; 1995 -- $95.2.
Retirement benefits are provided under defined benefit plans for employees
of Ford Credit and its subsidiaries in the United States by the Ford General
Retirement Plan and for employees of the foreign subsidiaries in Europe,
Australia and Canada by the respective Ford retirement plans. Employee
retirement plan costs allocated to Ford Credit and its subsidiaries from Ford
and charged to operating expenses were as follows (in millions): 1997 -- $13.6;
1996 -- $16.6; 1995 -- $15.9.
See other notes for additional information regarding transactions with
affiliated companies.
NOTE 13. LITIGATION AND CLAIMS
Various legal actions, governmental proceedings and other claims are
pending or may be instituted or asserted in the future against Ford Credit and
its subsidiaries. Certain of the pending legal actions are, or purport to be,
class actions. Some of these matters involve or may involve compensatory,
punitive or antitrust or other treble damage claims in very significant amounts
or other relief which, if granted, would require very significant expenditures.
Litigation is subject to many uncertainties, the outcome of individual
litigated matters is not predictable with assurance and it is reasonably
possible that some of the foregoing matters could be decided unfavorably to Ford
Credit or the subsidiary involved. Although the amount of liability at December
31, 1997 with respect to these matters cannot be ascertained, Ford Credit
believes that any resulting liability should not materially affect the
consolidated financial position or results of operations of Ford Credit and its
subsidiaries.
FC-20
63
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 14. FINANCIAL INSTRUMENTS
BOOK AND ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments held by Ford Credit and
its subsidiaries at December 31, and the valuation techniques used to estimate
the fair value, were as follows:
1997 1996
--------------------- ---------------------
ESTIMATED ESTIMATED
BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE
----- --------- ----- ---------
(IN MILLIONS)
ASSETS
Cash and cash equivalents......................... $ 689.5 $ 689.5 $ 2,716.0 $ 2,716.0
Investments in securities......................... 887.9 888.2 1,324.8 1,325.1
Finance receivables, net and retained interest in
sold receivables................................ 76,970.5 76,473.7 76,735.5 76,066.7
LIABILITIES
Debt payable within one year...................... $55,780.4 $55,780.4 $52,195.0 $52,195.0
Debt payable after one year....................... 44,944.6 45,828.2 45,829.3 45,563.4
DERIVATIVE CONTRACTS:
Foreign exchange instruments
Contracts with unrealized gains.............. 64.8 115.9 102.9 68.5
Contracts with unrealized losses............. (814.3) (898.4) (784.1) (722.8)
Interest rate instruments
Contracts with unrealized gains.............. 80.6 546.9 250.2 433.7
Contracts with unrealized losses............. (70.9) (159.9) (123.1) (285.5)
Cash and Cash Equivalents. The book value approximates fair value because
of the short maturity of these instruments.
Investments in Securities. The estimated fair value of investments in
marketable equity and debt securities are estimated based on market prices. Book
value of investments in non-marketable equity securities approximate fair value
(See Note 3.).
Finance Receivables, Net and Retained Interest in Sold Receivables. The
fair value of substantially all finance receivables is estimated by discounting
future cash flows using an estimated discount rate which reflects the current
credit, interest rate and prepayment risks associated with similar types of
instruments. For receivables with short maturities, the book values approximate
fair values. Included in finance receivables is the retained interest in sold
finance receivables and related amounts. These amounts are recorded at the
present value of estimated future cash flows discounted at rates commensurate
with this type of instrument, which approximates fair value. Certain leases are
excluded from the fair market valuation of finance receivables.
Debt Payable Within One Year. The book value approximates fair value
because of the short maturity of these instruments.
Debt Payable After One Year. The fair value is estimated based on quoted
market prices or current rates for similar debt with the same remaining
maturities.
FC-21
64
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 14. FINANCIAL INSTRUMENTS -- CONTINUED
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The following sections describe the various off-balance-sheet financial
instruments that Ford Credit and its subsidiaries held as of December 31, 1997
and 1996. Also included is a brief discussion of the estimated fair value of
those contracts and certain risks associated with holding those contracts
through maturity.
Foreign Exchange Instruments. Ford Credit and certain of its subsidiaries
have entered into foreign currency swap and forward agreements to manage
exposure to foreign exchange rate fluctuations. At December 31, 1997 and 1996,
the total notional amount of Ford Credit's foreign exchange instruments
outstanding was $12.5 billion and $10.6 billion, respectively. These agreements
hedge principal and interest payments on debt issues that are denominated in
foreign currencies. The book value of the foreign currency swap and forward
agreements represents the amount payable to the counterparty since the last
settlement date. The fair value of these foreign agreements was estimated using
current market rates.
Interest Rate Instruments. Ford Credit and certain of its subsidiaries have
entered into interest rate swap agreements to manage exposure to fluctuations in
interest rates. The underlying notional amount of interest rate swaps was $86.6
billion at December 31, 1997 and $74.1 billion at December 31, 1996,
respectively.
The differential paid or received on interest rate swap agreements is
recognized on an accrual basis as an adjustment to interest expense. The book
value of an interest rate swap agreement represents the differential receivable
or payable with a swap counterparty since the last settlement date.
The fair value of an interest rate swap is the estimated amount Ford Credit
would receive or pay to terminate the agreement. The fair value is calculated
using current market rates for similar instruments with the same remaining
maturities. Unrealized gains and losses are netted for individual counterparties
where legally permissible.
COUNTERPARTY CREDIT RISK
Ford Credit manages its foreign currency and interest rate counterparty
credit risks by limiting exposure and by monitoring the financial condition of
counterparties. The amount of exposure Ford Credit may have to a single
counterparty on a worldwide basis is limited by company policy. In the unlikely
event that a counterparty fails to meet the terms of a foreign currency or an
interest rate instrument, risk is limited to the fair value of the instrument.
CONCENTRATIONS OF CREDIT RISK
The business of Ford Credit is substantially dependent upon Ford Motor
Company. Any protracted reduction or suspension of Ford's production or sale of
vehicles, resulting from a decline in demand, a work stoppage, governmental
action, adverse publicity, or other event, could have a substantial adverse
effect on Ford Credit.
Ford Credit controls its credit risk through credit standards, limits on
exposure and by monitoring the financial condition of other parties. The
majority of Ford Credit's finance receivables are geographically diversified
throughout the United States. Foreign finance receivables are concentrated in
Europe, Canada, and Australia.
NOTE 15. STOCK OPTIONS
Ford Credit employees participate in the stock option plans of Ford. Ford
Credit has stock options outstanding under Ford's 1985 Stock Option Plan and
1990 Long-Term Incentive Plan ("Plans"). No further grants may be made under the
1985 Plan. Grants may be made under the 1990 Plan through April 2000.
FC-22
65
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 15. STOCK OPTIONS -- CONTINUED
Options granted in 1997 and subsequent years under the 1990 Plan become
exercisable 33% after one year from the date of grant, 66% after two years and
100% after three years. In general, options granted under the 1985 Plan and
options granted prior to 1997 under the 1990 Plan become exercisable 25% after
one year from the date of grant, 50% after two years, 75% after three years and
100% after four years. Options under both Plans expire after 10 years.
Information concerning stock options for Ford Credit's employees is as
follows (shares in thousands):
1997 1996 1995
------------------ ------------------ ------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ --------- ------ --------- ------ ---------
Shares subject to option
Outstanding at beginning of period.... 2,446 $26.93 2,267 $25.22 1,916 $23.24
New grants (based on fair value of
common stock at dates of grant)..... 430 32.05 423 32.69 445 32.00
Exercised*............................ (404) 23.19 (190) 20.32 (75) 19.62
Surrendered upon exercise of stock
appreciation rights................. (53) 22.44 (40) 23.03 --
Terminated and expired................ -- (14) 31.14 (19) 28.05
------ ------ -----
Outstanding at end of period.......... 2,419 28.44 2,446 26.93 2,267 25.22
Outstanding but not exercisable....... (1,078) (1,021) (972) --
------ ------ -----
Exercisable at end of period..... 1,341 25.85 1,425 23.61 1,295 21.77
====== ====== =====
- -------------------------
* Exercised at option prices ranging from $15.00 to $32.69 during 1997, $13.42
to $29.06 during 1996, and $9.09 to $29.06 during 1995.
The estimated fair value as of date of grant of options granted in 1997,
1996, and 1995 using the Black-Scholes option-pricing model, was as follows:
1997 1996 1995
---- ---- ----
Estimated fair value per share of options granted during the
year...................................................... $ 5.76 $ 6.93 $ 7.16
Assumptions:
Annualized dividend yield................................. 4.8% 4.3% 3.9%
Common stock price volatility............................. 22.1% 25.2% 26.2%
Risk-free rate of return.................................. 6.7% 6.2% 5.8%
Expected option term (in years)........................... 5 5 5
The Company adopted the disclosure requirements of Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation" but elected to continue to measure compensation cost using the
intrinsic value method, in accordance with APB Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees". Accordingly, no compensation cost
for stock options has been recognized. If compensation cost had been determined
based on the estimated fair value of options granted in 1997, 1996, and 1995
consistent with the methodology in SFAS 123, the pro forma effects on the
Company's net income would not have been material.
FC-23
66
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 16. SEGMENT INFORMATION
Total financing revenue and other revenue, income before income taxes and
assets identifiable with United States, Europe, and other foreign operations
were as follows:
1997 1996 1995
---- ---- ----
(IN MILLIONS)
Financing revenue and other revenue
United States operations............................... $ 13,911.5 $ 13,159.6 $ 12,011.7
European operations.................................... 2,175.7 2,137.2 1,887.1
Other foreign operations............................... 1,515.8 1,353.4 1,098.4
---------- ---------- ----------
Total financing revenue and other revenue......... $ 17,603.0 $ 16,650.2 $ 14,997.2
========== ========== ==========
Income before income taxes
United States operations............................... $ 1,244.8 $ 1,662.3 $ 1,617.4
European operations.................................... 383.5 358.1 382.5
Other foreign operations............................... 176.7 164.5 72.5
Equity in net income of affiliated companies........... 1.0 55.3 255.4
---------- ---------- ----------
Total income before income taxes.................. $ 1,806.0 $ 2,240.2 $ 2,327.8
========== ========== ==========
Assets at December 31
United States operations............................... $ 92,407.6 $ 93,190.1 $ 85,223.8
European operations.................................... 17,867.7 18,743.9 16,688.7
Other foreign operations............................... 11,648.4 9,718.0 7,614.9
Equity in net assets of affiliated companies........... 49.6 44.4 1,730.5
---------- ---------- ----------
Total assets...................................... $121,973.3 $121,696.4 $111,257.9
========== ========== ==========
NOTE 17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected financial data by calendar quarter were as follows:
FIRST SECOND THIRD FOURTH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ----
1997 (IN MILLIONS)
- ----
Total financing revenue..................... $3,929.8 $3,955.6 $4,149.0 $4,067.5 $16,101.9
Interest expense............................ 1,626.6 1,609.8 1,639.6 1,651.1 6,527.1
Depreciation on operating leases............ 1,445.5 1,467.8 1,624.1 1,650.8 6,188.2
Total financing margin and revenue.......... 1,237.5 1,219.7 1,234.4 1,196.1 4,887.7
Provision for credit losses................. 355.7 296.4 370.1 316.0 1,338.2
Net income............................. 275.9 279.0 257.7 218.2 1,030.8
1996
- ----
Total financing revenue..................... $3,725.7 $3,780.0 $3,856.2 $3,985.7 $15,347.6
Interest expense............................ 1,553.0 1,575.9 1,540.1 1,590.7 6,259.7
Depreciation on operating leases............ 1,377.4 1,337.6 1,403.5 1,419.1 5,537.6
Total financing margin and revenue.......... 1,008.4 1,235.2 1,250.9 1,358.4 4,852.9
Provision for credit losses................. 203.5 196.9 300.4 292.5 993.3
Net income............................. 339.0 376.0 340.9 384.7 1,440.6
FC-24
67
EXHIBIT INDEX
DESIGNATION DESCRIPTION
----------- -----------
Exhibit 3-A* Restated Certificate of Incorporation of Ford Motor Credit
Company.
Exhibit 3-B* By-Laws of Ford Motor Credit Company as amended through
March 2, 1988.
Exhibit 4-A* Form of Indenture dated as of August 1, 1984 between Ford
Motor Credit Company and The Chase Manhattan Bank (National
Association) relating to Debt Securities.
Exhibit 4-A-1* Form of First Supplemental Indenture dated August 15, 1986
between Ford Motor Credit Company and The Chase Manhattan
Bank (National Association) supplementing the Indenture
designated as Exhibit 4-A.
Exhibit 4-A-2* Form of Second Supplemental Indenture dated as of October
15, 1986 between Ford Motor Credit Company and The Chase
Manhattan Bank (National Association) supplementing the
Indenture designated as Exhibit 4-A.
Exhibit 4-B* Form of Indenture dated as of February 1, 1985 between Ford
Motor Credit Company and Manufacturers Hanover Trust Company
relating to Debt Securities.
Exhibit 4-B-1* Form of First Supplemental Indenture dated as of April 1,
1986 between Ford Motor Credit Company and Manufacturers
Hanover Trust Company supplementing the Indenture designated
as Exhibit 4-B.
Exhibit 4-B-2* Form of Second Supplemental Indenture dated as of September
1, 1986 between Ford Motor Credit Company and Manufacturers
Hanover Trust Company supplementing Indenture designated as
Exhibit 4-B.
Exhibit 4-B-3* Form of Third Supplemental Indenture dated as of March 15,
1987 between Ford Motor Credit Company and Manufacturers
Hanover Trust Company supplementing the Indenture designated
as Exhibit 4-B.
Exhibit 4-B-4* Form of Fourth Supplemental Indenture dated as of April 15,
1988 between Ford Motor Credit Company and Manufacturers
Hanover Trust Company supplementing the Indenture designated
as Exhibit 4-B.
Exhibit 4-B-5* Form of Fifth Supplemental Indenture dated as of September
1, 1990 between Ford Motor Credit Company and Manufacturers
Hanover Trust Company supplementing the Indenture designated
as Exhibit 4-B.
Exhibit 4-C* Indenture dated as of November 1, 1987 between Ford Motor
Credit Company and Continental Bank, National Association
relating to Debt Securities.
Exhibit 4-D* Indenture dated as of August 1, 1994 between Ford Motor
Credit Company and First Fidelity Bank, National
Association, relating to Debt Securities.
Exhibit 10-J* Copy of Amended and Restated Profit Maintenance Agreement
dated as of July 1, 1993 between Ford Motor Credit Company
and Ford Motor Company.
Exhibit 10-X* Copy of Agreement dated as of February 1, 1980 between Ford
Motor Company and Ford Motor Credit Company.
Exhibit 12-A Calculation of Ratio of Earnings to Fixed Charges of Ford
Credit.
Exhibit 12-B Calculation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends of Ford.
Exhibit 23 Consent of Independent Accountants.
Exhibit 24 Powers of Attorney.
- -------------------------
* Previously filed.