UNITED STATES
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 (No Fee Required)
For the fiscal year ended December 31, 1996
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 1-3950
FORD MOTOR COMPANY
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(Exact name of Registrant as specified in its charter)
Delaware 38-0549190
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(State of incorporation) (I.R.S. employer identification no.)
The American Road, Dearborn, Michigan 48121
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(Address of principal executive offices) (Zip code)
313-322-3000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered (a)
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Common Stock, par value $1.00 per share New York Stock Exchange
Pacific Coast Stock Exchange
Depositary Shares, each representing New York Stock Exchange
1/1,000 of a share of Series A Cumulative
Convertible Preferred Stock, as described
below
Depositary Shares, each representing New York Stock Exchange
1/2,000 of a share of Series B Cumulative
Preferred Stock, as described below
_______________
(a) In addition, shares of Common Stock of the Registrant are listed on
certain stock exchanges in the United Kingdom and Continental Europe.
[Cover page 1 of 2 pages]
Securities registered pursuant to Section 12(g) of the Act:
Series A Cumulative Convertible Preferred Stock, par value $1.00 per share, with
an annual dividend rate of $4,200 per share and a liquidation preference of
$50,000 per share.
Series B Cumulative Preferred Stock, par value $1.00 per share, with an annual
dividend rate of $4,125 per share and a liquidation preference of $50,000 per
share.
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
----
As of February 28, 1997, the Registrant had outstanding 1,118,857,214 shares of
Common Stock and 70,852,076 shares of Class B Stock. Based on the New York Stock
Exchange Composite Transaction closing price of the Common Stock on that date
($32-7/8 a share), the aggregate market value of such Common Stock was
$36,782,430,910.20. Although there is no quoted market for the Registrant's
Class B Stock, shares of Class B Stock may be converted at any time into an
equal number of shares of Common Stock for the purpose of effecting the sale or
other disposition of such shares of Common Stock. The shares of Common Stock and
Class B Stock outstanding at February 28, 1997 included shares owned by persons
who may be deemed to be "affiliates" of the Registrant. The Registrant does not
believe, however, that any such person should be considered to be an affiliate.
For information concerning ownership of outstanding Common Stock and Class B
Stock, see the Proxy Statement for the Registrant's Annual Meeting of
Stockholders to be held on May 8, 1997 (the "Proxy Statement"), which is
incorporated by reference under various Items of this Report.
Document Incorporated by Reference*
----------------------------------
Document Where Incorporated
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Proxy Statement Part III (Items 10,
11, 12 and 13)
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* As stated under various Items of this Report, only certain specified
portions of such document are incorporated by reference herein.
[Cover page 2 of 2 pages]
PART I
Item 1. Business
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Ford Motor Company (referred to herein as "Ford", the "Company" or the
"Registrant") 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 also is one of the largest providers of financial services
worldwide.
General
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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
following subsidiaries: Ford Motor Credit Company ("Ford Credit"), Associates
First Capital Corporation ("The Associates") and The Hertz Corporation
("Hertz").
See Note 17 (pages FS-31 and FS-32) of the Notes to Financial Statements
and Item 6. "Selected Financial Data" for information relating to revenue,
operating income/(loss) and assets attributable to Ford's industry segments.
Also see Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for information with respect to revenue, net income
and other matters.
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.
Item 1. Business (Continued)
----------------------------
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 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 with relatively small changes in unit volume.
United States
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Sales Data. The following table shows U.S. industry demand for the years
indicated:
-2-
Item 1. Business (Continued)
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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 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:
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*As announced on February 19, 1997, Ford and Freightliner Corporation
("Freightliner") have signed a letter of intent relating to the purchase by
Freightliner of technology, unique tooling and assembly equipment for Ford's
heavy trucks. The potential sale covers the United States, Canadian, Mexican
and Australian markets. The transaction is subject to the signing of definitive
agreements and regulatory approvals.
As shown in the tables above, since 1992 there has been a significant 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 middle, large and luxury segments for Ford and increased sales of
trucks in the compact bus/van/utility (e.g., Windstar and Explorer/Mountaineer),
full-size bus/van/utility (e.g., Expedition) and full-size pickup (e.g.,
F-Series) segments for both the industry and Ford.
-3-
Item 1. Business (Continued)
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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:
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* 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.
-4-
Item 1. Business (Continued)
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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 24% in 1992
to 22.4% in 1996. This trend reflects in part the effects of the strengthening
prior to 1996 of the Japanese yen on the prices of vehicles produced by the
Japanese manufacturers, the overall market shift from cars to trucks and
improvements in the vehicles produced by U.S. manufacturers. Recently, however,
the Japanese yen has weakened against the dollar, which could result in
increased sales of Japanese vehicles in the United States.
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 1996.
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 1996, 1995, and 1994 were 8.0%, 8.2%, and 7.8%,
respectively. "Marketing costs" include (i) marketing incentives on vehicles
such as retail rebates and costs for special financing rates, (ii) reserves for
residual guaranties 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:
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. In recent years, due to competitive pressures, vehicle
manufacturers have both expanded the coverage and extended the terms of
warranties on vehicles sold in the United States. Ford presently provides
warranty coverage for defects in factory-supplied materials and workmanship on
all vehicles 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.
Different warranty coverage is provided 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
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.
-5-
Item 1. Business (Continued)
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Europe
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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
considerably by country.) This competitive environment is expected to intensify
further as Japanese manufacturers, which together had a European car market
share of 10.8% for 1996, 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 1996 the European automotive industry
had excess capacity of approximately 6 million units (based on a comparison of
European domestic demand and capacity).
In 1996, European car industry sales were 12.6 million units, up 6% from
1995 levels. Truck sales were 1.7 million units, up 6% from 1995 levels. Ford's
European car share for 1996 was 11.6%, down 2/10 of a point from 1995, and its
European truck share for 1996 was 13.1%, down 1.4 points from 1995.
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 1996 compared with 1995,
total industry sales were up 4% in Great Britain and up 5% in Germany.
Other Foreign Markets
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Mexico and Canada. Mexico and Canada also are important markets for Ford.
Generally, industry conditions in Canada closely follow conditions in the U.S.
market. In 1996, industry sales of cars and trucks in Canada were 1.2 million
units, up 3.2% from 1995 levels. 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, the
Mexican economy began its recovery and industry volume was 331,000 units, up 42%
from 1995 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 were 1.7 million units in
Brazil in 1996, up 4% from 1995, and 376,000 units in Argentina in 1996, up 15%
from 1995. Prior to 1995, the Company operated in this region through
Autolatina, a joint venture with Volkswagen AG. This joint venture was dissolved
in the fourth quarter of 1995, and Ford is in the process of reestablishing
operations in Brazil and Argentina.
Asia Pacific. In the Asia Pacific region, Australia, Taiwan and Japan are
the principal markets for Ford products with industry volumes in 1996 of
650,000, 471,000 and 7.1 million units, respectively. In 1996, Ford was the
market share leader in Australia with a 20.3% combined car and truck market
share. In Taiwan (where sales of built-up vehicles manufactured in Japan are
prohibited), Ford had the second highest market share with a combined car and
truck market share in 1996 of 17.5%. 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. In May 1996,
Ford increased its ownership interest in Mazda Motor Corporation to 33.4%, as
further discussed in Note 15 (page FS-29) of the Notes to Financial Statements
included with this Report.
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 1996 industry volume in South Africa was 393,000 units, up 4%
from 1995 levels.
-6-
Item 1. Business (Continued)
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Financial Services Operations
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Reorganization
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Beginning in late 1995 and continuing through 1996, Ford reorganized its
Financial Services operations in order to align more closely legal ownership of
the Financial Services affiliates with management responsibility for such
affiliates. As a result of the reorganization, Ford Credit and The Associates
became subsidiaries of a newly formed subsidiary called Ford FSG, Inc.
("FFSGI"). Also, The Associates completed an initial public offering of its
common stock representing a 19.3% economic interest in The Associates. In
addition, USL Capital Corporation ("USL Capital"), a subsidiary engaged in
commercial financing activities, completed the sale of substantially all of its
assets, as well as certain assets owned by Ford Credit and managed by USL
Capital.
Ford Motor Credit Company
-------------------------
Ford Credit is an indirect wholly owned subsidiary of Ford. Ford Credit and
its subsidiaries provide wholesale financing and capital loans throughout the
world to Ford retail dealerships and associated non-Ford dealerships, 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 and its
subsidiaries 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 March 1996, an affiliate of Ford contributed The American Road Insurance
Company ("American Road") to Ford Credit. The operations of American Road and
its subsidiaries are conducted in the United States and Canada and consist 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. Also, in December
1996, FFSGI contributed a majority interest (78%) in Ford Credit Europe plc
("Ford Credit Europe") to Ford Credit. Substantially all of the minority
interest in Ford Credit Europe continues to be beneficially owned by Ford. 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. The
financial information presented below relating to Ford Credit includes the
results of Ford Credit Europe for all dates and periods for which the
information is provided.
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,
respectively, during years indicated:
-7-
Item 1. Business (Continued)
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Ford Credit's finance receivables and investments in operating leases were
as follows at the dates indicated (in millions):
Installments on finance receivables, including interest, past-due 60 days
or more and the aggregate receivable balances related to such past-due
installments were as follows at the dates indicated (in millions):
The following table sets forth information concerning Ford Credit's credit
loss experience with respect to the various categories of financing during the
years indicated (dollar amounts in millions):
-8-
Item 1. Business (Continued)
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An analysis of Ford Credit's allowance for credit losses on finance
receivables and operating leases is as follows for the years indicated (in
millions):
Ford Credit and Ford Credit Europe rely heavily on their ability to raise
substantial amounts of funds. These funds are obtained primarily by sales of
commercial paper, the issuance of term debt and, in the case of Ford Credit
Europe, 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 and dividend payments,
interest supplements and other support from Ford for vehicles financed and
leased by Ford Credit or Ford Credit Europe under Ford-sponsored special
financing or leasing programs. Funds can also be affected by the timing of
payments for the financing of dealers' wholesale inventories and for income
taxes.
The ability of Ford Credit and Ford Credit Europe to obtain funds is
affected by their credit ratings, which are closely related to the financial
condition of and the outlook for Ford, and the nature and availability of
support facilities, such as revolving credit agreements and receivables sales
facilities. The long-term senior debt of each of Ford, Ford Credit and Ford
Credit Europe is rated "A1" and "A+" and the commercial paper of each of Ford
Credit and Ford Credit Europe is rated "Prime-1" and "A-1" by Moody's Investors
Service and Standard & Poor's Ratings Group, respectively.
Ford and Ford Credit are parties to a profit maintenance agreement which
provides for payments by Ford to the extent required to maintain Ford Credit's
earnings at specified minimum levels. In addition, Ford and Ford Credit Europe
are parties to a support agreement which requires Ford to retain a certain
direct or indirect ownership interest in Ford Credit Europe and to make (or
cause Ford Credit to make) payments to the extent required to maintain Ford
Credit Europe's net worth at specified minimum levels. No payments were required
under either of these agreements during the period 1988 through 1996.
Associates First Capital Corporation
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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. The
Associates' consumer finance operations consist of a variety of specialized
consumer financing products and services including home equity lending, personal
installment lending, retail sales financing and credit cards. The commercial
operations primarily provide retail financing, leasing and wholesale financing
for heavy-duty and medium-duty trucks and truck trailers, construction, material
handling and other industrial equipment and manufactured housing. The Associates
also provides a number of other products and services, including credit-related
and non-credit-related insurance to its consumer and commercial customers as
well as certain fee-based services such as auto fleet leasing and management,
small business administration lending, relocation services and auto club and
roadside assistance services. As mentioned above, in 1996 The Associates
completed an initial public offering of its common stock representing a 19.3%
economic interest in The Associates.
-9-
Item 1. Business (Continued)
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The Associates' net finance receivables were as follows at the dates
indicated (in millions):
The following table sets forth information as of the dates shown regarding
The Associates' net credit losses, allowance for losses and contractual
delinquency.
An analysis of The Associates' allowance for losses on finance
receivables is as follows for the years indicated (in millions):
-10-
Item 1. Business (Continued)
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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 January 1997, Ford announced that it was reviewing strategic options
regarding Hertz, including a partial sale. Consistent with this announcement, on
February 28, 1997, Hertz filed a registration statement with the Securities and
Exchange Commission relating to a proposed public offering of less than 20% of
Hertz' common stock.
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, each passenger car
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. In October 1996, the EPA issued
regulations that changed the test procedures for measuring motor vehicle
emissions. If adequate fuel economy adjustment factors are not proposed and
adopted, these regulations may require costly measures to increase fuel economy.
The Act also requires production of new vehicles capable of operating on
clean alternative fuels under a pilot test program begun in California in 1996.
Under this pilot program, each manufacturer is required to sell a certain number
of alternative fuel vehicles each model year. Since California's reformulated
(i.e., cleaner burning) gasoline is an alternative fuel under the Act, most
manufacturers have complied with this requirement by selling vehicles certified
to California standards.
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 March 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
-11-
Item 1. Business (Continued)
----------------------------
beginning with the 2001 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
nonelectric vehicles or to offer substantial discounts on electric vehicles,
selling them well below cost, while increasing the price on nonelectric
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 form 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. On
March 11, 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
has been adopted in New York and Massachusetts and is currently in effect for
model years 1996 and beyond. In addition, these two states have adopted ZEV
mandates beginning in model year 1998. Connecticut has adopted the California
program beginning in 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, 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 triggered.
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.
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.
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. European standards are
generally less stringent than comparable U.S. standards. 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 draft directive provides that prior to December 31, 1998 a technical
feasibility and cost-effectiveness study will be conducted to review appropriate
mandatory standards for 2005.
-12-
Item 1. Business (Continued)
----------------------------
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") prohibits the sale in the United States of any new motor
vehicle or item of motor vehicle equipment that does not conform to motor
vehicle safety standards established by the National Highway Traffic Safety
Administration (the "Safety Administration"). Compliance with 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. The Safety
Administration can order recalls of vehicles and equipment that it finds do not
conform to safety standards. A manufacturer is also obligated to recall its
vehicles if it determines that they contain a safety defect. There currently are
pending before the Safety Administration a number of investigations relating to
alleged safety defects or noncompliance with safety standards in vehicles built,
imported or sold by Ford. The cost of recall programs to remedy safety defects
or noncompliance, should any be determined to exist as a result of such
investigations, could be substantial.
Recently, the Safety Administration adopted a final rule that permits
vehicle manufacturers to reduce the inflation power in air bags in future
models. This final rule will allow Ford and other manufacturers to utilize
designs intended to reduce the risk of air bag deployment related injuries.
The Safety Administration is also considering proposals relating to air bag
deactivation and so-called "smart air bags", including air bags that
automatically adjust their inflation to the size or position of the occupant.
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.
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 for model years 1996 through 1998.
Ford expects to be able to comply with the foregoing CAFE standards, in
some cases using credits from prior or succeeding years. However, an increase in
demand for larger vehicles and 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 a July 1996 meeting of the
parties to the United Nations Climate Change Convention, the United States
indicated its conceptual support for amending the agreement among the parties to
incorporate binding emission reduction levels. If the CCAP 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.
-13-
Item 1. Business (Continued)
----------------------------
Foreign Requirements. In June 1996, the European Union Council of
Environmental Ministers affirmed as a medium-term objective an average of
CO2-emission value for new cars of 120 grams per kilometer. Recognizing that
this may not be achievable by 2005, the Council directed the European Commission
to consider intermediate objectives for 2005 and extension of the 120 grams per
kilometers target until 2010. The European Parliament has requested the
Commission to consider proposals to reduce the average CO2 emissions of new cars
to 90 grams per kilometer by 2005. If adopted, certain of the proposals being
considered could require costly actions that could have substantial adverse
effects on Ford's sales volumes and profits in Europe.
In March 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.
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 for and
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
-14-
Item 1. Business (Continued)
----------------------------
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 is currently studying proposals to introduce an
obligation for motor vehicle manufacturers to take back end-of-life vehicles on
a cost-free basis, 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, and to ban the use of certain substances in vehicles. 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 have 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.
Pollution Control Costs - During the period 1997 through 2001, Ford expects
that approximately $700 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 1997 and
$85 million will be spent in 1998.
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.
-15-
Item 1. Business (Continued)
----------------------------
Employment Data
---------------
Average employment of Ford's Automotive and Financial Services
operations by geographic area was as follows for the years indicated:
In 1996, average Ford employment, excluding operations in Argentina and
Brazil, increased 1.6 percent reflecting primarily growth in the Company's
Financial Services operations.
In 1996, following the dissolution of Autolatina, an unconsolidated joint
venture, Ford re-established wholly owned operations in Argentina and
Brazil. In prior years, Autolatina employees were not included in Ford worldwide
employment statistics.
For further information regarding employment statistics of Ford, see Item
6. "Selected Financial Data". For information concerning employee retirement
benefits, see Note 8 of Notes to Financial Statements.
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 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.
-16-
Item 1. Business (Continued)
----------------------------
Research and Development
------------------------
Ford and certain of its subsidiaries have staffs of professional employees
whose activities are directed primarily to the improvement of the performance
(including fuel efficiency), safety and comfort of the products of those
companies and to the development of new products, and also have staffs of
scientists engaged in basic research. Extensive engineering, research and design
facilities are maintained for these purposes. Principal among them are the
engineering, research and design centers of Ford at Dearborn, Michigan; of Ford
Motor Company, Limited at Dunton, England; and of Ford Werke AG at Merkenich,
Germany.
In 1996, 1995 and 1994, $6.8 billion, $6.6 billion and $5.8 billion,
respectively, were charged to income of Ford and its consolidated subsidiaries
for Ford-sponsored research and development activities relating to the
development of new products and services and the improvement of existing
products and services. The increase from 1995 to 1996 was more than explained by
the inclusion of research and development expense for new entities in Brazil and
Argentina and support for new markets. In addition, $42 million, $18 million and
$38 million were charged to income in 1996, 1995 and 1994, respectively, for
customer-sponsored research and development activities.
Item 2. Properties
-------------------
Ford's U.S. manufacturing and assembly facilities, substantially all of
which are owned by Ford and its subsidiaries, are situated in various sections
of the country and include assembly plants, engine plants, casting plants, metal
stamping plants, electronic components plants, transmission and axle plants,
glass plants and industrial equipment plants. A major portion of the
distribution centers, warehouses and sales offices is owned by Ford, with the
remainder being leased.
In addition, Ford's foreign subsidiaries maintain and operate manufacturing
plants, assembly facilities, parts distribution centers and engineering centers
outside the United States, substantially all of which are owned by such
subsidiaries.
The furniture, equipment and other physical property owned by Ford's
Financial Services operations are not material in relation to their total
assets.
-17-
Item 3. 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. See Item 1,
"Business-Governmental Standards". Included among the foregoing matters are the
following:
Product Liability Matters - 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 $797 million at December 31, 1996.
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 $1.2
billion at December 31, 1996.
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.
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
$393 million at December 31, 1996. (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 - Ford has received notices from government
environmental enforcement agencies concerning two 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.
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
-18-
Item 3. Legal Proceedings
--------------------------
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.
Other Matters - 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.
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
April 1996, the district court judge issued an order adopting the magistrate
judge's recommendation and granting Ford's motion to dismiss the case and hold
that Lemelson's patents pertaining to machine vision inspection technology are
unenforceable. The patents were held unenforceable because Lemelson engaged in
"undue delay" by taking 35 years or more to prosecute the numerous patent
applications for these patents and claimed the work of others as he saw the
technologies develop. The judge indicated that he will issue a separate opinion
supporting the order and issue a judgment in due course. In June 1996, Lemelson
filed two motions for reconsideration of the district court's order and oral
arguments were heard on February 27, 1997. If Lemelson were to prevail, Ford
could be required to pay substantial damages of an as yet indeterminate amount
and could become subject to an injunction preventing future use of any process
or product found to be covered by a valid patent.
Currently, there are six purported class action lawsuits pending against
the Company that allege defects in the paint processes used with respect to
certain vehicles manufactured by Ford. Four lawsuits are nationwide in scope,
three of which have been consolidated for pretrial proceedings in the U.S.
District Court for the Eastern District of Louisiana and one of which was filed
in federal court in Mississippi. A fifth case recently filed in Kansas federal
court is a statewide action. The Company is seeking to have the Mississippi and
Kansas cases consolidated with the other three in Louisiana. The sixth lawsuit
is pending in Texas state court and is limited to Texas purchasers of the
subject vehicles. In each pending lawsuit, the plaintiffs seek unspecified
compensatory damages, as well as punitive damages, attorneys' fees and costs.
The lawsuits appear to focus on vehicles painted with a high-build electrocoat
primer, with two of the federal court cases alleging defects with respect to
unspecified water-based primers. The vehicles in the high-build electrocoat
category are: 1984 through 1993 F-Series/Broncos, 1984 through 1989 Mustangs,
1984 through 1992 Rangers, 1984 through 1989 Bronco II's and 1984 through 1994
heavy trucks. The vehicles in the water-based primer category are unspecified
1984 through 1996 model year vehicles. In July 1996, the federal court dismissed
virtually all claims in the two cases then consolidated before it, but with
leave to amend certain claims. The plaintiffs have since amended their
complaints and Ford has filed motions to dismiss these cases. In January 1997,
the court in the Texas case granted a portion of the Company's motion for
summary judgment but certified two classes of plaintiffs for trial. Ford is
appealing the class certification order. Were plaintiffs to prevail in these
lawsuits, Ford could be required to pay substantial damages.
Nine purported class action lawsuits seeking economic damages (including
damages for diminution in value and rescission of purchase agreements) have been
brought on behalf of all Bronco II owners in the United States and are currently
pending against Ford. Each lawsuit expressly excludes personal injury claimants,
whose claims are discussed above. Several of the lawsuits seek recovery of
unspecified punitive damages. In addition, several of the lawsuits seek an order
requiring the Company to recall and retrofit these vehicles. The Federal
Judicial Panel on Multidistrict Litigation consolidated seven of these cases for
pretrial purposes in federal court in Louisiana. The other two cases remain
pending in state courts in Alabama and Texas. A tentative settlement was reached
in these matters in 1994, but was rejected by the Louisiana federal court. In
-19-
Item 3. Legal Proceedings
--------------------------
late 1996, the parties submitted a revised settlement proposal, but the
Louisiana federal court rejected that proposal in February 1997. In March 1997,
the court denied plaintiffs' motion for certification of a 49-state class,
ruling that only individualized adjudications of the merits of plaintiffs'
claims would provide a fair and efficient resolution of these matters. While the
court has denied class certification, the seven lawsuits are still pending
before it. Ford has filed summary judgment motions in these cases and plans to
file similar motions in the Alabama and Texas lawsuits.
Currently pending are thirteen purported nationwide class action lawsuits
and one purported statewide class action lawsuit covering purchasers of numerous
Ford vehicle lines, ranging in model years from 1983 to 1993, that are equipped
with an allegedly defective ignition switch. Plaintiffs claim that the ignition
switch in these vehicles has a design defect that can cause the switch to short
circuit, resulting in smoke and fire damage to the vehicle. In two of the class
actions, plaintiffs purport to represent a class of owners who have allegedly
experienced a related fire incident. 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. Thirteen of the lawsuits have been
consolidated for initial pretrial proceedings (including a class certification
determination) in federal court in New Jersey. The remaining lawsuit was pending
in state court in Texas but has been removed and conditionally transferred to
the federal court in New Jersey. If the plaintiffs in the purported class
actions were to prevail, Ford could be required to pay substantial damages.
In 1995, Ford voluntarily recalled 248,000 vehicles in Canada equipped with
the allegedly defective ignition switch. In addition, in 1996, Ford recalled an
additional 8.5 million vehicles in the U.S. and Canada. Investigations
concerning the ignition switch being conducted by the Safety Administration and
Transport Canada were closed in 1996 because the agencies were satisfied that
the prior recalls were adequate to reduce the risk of fire in the population of
vehicles using the same or similar ignition switch. The Safety Administration
and Transport Canada continue to monitor this issue.
In 1996, six purported class action lawsuits were brought on behalf of
purchasers or lessees of Ford-manufactured vehicles with distributor-mounted
thick film ignition (TFI) modules. The plaintiffs allege that vehicles with the
distributor-mounted TFI modules are defective due to a propensity to stumble,
stall or not start. The cases are currently pending in state courts in Alabama,
California, Illinois, Maryland, Tennessee and Washington. The cases pending in
Alabama and Tennessee courts have been conditionally certified as nationwide
class actions. The lawsuit in California purports to represent a state-wide
class, and the remaining three cases purport to be regional class actions. The
parties have agreed to stay proceedings in all but the California action through
the hearing on plaintiffs' motion for class certification and completion of
discovery in the California case. The plaintiffs seek pre- and post-judgment
interest, attorney fees, disgorgement of profits, compensatory damages, punitive
damages, notice to the public and the recall and retrofit of all vehicles with
the allegedly defective TFI modules. If the plaintiffs were to prevail in these
lawsuits, Ford could be required to pay substantial damages.
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.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
Not required.
-20-
Item 4A. Executive Officers of the Registrant
----------------------------------------------
The executive officers of the Registrant and their respective positions and
ages at March 15, 1997 are shown in the table below:
-21-
Item 4A. Executive Officers of the Registrant (Continued)
----------------------------------------------------------
-22-
Item 4A. Executive Officers of the Registrant (Continued)
-----------------------------------------------------------
-23-
Item 4A. Executive Officers of the Registrant (Continued)
----------------------------------------------------------
---------------
(1) Also Chairman of the Organization Review and Nominating Committee of the
Board of Directors.
(2) Also a member of the Finance Committee of the Board of Directors.
Some of the officers listed above also are members of one or more
additional committees of the Registrant that are not committees of the Board of
Directors.
All of the above officers, other than Mr. Ross, have been employed by the
Registrant or its subsidiaries in one or more capacities during the past five
years. Before joining Ford, Mr. Ross had been a partner in the New York law firm
of Davis, Polk & Wardwell since 1989.
Under the By-Laws of the Registrant the executive officers are elected by
the Board of Directors at the Annual Meeting of the Board of Directors held for
this purpose, each to hold office until his or her successor shall have been
chosen and shall have qualified or as otherwise provided in the By-Laws.
-24-
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
------------------------------------------------------------------------
The Common Stock of Ford presently is listed on the New York and Pacific
Coast Stock Exchanges in the United States and on certain stock exchanges in
Belgium, France, Germany, Switzerland and the United Kingdom.
The high and low sales prices for Ford Common Stock and the dividends paid
per share of Common and Class B Stock for each full quarterly period in the
years indicated were as follows:
As of February 28, 1997, stockholders of record of Ford included 252,137
holders of Common Stock and 108 holders of Class B Stock.
-25-
Item 6. Selected Financial Data
--------------------------------
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):
-26-
Item 6. Selected Financial Data (Continued)
-------------------------------------------
-27-
Item 6. Selected Financial Data (Continued)
-------------------------------------------
SUMMARY OF VEHICLE UNIT SALES h/
(in thousands)
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
--------------------------------------------------------------------------------
OVERVIEW
The Company's worldwide net income was $4,446 million in 1996, or $3.64 per
share of Common and Class B Stock (fully diluted), compared with $4,139 million,
or $3.33 per share (fully diluted) in 1995. Results in 1996 and 1995 included
several one-time actions (see below). Income per share in 1995 also included a
one-time reduction of $0.06 per share related to the exchange of Series B
Preferred Stock for company-obligated mandatorily redeemable preferred
securities of a subsidiary trust.
The Company's earnings in 1996 were up $307 million from 1995, reflecting
primarily improved Automotive results in North America and one-time actions and
record operating earnings in Financial Services; higher operating losses in
South America and Europe and a one-time charge for employee separation programs
were partial offsets. The Company's worldwide sales and revenues were
$147 billion in 1996, up $9.9 billion or 7% from 1995. Vehicle unit sales of
cars and trucks were 6,653,000, up 47,000 units. Stockholders' equity was $26.8
billion at December 31, 1996, compared with $24.5 billion at December 31, 1995.
In 1996, Automotive capital expenditures for new products and facilities
totaled $8.2 billion, down $467 million from 1995. Automotive cash and
marketable securities were $15.4 billion at December 31, 1996, up $3 billion
from December 31, 1995. Automotive debt at December 31, 1996 totaled $8.2
billion, up $849 million from a year ago. Automotive net cash was $7.2 billion
at December 31, 1996.
The Company has completed launches of its highest-volume products in North
America (F-Series, Taurus, Sable and Escort) and Europe (Mondeo and Fiesta).
Important new products were launched during 1996 and have received strong
customer reception, including the Expedition, Ka and Jaguar XK8.
The Company's Financial Statements and Notes to Financial Statements on
pages FS-1 through FS-33, including the Report of Independent Accountants,
should be read as an integral part of this review.
Fourth Quarter 1996
-------------------
In fourth quarter 1996, Ford earned $1,204 million, or $0.99 per share of
Common and Class B Stock (fully diluted), compared with $660 million, or $0.48
per share (fully diluted) in fourth quarter 1995. Results in fourth quarter 1996
and 1995 included several one-time actions (see below). Income per share in
fourth quarter 1995 also included a one-time reduction of $0.06 per share
related to the exchange of Series B Preferred Stock.
The Company's net income for fourth quarter 1996 and 1995 was as follows
(in millions):
Net Income/(Loss)
---------------------
Fourth Fourth
Quarter Quarter
1996 1995
------- -------
U.S. Automotive $ 628 $ 168
Automotive Outside U.S.
- Europe (88) (48)
- South America (287) (112)
- Other 137 8
------ -----
Total Automotive Outside U.S. (238) (152)
------ -----
Total Automotive 390 16
------ -----
Financial Services 814 644
------ -----
Total Company $1,204 $ 660
====== =====
Earnings for Automotive operations in the U.S. improved in fourth quarter
1996, compared with fourth quarter 1995, as a result of higher margins
(reflecting improved sales mix and cost reductions) and
-29-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
--------------------------------------------------------------------------------
higher volume (up 51,000 units), offset partially by higher product costs
and costs for employee separation programs.
Higher losses incurred by Automotive operations in Europe were more than
explained by higher costs for employee separation programs. Higher losses
incurred in South America resulted primarily from the nonrecurrence of a gain in
fourth quarter 1995 from the dissolution of the Autolatina joint venture, as
well as costs for employee separation programs; higher margins and volume were
partial offsets.
Higher earnings for Financial Services operations reflected a partial
reversal of a second quarter 1996 provision for losses on notes receivable from
Budget Rent A Car Corporation and record earnings at The Associates and Hertz,
offset partially by lower earnings at Ford Credit and the effect of the sale of
USL Capital's assets.
ONE-TIME ACTIONS
Net income in 1996 and 1995 included several one-time actions, as follows
(in millions):
-------------------
*Includes $0.06 per share reduction for exchange of Series B Preferred
Stock
See Note 15 (pages FS-28 and FS-29) of the Notes to Financial Statements for
further information on these one-time actions.
RESULTS OF OPERATIONS
The Company's net income for worldwide Automotive operations in 1996, 1995
and 1994, was as follows (in millions):
-30-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
--------------------------------------------------------------------------------
The Company's net income for worldwide Financial Services operations in
1996, 1995 and 1994, was as follows (in millions):
1996 COMPARED WITH 1995
Automotive Operations
---------------------
Earnings for Automotive operations in the U.S. were up $164 million in 1996
compared with a year ago. The increase resulted from higher margins (reflecting
improved sales mix and cost reductions), offset partially by higher product
costs and costs for employee separation programs. The after-tax return on sales
was 2.7% in 1996, up 2/10 of a point from a year ago.
The U.S. economy continued to grow at a moderate rate in 1996, with
interest rates and inflation at comparatively low levels. Car and truck industry
volumes totaled 15.5 million units in 1996, compared with 15.1 million units in
1995. The increase in industry sales was more than explained by higher truck
industry sales. Ford's U.S. car market share was 20.6%, down 3/10 of a point
from 1995. Ford's U.S. truck share was 31.1%, down 8/10 of a point from 1995.
Ford's combined U.S. car and truck share was 25.2%, down 4/10 of a point from
1995. Reduced sales of lower margin fleet vehicles account for the decline. The
Company expects car and truck industry sales in 1997 to be about equal to 1996.
Unfavorable results for Automotive operations in Europe, compared with a
year ago, reflected costs associated with launching new products, adverse
vehicle mix, higher marketing costs, and costs for employee separation programs,
offset partially by higher volume. In 1996, the European automotive industry
experienced increased competition as a result of industry overcapacity, as well
as a market shift to lower profit smaller cars. This trend is expected to
continue in 1997 and beyond. Ford is continuing to focus on cost reductions,
including vehicle cost reductions, and the rationalization of manufacturing
capacity. Its recently launched new products (the Fiesta, Ka and an updated
Mondeo) will strengthen Ford's European product offerings.
European car and truck industry volumes totaled 14.3 million units in 1996,
compared with 13.4 million units in 1995. Ford's European car market share was
11.6%, down 2/10 of a point from 1995. Ford's European truck share was 13.1%,
down 1.4 points from 1995. Ford's combined European car and truck share was
11.8%, down 4/10 of a point from 1995, reflecting primarily reduced sales of
lower margin fleet vehicles. Car and truck industry sales in 1997 are expected
to be about equal to 1996.
Higher losses in 1996 incurred by Automotive operations in South America
reflected primarily higher losses for operations in Brazil as a result of a long
and costly launch process following the dissolution of the Autolatina joint
venture with Volkswagen AG. Costs for employee separation programs, in addition
to increased competition and a market shift to smaller (Fiesta-sized) cars that
resulted in lower market share, also affected results unfavorably. The Company
is in the process of reestablishing operations in Brazil and Argentina. Losses
in Brazil are expected to continue in 1997. To improve the competitiveness of
its product offerings in Brazil, Ford will have several new products (the Ka,
Fiesta,
-31-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
-------------------------------------------------------------------------------
Escort and Ranger) available for sale throughout most of 1997. In
addition, Ford is focusing on further facility rationalization in the region.
Comparison of Automotive Sales and Total Costs and Expenses
-----------------------------------------------------------
Automotive sales totaled $118 billion in 1996, up 6.8% from 1995. Sales in
the U.S. were $76 billion in 1996 compared with $73.9 billion in 1995, and sales
outside the U.S. were $42 billion in 1996 compared with $36.6 billion in 1995.
Total costs and expenses were $115.5 billion in 1996, up 7.7% from 1995.
Approximately half of the increase in sales and total costs and expenses was
attributable to the inclusion in the Company's consolidated results of
operations, beginning in 1996, of the sales and total costs and expenses for new
entities in Brazil and Argentina resulting from the dissolution of the
Autolatina joint venture. Amounts for 1995 exclude these new entities. The
balance of the increase in sales and total costs and expenses was attributable
primarily to the effects of higher unit volume and a richer sales mix, as well
as costs for employee separation programs.
Research and development expense totaled $6,821 million in 1996, up 3% from
1995. The increase was more than explained by the inclusion of research and
development expense for new entities in Brazil and Argentina and support for new
markets.
Financial Services Operations
-----------------------------
Earnings for Financial Services operations were up $708 million in 1996,
compared with a year ago, including $512 million from the one-time actions
described above. Improvements from operations totaled $196 million.
Ford Credit's earnings in 1996 include a majority ownership (78%) of Ford
Credit Europe, and results for 1995 and 1994 have been restated to reflect this
ownership change. Lower consolidated net income at Ford Credit in 1996, compared
with 1995, resulted primarily from the absence of equity in the net income of
Ford Holdings, Inc. ("Ford Holdings") (reflecting the repurchase in first
quarter 1996 by Ford Holdings of substantially all of the shares of Ford
Holdings' stock owned by Ford Credit), higher credit losses and higher loss
reserve requirements; higher levels of earning assets and improved net interest
margins were partial offsets. Ford Holdings is a holding company which owns
primarily USL Capital and, until December 1995, also owned The Associates.
Depreciation costs increased as a result of continued growth in operating
leases; the related lease revenues more than offset the increased depreciation.
Credit losses as a percent of average net finance receivables (including net
investment in operating leases) were 0.78% in 1996, compared with 0.51% in 1995.
Ford Credit believes the higher levels of credit losses may continue in 1997.
Record earnings at The Associates reflected primarily higher levels of
earning assets, lower operating costs and improved net interest margins, offset
partially by higher credit losses. Credit losses as a percent of average net
finance receivables were 2.03% in 1996, compared with 1.70% in 1995. The
Associates also believes the higher levels of credit losses may continue.
Record earnings at Hertz reflected primarily higher volume in car rental
and equipment rental operations.
HISTORICAL REFERENCE: 1995 COMPARED WITH 1994
The Company's worldwide net income was $4,139 million in 1995, or $3.33 per
share of Common and Class B Stock (fully diluted), compared with $5,308 million,
or $4.44 per share (fully diluted) in 1994. The Company's worldwide sales and
revenues were $137.1 billion in 1995, up $8.7 billion, or 7% from
-32-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
-------------------------------------------------------------------------------
1994. Vehicle unit sales of cars and trucks were 6,606,000, down 247,000
units, or 3.6%. Stockholders' equity was $24.5 billion at December 31, 1995, up
$2.9 billion from December 31, 1994.
The Company's earnings in 1995 were down from 1994, a record year, and
reflected the effects of lower volumes in the U.S., costs associated with
introducing new products and lower earnings at operations outside the U.S.,
primarily in South America. Results in 1995 included costs for employee
separation programs ($146 million). Earnings from Financial Services operations
were up $688 million compared with 1994. The improvement reflected record
earnings at Ford Credit, The Associates, USL Capital and Hertz and the
nonrecurrence of a $440 million charge to net income in 1994 for the disposition
of First Nationwide Bank.
Automotive Operations
---------------------
Earnings for Automotive operations in the U.S. declined in 1995, compared
with 1994, primarily as a result of lower unit volume (reflecting nonrecurrence
of a dealer inventory increase in 1994 and lower industry sales) and costs
associated with introducing new products (mainly the all-new Taurus, Sable and
F-150 pickup truck). U.S. Automotive after-tax return on sales was 2.5% in 1995,
down 1.6 points from a year ago.
The U.S. economy grew at a moderate rate in 1995 with interest rates and
inflation at comparatively low levels. Car and truck industry volumes, however,
decreased from 15.4 million units in 1994 to 15.1 million units in 1995. Most of
the decrease in industry sales was attributable to cars. Ford's share of the
U.S. car market was 20.9%, down 9/10 of a point from 1994. Ford's U.S. truck
share was 31.9%, up 1.8 points from 1994. Ford's combined U.S. car and truck
share was 25.6%, up 4/10 of a point from 1994. The increase in share reflected
primarily higher sales of the Explorer and F-Series trucks, offset partially by
lower sales of specialty vehicles and lower availability of the Taurus and Sable
due to model changeover.
Lower results for Automotive operations in Europe reflected primarily costs
associated with introducing new products (the all-new Galaxy minivan and Fiesta)
and the unfavorable effect of changes in foreign currency exchange rates.
Car and truck industry sales in Europe were 13.4 million units in 1995,
compared with 13.3 million units in 1994. Ford's share of the European car
market was 11.8%, equal to a year ago. Ford's European truck share was 14.5%, up
1/10 of a point from 1994. Ford's combined European car and truck share was
12.2%, up 1/10 of a point from 1994.
Outside the U.S. and Europe, Ford earned $97 million in 1995, compared with
$783 million in 1994. About half of the decrease reflected primarily unfavorable
results for operations in Brazil, where higher import duties and a market shift
to small cars resulted in excess dealer inventories and higher marketing costs.
These factors were offset partially in 1995 by a one-time gain from the
dissolution of Ford's Autolatina joint venture. The decline in earnings outside
the U.S. and Europe also reflected the nonrecurrence of a one-time favorable
effect for devaluation of the Mexican Peso in 1994 and lower results in
Argentina.
During fourth quarter 1995, the Company's Autolatina joint venture in
Brazil and Argentina with Volkswagen AG was dissolved. The dissolution resulted
in a gain of $230 million, primarily from a one-time cash compensation payment
to Ford.
-33-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
-------------------------------------------------------------------------------
Financial Services Operations
-----------------------------
The increase in Ford Credit's consolidated net income in 1995, compared
with 1994, resulted primarily from higher levels of earning assets, favorable
cost performance and lower taxes, offset partially by lower net interest margins
and higher credit losses. Depreciation costs increased as a result of continued
growth in operating leases; the related lease revenues more than offset the
increased depreciation. Ford Credit's results for 1995 included $255 million
from equity in the net income of affiliated companies, primarily Ford Holdings,
compared with $233 million a year ago.
Record earnings at The Associates reflected primarily higher levels of
earning assets and improved net interest margins.
Record earnings at Hertz reflected primarily higher volume in equipment
rentals, offset partially by increased depreciation and borrowing costs.
LIQUIDITY AND CAPITAL RESOURCES
Automotive Operations
---------------------
Automotive cash and marketable securities were $15.4 billion at December
31, 1996, up $3 billion from December 31, 1995. The Company paid $1.8 billion in
cash dividends on its Common Stock, Class B Stock and Preferred Stock during
1996.
Automotive capital expenditures were $8.2 billion in 1996, down $467
million from 1995. Automotive capital expenditures as a percentage of sales was
7% in 1996, down 9/10 of a point from 1995. During the next several years,
Ford's spending for product change is expected to be at similar or higher
levels; however, as a percentage of sales, spending is expected to be at similar
or lower levels.
Automotive debt at December 31, 1996 totaled $8.2 billion, which was 23% of
total capitalization (stockholders' equity and Automotive debt), compared with
$7.3 billion, or 22% of total capitalization, at December 31, 1995.
For a discussion of Ford's support facilities at December 31, 1996, see
Note 9 (page FS-23) of the Notes to Financial Statements.
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 facilities.
Ford Credit's outstanding commercial paper totaled $38 billion at
December 31, 1996 with an average remaining maturity of 34 days. Support
facilities represent additional sources of funds, if required.
For a discussion of support facilities of Ford Credit and other Financial
Services subsidiaries at December 31, 1996, see Note 9 (page FS-23) of the Notes
to Financial Statements.
-34-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
-------------------------------------------------------------------------------
Derivative Financial Instruments
--------------------------------
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.
Financial Services operations issue debt and other payables with various
maturity and interest rate structures 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.
These financial exposures are monitored and managed by the Company as an
integral part of the Company's overall risk management program, which recognizes
the unpredictability of financial markets and seeks to reduce the potentially
adverse effect on the Company'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. For more information on these financial exposures, see
Note 1 (page FS-9) and Note 14 (page FS-27) of the Notes to Financial
Statements.
YEAR 2000 DATE CONVERSION
The Company has established a central office to coordinate the
identification, evaluation and implementation of changes to computer systems and
applications necessary to achieve a year 2000 date conversion with no effect on
customers or disruption to business operations. These actions are necessary to
ensure that the systems and applications will recognize and process the year
2000 and beyond. Major areas of potential business impact have been identified
and are being dimensioned, and initial conversion efforts are underway. The
Company also is communicating with suppliers, dealers, financial institutions
and others with which it does business to coordinate year 2000 conversion. The
total cost of compliance and its effect on the Company's future results of
operations is being determined as part of the detailed conversion planning.
Item 8. Financial Statements and Supplementary Data
----------------------------------------------------
The Financial Statements and Notes to Financial Statements of the
Registrant and the Report of Independent Accountants that are filed as part of
this Report are listed under Item 14. "Exhibits, Financial Statement Schedules,
and Reports on Form 8-K" and are set forth on pages FS-1 through FS-33
immediately following the signature pages of this Report.
Selected quarterly financial data of Ford and its consolidated subsidiaries
for 1996 and 1995 are set forth in Note 18 of the Notes to Financial Statements.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
-----------------------------------------------------------------------
Not required.
-35-
PART III
Item 10. Directors and Executive Officers of the Registrant
------------------------------------------------------------
The information called for by Item 10 is incorporated by reference from the
information under the captions "Election of Directors" and "Management Stock
Ownership" in the Proxy Statement, except that the information called for by
Item 10 with respect to executive officers of the Registrant appears as Item 4A
under Part I of this Report.
Item 11. Executive Compensation
--------------------------------
The information called for by Item 11 is incorporated by reference from the
information under the following captions in the Proxy Statement: "Compensation
of Directors", "Compensation and Option Committee Report on Executive
Compensation", "Compensation of Executive Officers", "Stock Options",
"Contingent Stock Rights and Restricted Stock Units", "Stock Performance Graphs"
and "Retirement Plans".
Item 12. Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------
The information called for by Item 12 is incorporated by reference from the
information under the caption "Management Stock Ownership" in the Proxy
Statement.
Item 13. Certain Relationships and Related Transactions
--------------------------------------------------------
The information called for by Item 13 is incorporated by reference from the
information under the caption "Certain Relationships and Related Transactions"
in the Proxy Statement.
-36-
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
--------------------------------------------------------------------------
(a) 1. Financial Statements - Ford Motor Company and Subsidiaries
Consolidated Statement of Income for the years ended December 31, 1996,
1995 and 1994.
Consolidated Balance Sheet at December 31, 1996 and 1995.
Consolidated Statement of Cash Flows for the years ended December 31,
1996, 1995 and 1994.
Consolidated Statement of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994.
Notes to Financial Statements
Report of Independent Accountants
The Financial Statements, the Notes to Financial Statements and the Report
of Independent Accountants listed above are filed as part of this Report and are
set forth on pages FS-1 through FS-33 immediately following the signatures pages
of this Report.
(a) 2. Financial Statement Schedules
Designation Description
----------- -----------
Supplemental
Schedule Condensed Financial Information of Subsidiary
The Financial Statement Schedule listed above is filed as part of this
Report and is set forth on page FSS-1 immediately following page FS-33. The
schedules not filed are omitted because the information required to be contained
therein is disclosed elsewhere in the Financial Statements or the amounts
involved are not sufficient to require submission.
-37-
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
--------------------------------------------------------------------------
(a) 3. Exhibits
-38-
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
--------------------------------------------------------------------------
-39-
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
--------------------------------------------------------------------------
-40-
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
--------------------------------------------------------------------------
-41-
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
--------------------------------------------------------------------------
Instruments defining the rights of holders of certain issues of long-term
debt of the Registrant and of certain consolidated subsidiaries and of any
unconsolidated subsidiary, for which financial statements are required to be
filed with this Report, 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 and its subsidiaries on a consolidated basis.
The Registrant agrees to furnish a copy of each of such instruments to the
Commission upon request.
(b) Reports on Form 8-K
During the quarter ended December 31, 1996, the Registrant filed the
following Current Reports on Form 8-K:
1. Current Report on Form 8-K dated September 30, 1996 (filed October 2,
1996) concerning the new collective bargaining agreement with the UAW.
2. Current Report on Form 8-K dated October 10, 1996 concerning formation
of the new Automotive Products Operations.
3. Current Report on Form 8-K dated October 16, 1996 regarding the
consolidated results of operations and financial condition of the
Registrant and its subsidiaries for the three and nine-month periods
ended or at September 30, 1996.
-42-
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 COMPANY
By: John M. Devine*
-----------------------
(John M. Devine)
Executive Vice President and
Chief Financial Officer
Date: March 18, 1997
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 on the date indicated.
-43-
-44-
FS-1
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.
FS-2
FS-3
FS-4
FS-5
FS-6
Ford Motor Company and Subsidiaries
Notes to Financial Statements
NOTE 1. Accounting Policies
----------------------------
Principles of Consolidation
---------------------------
The consolidated financial statements include all significant majority-owned
subsidiaries and reflect the operating results, assets, liabilities and cash
flows for two business segments: Automotive and Financial Services. The assets
and liabilities of the Automotive segment are classified as current or
noncurrent, and those of the Financial Services segment are unclassified.
Affiliates that are 20% to 50% owned, principally Mazda Motor Corporation and
AutoAlliance International Inc., and subsidiaries where control is expected to
be temporary, principally investments in certain dealerships, are accounted for
on an equity basis. For purposes of Notes to Financial Statements,
"Ford" or "the company" means Ford Motor Company and its majority-owned
consolidated subsidiaries unless the context requires otherwise. Certain amounts
for prior periods have been reclassified to conform with 1996 presentations.
Automotive revenues and costs for 1996 include new entities in Brazil and
Argentina resulting from the dissolution of Autolatina; amounts for 1995 and
1994 exclude these entities (Note 15).
Use of estimates and assumptions 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 those estimates
and assumptions.
Nature of Operations
--------------------
The company operates in two principal business segments. The Automotive segment
consists of the design, manufacture, assembly and sale of cars, trucks and
related parts and accessories. The Financial Services segment consists primarily
of financing operations, vehicle and equipment leasing and rental operations,
and insurance operations.
Intersegment transactions represent principally transactions occurring in the
ordinary course of business, borrowings and related transactions between
entities in the Financial Services and Automotive segments, and interest and
other support under special vehicle financing programs. These arrangements are
reflected in the respective business segments.
Revenue Recognition - Automotive
--------------------------------
Sales are recorded by the company when products are shipped to dealers, except
as described below. Estimated costs for approved sales incentive programs
normally are recognized as sales reductions at the time of revenue recognition.
Estimated costs for sales incentive programs approved subsequent to the time
that related sales were recorded are recognized when the programs are approved.
Beginning December 1, 1995, sales through dealers to certain daily rental
companies where the daily rental company has an option to require Ford to
repurchase vehicles, subject to certain conditions, are recognized over the
period of daily rental service in a manner similar to lease accounting. This
change in accounting principle was made in accordance with the Emerging Issues
Task Force consensus on Issue 95-1, "Revenue Recognition on Sales with a
Guaranteed Minimum Residual Value." Ford elected to recognize this change in
accounting principle on a prospective basis; the effect on the company's
consolidated results of operations was not material. Previously, the company
recognized revenue for these vehicles when shipped. The carrying value of these
vehicles, included in other current assets, was $1,803 million at December 31,
1996.
FS-7
NOTE 1. Accounting Policies (continued)
----------------------------
Revenue Recognition - Financial Services
----------------------------------------
Revenue from finance receivables is recognized over the term of the receivable
using the interest method. Certain loan origination costs are deferred and
amortized over the term of the related receivable as a reduction in financing
revenue. Revenue from operating leases is recognized as scheduled payments
become due. Agreements between Automotive operations and certain Financial
Services operations provide for interest supplements and other support costs to
be paid by Automotive operations on certain financing and leasing transactions.
Financial Services operations recognize this revenue in income over the period
that the related receivables and leases are outstanding; the estimated costs of
interest supplements and other support costs are recorded as sales incentives by
Automotive operations.
Other Costs
-----------
Advertising and sales promotion costs are expensed as incurred. Advertising
costs were $2,155 million in 1996, $2,024 million in 1995 and $1,823 million in
1994.
Estimated costs related to product warranty are accrued at the time of sale.
Research and development costs are expensed as incurred and were $6,821 million
in 1996, $6,624 million in 1995 and $5,811 million in 1994. The increase from
1995 to 1996 was more than explained by the inclusion of research and
development expense for new entities in Brazil and Argentina and support for
new markets.
Income Per Share of Common and Class B Stock
--------------------------------------------
Income per share of Common and Class B Stock is calculated by dividing the
income attributable to Common and Class B Stock by the average number of shares
of Common and Class B Stock outstanding during the applicable period.
The company has outstanding securities, primarily Series A Preferred Stock, that
could be converted to Common Stock. Other obligations, such as stock options,
are considered to be common stock equivalents. The calculation of income per
share of Common and Class B Stock assuming full dilution takes into account the
effect of these convertible securities and common stock equivalents when the
effect is material and dilutive.
Income attributable to Common and Class B Stock was as follows (in millions):
- - - - -
* Represents a one-time reduction of $0.06 per share of Common
and Class B Stock to reflect the excess of the fair value of
company-obligated mandatorily redeemable preferred securities
of a subsidiary trust at date of issuance over the carrying
amount of exchanged Series B Preferred Stock
FS-8
NOTE 1. Accounting Policies (continued)
----------------------------
Derivative Financial Instruments
--------------------------------
Ford has operations in over 30 countries and sells vehicles in over 200 markets,
and is exposed to a variety of market risks, including the effects of changes in
foreign currency exchange rates, interest rates and commodity prices. These
financial exposures are monitored and managed by the company as an integral part
of the company's overall risk management program, which recognizes the
unpredictability of financial markets and seeks to reduce the potentially
adverse effect on the company's results. The company uses derivative financial
instruments to manage the exposures to fluctuations in exchange rates, interest
rates and commodity prices. All derivative financial instruments are classified
as "held for purposes other than trading"; company policy specifically prohibits
the use of leveraged derivatives or use of any derivatives for speculative
purposes.
Ford's primary foreign currency exposures, in terms of net corporate exposure,
are in the German Mark, Japanese Yen, British Pound Sterling, Brazilian Real and
Spanish Peseta. Agreements to manage foreign currency exposures include forward
contracts, swaps and options. The company uses these derivative instruments to
hedge assets and liabilities denominated in foreign currencies, firm commitments
and certain investments in foreign subsidiaries. Gains and losses on hedges of
firm commitments are deferred and recognized with the related transactions. In
the case of hedges of net investments in foreign subsidiaries, gains and losses
are recognized as an adjustment to the foreign currency translation component of
stockholders' equity. All other gains and losses are recognized in cost of sales
for Automotive and interest expense for Financial Services. These instruments
usually mature in two years or less for Automotive exposures and longer for
Financial Services exposures, consistent with the underlying transactions. The
effect of changes in exchange rates may not be fully offset by gains or losses
on currency derivatives, depending on the extent to which the exposures are
hedged.
Interest rate swap agreements are used to manage the effects of interest rate
fluctuations by changing the interest rate characteristics of debt to match the
interest rate characteristics of corresponding assets. These instruments mature
primarily through 2001, consistent with the underlying debt. The differential
paid or received on interest rate swaps 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.
Ford has a commodity hedging program that uses primarily forward contracts and
options to manage the effects of changes in commodity prices on Automotive
results. The financial instruments used in this program mature in two years or
less, consistent with the related purchase commitments. Gains and losses are
recognized in cost of sales during the settlement period of the related
transactions.
FS-9
NOTE 1. Accounting Policies (continued)
----------------------------
Foreign Currency Translation
----------------------------
Revenues, costs and expenses of foreign subsidiaries are translated to U.S.
dollars at average-period exchange rates. The effect of changes in exchange
rates on revenues and costs was generally unfavorable in 1996, 1995 and 1994.
Assets and liabilities of foreign subsidiaries are translated to U.S. dollars at
end-of-period exchange rates. The effects of this translation for most foreign
subsidiaries and certain other foreign currency transactions are reported in a
separate component of stockholders' equity. Translation gains and losses for
foreign subsidiaries that are located in highly inflationary countries or
conduct a major portion of their business with the company's U.S. operations are
included in income. Also included in income are gains and losses arising from
transactions denominated in a currency other than the functional currency of the
subsidiary involved.
The effect of changes in exchange rates on assets and liabilities, as described
above, decreased net income by $156 million in 1996, and increased net income by
$13 million in 1995 and $376 million in 1994. These amounts included a pre-tax
net transaction and translation loss of $300 million in 1996, and gains of $37
million in 1995 and $574 million in 1994.
Impairment of Long-Lived Assets and Certain Identifiable Intangibles
--------------------------------------------------------------------
The company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," as of January 1, 1996. The effect of adopting this standard was
not material.
The company evaluates the carrying value of goodwill for potential impairment on
an ongoing basis. Such evaluations compare operating income before amortization
of goodwill to the amortization recorded for the operations to which the
goodwill relates. The company also evaluates the carrying value of long-lived
assets and long-lived assets to be disposed of for potential impairment on an
ongoing basis. The company considers projected future operating results, trends
and other circumstances in making such estimates and evaluations.
Goodwill
--------
Goodwill represents the excess of the purchase price over the fair value of the
net assets of acquired companies and is amortized using the straight-line method
principally over 40 years. Total goodwill included in Automotive and Financial
Services other assets at December 31, 1996 was $2.3 billion and $2.9 billion,
respectively.
FS-10
NOTE 1. Accounting Policies (continued)
----------------------------
Company-Obligated Mandatorily Redeemable Preferred Securities of a Subsidiary
Trust
-----------------------------------------------------------------------------
During 1995, Ford Motor Company Capital Trust I (the "Trust") issued $632
million of its 9% Trust Originated Preferred Securities (the "Preferred
Securities") in a one-for-one exchange for 25,273,537 shares of the company's
outstanding Series B Depositary Shares ("Depositary Shares"). Concurrent with
the exchange and the related purchase by Ford of the Trust's common securities
(the "Common Securities"), the company issued to the Trust $651 million
aggregate principal amount of its 9% Junior Subordinated Debentures due December
2025 (the "Debentures"). The sole assets of the Trust are and will be the
Debentures. The Debentures are redeemable, in whole or in part, at the company's
option on or after December 1, 2002, at a redemption price of $25 per Debenture
plus accrued and unpaid interest. If the company redeems the Debentures, or upon
maturity of the Debentures, the Trust is required to redeem the Preferred
Securities and Common Securities at $25 per share plus accrued and unpaid
distributions.
Ford guarantees to pay in full to the holders of the Preferred Securities all
distributions and other payments on the Preferred Securities to the extent not
paid by the Trust only if and to the extent that Ford has made a payment of
interest or principal on the Debentures. This guarantee, when taken together
with Ford's obligations under the Debentures and the Indenture relating thereto
and its obligations under the Declaration of Trust of the Trust, including its
obligation to pay certain costs and expenses of the Trust, constitutes a full
and unconditional guarantee by Ford of the Trust's obligations under the
Preferred Securities.
Preferred Stockholders' Equity in a Subsidiary Company
------------------------------------------------------
During fourth quarter 1995, Ford Holdings, Inc. ("Ford Holdings"), a subsidiary
of Ford, merged with Ford Holdings Capital Corporation, a subsidiary of Ford
Holdings, which resulted in the cancellation of the voting preferred stock of
Ford Holdings in exchange for payment by Ford Holdings of the liquidation
preference of the stock plus accrued and unpaid dividends.
NOTE 2. Marketable and Other Securities
----------------------------------------
Trading securities are recorded at fair value with unrealized gains and losses
included in income. Available-for-sale securities are recorded at fair value
with unrealized gains and losses excluded from income and reported, net of tax,
in a separate component of stockholders' 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 bases of cost used in
determining realized gains and losses are specific identification for Automotive
operations and first-in, first-out for Financial Services operations.
The fair value of most securities is determined by quoted market prices. The
estimated fair value of securities for which there are no quoted market prices
is based on similar types of securities that are traded in the market.
Expected maturities of debt securities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without penalty.
FS-11
NOTE 2. Marketable and Other Securities (continued)
----------------------------------------
Automotive
----------
Investments in securities at December 31 were as follows (in millions):
Included in stockholders' equity at December 31, 1996 and 1995 was $96 million
and $146 million, respectively, which represented the company's equity interest
in the unrealized gains on securities owned by certain unconsolidated
affiliates.
Financial Services
------------------
Investments in securities at December 31, 1996 were as follows (in millions):
FS-12
NOTE 2. Marketable and Other Securities (continued)
----------------------------------------
Financial Services (continued)
------------------
Investments in securities at December 31, 1995 were as follows (in millions):
The amortized cost and fair value of investments in available-for-sale
securities and held-to-maturity securities at December 31 by contractual
maturity, were as follows (in millions):
Proceeds from sales of available-for-sale securities were $8.4 billion in 1996,
$2.4 billion in 1995 and $9.1 billion in 1994. In 1996, gross gains of $43
million and gross losses of $21 million were realized on those sales; gross
gains of $39 million and gross losses of $18 million were realized in 1995, and
gross gains of $24 million and gross losses of $56 million were realized in
1994. Stockholders' equity included, net of tax, net unrealized gains of $54
million and $56 million at December 31, 1996 and 1995, respectively.
FS-13
NOTE 3. Receivables - Financial Services
-----------------------------------------
Included in net receivables and lease investments at December 31 were net
finance receivables, investments in direct financing leases and investments in
operating leases. The investments in direct financing and operating leases
relate to the leasing of vehicles, various types of transportation and other
equipment, and facilities.
Net finance receivables at December 31 were as follows (in millions):
Included in finance receivables at December 31, 1996 and 1995 were a total
of $1.2 billion and $1.3 billion, respectively, owed by three customers with the
largest receivable balances. Other finance receivables consisted primarily of
commercial and consumer loans, collateralized loans, credit card receivables,
general corporate obligations and accrued interest. Also included in other
finance receivables at December 31, 1996 and 1995 were $4 billion and
$3.5 billion, respectively, of accounts receivable purchased by certain
Financial Services operations from Automotive operations.
Contractual maturities of total finance receivables are as follows (in
millions): 1997 - $55,123; 1998 - $20,648; 1999 - $14,294; thereafter - $32,235.
Experience indicates that a substantial portion of the portfolio generally is
repaid before the contractual maturity dates.
The fair value of most receivables was estimated by discounting future cash
flows using an estimated discount rate that reflected the credit, interest rate
and prepayment risks associated with similar types of instruments. For
receivables with short maturities, the book value approximated fair value.
Sales of finance receivables increased net income by $56 million in 1996, $69
million in 1995 and $15 million in 1994.
Investments in direct financing leases at December 31 were as follows (in
millions):
Minimum direct financing lease rentals (including executory costs of $26
million) are contractually due as follows (in millions): 1997 - $4,145; 1998 -
$2,761; 1999 - $1,671; 2000 - $806; 2001 - $287; thereafter - $110.
FS-14
NOTE 3. Receivables - Financial Services (continued)
-----------------------------------------
Investments in operating leases at December 31 were as follows (in millions):
Minimum rentals on operating leases are contractually due as follows (in
millions): 1997 - $11,365; 1998 - $10,535; 1999 - $1,185; 2000 - $247; 2001 -
$50; thereafter - $300.
Depreciation expense for assets subject to operating leases is provided
primarily on the straight-line method over the term of the lease in amounts
necessary to reduce the carrying amount of the asset to its estimated residual
value. Gains and losses upon disposal of the asset also are included in
depreciation expense. Depreciation expense was as follows (in millions): 1996 -
$5,867; 1995 - $5,508; 1994 - $4,231.
Allowances for credit losses are estimated and established as required
based on historical experience. Other factors that affect collectibility also
are evaluated, and additional amounts may be provided. Finance receivables and
lease investments are charged to the allowances for credit losses when an
account is deemed to be uncollectible, taking into consideration the financial
condition of the borrower, the value of the collateral, recourse to guarantors
and other factors. Recoveries on finance receivables and lease investments
previously charged off as uncollectible are credited to the allowances for
credit losses.
Changes in the allowances for credit losses were as follows (in millions):
Statement of Financial Accounting Standards No. 125 ("SFAS 125"),
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," was issued in June 1996, effective for transfers and servicing
of financial assets and extinguishments of liabilities after December 31, 1996.
The company will adopt this standard on January 1, 1997. The effect of adopting
SFAS 125 is not expected to be material.
The company adopted Statement of Financial Accounting Standards No. 114
("SFAS 114"), "Accounting by Creditors for Impairment of a Loan," and Statement
of Financial Accounting Standards No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures," as of
January 1, 1995. The effect of adopting these standards, which require that
impaired loans be measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate, was not material.
FS-15
NOTE 4. Inventories - Automotive
---------------------------------
Inventories at December 31 were as follows (in millions):
Inventories are stated at the lower of cost or market. The cost of most
U.S. inventories is determined by the last-in, first-out ("LIFO") method. The
cost of the remaining inventories is determined primarily by the first-in,
first-out ("FIFO") method.
If the FIFO method had been used instead of the LIFO method, inventories
would have been higher by $1,445 million and $1,406 million at December 31, 1996
and 1995, respectively.
NOTE 5. Net Property, Depreciation and Amortization - Automotive
-----------------------------------------------------------------
Net property at December 31 was as follows (in millions):
Property, equipment and special tools are stated at cost, less accumulated
depreciation and amortization. Property and equipment placed in service before
January 1, 1993 are depreciated using an accelerated method that results in
accumulated depreciation of approximately two-thirds of asset cost during the
first half of the estimated useful life of the asset. Property and equipment
placed in service after December 31, 1992 are depreciated using the
straight-line method of depreciation over the estimated useful life of the
asset. On average, buildings and land improvements are depreciated based on a
30-year life; machinery and equipment are depreciated based on a 14-year life.
Special tools are amortized using an accelerated method over periods of time
representing the estimated productive life of those tools.
Depreciation and amortization expenses were as follows (in millions):
When property and equipment are retired, the general policy is to charge
the cost of those assets, reduced by net salvage proceeds, to accumulated
depreciation. Maintenance, repairs and rearrangement costs are expensed as
incurred and were $2,325 million in 1996, $2,206 million in 1995 and $2,065
million in 1994. Expenditures that increase the value or productive capacity of
assets are capitalized. Preproduction costs related to new facilities are
expensed as incurred.
FS-16
NOTE 6. Income Taxes
---------------------
Income before income taxes for U.S. and foreign operations, excluding
equity in net (loss)/income of affiliated companies, was as follows (in
millions):
The provision for income taxes was estimated as follows (in millions):
The provision includes estimated taxes payable on that portion of retained
earnings of subsidiaries expected to be received by the company. No provision
was made with respect to $1.9 billion of retained earnings at December 31, 1996
that have been invested by foreign subsidiaries. It is not practicable to
estimate the amount of unrecognized deferred tax liability for the undistributed
foreign earnings.
A reconciliation of the provision for income taxes compared with the
amounts at the U.S. statutory tax rate is shown below (in millions):
FS-17
NOTE 6. Income Taxes (continued)
---------------------
Deferred income taxes reflect the estimated tax effect of temporary
differences between assets and liabilities for financial reporting purposes and
those amounts as measured by tax laws and regulations and net operating losses
of subsidiaries. The components of deferred income tax assets and liabilities at
December 31 were as follows (in millions):
Foreign net operating loss carryforwards for tax purposes were $4.3 billion
at December 31, 1996. A substantial portion of these losses has an indefinite
carryforward period; the remaining losses have expiration dates beginning in
1997. For financial statement purposes, the tax benefit of operating losses is
recognized as a deferred tax asset, subject to appropriate valuation allowances.
The company evaluates the tax benefits of operating loss carryforwards on an
ongoing basis. Such evaluations include a review of historical and consideration
of projected future operating results, the eligible carryforward period and
other circumstances.
FS-18
NOTE 7. Liabilities - Automotive
---------------------------------
Current Liabilities
-------------------
Included in accrued liabilities at December 31 were the following (in millions):
Noncurrent Liabilities
----------------------
Included in other liabilities at December 31 were the following (in millions):
NOTE 8. Employee Retirement Benefits
-------------------------------------
Employee Retirement Plans
-------------------------
The company has two principal retirement plans in the U.S. The Ford-UAW
Retirement Plan covers hourly employees represented by the UAW, and the General
Retirement Plan covers substantially all other employees of the company and
several finance subsidiaries in the U.S. The hourly plan provides
noncontributory benefits related to employee service. The salaried plan provides
similar noncontributory benefits and contributory benefits related to pay and
service. Other U.S. and non-U.S. subsidiaries have separate plans that generally
provide similar types of benefits covering their employees. The company and its
subsidiaries also have defined benefit plans applicable to certain executives
which are not funded.
The company's policy for funded plans is to contribute annually, at a
minimum, amounts required by applicable law, regulations and union agreements.
Plan assets consist principally of investments in stocks, government and other
fixed income securities and real estate. The various plans generally are funded,
except in Germany, where this has not been the custom, and as noted above; in
those cases, an unfunded liability is recorded.
The company's pension expense, including Financial Services, was as follows
(in millions):
FS-19
NOTE 8. Employee Retirement Benefits (continued)
-------------------------------------
Pension expense in 1996 increased for U.S. and non-U.S. plans as a result
of employee separation programs and lower discount rates. Pension expense in
1995 decreased for U.S. plans primarily as a result of higher discount rates,
and increased for non-U.S. plans primarily as a result of benefit improvements
and unfavorable exchange rate changes. In addition, amendments made in September
1996 to the Ford-UAW Retirement Plan and the General Retirement Plan provide
pension benefit improvements for present and future retirees that will increase
the company's pension expense in future years compared with 1996.
The status of these plans at December 31 was as follows (in millions):
- - - - -
a/ The balance of the initial difference between assets and obligation
deferred for recognition over a 15-year period.
b/ The prior service effect of plan amendments deferred for recognition
over remaining service.
c/ The deferred gain or loss resulting from investments, other experience
and changes in assumptions.
d/ An adjustment to reflect the unfunded accumulated benefit obligation in
the balance sheet for plans whose benefits exceed the assets. At
December 31, 1996, the unfunded liability in excess of $651 million
resulted in an increase in the charge to stockholders' equity of $159
million net of deferred taxes; at December 31, 1995, the charge to
stockholders' equity was $108 million.
FS-20
NOTE 8. Employee Retirement Benefits (continued)
-------------------------------------
Postretirement Health Care and Life Insurance Benefits
------------------------------------------------------
The company and certain of its subsidiaries sponsor unfunded plans to provide
selected health care and life insurance benefits for retired employees. The
company's U.S. and Canadian employees may become eligible for these benefits if
they retire while working for the company; however, benefits and eligibility
rules may be modified from time to time. The estimated cost for these benefits
is accrued over periods of employee service on an actuarially determined basis.
Net postretirement benefit expense, including Financial Services, was as
follows (in millions):
The status of these plans at December 31 was as follows (in millions):
- - - - -
* The prior service effect of plan amendments deferred for
recognition over remaining service to retirement eligibility
** The deferred gain or loss resulting from experience and changes in
assumptions deferred for recognition over remaining service to
retirement
Changing the assumed health care cost trend rates by one percentage point
is estimated to change the aggregate service and interest cost components of net
postretirement benefit expense for 1996 by about $200 million and the
accumulated postretirement benefit obligation at December 31, 1996 by about
$2 billion.
FS-21
NOTE 9. Debt
-------------
The fair value of debt was estimated based on quoted market prices or
current rates for similar debt with the same remaining maturities.
Automotive
----------
Long-term debt at December 31, 1996 included maturities as follows (in
millions): 1997 - $640 (included in current liabilities); 1998 - $401; 1999 -
$148; 2000 - $1,006; 2001 - $893; thereafter - $4,047.
Included in long-term debt at December 31, 1996 and 1995 were obligations
of $5,961 million and $5,031 million, respectively, with fixed interest rates
and $534 million and $444 million, respectively, with variable interest rates
(generally based on LIBOR or other short-term rates). Obligations payable in
foreign currencies at December 31, 1996 and 1995 were $756 million and
$968 million, respectively.
Agreements to manage exposures to fluctuations in interest rates, which
include primarily interest rate swap agreements and futures contracts, did not
materially change the overall weighted-average interest rate on long-term debt
and effectively decreased the obligations subject to variable interest rates to
$363 million at December 31, 1996 and $287 million at December 31, 1995.
Financial Services
------------------
FS-22
NOTE 9. Debt (continued)
-------------
Financial Services (continued)
------------------
Information concerning short-term borrowings (excluding long-term debt
payable within one year) is as follows (in millions):
Long-term debt at December 31, 1996 included maturities as follows (in
millions): 1997 - $14,592; 1998 - $14,742; 1999 - $14,473; 2000 - $12,442; 2001
- $11,211; thereafter - $17,773.
Included in long-term debt at December 31, 1996 and 1995 were obligations
of $55.8 billion and $53.2 billion, respectively, with fixed interest rates and
$14.8 billion and $15.1 billion, respectively, with variable interest rates
(generally based on LIBOR or other short-term rates). Obligations payable in
foreign currencies at December 31, 1996 and 1995 were $28 billion and $21
billion, respectively. These obligations were issued primarily to fund foreign
business operations.
Agreements to manage exposures to fluctuations in interest rates include
primarily interest rate swap agreements. At December 31, 1996, these agreements
decreased the weighted-average interest rate on long-term debt to 6.4%, compared
with 6.7% excluding these agreements, and effectively decreased the obligations
subject to variable interest rates to $13.6 billion; the weighted-average
interest rate on short-term debt increased to 5.7%, compared with 5.6% excluding
these agreements. At December 31, 1995, these agreements did not materially
change the overall weighted-average interest rate on long-term debt of 7% and
effectively decreased the obligations subject to variable rates to
$11.9 billion; the weighted-average interest rate on short-term debt increased
to 5.8%, compared with 5.7% excluding these agreements.
Support Facilities
------------------
At December 31, 1996, Ford had long-term contractually committed global
credit agreements under which $8.4 billion is available from various banks
through June 30, 2001. The entire $8.4 billion may be used, at Ford's option, by
any affiliate of Ford; however, any borrowing by an affiliate will be guaranteed
by Ford. In addition, Ford has the ability to transfer on a nonguaranteed basis
the entire $8.4 billion in varying portions to Ford Motor Credit Company ("Ford
Credit"), a subsidiary of Ford, and to Ford Credit Europe plc ("Ford Credit
Europe"), a subsidiary of Ford Credit. These facilities were unused at December
31, 1996.
At December 31, 1996, Financial Services had a total of $49.8 billion of
contractually committed support facilities. Of these facilities, $24.5 billion
(excluding the $8.4 billion of Ford's credit facilities) are contractually
committed global credit agreements under which $19.6 billion and $4.9 billion
are available to Ford Credit and Ford Credit Europe, respectively, from various
banks; 62% and 76%, respectively, of such facilities are available through June
30, 2001. The entire $19.6 billion may be used, at Ford Credit's option, by any
subsidiary of Ford Credit, and the entire $4.9 billion may be used, at Ford
Credit Europe's option, by any subsidiary of Ford Credit Europe. Any borrowings
by such subsidiaries will be guaranteed by Ford Credit or Ford Credit Europe, as
the case may be. At December 31, 1996, $165 million of the Ford Credit global
facilities were in use; $709 million of the Ford Credit Europe global facilities
were in use. Other than the global credit agreements, the remaining portion of
the Financial Services support facilities at December 31, 1996 consisted of
$22.6 billion of contractually committed support facilities available to various
affiliates in the U.S. and $2.7 billion of contractually committed support
facilities available to various affiliates outside the U.S.; at
December 31, 1996, approximately $1.4 billion of these facilities were in use.
FS-23
NOTE 10. Capital Stock
-----------------------
At December 31, 1996, all general voting power was vested in the holders of
Common Stock and the holders of Class B Stock, voting together without regard to
class. At that date, the holders of Common Stock were entitled to one vote per
share and, in the aggregate, had 60% of the general voting power; the holders of
Class B Stock were entitled to such number of votes per share as would give
them, in the aggregate, the remaining 40% of the general voting power, as
provided in the company's Certificate of Incorporation.
The Certificate of Incorporation provides that all shares of Common Stock
and Class B Stock share equally in dividends (other than dividends declared with
respect to any outstanding Preferred Stock), except that any stock dividends are
payable in shares of Common Stock to holders of that class and in Class B Stock
to holders of that class. Upon liquidation, all shares of Common Stock and Class
B Stock are entitled to share equally in the assets of the company available for
distribution to the holders of such shares.
On April 14, 1994, the company's Board of Directors declared a 2-for-1
stock split in the form of a 100% stock dividend on the company's Common Stock
and Class B Stock effective June 6, 1994. Share data were restated to reflect
the split, where appropriate.
Information concerning the Preferred Stock of the company is as follows:
The Series A and Series B Preferred Stock rank (and any other outstanding
Preferred Stock of the company would rank) senior to the Common Stock and Class
B Stock in respect of dividends and liquidation rights.
FS-24
NOTE 11. Stock Options
-----------------------
The company has stock options outstanding under the 1985 Stock Option Plan
and the 1990 Long-Term Incentive Plan. These Plans were approved by the
stockholders. No further grants may be made under the 1985 Plan. Grants may be
made under the 1990 Plan through April 2000. In general, options granted under
the 1985 Plan and options granted to date under the 1990 Plan become exercisable
25% after one year from the date of grant, 50% after two years, 75% after three
years and in full after four years. Options under both Plans expire after 10
years. Certain options outstanding under the Plans were granted with an equal
number of accompanying stock appreciation rights which may be exercised in lieu
of the options. Under the Plans, a stock appreciation right entitles the holder
to receive, without payment, the excess of the fair market value of the Common
Stock on the date of exercise over the option price, either in Common Stock or
cash or a combination. In addition, grants of Contingent Stock Rights were made
with respect to 865,100 shares in 1996, 884,500 shares in 1995 and 709,800
shares in 1994 under the 1990 Long-Term Incentive Plan (not included in the
tables below). The number of shares ultimately awarded will depend on the extent
to which the Performance Target specified in each Right is achieved, individual
performance of the recipients and other factors, as determined by the
Compensation and Option Committee of the Board of Directors.
There were no shares authorized for future grants at December 31, 1996,
1995 and 1994. Up to 1% of Common Stock issued as of December 31 of any year may
be made available for stock options and other plan awards in the next succeeding
calendar year. That limit may be increased up to 2% in any year, with a
corresponding reduction in shares available for grants in future years. At
December 31, 1996, this reduction aggregated to 279,420 shares.
Information concerning stock options is as follows (shares in millions):
- - - - -
* Exercised at option prices ranging from $13.42 to $29.06 during 1996,
$9.09 to $29.06 during 1995, and $9.09 to $28.84 during 1994
** Included 4.8 and 45.5 million shares under the 1985 and 1990 Plans,
respectively, at option prices ranging from $13.42 to $32.75 per share.
At December 31, 1996, the weighted-average remaining
exercise period relating to the outstanding options was 6.9 years
The estimated fair value as of date of grant of options granted in 1996 and
1995, using the Black-Scholes option-pricing model, was as follows:
FS-25
NOTE 11. Stock Options (continued)
-----------------------
The company adopted the disclosure requirements of Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," effective with the 1996 financial statements, 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 1996 and 1995, consistent with the methodology in
SFAS 123, the pro forma effects on the company's net income and income per share
would not have been material.
NOTE 12. Litigation and Claims
-------------------------------
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.
Litigation is subject to many uncertainties, and the outcome of individual
litigated matters is not predictable with assurance. Reserves have been
established by the company for certain of the matters discussed in the foregoing
paragraph where losses are deemed probable. It is reasonably possible, however,
that some of the matters discussed in the foregoing paragraph for which reserves
have not been established could be decided unfavorably to the company or the
subsidiary involved and could require the company or such subsidiary to pay
damages or make other expenditures in amounts or a range of amounts that cannot
be estimated at December 31, 1996. The company does not reasonably expect, based
on its analysis, that any adverse outcome from such matters would have a
material effect on future consolidated financial statements for a particular
year, although such an outcome is possible.
NOTE 13. Commitments and Contingencies
---------------------------------------
At December 31, 1996, the company had the following minimum rental
commitments under non-cancelable operating leases (in millions): 1997 - $776;
1998 - $416; 1999 - $395; 2000 - $269; 2001 - $206; thereafter - $915. These
amounts include rental commitments related to the sale and leaseback of certain
Automotive machinery and equipment.
The company and certain of its subsidiaries have entered into agreements
with various banks to provide credit card programs that offer rebates that can
be applied against the purchase or lease of Ford vehicles. The maximum amount of
rebates available to qualified cardholders at December 31, 1996 and 1995 was
$4.1 billion and $3.1 billion, respectively. The company has provided for the
estimated net cost of these programs as a sales incentive based on the estimated
number of participants who ultimately will purchase vehicles.
Certain Financial Services subsidiaries make credit lines available to
holders of their credit cards. At December 31, 1996 and 1995, the unused portion
of available credit was approximately $18.8 billion and $17.3 billion,
respectively, and is revocable under specified conditions. The fair value of
unused credit lines and the potential risk of loss were not considered to be
material.
FS-26
NOTE 14. Financial Instruments
-------------------------------
Estimated fair value amounts have been determined using available market
information and various valuation methods depending on the type of instrument.
In evaluating the fair value information, considerable judgment is required to
interpret the market data used to develop the estimates. The use of different
market assumptions and/or different valuation techniques may have a material
effect on the estimated fair value amounts. Accordingly, the estimates of fair
value presented herein may not be indicative of the amounts that could be
realized in a current market exchange.
Balance Sheet Financial Instruments
-----------------------------------
Information about specific valuation techniques and estimated fair values is
provided throughout the Notes to Financial Statements. Book value and estimated
fair value amounts at December 31 were as follows (in millions):
Foreign Currency and Interest Rate Instruments
----------------------------------------------
The fair value of foreign currency and interest rate instruments was estimated
using current market prices provided by outside quotation services. The
estimated fair value, notional amount and deferred loss at December 31 were as
follows (in millions):
Counterparty Credit Risk
------------------------
Ford manages its foreign currency and interest rate counterparty credit risks by
limiting exposure to and by monitoring the financial condition of each
counterparty. The amount of exposure Ford 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, the company's risk is limited to the fair value of the instrument.
Other Financial Agreements
--------------------------
At December 31, 1996, the notional amount of commodity hedging contracts
outstanding totaled $300 million; the notional amount at December 31, 1995 was
not material. The company also had guaranteed $1.1 billion of debt of
unconsolidated subsidiaries, affiliates and others. The risk of loss under these
financial agreements is not material.
FS-27
NOTE 15. Acquisitions, Dispositions and Restructuring
------------------------------------------------------
Asset Write-Downs and Dispositions - Financial Services
-------------------------------------------------------
During third quarter 1996, USL Capital Corporation ("USL Capital'), a subsidiary
of Ford Holdings, concluded a series of transactions for the sale of
substantially all of its assets, as well as certain assets owned by Ford Credit
and managed by USL Capital. Proceeds from the sale were used to pay down related
liabilities and debt.
The company recorded a pre-tax charge in 1996 totaling $384 million
($233 million after taxes) to recognize the estimated value of its outstanding
notes receivable from, and preferred stock investment in, Budget Rent a Car
Corporation ("BRAC"). The initial provision taken in second quarter 1996
totaling $700 million ($437 million after taxes) resulted from conclusions
reached in a study of Ford's rental car business strategy. In accordance with
SFAS 114, the notes receivable provision reflected primarily the unsecured
portion of financing provided to BRAC by Ford. The preferred stock write-down
reflected recognition of the fair value of Ford's investment at the time. In
fourth quarter 1996, the notes receivable provision was reduced by $316 million
($204 million after taxes), reflecting a strengthening of the rental car
business, recent sales of rental car franchises, and increased investor interest
that led to a reassessment of the value of notes receivable from BRAC to Ford.
In connection with a January 1997 agreement by Team Rental Group, Inc. ("Team
Rental") to acquire all of the outstanding common stock of BRAC, a portion of
Ford's loans to BRAC will be forgiven and the remainder will be repaid or
purchased in cash and Team Rental common stock. In addition, the BRAC preferred
stock held by Ford will be redeemed. Ford will own approximately 22% of Team
Rental when the transaction is completed.
During September 1994, substantially all of the assets of First Nationwide Bank,
since known as Granite Savings Bank (the "Bank"), were sold to, and
substantially all of the Bank's liabilities were assumed by, First Madison Bank.
The Bank is a wholly-owned subsidiary of Granite Management Corporation
(formerly First Nationwide Financial Corporation) ("Granite"), which in turn is
a wholly-owned subsidiary of Ford. The company recognized in first quarter 1994
earnings a charge related to the disposition of the Bank, reflecting the
nonrecovery of goodwill and reserves for estimated losses on assets not included
in the sale. The company's income statement included the results of operations
of Granite through March 31, 1994. The remaining net assets of Granite at
December 31, 1996 and 1995 were included in the balance sheet under Financial
Services - Other Assets.
The effect of the USL Capital disposition, BRAC write-down and Bank disposition
on the company's results from operations are summarized below (in millions):
Sale of The Associates' Common Stock
------------------------------------
During May 1996, Associates First Capital Corporation ("The Associates"), a
subsidiary of Ford, completed an initial public offering of its common stock
representing a 19.3% economic interest in The Associates (the "IPO"). Ford
recorded in second quarter 1996 a non-operating gain of $650 million resulting
from the IPO, to recognize the excess of the net proceeds from the IPO over the
proportionate share of Ford's investment in The Associates. The gain was not
subject to income taxes.
FS-28
NOTE 15. Acquisitions, Dispositions and Restructuring (continued)
------------------------------------------------------
Investment in Mazda Motor Corporation
-------------------------------------
During May 1996, Ford increased its investment in Mazda Motor Corporation
("Mazda") from its existing 24.5% ownership interest to a 33.4% ownership
interest by purchasing from Mazda newly-issued shares of common stock for an
aggregate purchase price of $484 million. In connection with the purchase of
shares, Mazda agreed to coordinate more closely with Ford its strategies and
plans, particularly in the areas of product development, manufacturing and
distribution of vehicles, so as to improve the competitiveness and economies of
scale of both companies. Ford and Mazda remain separate public companies with
separate identities. Ford is not responsible for any of Mazda's liabilities,
debts or other obligations, and Mazda's operating results and financial position
are not consolidated with those of Ford; Mazda continues to be reflected in
Ford's consolidated financial statements on an equity basis.
Dissolution of Autolatina Joint Venture
---------------------------------------
During fourth quarter 1995, the company's joint venture with Volkswagen AG in
Brazil and Argentina was dissolved. The dissolution resulted in a gain of $230
million, primarily from a one-time cash compensation payment to Ford. Prior to
dissolution, the company held a 49% interest in Autolatina and accounted for it
on an equity basis. Effective December 31, 1995, the assets and liabilities of
the new entities in Brazil and Argentina were consolidated in the company's
balance sheet; revenues and costs for 1996 were consolidated in the company's
income statement. Automotive revenues and costs for 1995 and 1994 exclude these
entities; the company's income statement for 1995 and 1994 included Ford's
equity share in the results of the Autolatina joint venture.
Sale of Annuity Business
------------------------
During 1995, the company agreed to sell its annuity business to SunAmerica, Inc.
for $173 million. The sale was completed in early 1996. The company recognized a
one-time charge related to the sale that was not material. The company's income
statement included the results of operations of the annuity business through
December 31, 1995. Net assets of the annuity business were included in the
balance sheet under Financial Services - Other Assets at December 31, 1995.
Acquisition of The Hertz Corporation
------------------------------------
During April 1994, The Hertz Corporation ("Hertz") became a wholly-owned
subsidiary of Ford. The operating results, assets, liabilities and cash flows of
Hertz are consolidated as part of the Financial Services segment.
Employee Separation Programs
----------------------------
Costs for special voluntary employee separation programs reduced the company's
Automotive net income for 1996 and 1995 by $436 million and $146 million,
respectively. These programs affected about 3,500 salaried employees in 1996,
primarily in the U.S.; there also were reductions in hourly employment outside
the U.S. Costs for voluntary separation programs are recognized in expense when
employees accept offers of early retirement or termination and the costs can be
reasonably estimated.
FS-29
NOTE 16. Cash Flows
--------------------
The reconciliation of net income to cash flows from operating activities is as
follows (in millions):
The company considers all highly liquid investments purchased with a maturity of
three months or less, including short-term time deposits and government, agency
and corporate obligations, to be cash equivalents. Automotive cash equivalents
at December 31, 1996 and 1995 were $2.8 billion and $4.7 billion, respectively;
Financial Services cash equivalents at December 31, 1996 and 1995 were
$2.8 billion and $1.8 billion, respectively. Cash flows resulting from futures
contracts, forward contracts and options that are accounted for as hedges of
identifiable transactions are classified in the same category as the item being
hedged. Purchases, sales and maturities of trading securities are included in
cash flows from operating activities. Purchases, sales and maturities of
available-for-sale and held-to-maturity securities are included in cash flows
from investing activities.
Cash paid for interest and income taxes was as follows (in millions):
FS-30
NOTE 17. Segment Information
-----------------------------
The company's major geographic areas are the United States and Europe. Other
geographic areas (primarily Canada, Mexico, South America and Asia Pacific)
individually are not material. Financial information segregated by major
geographic area is as follows (in millions):
- - - - -
* Intercompany sales among geographic areas consist primarily of vehicles, parts
and components manufactured by the company and various subsidiaries and sold to
different entities within the consolidated group; transfer prices for these
transactions are established by agreement between the affected entities
- - - - -
** Financial Services activities do not report operating income; income before
income taxes is representative of operating income
FS-31
NOTE 17. Segment Information (continued)
-----------------------------
Financial Services (continued)
------------------
NOTE 18. Summary Quarterly Financial Data (Unaudited)
------------------------------------------------------
(in millions, except amounts per share)
FS-32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Ford Motor Company
We have audited the consolidated financial statements and the supplemental
schedule of condensed financial information of selected subsidiaries of Ford
Motor Company and Subsidiaries listed in Items 14(a)1 and 14(a)2 of this Form
10-K. These financial statements and the supplemental schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and supplemental schedule 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 Company
and Subsidiaries at December 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles. In addition, in our opinion, the supplemental schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information presented
therein.
/s/Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
400 Renaissance Center
Detroit, Michigan 48243
313-446-7100
January 27, 1997
FS-33
Ford Capital B.V., a wholly-owned subsidiary of Ford Motor Company, was
established primarily for the purpose of raising funds through the issuance of
commercial paper and debt securities. Ford Capital B.V. also holds shares of the
capital stock of Ford Nederland B.V., Ford Motor Company (Belgium) N.V.,
Ford Motor Company A/S (Denmark), Ford Poland S.A., and Ford Distribution Sp.
z.o.o., Ltd. Substantially all of the assets of Ford Capital B.V., other than
its ownership interests in subsidiaries, represent receivables from Ford Motor
Company or its consolidated subsidiaries.
FSS-1
EXHIBIT INDEX
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 (No Fee Required)
For the fiscal year ended December 31, 1996
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
------------ --------------
Commission file number 1-3950
FORD MOTOR COMPANY
------------------
(Exact name of Registrant as specified in its charter)
Delaware 38-0549190
-------- ----------
(State of incorporation) (I.R.S. employer identification no.)
The American Road, Dearborn, Michigan 48121
------------------------------------- -----
(Address of principal executive offices) (Zip code)
313-322-3000
------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered (a)
--------------------------------------- --------------------------
Common Stock, par value $1.00 per share New York Stock Exchange
Pacific Coast Stock Exchange
Depositary Shares, each representing New York Stock Exchange
1/1,000 of a share of Series A Cumulative
Convertible Preferred Stock, as described
below
Depositary Shares, each representing New York Stock Exchange
1/2,000 of a share of Series B Cumulative
Preferred Stock, as described below
_______________
(a) In addition, shares of Common Stock of the Registrant are listed on
certain stock exchanges in the United Kingdom and Continental Europe.
[Cover page 1 of 2 pages]
Securities registered pursuant to Section 12(g) of the Act:
Series A Cumulative Convertible Preferred Stock, par value $1.00 per share, with
an annual dividend rate of $4,200 per share and a liquidation preference of
$50,000 per share.
Series B Cumulative Preferred Stock, par value $1.00 per share, with an annual
dividend rate of $4,125 per share and a liquidation preference of $50,000 per
share.
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
---- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
----
As of February 28, 1997, the Registrant had outstanding 1,118,857,214 shares of
Common Stock and 70,852,076 shares of Class B Stock. Based on the New York Stock
Exchange Composite Transaction closing price of the Common Stock on that date
($32-7/8 a share), the aggregate market value of such Common Stock was
$36,782,430,910.20. Although there is no quoted market for the Registrant's
Class B Stock, shares of Class B Stock may be converted at any time into an
equal number of shares of Common Stock for the purpose of effecting the sale or
other disposition of such shares of Common Stock. The shares of Common Stock and
Class B Stock outstanding at February 28, 1997 included shares owned by persons
who may be deemed to be "affiliates" of the Registrant. The Registrant does not
believe, however, that any such person should be considered to be an affiliate.
For information concerning ownership of outstanding Common Stock and Class B
Stock, see the Proxy Statement for the Registrant's Annual Meeting of
Stockholders to be held on May 8, 1997 (the "Proxy Statement"), which is
incorporated by reference under various Items of this Report.
Document Incorporated by Reference*
----------------------------------
Document Where Incorporated
-------- ------------------
Proxy Statement Part III (Items 10,
11, 12 and 13)
-------------------------
* As stated under various Items of this Report, only certain specified
portions of such document are incorporated by reference herein.
[Cover page 2 of 2 pages]
PART I
Item 1. Business
-----------------
Ford Motor Company (referred to herein as "Ford", the "Company" or the
"Registrant") 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 also is one of the largest providers of financial services
worldwide.
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
following subsidiaries: Ford Motor Credit Company ("Ford Credit"), Associates
First Capital Corporation ("The Associates") and The Hertz Corporation
("Hertz").
See Note 17 (pages FS-31 and FS-32) of the Notes to Financial Statements
and Item 6. "Selected Financial Data" for information relating to revenue,
operating income/(loss) and assets attributable to Ford's industry segments.
Also see Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for information with respect to revenue, net income
and other matters.
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.
Item 1. Business (Continued)
----------------------------
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 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 with relatively small changes in unit volume.
United States
-------------
Sales Data. The following table shows U.S. industry demand for the years
indicated:
-2-
Item 1. Business (Continued)
----------------------------
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 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:
----------------------
*As announced on February 19, 1997, Ford and Freightliner Corporation
("Freightliner") have signed a letter of intent relating to the purchase by
Freightliner of technology, unique tooling and assembly equipment for Ford's
heavy trucks. The potential sale covers the United States, Canadian, Mexican
and Australian markets. The transaction is subject to the signing of definitive
agreements and regulatory approvals.
As shown in the tables above, since 1992 there has been a significant 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 middle, large and luxury segments for Ford and increased sales of
trucks in the compact bus/van/utility (e.g., Windstar and Explorer/Mountaineer),
full-size bus/van/utility (e.g., Expedition) and full-size pickup (e.g.,
F-Series) segments for both the industry and Ford.
-3-
Item 1. Business (Continued)
---------------------------
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:
------------------
* 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.
-4-
Item 1. Business (Continued)
---------------------------
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 24% in 1992
to 22.4% in 1996. This trend reflects in part the effects of the strengthening
prior to 1996 of the Japanese yen on the prices of vehicles produced by the
Japanese manufacturers, the overall market shift from cars to trucks and
improvements in the vehicles produced by U.S. manufacturers. Recently, however,
the Japanese yen has weakened against the dollar, which could result in
increased sales of Japanese vehicles in the United States.
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 1996.
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 1996, 1995, and 1994 were 8.0%, 8.2%, and 7.8%,
respectively. "Marketing costs" include (i) marketing incentives on vehicles
such as retail rebates and costs for special financing rates, (ii) reserves for
residual guaranties 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:
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. In recent years, due to competitive pressures, vehicle
manufacturers have both expanded the coverage and extended the terms of
warranties on vehicles sold in the United States. Ford presently provides
warranty coverage for defects in factory-supplied materials and workmanship on
all vehicles 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.
Different warranty coverage is provided 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
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.
-5-
Item 1. Business (Continued)
----------------------------
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
considerably by country.) This competitive environment is expected to intensify
further as Japanese manufacturers, which together had a European car market
share of 10.8% for 1996, 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 1996 the European automotive industry
had excess capacity of approximately 6 million units (based on a comparison of
European domestic demand and capacity).
In 1996, European car industry sales were 12.6 million units, up 6% from
1995 levels. Truck sales were 1.7 million units, up 6% from 1995 levels. Ford's
European car share for 1996 was 11.6%, down 2/10 of a point from 1995, and its
European truck share for 1996 was 13.1%, down 1.4 points from 1995.
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 1996 compared with 1995,
total industry sales were up 4% in Great Britain and up 5% in Germany.
Other Foreign Markets
---------------------
Mexico and Canada. Mexico and Canada also are important markets for Ford.
Generally, industry conditions in Canada closely follow conditions in the U.S.
market. In 1996, industry sales of cars and trucks in Canada were 1.2 million
units, up 3.2% from 1995 levels. 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, the
Mexican economy began its recovery and industry volume was 331,000 units, up 42%
from 1995 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 were 1.7 million units in
Brazil in 1996, up 4% from 1995, and 376,000 units in Argentina in 1996, up 15%
from 1995. Prior to 1995, the Company operated in this region through
Autolatina, a joint venture with Volkswagen AG. This joint venture was dissolved
in the fourth quarter of 1995, and Ford is in the process of reestablishing
operations in Brazil and Argentina.
Asia Pacific. In the Asia Pacific region, Australia, Taiwan and Japan are
the principal markets for Ford products with industry volumes in 1996 of
650,000, 471,000 and 7.1 million units, respectively. In 1996, Ford was the
market share leader in Australia with a 20.3% combined car and truck market
share. In Taiwan (where sales of built-up vehicles manufactured in Japan are
prohibited), Ford had the second highest market share with a combined car and
truck market share in 1996 of 17.5%. 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. In May 1996,
Ford increased its ownership interest in Mazda Motor Corporation to 33.4%, as
further discussed in Note 15 (page FS-29) of the Notes to Financial Statements
included with this Report.
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 1996 industry volume in South Africa was 393,000 units, up 4%
from 1995 levels.
-6-
Item 1. Business (Continued)
---------------------------
Financial Services Operations
-----------------------------
Reorganization
--------------
Beginning in late 1995 and continuing through 1996, Ford reorganized its
Financial Services operations in order to align more closely legal ownership of
the Financial Services affiliates with management responsibility for such
affiliates. As a result of the reorganization, Ford Credit and The Associates
became subsidiaries of a newly formed subsidiary called Ford FSG, Inc.
("FFSGI"). Also, The Associates completed an initial public offering of its
common stock representing a 19.3% economic interest in The Associates. In
addition, USL Capital Corporation ("USL Capital"), a subsidiary engaged in
commercial financing activities, completed the sale of substantially all of its
assets, as well as certain assets owned by Ford Credit and managed by USL
Capital.
Ford Motor Credit Company
-------------------------
Ford Credit is an indirect wholly owned subsidiary of Ford. Ford Credit and
its subsidiaries provide wholesale financing and capital loans throughout the
world to Ford retail dealerships and associated non-Ford dealerships, 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 and its
subsidiaries 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 March 1996, an affiliate of Ford contributed The American Road Insurance
Company ("American Road") to Ford Credit. The operations of American Road and
its subsidiaries are conducted in the United States and Canada and consist 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. Also, in December
1996, FFSGI contributed a majority interest (78%) in Ford Credit Europe plc
("Ford Credit Europe") to Ford Credit. Substantially all of the minority
interest in Ford Credit Europe continues to be beneficially owned by Ford. 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. The
financial information presented below relating to Ford Credit includes the
results of Ford Credit Europe for all dates and periods for which the
information is provided.
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,
respectively, during years indicated:
-7-
Item 1. Business (Continued)
----------------------------
Ford Credit's finance receivables and investments in operating leases were
as follows at the dates indicated (in millions):
Installments on finance receivables, including interest, past-due 60 days
or more and the aggregate receivable balances related to such past-due
installments were as follows at the dates indicated (in millions):
The following table sets forth information concerning Ford Credit's credit
loss experience with respect to the various categories of financing during the
years indicated (dollar amounts in millions):
-8-
Item 1. Business (Continued)
----------------------------
An analysis of Ford Credit's allowance for credit losses on finance
receivables and operating leases is as follows for the years indicated (in
millions):
Ford Credit and Ford Credit Europe rely heavily on their ability to raise
substantial amounts of funds. These funds are obtained primarily by sales of
commercial paper, the issuance of term debt and, in the case of Ford Credit
Europe, 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 and dividend payments,
interest supplements and other support from Ford for vehicles financed and
leased by Ford Credit or Ford Credit Europe under Ford-sponsored special
financing or leasing programs. Funds can also be affected by the timing of
payments for the financing of dealers' wholesale inventories and for income
taxes.
The ability of Ford Credit and Ford Credit Europe to obtain funds is
affected by their credit ratings, which are closely related to the financial
condition of and the outlook for Ford, and the nature and availability of
support facilities, such as revolving credit agreements and receivables sales
facilities. The long-term senior debt of each of Ford, Ford Credit and Ford
Credit Europe is rated "A1" and "A+" and the commercial paper of each of Ford
Credit and Ford Credit Europe is rated "Prime-1" and "A-1" by Moody's Investors
Service and Standard & Poor's Ratings Group, respectively.
Ford and Ford Credit are parties to a profit maintenance agreement which
provides for payments by Ford to the extent required to maintain Ford Credit's
earnings at specified minimum levels. In addition, Ford and Ford Credit Europe
are parties to a support agreement which requires Ford to retain a certain
direct or indirect ownership interest in Ford Credit Europe and to make (or
cause Ford Credit to make) payments to the extent required to maintain Ford
Credit Europe's net worth at specified minimum levels. No payments were required
under either of these agreements during the period 1988 through 1996.
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. The
Associates' consumer finance operations consist of a variety of specialized
consumer financing products and services including home equity lending, personal
installment lending, retail sales financing and credit cards. The commercial
operations primarily provide retail financing, leasing and wholesale financing
for heavy-duty and medium-duty trucks and truck trailers, construction, material
handling and other industrial equipment and manufactured housing. The Associates
also provides a number of other products and services, including credit-related
and non-credit-related insurance to its consumer and commercial customers as
well as certain fee-based services such as auto fleet leasing and management,
small business administration lending, relocation services and auto club and
roadside assistance services. As mentioned above, in 1996 The Associates
completed an initial public offering of its common stock representing a 19.3%
economic interest in The Associates.
-9-
Item 1. Business (Continued)
---------------------------
The Associates' net finance receivables were as follows at the dates
indicated (in millions):
The following table sets forth information as of the dates shown regarding
The Associates' net credit losses, allowance for losses and contractual
delinquency.
An analysis of The Associates' allowance for losses on finance
receivables is as follows for the years indicated (in millions):
-10-
Item 1. Business (Continued)
---------------------------
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 January 1997, Ford announced that it was reviewing strategic options
regarding Hertz, including a partial sale. Consistent with this announcement, on
February 28, 1997, Hertz filed a registration statement with the Securities and
Exchange Commission relating to a proposed public offering of less than 20% of
Hertz' common stock.
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, each passenger car
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. In October 1996, the EPA issued
regulations that changed the test procedures for measuring motor vehicle
emissions. If adequate fuel economy adjustment factors are not proposed and
adopted, these regulations may require costly measures to increase fuel economy.
The Act also requires production of new vehicles capable of operating on
clean alternative fuels under a pilot test program begun in California in 1996.
Under this pilot program, each manufacturer is required to sell a certain number
of alternative fuel vehicles each model year. Since California's reformulated
(i.e., cleaner burning) gasoline is an alternative fuel under the Act, most
manufacturers have complied with this requirement by selling vehicles certified
to California standards.
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 March 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
-11-
Item 1. Business (Continued)
----------------------------
beginning with the 2001 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
nonelectric vehicles or to offer substantial discounts on electric vehicles,
selling them well below cost, while increasing the price on nonelectric
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 form 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. On
March 11, 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
has been adopted in New York and Massachusetts and is currently in effect for
model years 1996 and beyond. In addition, these two states have adopted ZEV
mandates beginning in model year 1998. Connecticut has adopted the California
program beginning in 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, 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 triggered.
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.
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.
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. European standards are
generally less stringent than comparable U.S. standards. 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 draft directive provides that prior to December 31, 1998 a technical
feasibility and cost-effectiveness study will be conducted to review appropriate
mandatory standards for 2005.
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Item 1. Business (Continued)
----------------------------
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") prohibits the sale in the United States of any new motor
vehicle or item of motor vehicle equipment that does not conform to motor
vehicle safety standards established by the National Highway Traffic Safety
Administration (the "Safety Administration"). Compliance with 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. The Safety
Administration can order recalls of vehicles and equipment that it finds do not
conform to safety standards. A manufacturer is also obligated to recall its
vehicles if it determines that they contain a safety defect. There currently are
pending before the Safety Administration a number of investigations relating to
alleged safety defects or noncompliance with safety standards in vehicles built,
imported or sold by Ford. The cost of recall programs to remedy safety defects
or noncompliance, should any be determined to exist as a result of such
investigations, could be substantial.
Recently, the Safety Administration adopted a final rule that permits
vehicle manufacturers to reduce the inflation power in air bags in future
models. This final rule will allow Ford and other manufacturers to utilize
designs intended to reduce the risk of air bag deployment related injuries.
The Safety Administration is also considering proposals relating to air bag
deactivation and so-called "smart air bags", including air bags that
automatically adjust their inflation to the size or position of the occupant.
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.
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 for model years 1996 through 1998.
Ford expects to be able to comply with the foregoing CAFE standards, in
some cases using credits from prior or succeeding years. However, an increase in
demand for larger vehicles and 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 a July 1996 meeting of the
parties to the United Nations Climate Change Convention, the United States
indicated its conceptual support for amending the agreement among the parties to
incorporate binding emission reduction levels. If the CCAP 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.
-13-
Item 1. Business (Continued)
----------------------------
Foreign Requirements. In June 1996, the European Union Council of
Environmental Ministers affirmed as a medium-term objective an average of
CO2-emission value for new cars of 120 grams per kilometer. Recognizing that
this may not be achievable by 2005, the Council directed the European Commission
to consider intermediate objectives for 2005 and extension of the 120 grams per
kilometers target until 2010. The European Parliament has requested the
Commission to consider proposals to reduce the average CO2 emissions of new cars
to 90 grams per kilometer by 2005. If adopted, certain of the proposals being
considered could require costly actions that could have substantial adverse
effects on Ford's sales volumes and profits in Europe.
In March 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.
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 for and
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
-14-
Item 1. Business (Continued)
----------------------------
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 is currently studying proposals to introduce an
obligation for motor vehicle manufacturers to take back end-of-life vehicles on
a cost-free basis, 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, and to ban the use of certain substances in vehicles. 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 have 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.
Pollution Control Costs - During the period 1997 through 2001, Ford expects
that approximately $700 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 1997 and
$85 million will be spent in 1998.
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.
-15-
Item 1. Business (Continued)
----------------------------
Employment Data
---------------
Average employment of Ford's Automotive and Financial Services
operations by geographic area was as follows for the years indicated:
In 1996, average Ford employment, excluding operations in Argentina and
Brazil, increased 1.6 percent reflecting primarily growth in the Company's
Financial Services operations.
In 1996, following the dissolution of Autolatina, an unconsolidated joint
venture, Ford re-established wholly owned operations in Argentina and
Brazil. In prior years, Autolatina employees were not included in Ford worldwide
employment statistics.
For further information regarding employment statistics of Ford, see Item
6. "Selected Financial Data". For information concerning employee retirement
benefits, see Note 8 of Notes to Financial Statements.
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 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.
-16-
Item 1. Business (Continued)
----------------------------
Research and Development
------------------------
Ford and certain of its subsidiaries have staffs of professional employees
whose activities are directed primarily to the improvement of the performance
(including fuel efficiency), safety and comfort of the products of those
companies and to the development of new products, and also have staffs of
scientists engaged in basic research. Extensive engineering, research and design
facilities are maintained for these purposes. Principal among them are the
engineering, research and design centers of Ford at Dearborn, Michigan; of Ford
Motor Company, Limited at Dunton, England; and of Ford Werke AG at Merkenich,
Germany.
In 1996, 1995 and 1994, $6.8 billion, $6.6 billion and $5.8 billion,
respectively, were charged to income of Ford and its consolidated subsidiaries
for Ford-sponsored research and development activities relating to the
development of new products and services and the improvement of existing
products and services. The increase from 1995 to 1996 was more than explained by
the inclusion of research and development expense for new entities in Brazil and
Argentina and support for new markets. In addition, $42 million, $18 million and
$38 million were charged to income in 1996, 1995 and 1994, respectively, for
customer-sponsored research and development activities.
Item 2. Properties
-------------------
Ford's U.S. manufacturing and assembly facilities, substantially all of
which are owned by Ford and its subsidiaries, are situated in various sections
of the country and include assembly plants, engine plants, casting plants, metal
stamping plants, electronic components plants, transmission and axle plants,
glass plants and industrial equipment plants. A major portion of the
distribution centers, warehouses and sales offices is owned by Ford, with the
remainder being leased.
In addition, Ford's foreign subsidiaries maintain and operate manufacturing
plants, assembly facilities, parts distribution centers and engineering centers
outside the United States, substantially all of which are owned by such
subsidiaries.
The furniture, equipment and other physical property owned by Ford's
Financial Services operations are not material in relation to their total
assets.
-17-
Item 3. 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. See Item 1,
"Business-Governmental Standards". Included among the foregoing matters are the
following:
Product Liability Matters - 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 $797 million at December 31, 1996.
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 $1.2
billion at December 31, 1996.
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.
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
$393 million at December 31, 1996. (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 - Ford has received notices from government
environmental enforcement agencies concerning two 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.
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
-18-
Item 3. Legal Proceedings
--------------------------
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.
Other Matters - 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.
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
April 1996, the district court judge issued an order adopting the magistrate
judge's recommendation and granting Ford's motion to dismiss the case and hold
that Lemelson's patents pertaining to machine vision inspection technology are
unenforceable. The patents were held unenforceable because Lemelson engaged in
"undue delay" by taking 35 years or more to prosecute the numerous patent
applications for these patents and claimed the work of others as he saw the
technologies develop. The judge indicated that he will issue a separate opinion
supporting the order and issue a judgment in due course. In June 1996, Lemelson
filed two motions for reconsideration of the district court's order and oral
arguments were heard on February 27, 1997. If Lemelson were to prevail, Ford
could be required to pay substantial damages of an as yet indeterminate amount
and could become subject to an injunction preventing future use of any process
or product found to be covered by a valid patent.
Currently, there are six purported class action lawsuits pending against
the Company that allege defects in the paint processes used with respect to
certain vehicles manufactured by Ford. Four lawsuits are nationwide in scope,
three of which have been consolidated for pretrial proceedings in the U.S.
District Court for the Eastern District of Louisiana and one of which was filed
in federal court in Mississippi. A fifth case recently filed in Kansas federal
court is a statewide action. The Company is seeking to have the Mississippi and
Kansas cases consolidated with the other three in Louisiana. The sixth lawsuit
is pending in Texas state court and is limited to Texas purchasers of the
subject vehicles. In each pending lawsuit, the plaintiffs seek unspecified
compensatory damages, as well as punitive damages, attorneys' fees and costs.
The lawsuits appear to focus on vehicles painted with a high-build electrocoat
primer, with two of the federal court cases alleging defects with respect to
unspecified water-based primers. The vehicles in the high-build electrocoat
category are: 1984 through 1993 F-Series/Broncos, 1984 through 1989 Mustangs,
1984 through 1992 Rangers, 1984 through 1989 Bronco II's and 1984 through 1994
heavy trucks. The vehicles in the water-based primer category are unspecified
1984 through 1996 model year vehicles. In July 1996, the federal court dismissed
virtually all claims in the two cases then consolidated before it, but with
leave to amend certain claims. The plaintiffs have since amended their
complaints and Ford has filed motions to dismiss these cases. In January 1997,
the court in the Texas case granted a portion of the Company's motion for
summary judgment but certified two classes of plaintiffs for trial. Ford is
appealing the class certification order. Were plaintiffs to prevail in these
lawsuits, Ford could be required to pay substantial damages.
Nine purported class action lawsuits seeking economic damages (including
damages for diminution in value and rescission of purchase agreements) have been
brought on behalf of all Bronco II owners in the United States and are currently
pending against Ford. Each lawsuit expressly excludes personal injury claimants,
whose claims are discussed above. Several of the lawsuits seek recovery of
unspecified punitive damages. In addition, several of the lawsuits seek an order
requiring the Company to recall and retrofit these vehicles. The Federal
Judicial Panel on Multidistrict Litigation consolidated seven of these cases for
pretrial purposes in federal court in Louisiana. The other two cases remain
pending in state courts in Alabama and Texas. A tentative settlement was reached
in these matters in 1994, but was rejected by the Louisiana federal court. In
-19-
Item 3. Legal Proceedings
--------------------------
late 1996, the parties submitted a revised settlement proposal, but the
Louisiana federal court rejected that proposal in February 1997. In March 1997,
the court denied plaintiffs' motion for certification of a 49-state class,
ruling that only individualized adjudications of the merits of plaintiffs'
claims would provide a fair and efficient resolution of these matters. While the
court has denied class certification, the seven lawsuits are still pending
before it. Ford has filed summary judgment motions in these cases and plans to
file similar motions in the Alabama and Texas lawsuits.
Currently pending are thirteen purported nationwide class action lawsuits
and one purported statewide class action lawsuit covering purchasers of numerous
Ford vehicle lines, ranging in model years from 1983 to 1993, that are equipped
with an allegedly defective ignition switch. Plaintiffs claim that the ignition
switch in these vehicles has a design defect that can cause the switch to short
circuit, resulting in smoke and fire damage to the vehicle. In two of the class
actions, plaintiffs purport to represent a class of owners who have allegedly
experienced a related fire incident. 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. Thirteen of the lawsuits have been
consolidated for initial pretrial proceedings (including a class certification
determination) in federal court in New Jersey. The remaining lawsuit was pending
in state court in Texas but has been removed and conditionally transferred to
the federal court in New Jersey. If the plaintiffs in the purported class
actions were to prevail, Ford could be required to pay substantial damages.
In 1995, Ford voluntarily recalled 248,000 vehicles in Canada equipped with
the allegedly defective ignition switch. In addition, in 1996, Ford recalled an
additional 8.5 million vehicles in the U.S. and Canada. Investigations
concerning the ignition switch being conducted by the Safety Administration and
Transport Canada were closed in 1996 because the agencies were satisfied that
the prior recalls were adequate to reduce the risk of fire in the population of
vehicles using the same or similar ignition switch. The Safety Administration
and Transport Canada continue to monitor this issue.
In 1996, six purported class action lawsuits were brought on behalf of
purchasers or lessees of Ford-manufactured vehicles with distributor-mounted
thick film ignition (TFI) modules. The plaintiffs allege that vehicles with the
distributor-mounted TFI modules are defective due to a propensity to stumble,
stall or not start. The cases are currently pending in state courts in Alabama,
California, Illinois, Maryland, Tennessee and Washington. The cases pending in
Alabama and Tennessee courts have been conditionally certified as nationwide
class actions. The lawsuit in California purports to represent a state-wide
class, and the remaining three cases purport to be regional class actions. The
parties have agreed to stay proceedings in all but the California action through
the hearing on plaintiffs' motion for class certification and completion of
discovery in the California case. The plaintiffs seek pre- and post-judgment
interest, attorney fees, disgorgement of profits, compensatory damages, punitive
damages, notice to the public and the recall and retrofit of all vehicles with
the allegedly defective TFI modules. If the plaintiffs were to prevail in these
lawsuits, Ford could be required to pay substantial damages.
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.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
Not required.
-20-
Item 4A. Executive Officers of the Registrant
----------------------------------------------
The executive officers of the Registrant and their respective positions and
ages at March 15, 1997 are shown in the table below:
-21-
Item 4A. Executive Officers of the Registrant (Continued)
----------------------------------------------------------
-22-
Item 4A. Executive Officers of the Registrant (Continued)
-----------------------------------------------------------
-23-
Item 4A. Executive Officers of the Registrant (Continued)
----------------------------------------------------------
---------------
(1) Also Chairman of the Organization Review and Nominating Committee of the
Board of Directors.
(2) Also a member of the Finance Committee of the Board of Directors.
Some of the officers listed above also are members of one or more
additional committees of the Registrant that are not committees of the Board of
Directors.
All of the above officers, other than Mr. Ross, have been employed by the
Registrant or its subsidiaries in one or more capacities during the past five
years. Before joining Ford, Mr. Ross had been a partner in the New York law firm
of Davis, Polk & Wardwell since 1989.
Under the By-Laws of the Registrant the executive officers are elected by
the Board of Directors at the Annual Meeting of the Board of Directors held for
this purpose, each to hold office until his or her successor shall have been
chosen and shall have qualified or as otherwise provided in the By-Laws.
-24-
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
------------------------------------------------------------------------
The Common Stock of Ford presently is listed on the New York and Pacific
Coast Stock Exchanges in the United States and on certain stock exchanges in
Belgium, France, Germany, Switzerland and the United Kingdom.
The high and low sales prices for Ford Common Stock and the dividends paid
per share of Common and Class B Stock for each full quarterly period in the
years indicated were as follows:
As of February 28, 1997, stockholders of record of Ford included 252,137
holders of Common Stock and 108 holders of Class B Stock.
-25-
Item 6. Selected Financial Data
--------------------------------
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):
-26-
Item 6. Selected Financial Data (Continued)
-------------------------------------------
-27-
Item 6. Selected Financial Data (Continued)
-------------------------------------------
SUMMARY OF VEHICLE UNIT SALES h/
(in thousands)
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
--------------------------------------------------------------------------------
OVERVIEW
The Company's worldwide net income was $4,446 million in 1996, or $3.64 per
share of Common and Class B Stock (fully diluted), compared with $4,139 million,
or $3.33 per share (fully diluted) in 1995. Results in 1996 and 1995 included
several one-time actions (see below). Income per share in 1995 also included a
one-time reduction of $0.06 per share related to the exchange of Series B
Preferred Stock for company-obligated mandatorily redeemable preferred
securities of a subsidiary trust.
The Company's earnings in 1996 were up $307 million from 1995, reflecting
primarily improved Automotive results in North America and one-time actions and
record operating earnings in Financial Services; higher operating losses in
South America and Europe and a one-time charge for employee separation programs
were partial offsets. The Company's worldwide sales and revenues were
$147 billion in 1996, up $9.9 billion or 7% from 1995. Vehicle unit sales of
cars and trucks were 6,653,000, up 47,000 units. Stockholders' equity was $26.8
billion at December 31, 1996, compared with $24.5 billion at December 31, 1995.
In 1996, Automotive capital expenditures for new products and facilities
totaled $8.2 billion, down $467 million from 1995. Automotive cash and
marketable securities were $15.4 billion at December 31, 1996, up $3 billion
from December 31, 1995. Automotive debt at December 31, 1996 totaled $8.2
billion, up $849 million from a year ago. Automotive net cash was $7.2 billion
at December 31, 1996.
The Company has completed launches of its highest-volume products in North
America (F-Series, Taurus, Sable and Escort) and Europe (Mondeo and Fiesta).
Important new products were launched during 1996 and have received strong
customer reception, including the Expedition, Ka and Jaguar XK8.
The Company's Financial Statements and Notes to Financial Statements on
pages FS-1 through FS-33, including the Report of Independent Accountants,
should be read as an integral part of this review.
Fourth Quarter 1996
-------------------
In fourth quarter 1996, Ford earned $1,204 million, or $0.99 per share of
Common and Class B Stock (fully diluted), compared with $660 million, or $0.48
per share (fully diluted) in fourth quarter 1995. Results in fourth quarter 1996
and 1995 included several one-time actions (see below). Income per share in
fourth quarter 1995 also included a one-time reduction of $0.06 per share
related to the exchange of Series B Preferred Stock.
The Company's net income for fourth quarter 1996 and 1995 was as follows
(in millions):
Net Income/(Loss)
---------------------
Fourth Fourth
Quarter Quarter
1996 1995
------- -------
U.S. Automotive $ 628 $ 168
Automotive Outside U.S.
- Europe (88) (48)
- South America (287) (112)
- Other 137 8
------ -----
Total Automotive Outside U.S. (238) (152)
------ -----
Total Automotive 390 16
------ -----
Financial Services 814 644
------ -----
Total Company $1,204 $ 660
====== =====
Earnings for Automotive operations in the U.S. improved in fourth quarter
1996, compared with fourth quarter 1995, as a result of higher margins
(reflecting improved sales mix and cost reductions) and
-29-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
--------------------------------------------------------------------------------
higher volume (up 51,000 units), offset partially by higher product costs
and costs for employee separation programs.
Higher losses incurred by Automotive operations in Europe were more than
explained by higher costs for employee separation programs. Higher losses
incurred in South America resulted primarily from the nonrecurrence of a gain in
fourth quarter 1995 from the dissolution of the Autolatina joint venture, as
well as costs for employee separation programs; higher margins and volume were
partial offsets.
Higher earnings for Financial Services operations reflected a partial
reversal of a second quarter 1996 provision for losses on notes receivable from
Budget Rent A Car Corporation and record earnings at The Associates and Hertz,
offset partially by lower earnings at Ford Credit and the effect of the sale of
USL Capital's assets.
ONE-TIME ACTIONS
Net income in 1996 and 1995 included several one-time actions, as follows
(in millions):
-------------------
*Includes $0.06 per share reduction for exchange of Series B Preferred
Stock
See Note 15 (pages FS-28 and FS-29) of the Notes to Financial Statements for
further information on these one-time actions.
RESULTS OF OPERATIONS
The Company's net income for worldwide Automotive operations in 1996, 1995
and 1994, was as follows (in millions):
-30-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
--------------------------------------------------------------------------------
The Company's net income for worldwide Financial Services operations in
1996, 1995 and 1994, was as follows (in millions):
1996 COMPARED WITH 1995
Automotive Operations
---------------------
Earnings for Automotive operations in the U.S. were up $164 million in 1996
compared with a year ago. The increase resulted from higher margins (reflecting
improved sales mix and cost reductions), offset partially by higher product
costs and costs for employee separation programs. The after-tax return on sales
was 2.7% in 1996, up 2/10 of a point from a year ago.
The U.S. economy continued to grow at a moderate rate in 1996, with
interest rates and inflation at comparatively low levels. Car and truck industry
volumes totaled 15.5 million units in 1996, compared with 15.1 million units in
1995. The increase in industry sales was more than explained by higher truck
industry sales. Ford's U.S. car market share was 20.6%, down 3/10 of a point
from 1995. Ford's U.S. truck share was 31.1%, down 8/10 of a point from 1995.
Ford's combined U.S. car and truck share was 25.2%, down 4/10 of a point from
1995. Reduced sales of lower margin fleet vehicles account for the decline. The
Company expects car and truck industry sales in 1997 to be about equal to 1996.
Unfavorable results for Automotive operations in Europe, compared with a
year ago, reflected costs associated with launching new products, adverse
vehicle mix, higher marketing costs, and costs for employee separation programs,
offset partially by higher volume. In 1996, the European automotive industry
experienced increased competition as a result of industry overcapacity, as well
as a market shift to lower profit smaller cars. This trend is expected to
continue in 1997 and beyond. Ford is continuing to focus on cost reductions,
including vehicle cost reductions, and the rationalization of manufacturing
capacity. Its recently launched new products (the Fiesta, Ka and an updated
Mondeo) will strengthen Ford's European product offerings.
European car and truck industry volumes totaled 14.3 million units in 1996,
compared with 13.4 million units in 1995. Ford's European car market share was
11.6%, down 2/10 of a point from 1995. Ford's European truck share was 13.1%,
down 1.4 points from 1995. Ford's combined European car and truck share was
11.8%, down 4/10 of a point from 1995, reflecting primarily reduced sales of
lower margin fleet vehicles. Car and truck industry sales in 1997 are expected
to be about equal to 1996.
Higher losses in 1996 incurred by Automotive operations in South America
reflected primarily higher losses for operations in Brazil as a result of a long
and costly launch process following the dissolution of the Autolatina joint
venture with Volkswagen AG. Costs for employee separation programs, in addition
to increased competition and a market shift to smaller (Fiesta-sized) cars that
resulted in lower market share, also affected results unfavorably. The Company
is in the process of reestablishing operations in Brazil and Argentina. Losses
in Brazil are expected to continue in 1997. To improve the competitiveness of
its product offerings in Brazil, Ford will have several new products (the Ka,
Fiesta,
-31-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
-------------------------------------------------------------------------------
Escort and Ranger) available for sale throughout most of 1997. In
addition, Ford is focusing on further facility rationalization in the region.
Comparison of Automotive Sales and Total Costs and Expenses
-----------------------------------------------------------
Automotive sales totaled $118 billion in 1996, up 6.8% from 1995. Sales in
the U.S. were $76 billion in 1996 compared with $73.9 billion in 1995, and sales
outside the U.S. were $42 billion in 1996 compared with $36.6 billion in 1995.
Total costs and expenses were $115.5 billion in 1996, up 7.7% from 1995.
Approximately half of the increase in sales and total costs and expenses was
attributable to the inclusion in the Company's consolidated results of
operations, beginning in 1996, of the sales and total costs and expenses for new
entities in Brazil and Argentina resulting from the dissolution of the
Autolatina joint venture. Amounts for 1995 exclude these new entities. The
balance of the increase in sales and total costs and expenses was attributable
primarily to the effects of higher unit volume and a richer sales mix, as well
as costs for employee separation programs.
Research and development expense totaled $6,821 million in 1996, up 3% from
1995. The increase was more than explained by the inclusion of research and
development expense for new entities in Brazil and Argentina and support for new
markets.
Financial Services Operations
-----------------------------
Earnings for Financial Services operations were up $708 million in 1996,
compared with a year ago, including $512 million from the one-time actions
described above. Improvements from operations totaled $196 million.
Ford Credit's earnings in 1996 include a majority ownership (78%) of Ford
Credit Europe, and results for 1995 and 1994 have been restated to reflect this
ownership change. Lower consolidated net income at Ford Credit in 1996, compared
with 1995, resulted primarily from the absence of equity in the net income of
Ford Holdings, Inc. ("Ford Holdings") (reflecting the repurchase in first
quarter 1996 by Ford Holdings of substantially all of the shares of Ford
Holdings' stock owned by Ford Credit), higher credit losses and higher loss
reserve requirements; higher levels of earning assets and improved net interest
margins were partial offsets. Ford Holdings is a holding company which owns
primarily USL Capital and, until December 1995, also owned The Associates.
Depreciation costs increased as a result of continued growth in operating
leases; the related lease revenues more than offset the increased depreciation.
Credit losses as a percent of average net finance receivables (including net
investment in operating leases) were 0.78% in 1996, compared with 0.51% in 1995.
Ford Credit believes the higher levels of credit losses may continue in 1997.
Record earnings at The Associates reflected primarily higher levels of
earning assets, lower operating costs and improved net interest margins, offset
partially by higher credit losses. Credit losses as a percent of average net
finance receivables were 2.03% in 1996, compared with 1.70% in 1995. The
Associates also believes the higher levels of credit losses may continue.
Record earnings at Hertz reflected primarily higher volume in car rental
and equipment rental operations.
HISTORICAL REFERENCE: 1995 COMPARED WITH 1994
The Company's worldwide net income was $4,139 million in 1995, or $3.33 per
share of Common and Class B Stock (fully diluted), compared with $5,308 million,
or $4.44 per share (fully diluted) in 1994. The Company's worldwide sales and
revenues were $137.1 billion in 1995, up $8.7 billion, or 7% from
-32-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
-------------------------------------------------------------------------------
1994. Vehicle unit sales of cars and trucks were 6,606,000, down 247,000
units, or 3.6%. Stockholders' equity was $24.5 billion at December 31, 1995, up
$2.9 billion from December 31, 1994.
The Company's earnings in 1995 were down from 1994, a record year, and
reflected the effects of lower volumes in the U.S., costs associated with
introducing new products and lower earnings at operations outside the U.S.,
primarily in South America. Results in 1995 included costs for employee
separation programs ($146 million). Earnings from Financial Services operations
were up $688 million compared with 1994. The improvement reflected record
earnings at Ford Credit, The Associates, USL Capital and Hertz and the
nonrecurrence of a $440 million charge to net income in 1994 for the disposition
of First Nationwide Bank.
Automotive Operations
---------------------
Earnings for Automotive operations in the U.S. declined in 1995, compared
with 1994, primarily as a result of lower unit volume (reflecting nonrecurrence
of a dealer inventory increase in 1994 and lower industry sales) and costs
associated with introducing new products (mainly the all-new Taurus, Sable and
F-150 pickup truck). U.S. Automotive after-tax return on sales was 2.5% in 1995,
down 1.6 points from a year ago.
The U.S. economy grew at a moderate rate in 1995 with interest rates and
inflation at comparatively low levels. Car and truck industry volumes, however,
decreased from 15.4 million units in 1994 to 15.1 million units in 1995. Most of
the decrease in industry sales was attributable to cars. Ford's share of the
U.S. car market was 20.9%, down 9/10 of a point from 1994. Ford's U.S. truck
share was 31.9%, up 1.8 points from 1994. Ford's combined U.S. car and truck
share was 25.6%, up 4/10 of a point from 1994. The increase in share reflected
primarily higher sales of the Explorer and F-Series trucks, offset partially by
lower sales of specialty vehicles and lower availability of the Taurus and Sable
due to model changeover.
Lower results for Automotive operations in Europe reflected primarily costs
associated with introducing new products (the all-new Galaxy minivan and Fiesta)
and the unfavorable effect of changes in foreign currency exchange rates.
Car and truck industry sales in Europe were 13.4 million units in 1995,
compared with 13.3 million units in 1994. Ford's share of the European car
market was 11.8%, equal to a year ago. Ford's European truck share was 14.5%, up
1/10 of a point from 1994. Ford's combined European car and truck share was
12.2%, up 1/10 of a point from 1994.
Outside the U.S. and Europe, Ford earned $97 million in 1995, compared with
$783 million in 1994. About half of the decrease reflected primarily unfavorable
results for operations in Brazil, where higher import duties and a market shift
to small cars resulted in excess dealer inventories and higher marketing costs.
These factors were offset partially in 1995 by a one-time gain from the
dissolution of Ford's Autolatina joint venture. The decline in earnings outside
the U.S. and Europe also reflected the nonrecurrence of a one-time favorable
effect for devaluation of the Mexican Peso in 1994 and lower results in
Argentina.
During fourth quarter 1995, the Company's Autolatina joint venture in
Brazil and Argentina with Volkswagen AG was dissolved. The dissolution resulted
in a gain of $230 million, primarily from a one-time cash compensation payment
to Ford.
-33-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
-------------------------------------------------------------------------------
Financial Services Operations
-----------------------------
The increase in Ford Credit's consolidated net income in 1995, compared
with 1994, resulted primarily from higher levels of earning assets, favorable
cost performance and lower taxes, offset partially by lower net interest margins
and higher credit losses. Depreciation costs increased as a result of continued
growth in operating leases; the related lease revenues more than offset the
increased depreciation. Ford Credit's results for 1995 included $255 million
from equity in the net income of affiliated companies, primarily Ford Holdings,
compared with $233 million a year ago.
Record earnings at The Associates reflected primarily higher levels of
earning assets and improved net interest margins.
Record earnings at Hertz reflected primarily higher volume in equipment
rentals, offset partially by increased depreciation and borrowing costs.
LIQUIDITY AND CAPITAL RESOURCES
Automotive Operations
---------------------
Automotive cash and marketable securities were $15.4 billion at December
31, 1996, up $3 billion from December 31, 1995. The Company paid $1.8 billion in
cash dividends on its Common Stock, Class B Stock and Preferred Stock during
1996.
Automotive capital expenditures were $8.2 billion in 1996, down $467
million from 1995. Automotive capital expenditures as a percentage of sales was
7% in 1996, down 9/10 of a point from 1995. During the next several years,
Ford's spending for product change is expected to be at similar or higher
levels; however, as a percentage of sales, spending is expected to be at similar
or lower levels.
Automotive debt at December 31, 1996 totaled $8.2 billion, which was 23% of
total capitalization (stockholders' equity and Automotive debt), compared with
$7.3 billion, or 22% of total capitalization, at December 31, 1995.
For a discussion of Ford's support facilities at December 31, 1996, see
Note 9 (page FS-23) of the Notes to Financial Statements.
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 facilities.
Ford Credit's outstanding commercial paper totaled $38 billion at
December 31, 1996 with an average remaining maturity of 34 days. Support
facilities represent additional sources of funds, if required.
For a discussion of support facilities of Ford Credit and other Financial
Services subsidiaries at December 31, 1996, see Note 9 (page FS-23) of the Notes
to Financial Statements.
-34-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
-------------------------------------------------------------------------------
Derivative Financial Instruments
--------------------------------
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.
Financial Services operations issue debt and other payables with various
maturity and interest rate structures 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.
These financial exposures are monitored and managed by the Company as an
integral part of the Company's overall risk management program, which recognizes
the unpredictability of financial markets and seeks to reduce the potentially
adverse effect on the Company'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. For more information on these financial exposures, see
Note 1 (page FS-9) and Note 14 (page FS-27) of the Notes to Financial
Statements.
YEAR 2000 DATE CONVERSION
The Company has established a central office to coordinate the
identification, evaluation and implementation of changes to computer systems and
applications necessary to achieve a year 2000 date conversion with no effect on
customers or disruption to business operations. These actions are necessary to
ensure that the systems and applications will recognize and process the year
2000 and beyond. Major areas of potential business impact have been identified
and are being dimensioned, and initial conversion efforts are underway. The
Company also is communicating with suppliers, dealers, financial institutions
and others with which it does business to coordinate year 2000 conversion. The
total cost of compliance and its effect on the Company's future results of
operations is being determined as part of the detailed conversion planning.
Item 8. Financial Statements and Supplementary Data
----------------------------------------------------
The Financial Statements and Notes to Financial Statements of the
Registrant and the Report of Independent Accountants that are filed as part of
this Report are listed under Item 14. "Exhibits, Financial Statement Schedules,
and Reports on Form 8-K" and are set forth on pages FS-1 through FS-33
immediately following the signature pages of this Report.
Selected quarterly financial data of Ford and its consolidated subsidiaries
for 1996 and 1995 are set forth in Note 18 of the Notes to Financial Statements.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
-----------------------------------------------------------------------
Not required.
-35-
PART III
Item 10. Directors and Executive Officers of the Registrant
------------------------------------------------------------
The information called for by Item 10 is incorporated by reference from the
information under the captions "Election of Directors" and "Management Stock
Ownership" in the Proxy Statement, except that the information called for by
Item 10 with respect to executive officers of the Registrant appears as Item 4A
under Part I of this Report.
Item 11. Executive Compensation
--------------------------------
The information called for by Item 11 is incorporated by reference from the
information under the following captions in the Proxy Statement: "Compensation
of Directors", "Compensation and Option Committee Report on Executive
Compensation", "Compensation of Executive Officers", "Stock Options",
"Contingent Stock Rights and Restricted Stock Units", "Stock Performance Graphs"
and "Retirement Plans".
Item 12. Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------
The information called for by Item 12 is incorporated by reference from the
information under the caption "Management Stock Ownership" in the Proxy
Statement.
Item 13. Certain Relationships and Related Transactions
--------------------------------------------------------
The information called for by Item 13 is incorporated by reference from the
information under the caption "Certain Relationships and Related Transactions"
in the Proxy Statement.
-36-
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
--------------------------------------------------------------------------
(a) 1. Financial Statements - Ford Motor Company and Subsidiaries
Consolidated Statement of Income for the years ended December 31, 1996,
1995 and 1994.
Consolidated Balance Sheet at December 31, 1996 and 1995.
Consolidated Statement of Cash Flows for the years ended December 31,
1996, 1995 and 1994.
Consolidated Statement of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994.
Notes to Financial Statements
Report of Independent Accountants
The Financial Statements, the Notes to Financial Statements and the Report
of Independent Accountants listed above are filed as part of this Report and are
set forth on pages FS-1 through FS-33 immediately following the signatures pages
of this Report.
(a) 2. Financial Statement Schedules
Designation Description
----------- -----------
Supplemental
Schedule Condensed Financial Information of Subsidiary
The Financial Statement Schedule listed above is filed as part of this
Report and is set forth on page FSS-1 immediately following page FS-33. The
schedules not filed are omitted because the information required to be contained
therein is disclosed elsewhere in the Financial Statements or the amounts
involved are not sufficient to require submission.
-37-
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
--------------------------------------------------------------------------
(a) 3. Exhibits
-38-
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
--------------------------------------------------------------------------
-39-
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
--------------------------------------------------------------------------
-40-
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
--------------------------------------------------------------------------
-41-
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
--------------------------------------------------------------------------
Instruments defining the rights of holders of certain issues of long-term
debt of the Registrant and of certain consolidated subsidiaries and of any
unconsolidated subsidiary, for which financial statements are required to be
filed with this Report, 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 and its subsidiaries on a consolidated basis.
The Registrant agrees to furnish a copy of each of such instruments to the
Commission upon request.
(b) Reports on Form 8-K
During the quarter ended December 31, 1996, the Registrant filed the
following Current Reports on Form 8-K:
1. Current Report on Form 8-K dated September 30, 1996 (filed October 2,
1996) concerning the new collective bargaining agreement with the UAW.
2. Current Report on Form 8-K dated October 10, 1996 concerning formation
of the new Automotive Products Operations.
3. Current Report on Form 8-K dated October 16, 1996 regarding the
consolidated results of operations and financial condition of the
Registrant and its subsidiaries for the three and nine-month periods
ended or at September 30, 1996.
-42-
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 COMPANY
By: John M. Devine*
-----------------------
(John M. Devine)
Executive Vice President and
Chief Financial Officer
Date: March 18, 1997
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 on the date indicated.
-43-
-44-
FS-1
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.
FS-2
FS-3
FS-4
FS-5
FS-6
Ford Motor Company and Subsidiaries
Notes to Financial Statements
NOTE 1. Accounting Policies
----------------------------
Principles of Consolidation
---------------------------
The consolidated financial statements include all significant majority-owned
subsidiaries and reflect the operating results, assets, liabilities and cash
flows for two business segments: Automotive and Financial Services. The assets
and liabilities of the Automotive segment are classified as current or
noncurrent, and those of the Financial Services segment are unclassified.
Affiliates that are 20% to 50% owned, principally Mazda Motor Corporation and
AutoAlliance International Inc., and subsidiaries where control is expected to
be temporary, principally investments in certain dealerships, are accounted for
on an equity basis. For purposes of Notes to Financial Statements,
"Ford" or "the company" means Ford Motor Company and its majority-owned
consolidated subsidiaries unless the context requires otherwise. Certain amounts
for prior periods have been reclassified to conform with 1996 presentations.
Automotive revenues and costs for 1996 include new entities in Brazil and
Argentina resulting from the dissolution of Autolatina; amounts for 1995 and
1994 exclude these entities (Note 15).
Use of estimates and assumptions 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 those estimates
and assumptions.
Nature of Operations
--------------------
The company operates in two principal business segments. The Automotive segment
consists of the design, manufacture, assembly and sale of cars, trucks and
related parts and accessories. The Financial Services segment consists primarily
of financing operations, vehicle and equipment leasing and rental operations,
and insurance operations.
Intersegment transactions represent principally transactions occurring in the
ordinary course of business, borrowings and related transactions between
entities in the Financial Services and Automotive segments, and interest and
other support under special vehicle financing programs. These arrangements are
reflected in the respective business segments.
Revenue Recognition - Automotive
--------------------------------
Sales are recorded by the company when products are shipped to dealers, except
as described below. Estimated costs for approved sales incentive programs
normally are recognized as sales reductions at the time of revenue recognition.
Estimated costs for sales incentive programs approved subsequent to the time
that related sales were recorded are recognized when the programs are approved.
Beginning December 1, 1995, sales through dealers to certain daily rental
companies where the daily rental company has an option to require Ford to
repurchase vehicles, subject to certain conditions, are recognized over the
period of daily rental service in a manner similar to lease accounting. This
change in accounting principle was made in accordance with the Emerging Issues
Task Force consensus on Issue 95-1, "Revenue Recognition on Sales with a
Guaranteed Minimum Residual Value." Ford elected to recognize this change in
accounting principle on a prospective basis; the effect on the company's
consolidated results of operations was not material. Previously, the company
recognized revenue for these vehicles when shipped. The carrying value of these
vehicles, included in other current assets, was $1,803 million at December 31,
1996.
FS-7
NOTE 1. Accounting Policies (continued)
----------------------------
Revenue Recognition - Financial Services
----------------------------------------
Revenue from finance receivables is recognized over the term of the receivable
using the interest method. Certain loan origination costs are deferred and
amortized over the term of the related receivable as a reduction in financing
revenue. Revenue from operating leases is recognized as scheduled payments
become due. Agreements between Automotive operations and certain Financial
Services operations provide for interest supplements and other support costs to
be paid by Automotive operations on certain financing and leasing transactions.
Financial Services operations recognize this revenue in income over the period
that the related receivables and leases are outstanding; the estimated costs of
interest supplements and other support costs are recorded as sales incentives by
Automotive operations.
Other Costs
-----------
Advertising and sales promotion costs are expensed as incurred. Advertising
costs were $2,155 million in 1996, $2,024 million in 1995 and $1,823 million in
1994.
Estimated costs related to product warranty are accrued at the time of sale.
Research and development costs are expensed as incurred and were $6,821 million
in 1996, $6,624 million in 1995 and $5,811 million in 1994. The increase from
1995 to 1996 was more than explained by the inclusion of research and
development expense for new entities in Brazil and Argentina and support for
new markets.
Income Per Share of Common and Class B Stock
--------------------------------------------
Income per share of Common and Class B Stock is calculated by dividing the
income attributable to Common and Class B Stock by the average number of shares
of Common and Class B Stock outstanding during the applicable period.
The company has outstanding securities, primarily Series A Preferred Stock, that
could be converted to Common Stock. Other obligations, such as stock options,
are considered to be common stock equivalents. The calculation of income per
share of Common and Class B Stock assuming full dilution takes into account the
effect of these convertible securities and common stock equivalents when the
effect is material and dilutive.
Income attributable to Common and Class B Stock was as follows (in millions):
- - - - -
* Represents a one-time reduction of $0.06 per share of Common
and Class B Stock to reflect the excess of the fair value of
company-obligated mandatorily redeemable preferred securities
of a subsidiary trust at date of issuance over the carrying
amount of exchanged Series B Preferred Stock
FS-8
NOTE 1. Accounting Policies (continued)
----------------------------
Derivative Financial Instruments
--------------------------------
Ford has operations in over 30 countries and sells vehicles in over 200 markets,
and is exposed to a variety of market risks, including the effects of changes in
foreign currency exchange rates, interest rates and commodity prices. These
financial exposures are monitored and managed by the company as an integral part
of the company's overall risk management program, which recognizes the
unpredictability of financial markets and seeks to reduce the potentially
adverse effect on the company's results. The company uses derivative financial
instruments to manage the exposures to fluctuations in exchange rates, interest
rates and commodity prices. All derivative financial instruments are classified
as "held for purposes other than trading"; company policy specifically prohibits
the use of leveraged derivatives or use of any derivatives for speculative
purposes.
Ford's primary foreign currency exposures, in terms of net corporate exposure,
are in the German Mark, Japanese Yen, British Pound Sterling, Brazilian Real and
Spanish Peseta. Agreements to manage foreign currency exposures include forward
contracts, swaps and options. The company uses these derivative instruments to
hedge assets and liabilities denominated in foreign currencies, firm commitments
and certain investments in foreign subsidiaries. Gains and losses on hedges of
firm commitments are deferred and recognized with the related transactions. In
the case of hedges of net investments in foreign subsidiaries, gains and losses
are recognized as an adjustment to the foreign currency translation component of
stockholders' equity. All other gains and losses are recognized in cost of sales
for Automotive and interest expense for Financial Services. These instruments
usually mature in two years or less for Automotive exposures and longer for
Financial Services exposures, consistent with the underlying transactions. The
effect of changes in exchange rates may not be fully offset by gains or losses
on currency derivatives, depending on the extent to which the exposures are
hedged.
Interest rate swap agreements are used to manage the effects of interest rate
fluctuations by changing the interest rate characteristics of debt to match the
interest rate characteristics of corresponding assets. These instruments mature
primarily through 2001, consistent with the underlying debt. The differential
paid or received on interest rate swaps 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.
Ford has a commodity hedging program that uses primarily forward contracts and
options to manage the effects of changes in commodity prices on Automotive
results. The financial instruments used in this program mature in two years or
less, consistent with the related purchase commitments. Gains and losses are
recognized in cost of sales during the settlement period of the related
transactions.
FS-9
NOTE 1. Accounting Policies (continued)
----------------------------
Foreign Currency Translation
----------------------------
Revenues, costs and expenses of foreign subsidiaries are translated to U.S.
dollars at average-period exchange rates. The effect of changes in exchange
rates on revenues and costs was generally unfavorable in 1996, 1995 and 1994.
Assets and liabilities of foreign subsidiaries are translated to U.S. dollars at
end-of-period exchange rates. The effects of this translation for most foreign
subsidiaries and certain other foreign currency transactions are reported in a
separate component of stockholders' equity. Translation gains and losses for
foreign subsidiaries that are located in highly inflationary countries or
conduct a major portion of their business with the company's U.S. operations are
included in income. Also included in income are gains and losses arising from
transactions denominated in a currency other than the functional currency of the
subsidiary involved.
The effect of changes in exchange rates on assets and liabilities, as described
above, decreased net income by $156 million in 1996, and increased net income by
$13 million in 1995 and $376 million in 1994. These amounts included a pre-tax
net transaction and translation loss of $300 million in 1996, and gains of $37
million in 1995 and $574 million in 1994.
Impairment of Long-Lived Assets and Certain Identifiable Intangibles
--------------------------------------------------------------------
The company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," as of January 1, 1996. The effect of adopting this standard was
not material.
The company evaluates the carrying value of goodwill for potential impairment on
an ongoing basis. Such evaluations compare operating income before amortization
of goodwill to the amortization recorded for the operations to which the
goodwill relates. The company also evaluates the carrying value of long-lived
assets and long-lived assets to be disposed of for potential impairment on an
ongoing basis. The company considers projected future operating results, trends
and other circumstances in making such estimates and evaluations.
Goodwill
--------
Goodwill represents the excess of the purchase price over the fair value of the
net assets of acquired companies and is amortized using the straight-line method
principally over 40 years. Total goodwill included in Automotive and Financial
Services other assets at December 31, 1996 was $2.3 billion and $2.9 billion,
respectively.
FS-10
NOTE 1. Accounting Policies (continued)
----------------------------
Company-Obligated Mandatorily Redeemable Preferred Securities of a Subsidiary
Trust
-----------------------------------------------------------------------------
During 1995, Ford Motor Company Capital Trust I (the "Trust") issued $632
million of its 9% Trust Originated Preferred Securities (the "Preferred
Securities") in a one-for-one exchange for 25,273,537 shares of the company's
outstanding Series B Depositary Shares ("Depositary Shares"). Concurrent with
the exchange and the related purchase by Ford of the Trust's common securities
(the "Common Securities"), the company issued to the Trust $651 million
aggregate principal amount of its 9% Junior Subordinated Debentures due December
2025 (the "Debentures"). The sole assets of the Trust are and will be the
Debentures. The Debentures are redeemable, in whole or in part, at the company's
option on or after December 1, 2002, at a redemption price of $25 per Debenture
plus accrued and unpaid interest. If the company redeems the Debentures, or upon
maturity of the Debentures, the Trust is required to redeem the Preferred
Securities and Common Securities at $25 per share plus accrued and unpaid
distributions.
Ford guarantees to pay in full to the holders of the Preferred Securities all
distributions and other payments on the Preferred Securities to the extent not
paid by the Trust only if and to the extent that Ford has made a payment of
interest or principal on the Debentures. This guarantee, when taken together
with Ford's obligations under the Debentures and the Indenture relating thereto
and its obligations under the Declaration of Trust of the Trust, including its
obligation to pay certain costs and expenses of the Trust, constitutes a full
and unconditional guarantee by Ford of the Trust's obligations under the
Preferred Securities.
Preferred Stockholders' Equity in a Subsidiary Company
------------------------------------------------------
During fourth quarter 1995, Ford Holdings, Inc. ("Ford Holdings"), a subsidiary
of Ford, merged with Ford Holdings Capital Corporation, a subsidiary of Ford
Holdings, which resulted in the cancellation of the voting preferred stock of
Ford Holdings in exchange for payment by Ford Holdings of the liquidation
preference of the stock plus accrued and unpaid dividends.
NOTE 2. Marketable and Other Securities
----------------------------------------
Trading securities are recorded at fair value with unrealized gains and losses
included in income. Available-for-sale securities are recorded at fair value
with unrealized gains and losses excluded from income and reported, net of tax,
in a separate component of stockholders' 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 bases of cost used in
determining realized gains and losses are specific identification for Automotive
operations and first-in, first-out for Financial Services operations.
The fair value of most securities is determined by quoted market prices. The
estimated fair value of securities for which there are no quoted market prices
is based on similar types of securities that are traded in the market.
Expected maturities of debt securities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without penalty.
FS-11
NOTE 2. Marketable and Other Securities (continued)
----------------------------------------
Automotive
----------
Investments in securities at December 31 were as follows (in millions):
Included in stockholders' equity at December 31, 1996 and 1995 was $96 million
and $146 million, respectively, which represented the company's equity interest
in the unrealized gains on securities owned by certain unconsolidated
affiliates.
Financial Services
------------------
Investments in securities at December 31, 1996 were as follows (in millions):
FS-12
NOTE 2. Marketable and Other Securities (continued)
----------------------------------------
Financial Services (continued)
------------------
Investments in securities at December 31, 1995 were as follows (in millions):
The amortized cost and fair value of investments in available-for-sale
securities and held-to-maturity securities at December 31 by contractual
maturity, were as follows (in millions):
Proceeds from sales of available-for-sale securities were $8.4 billion in 1996,
$2.4 billion in 1995 and $9.1 billion in 1994. In 1996, gross gains of $43
million and gross losses of $21 million were realized on those sales; gross
gains of $39 million and gross losses of $18 million were realized in 1995, and
gross gains of $24 million and gross losses of $56 million were realized in
1994. Stockholders' equity included, net of tax, net unrealized gains of $54
million and $56 million at December 31, 1996 and 1995, respectively.
FS-13
NOTE 3. Receivables - Financial Services
-----------------------------------------
Included in net receivables and lease investments at December 31 were net
finance receivables, investments in direct financing leases and investments in
operating leases. The investments in direct financing and operating leases
relate to the leasing of vehicles, various types of transportation and other
equipment, and facilities.
Net finance receivables at December 31 were as follows (in millions):
Included in finance receivables at December 31, 1996 and 1995 were a total
of $1.2 billion and $1.3 billion, respectively, owed by three customers with the
largest receivable balances. Other finance receivables consisted primarily of
commercial and consumer loans, collateralized loans, credit card receivables,
general corporate obligations and accrued interest. Also included in other
finance receivables at December 31, 1996 and 1995 were $4 billion and
$3.5 billion, respectively, of accounts receivable purchased by certain
Financial Services operations from Automotive operations.
Contractual maturities of total finance receivables are as follows (in
millions): 1997 - $55,123; 1998 - $20,648; 1999 - $14,294; thereafter - $32,235.
Experience indicates that a substantial portion of the portfolio generally is
repaid before the contractual maturity dates.
The fair value of most receivables was estimated by discounting future cash
flows using an estimated discount rate that reflected the credit, interest rate
and prepayment risks associated with similar types of instruments. For
receivables with short maturities, the book value approximated fair value.
Sales of finance receivables increased net income by $56 million in 1996, $69
million in 1995 and $15 million in 1994.
Investments in direct financing leases at December 31 were as follows (in
millions):
Minimum direct financing lease rentals (including executory costs of $26
million) are contractually due as follows (in millions): 1997 - $4,145; 1998 -
$2,761; 1999 - $1,671; 2000 - $806; 2001 - $287; thereafter - $110.
FS-14
NOTE 3. Receivables - Financial Services (continued)
-----------------------------------------
Investments in operating leases at December 31 were as follows (in millions):
Minimum rentals on operating leases are contractually due as follows (in
millions): 1997 - $11,365; 1998 - $10,535; 1999 - $1,185; 2000 - $247; 2001 -
$50; thereafter - $300.
Depreciation expense for assets subject to operating leases is provided
primarily on the straight-line method over the term of the lease in amounts
necessary to reduce the carrying amount of the asset to its estimated residual
value. Gains and losses upon disposal of the asset also are included in
depreciation expense. Depreciation expense was as follows (in millions): 1996 -
$5,867; 1995 - $5,508; 1994 - $4,231.
Allowances for credit losses are estimated and established as required
based on historical experience. Other factors that affect collectibility also
are evaluated, and additional amounts may be provided. Finance receivables and
lease investments are charged to the allowances for credit losses when an
account is deemed to be uncollectible, taking into consideration the financial
condition of the borrower, the value of the collateral, recourse to guarantors
and other factors. Recoveries on finance receivables and lease investments
previously charged off as uncollectible are credited to the allowances for
credit losses.
Changes in the allowances for credit losses were as follows (in millions):
Statement of Financial Accounting Standards No. 125 ("SFAS 125"),
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," was issued in June 1996, effective for transfers and servicing
of financial assets and extinguishments of liabilities after December 31, 1996.
The company will adopt this standard on January 1, 1997. The effect of adopting
SFAS 125 is not expected to be material.
The company adopted Statement of Financial Accounting Standards No. 114
("SFAS 114"), "Accounting by Creditors for Impairment of a Loan," and Statement
of Financial Accounting Standards No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures," as of
January 1, 1995. The effect of adopting these standards, which require that
impaired loans be measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate, was not material.
FS-15
NOTE 4. Inventories - Automotive
---------------------------------
Inventories at December 31 were as follows (in millions):
Inventories are stated at the lower of cost or market. The cost of most
U.S. inventories is determined by the last-in, first-out ("LIFO") method. The
cost of the remaining inventories is determined primarily by the first-in,
first-out ("FIFO") method.
If the FIFO method had been used instead of the LIFO method, inventories
would have been higher by $1,445 million and $1,406 million at December 31, 1996
and 1995, respectively.
NOTE 5. Net Property, Depreciation and Amortization - Automotive
-----------------------------------------------------------------
Net property at December 31 was as follows (in millions):
Property, equipment and special tools are stated at cost, less accumulated
depreciation and amortization. Property and equipment placed in service before
January 1, 1993 are depreciated using an accelerated method that results in
accumulated depreciation of approximately two-thirds of asset cost during the
first half of the estimated useful life of the asset. Property and equipment
placed in service after December 31, 1992 are depreciated using the
straight-line method of depreciation over the estimated useful life of the
asset. On average, buildings and land improvements are depreciated based on a
30-year life; machinery and equipment are depreciated based on a 14-year life.
Special tools are amortized using an accelerated method over periods of time
representing the estimated productive life of those tools.
Depreciation and amortization expenses were as follows (in millions):
When property and equipment are retired, the general policy is to charge
the cost of those assets, reduced by net salvage proceeds, to accumulated
depreciation. Maintenance, repairs and rearrangement costs are expensed as
incurred and were $2,325 million in 1996, $2,206 million in 1995 and $2,065
million in 1994. Expenditures that increase the value or productive capacity of
assets are capitalized. Preproduction costs related to new facilities are
expensed as incurred.
FS-16
NOTE 6. Income Taxes
---------------------
Income before income taxes for U.S. and foreign operations, excluding
equity in net (loss)/income of affiliated companies, was as follows (in
millions):
The provision for income taxes was estimated as follows (in millions):
The provision includes estimated taxes payable on that portion of retained
earnings of subsidiaries expected to be received by the company. No provision
was made with respect to $1.9 billion of retained earnings at December 31, 1996
that have been invested by foreign subsidiaries. It is not practicable to
estimate the amount of unrecognized deferred tax liability for the undistributed
foreign earnings.
A reconciliation of the provision for income taxes compared with the
amounts at the U.S. statutory tax rate is shown below (in millions):
FS-17
NOTE 6. Income Taxes (continued)
---------------------
Deferred income taxes reflect the estimated tax effect of temporary
differences between assets and liabilities for financial reporting purposes and
those amounts as measured by tax laws and regulations and net operating losses
of subsidiaries. The components of deferred income tax assets and liabilities at
December 31 were as follows (in millions):
Foreign net operating loss carryforwards for tax purposes were $4.3 billion
at December 31, 1996. A substantial portion of these losses has an indefinite
carryforward period; the remaining losses have expiration dates beginning in
1997. For financial statement purposes, the tax benefit of operating losses is
recognized as a deferred tax asset, subject to appropriate valuation allowances.
The company evaluates the tax benefits of operating loss carryforwards on an
ongoing basis. Such evaluations include a review of historical and consideration
of projected future operating results, the eligible carryforward period and
other circumstances.
FS-18
NOTE 7. Liabilities - Automotive
---------------------------------
Current Liabilities
-------------------
Included in accrued liabilities at December 31 were the following (in millions):
Noncurrent Liabilities
----------------------
Included in other liabilities at December 31 were the following (in millions):
NOTE 8. Employee Retirement Benefits
-------------------------------------
Employee Retirement Plans
-------------------------
The company has two principal retirement plans in the U.S. The Ford-UAW
Retirement Plan covers hourly employees represented by the UAW, and the General
Retirement Plan covers substantially all other employees of the company and
several finance subsidiaries in the U.S. The hourly plan provides
noncontributory benefits related to employee service. The salaried plan provides
similar noncontributory benefits and contributory benefits related to pay and
service. Other U.S. and non-U.S. subsidiaries have separate plans that generally
provide similar types of benefits covering their employees. The company and its
subsidiaries also have defined benefit plans applicable to certain executives
which are not funded.
The company's policy for funded plans is to contribute annually, at a
minimum, amounts required by applicable law, regulations and union agreements.
Plan assets consist principally of investments in stocks, government and other
fixed income securities and real estate. The various plans generally are funded,
except in Germany, where this has not been the custom, and as noted above; in
those cases, an unfunded liability is recorded.
The company's pension expense, including Financial Services, was as follows
(in millions):
FS-19
NOTE 8. Employee Retirement Benefits (continued)
-------------------------------------
Pension expense in 1996 increased for U.S. and non-U.S. plans as a result
of employee separation programs and lower discount rates. Pension expense in
1995 decreased for U.S. plans primarily as a result of higher discount rates,
and increased for non-U.S. plans primarily as a result of benefit improvements
and unfavorable exchange rate changes. In addition, amendments made in September
1996 to the Ford-UAW Retirement Plan and the General Retirement Plan provide
pension benefit improvements for present and future retirees that will increase
the company's pension expense in future years compared with 1996.
The status of these plans at December 31 was as follows (in millions):
- - - - -
a/ The balance of the initial difference between assets and obligation
deferred for recognition over a 15-year period.
b/ The prior service effect of plan amendments deferred for recognition
over remaining service.
c/ The deferred gain or loss resulting from investments, other experience
and changes in assumptions.
d/ An adjustment to reflect the unfunded accumulated benefit obligation in
the balance sheet for plans whose benefits exceed the assets. At
December 31, 1996, the unfunded liability in excess of $651 million
resulted in an increase in the charge to stockholders' equity of $159
million net of deferred taxes; at December 31, 1995, the charge to
stockholders' equity was $108 million.
FS-20
NOTE 8. Employee Retirement Benefits (continued)
-------------------------------------
Postretirement Health Care and Life Insurance Benefits
------------------------------------------------------
The company and certain of its subsidiaries sponsor unfunded plans to provide
selected health care and life insurance benefits for retired employees. The
company's U.S. and Canadian employees may become eligible for these benefits if
they retire while working for the company; however, benefits and eligibility
rules may be modified from time to time. The estimated cost for these benefits
is accrued over periods of employee service on an actuarially determined basis.
Net postretirement benefit expense, including Financial Services, was as
follows (in millions):
The status of these plans at December 31 was as follows (in millions):
- - - - -
* The prior service effect of plan amendments deferred for
recognition over remaining service to retirement eligibility
** The deferred gain or loss resulting from experience and changes in
assumptions deferred for recognition over remaining service to
retirement
Changing the assumed health care cost trend rates by one percentage point
is estimated to change the aggregate service and interest cost components of net
postretirement benefit expense for 1996 by about $200 million and the
accumulated postretirement benefit obligation at December 31, 1996 by about
$2 billion.
FS-21
NOTE 9. Debt
-------------
The fair value of debt was estimated based on quoted market prices or
current rates for similar debt with the same remaining maturities.
Automotive
----------
Long-term debt at December 31, 1996 included maturities as follows (in
millions): 1997 - $640 (included in current liabilities); 1998 - $401; 1999 -
$148; 2000 - $1,006; 2001 - $893; thereafter - $4,047.
Included in long-term debt at December 31, 1996 and 1995 were obligations
of $5,961 million and $5,031 million, respectively, with fixed interest rates
and $534 million and $444 million, respectively, with variable interest rates
(generally based on LIBOR or other short-term rates). Obligations payable in
foreign currencies at December 31, 1996 and 1995 were $756 million and
$968 million, respectively.
Agreements to manage exposures to fluctuations in interest rates, which
include primarily interest rate swap agreements and futures contracts, did not
materially change the overall weighted-average interest rate on long-term debt
and effectively decreased the obligations subject to variable interest rates to
$363 million at December 31, 1996 and $287 million at December 31, 1995.
Financial Services
------------------
FS-22
NOTE 9. Debt (continued)
-------------
Financial Services (continued)
------------------
Information concerning short-term borrowings (excluding long-term debt
payable within one year) is as follows (in millions):
Long-term debt at December 31, 1996 included maturities as follows (in
millions): 1997 - $14,592; 1998 - $14,742; 1999 - $14,473; 2000 - $12,442; 2001
- $11,211; thereafter - $17,773.
Included in long-term debt at December 31, 1996 and 1995 were obligations
of $55.8 billion and $53.2 billion, respectively, with fixed interest rates and
$14.8 billion and $15.1 billion, respectively, with variable interest rates
(generally based on LIBOR or other short-term rates). Obligations payable in
foreign currencies at December 31, 1996 and 1995 were $28 billion and $21
billion, respectively. These obligations were issued primarily to fund foreign
business operations.
Agreements to manage exposures to fluctuations in interest rates include
primarily interest rate swap agreements. At December 31, 1996, these agreements
decreased the weighted-average interest rate on long-term debt to 6.4%, compared
with 6.7% excluding these agreements, and effectively decreased the obligations
subject to variable interest rates to $13.6 billion; the weighted-average
interest rate on short-term debt increased to 5.7%, compared with 5.6% excluding
these agreements. At December 31, 1995, these agreements did not materially
change the overall weighted-average interest rate on long-term debt of 7% and
effectively decreased the obligations subject to variable rates to
$11.9 billion; the weighted-average interest rate on short-term debt increased
to 5.8%, compared with 5.7% excluding these agreements.
Support Facilities
------------------
At December 31, 1996, Ford had long-term contractually committed global
credit agreements under which $8.4 billion is available from various banks
through June 30, 2001. The entire $8.4 billion may be used, at Ford's option, by
any affiliate of Ford; however, any borrowing by an affiliate will be guaranteed
by Ford. In addition, Ford has the ability to transfer on a nonguaranteed basis
the entire $8.4 billion in varying portions to Ford Motor Credit Company ("Ford
Credit"), a subsidiary of Ford, and to Ford Credit Europe plc ("Ford Credit
Europe"), a subsidiary of Ford Credit. These facilities were unused at December
31, 1996.
At December 31, 1996, Financial Services had a total of $49.8 billion of
contractually committed support facilities. Of these facilities, $24.5 billion
(excluding the $8.4 billion of Ford's credit facilities) are contractually
committed global credit agreements under which $19.6 billion and $4.9 billion
are available to Ford Credit and Ford Credit Europe, respectively, from various
banks; 62% and 76%, respectively, of such facilities are available through June
30, 2001. The entire $19.6 billion may be used, at Ford Credit's option, by any
subsidiary of Ford Credit, and the entire $4.9 billion may be used, at Ford
Credit Europe's option, by any subsidiary of Ford Credit Europe. Any borrowings
by such subsidiaries will be guaranteed by Ford Credit or Ford Credit Europe, as
the case may be. At December 31, 1996, $165 million of the Ford Credit global
facilities were in use; $709 million of the Ford Credit Europe global facilities
were in use. Other than the global credit agreements, the remaining portion of
the Financial Services support facilities at December 31, 1996 consisted of
$22.6 billion of contractually committed support facilities available to various
affiliates in the U.S. and $2.7 billion of contractually committed support
facilities available to various affiliates outside the U.S.; at
December 31, 1996, approximately $1.4 billion of these facilities were in use.
FS-23
NOTE 10. Capital Stock
-----------------------
At December 31, 1996, all general voting power was vested in the holders of
Common Stock and the holders of Class B Stock, voting together without regard to
class. At that date, the holders of Common Stock were entitled to one vote per
share and, in the aggregate, had 60% of the general voting power; the holders of
Class B Stock were entitled to such number of votes per share as would give
them, in the aggregate, the remaining 40% of the general voting power, as
provided in the company's Certificate of Incorporation.
The Certificate of Incorporation provides that all shares of Common Stock
and Class B Stock share equally in dividends (other than dividends declared with
respect to any outstanding Preferred Stock), except that any stock dividends are
payable in shares of Common Stock to holders of that class and in Class B Stock
to holders of that class. Upon liquidation, all shares of Common Stock and Class
B Stock are entitled to share equally in the assets of the company available for
distribution to the holders of such shares.
On April 14, 1994, the company's Board of Directors declared a 2-for-1
stock split in the form of a 100% stock dividend on the company's Common Stock
and Class B Stock effective June 6, 1994. Share data were restated to reflect
the split, where appropriate.
Information concerning the Preferred Stock of the company is as follows:
The Series A and Series B Preferred Stock rank (and any other outstanding
Preferred Stock of the company would rank) senior to the Common Stock and Class
B Stock in respect of dividends and liquidation rights.
FS-24
NOTE 11. Stock Options
-----------------------
The company has stock options outstanding under the 1985 Stock Option Plan
and the 1990 Long-Term Incentive Plan. These Plans were approved by the
stockholders. No further grants may be made under the 1985 Plan. Grants may be
made under the 1990 Plan through April 2000. In general, options granted under
the 1985 Plan and options granted to date under the 1990 Plan become exercisable
25% after one year from the date of grant, 50% after two years, 75% after three
years and in full after four years. Options under both Plans expire after 10
years. Certain options outstanding under the Plans were granted with an equal
number of accompanying stock appreciation rights which may be exercised in lieu
of the options. Under the Plans, a stock appreciation right entitles the holder
to receive, without payment, the excess of the fair market value of the Common
Stock on the date of exercise over the option price, either in Common Stock or
cash or a combination. In addition, grants of Contingent Stock Rights were made
with respect to 865,100 shares in 1996, 884,500 shares in 1995 and 709,800
shares in 1994 under the 1990 Long-Term Incentive Plan (not included in the
tables below). The number of shares ultimately awarded will depend on the extent
to which the Performance Target specified in each Right is achieved, individual
performance of the recipients and other factors, as determined by the
Compensation and Option Committee of the Board of Directors.
There were no shares authorized for future grants at December 31, 1996,
1995 and 1994. Up to 1% of Common Stock issued as of December 31 of any year may
be made available for stock options and other plan awards in the next succeeding
calendar year. That limit may be increased up to 2% in any year, with a
corresponding reduction in shares available for grants in future years. At
December 31, 1996, this reduction aggregated to 279,420 shares.
Information concerning stock options is as follows (shares in millions):
- - - - -
* Exercised at option prices ranging from $13.42 to $29.06 during 1996,
$9.09 to $29.06 during 1995, and $9.09 to $28.84 during 1994
** Included 4.8 and 45.5 million shares under the 1985 and 1990 Plans,
respectively, at option prices ranging from $13.42 to $32.75 per share.
At December 31, 1996, the weighted-average remaining
exercise period relating to the outstanding options was 6.9 years
The estimated fair value as of date of grant of options granted in 1996 and
1995, using the Black-Scholes option-pricing model, was as follows:
FS-25
NOTE 11. Stock Options (continued)
-----------------------
The company adopted the disclosure requirements of Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," effective with the 1996 financial statements, 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 1996 and 1995, consistent with the methodology in
SFAS 123, the pro forma effects on the company's net income and income per share
would not have been material.
NOTE 12. Litigation and Claims
-------------------------------
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.
Litigation is subject to many uncertainties, and the outcome of individual
litigated matters is not predictable with assurance. Reserves have been
established by the company for certain of the matters discussed in the foregoing
paragraph where losses are deemed probable. It is reasonably possible, however,
that some of the matters discussed in the foregoing paragraph for which reserves
have not been established could be decided unfavorably to the company or the
subsidiary involved and could require the company or such subsidiary to pay
damages or make other expenditures in amounts or a range of amounts that cannot
be estimated at December 31, 1996. The company does not reasonably expect, based
on its analysis, that any adverse outcome from such matters would have a
material effect on future consolidated financial statements for a particular
year, although such an outcome is possible.
NOTE 13. Commitments and Contingencies
---------------------------------------
At December 31, 1996, the company had the following minimum rental
commitments under non-cancelable operating leases (in millions): 1997 - $776;
1998 - $416; 1999 - $395; 2000 - $269; 2001 - $206; thereafter - $915. These
amounts include rental commitments related to the sale and leaseback of certain
Automotive machinery and equipment.
The company and certain of its subsidiaries have entered into agreements
with various banks to provide credit card programs that offer rebates that can
be applied against the purchase or lease of Ford vehicles. The maximum amount of
rebates available to qualified cardholders at December 31, 1996 and 1995 was
$4.1 billion and $3.1 billion, respectively. The company has provided for the
estimated net cost of these programs as a sales incentive based on the estimated
number of participants who ultimately will purchase vehicles.
Certain Financial Services subsidiaries make credit lines available to
holders of their credit cards. At December 31, 1996 and 1995, the unused portion
of available credit was approximately $18.8 billion and $17.3 billion,
respectively, and is revocable under specified conditions. The fair value of
unused credit lines and the potential risk of loss were not considered to be
material.
FS-26
NOTE 14. Financial Instruments
-------------------------------
Estimated fair value amounts have been determined using available market
information and various valuation methods depending on the type of instrument.
In evaluating the fair value information, considerable judgment is required to
interpret the market data used to develop the estimates. The use of different
market assumptions and/or different valuation techniques may have a material
effect on the estimated fair value amounts. Accordingly, the estimates of fair
value presented herein may not be indicative of the amounts that could be
realized in a current market exchange.
Balance Sheet Financial Instruments
-----------------------------------
Information about specific valuation techniques and estimated fair values is
provided throughout the Notes to Financial Statements. Book value and estimated
fair value amounts at December 31 were as follows (in millions):
Foreign Currency and Interest Rate Instruments
----------------------------------------------
The fair value of foreign currency and interest rate instruments was estimated
using current market prices provided by outside quotation services. The
estimated fair value, notional amount and deferred loss at December 31 were as
follows (in millions):
Counterparty Credit Risk
------------------------
Ford manages its foreign currency and interest rate counterparty credit risks by
limiting exposure to and by monitoring the financial condition of each
counterparty. The amount of exposure Ford 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, the company's risk is limited to the fair value of the instrument.
Other Financial Agreements
--------------------------
At December 31, 1996, the notional amount of commodity hedging contracts
outstanding totaled $300 million; the notional amount at December 31, 1995 was
not material. The company also had guaranteed $1.1 billion of debt of
unconsolidated subsidiaries, affiliates and others. The risk of loss under these
financial agreements is not material.
FS-27
NOTE 15. Acquisitions, Dispositions and Restructuring
------------------------------------------------------
Asset Write-Downs and Dispositions - Financial Services
-------------------------------------------------------
During third quarter 1996, USL Capital Corporation ("USL Capital'), a subsidiary
of Ford Holdings, concluded a series of transactions for the sale of
substantially all of its assets, as well as certain assets owned by Ford Credit
and managed by USL Capital. Proceeds from the sale were used to pay down related
liabilities and debt.
The company recorded a pre-tax charge in 1996 totaling $384 million
($233 million after taxes) to recognize the estimated value of its outstanding
notes receivable from, and preferred stock investment in, Budget Rent a Car
Corporation ("BRAC"). The initial provision taken in second quarter 1996
totaling $700 million ($437 million after taxes) resulted from conclusions
reached in a study of Ford's rental car business strategy. In accordance with
SFAS 114, the notes receivable provision reflected primarily the unsecured
portion of financing provided to BRAC by Ford. The preferred stock write-down
reflected recognition of the fair value of Ford's investment at the time. In
fourth quarter 1996, the notes receivable provision was reduced by $316 million
($204 million after taxes), reflecting a strengthening of the rental car
business, recent sales of rental car franchises, and increased investor interest
that led to a reassessment of the value of notes receivable from BRAC to Ford.
In connection with a January 1997 agreement by Team Rental Group, Inc. ("Team
Rental") to acquire all of the outstanding common stock of BRAC, a portion of
Ford's loans to BRAC will be forgiven and the remainder will be repaid or
purchased in cash and Team Rental common stock. In addition, the BRAC preferred
stock held by Ford will be redeemed. Ford will own approximately 22% of Team
Rental when the transaction is completed.
During September 1994, substantially all of the assets of First Nationwide Bank,
since known as Granite Savings Bank (the "Bank"), were sold to, and
substantially all of the Bank's liabilities were assumed by, First Madison Bank.
The Bank is a wholly-owned subsidiary of Granite Management Corporation
(formerly First Nationwide Financial Corporation) ("Granite"), which in turn is
a wholly-owned subsidiary of Ford. The company recognized in first quarter 1994
earnings a charge related to the disposition of the Bank, reflecting the
nonrecovery of goodwill and reserves for estimated losses on assets not included
in the sale. The company's income statement included the results of operations
of Granite through March 31, 1994. The remaining net assets of Granite at
December 31, 1996 and 1995 were included in the balance sheet under Financial
Services - Other Assets.
The effect of the USL Capital disposition, BRAC write-down and Bank disposition
on the company's results from operations are summarized below (in millions):
Sale of The Associates' Common Stock
------------------------------------
During May 1996, Associates First Capital Corporation ("The Associates"), a
subsidiary of Ford, completed an initial public offering of its common stock
representing a 19.3% economic interest in The Associates (the "IPO"). Ford
recorded in second quarter 1996 a non-operating gain of $650 million resulting
from the IPO, to recognize the excess of the net proceeds from the IPO over the
proportionate share of Ford's investment in The Associates. The gain was not
subject to income taxes.
FS-28
NOTE 15. Acquisitions, Dispositions and Restructuring (continued)
------------------------------------------------------
Investment in Mazda Motor Corporation
-------------------------------------
During May 1996, Ford increased its investment in Mazda Motor Corporation
("Mazda") from its existing 24.5% ownership interest to a 33.4% ownership
interest by purchasing from Mazda newly-issued shares of common stock for an
aggregate purchase price of $484 million. In connection with the purchase of
shares, Mazda agreed to coordinate more closely with Ford its strategies and
plans, particularly in the areas of product development, manufacturing and
distribution of vehicles, so as to improve the competitiveness and economies of
scale of both companies. Ford and Mazda remain separate public companies with
separate identities. Ford is not responsible for any of Mazda's liabilities,
debts or other obligations, and Mazda's operating results and financial position
are not consolidated with those of Ford; Mazda continues to be reflected in
Ford's consolidated financial statements on an equity basis.
Dissolution of Autolatina Joint Venture
---------------------------------------
During fourth quarter 1995, the company's joint venture with Volkswagen AG in
Brazil and Argentina was dissolved. The dissolution resulted in a gain of $230
million, primarily from a one-time cash compensation payment to Ford. Prior to
dissolution, the company held a 49% interest in Autolatina and accounted for it
on an equity basis. Effective December 31, 1995, the assets and liabilities of
the new entities in Brazil and Argentina were consolidated in the company's
balance sheet; revenues and costs for 1996 were consolidated in the company's
income statement. Automotive revenues and costs for 1995 and 1994 exclude these
entities; the company's income statement for 1995 and 1994 included Ford's
equity share in the results of the Autolatina joint venture.
Sale of Annuity Business
------------------------
During 1995, the company agreed to sell its annuity business to SunAmerica, Inc.
for $173 million. The sale was completed in early 1996. The company recognized a
one-time charge related to the sale that was not material. The company's income
statement included the results of operations of the annuity business through
December 31, 1995. Net assets of the annuity business were included in the
balance sheet under Financial Services - Other Assets at December 31, 1995.
Acquisition of The Hertz Corporation
------------------------------------
During April 1994, The Hertz Corporation ("Hertz") became a wholly-owned
subsidiary of Ford. The operating results, assets, liabilities and cash flows of
Hertz are consolidated as part of the Financial Services segment.
Employee Separation Programs
----------------------------
Costs for special voluntary employee separation programs reduced the company's
Automotive net income for 1996 and 1995 by $436 million and $146 million,
respectively. These programs affected about 3,500 salaried employees in 1996,
primarily in the U.S.; there also were reductions in hourly employment outside
the U.S. Costs for voluntary separation programs are recognized in expense when
employees accept offers of early retirement or termination and the costs can be
reasonably estimated.
FS-29
NOTE 16. Cash Flows
--------------------
The reconciliation of net income to cash flows from operating activities is as
follows (in millions):
The company considers all highly liquid investments purchased with a maturity of
three months or less, including short-term time deposits and government, agency
and corporate obligations, to be cash equivalents. Automotive cash equivalents
at December 31, 1996 and 1995 were $2.8 billion and $4.7 billion, respectively;
Financial Services cash equivalents at December 31, 1996 and 1995 were
$2.8 billion and $1.8 billion, respectively. Cash flows resulting from futures
contracts, forward contracts and options that are accounted for as hedges of
identifiable transactions are classified in the same category as the item being
hedged. Purchases, sales and maturities of trading securities are included in
cash flows from operating activities. Purchases, sales and maturities of
available-for-sale and held-to-maturity securities are included in cash flows
from investing activities.
Cash paid for interest and income taxes was as follows (in millions):
FS-30
NOTE 17. Segment Information
-----------------------------
The company's major geographic areas are the United States and Europe. Other
geographic areas (primarily Canada, Mexico, South America and Asia Pacific)
individually are not material. Financial information segregated by major
geographic area is as follows (in millions):
- - - - -
* Intercompany sales among geographic areas consist primarily of vehicles, parts
and components manufactured by the company and various subsidiaries and sold to
different entities within the consolidated group; transfer prices for these
transactions are established by agreement between the affected entities
- - - - -
** Financial Services activities do not report operating income; income before
income taxes is representative of operating income
FS-31
NOTE 17. Segment Information (continued)
-----------------------------
Financial Services (continued)
------------------
NOTE 18. Summary Quarterly Financial Data (Unaudited)
------------------------------------------------------
(in millions, except amounts per share)
FS-32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Ford Motor Company
We have audited the consolidated financial statements and the supplemental
schedule of condensed financial information of selected subsidiaries of Ford
Motor Company and Subsidiaries listed in Items 14(a)1 and 14(a)2 of this Form
10-K. These financial statements and the supplemental schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and supplemental schedule 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 Company
and Subsidiaries at December 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles. In addition, in our opinion, the supplemental schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information presented
therein.
/s/Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
400 Renaissance Center
Detroit, Michigan 48243
313-446-7100
January 27, 1997
FS-33
Ford Capital B.V., a wholly-owned subsidiary of Ford Motor Company, was
established primarily for the purpose of raising funds through the issuance of
commercial paper and debt securities. Ford Capital B.V. also holds shares of the
capital stock of Ford Nederland B.V., Ford Motor Company (Belgium) N.V.,
Ford Motor Company A/S (Denmark), Ford Poland S.A., and Ford Distribution Sp.
z.o.o., Ltd. Substantially all of the assets of Ford Capital B.V., other than
its ownership interests in subsidiaries, represent receivables from Ford Motor
Company or its consolidated subsidiaries.
FSS-1
EXHIBIT INDEX