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, 1997
or
Transition report pursuant to Section 13 or 15(d) of the Securities
---- Exchange Act of 1934 (No Fee Required)
For the transition period from to
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Commission file number 1-3950
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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
1/2,000 of a share of Series B Cumulative
Preferred Stock, as described below
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(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 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 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
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As of February 27, 1998, the Registrant had outstanding 1,141,127,738 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
($56 9/16 a share), the aggregate market value of such Common Stock was
$64,545,037,681. 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 27, 1998 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 14, 1998 (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 and its subsidiaries also engage in automotive-related
businesses, such as, financing and renting vehicles and manufacturing automotive
components and systems.
General
The Company's two principal business segments are Automotive and Financial
Services. The activities of the Automotive segment consist of the design,
manufacture, assembly and sale of cars and trucks and related parts and
accessories. Substantially all of Ford's automotive products are marketed
through retail dealerships, most of which are privately owned and financed.
The primary activities of the Financial Services segment consist of
financing operations, vehicle and equipment leasing and rental operations, and
insurance operations. These activities are conducted primarily through the
Company's subsidiaries, Ford Motor Credit Company ("Ford Credit") and The Hertz
Corporation ("Hertz"). Ford also owns an 80.7% economic interest in Associates
First Capital Corporation ("The Associates"), which, as Ford has recently
announced, will be spun-off on April 7, 1998 to holders of Ford's Common and
Class B Stock.
See Note 17 (pages FS-32 and FS-33) 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)
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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 from 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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*In May 1997, Ford and Freightliner Corporation ("Freightliner") entered into an
agreement for the sale to Freightliner of Ford's heavy truck business in North
America and Australia. Ford ceased production of heavy trucks in North America
in December 1997. The transfer of the North American heavy truck business is
expected to be completed by the end of the first quarter of 1998, and the
transfer of the Australian business is expect to be completed by year-end 1998.
As shown in the tables above, since 1993 there has been a steady shift from
cars to trucks for both industry sales and Ford sales. Most of the shift
reflects fewer sales of cars in the middle and large segments for the industry
and in the small and middle segments for Ford, as well as increased sales of
trucks in all segments with the exception of compact pickups and medium/heavy
trucks.
-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:
--------------------------
* 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 22.8% in
1993 to 22.4% in 1996. This trend reflected in part the effects of a
strengthening Japanese yen, which put an upward pressure on the prices of
vehicles produced by Japanese manufacturers, as well as the overall market shift
from cars to trucks and improvements in vehicles produced by U.S. manufacturers.
During 1997, however, the share of the U.S. combined car and truck market held
by Japanese manufacturers increased to 23.2% as the Japanese yen weakened
against the dollar. The recent disruption in Asian financial markets and
associated further weakening of the yen creates additional competitive pressures
in the United States by Japanese manufacturers.
In the 1980s and continuing in the 1990s, Japanese manufacturers added
assembly capacity in North America (frequently referred to as "transplants") in
response to a variety of factors, including export restraints, movements in the
exchange rate between the Japanese yen and the U.S. dollar, the significant
growth of Japanese car sales in the United States and international trade
considerations. Ford estimates that production in the United States by Japanese
transplants was approximately 2.3 million units in 1997.
Marketing Incentives and Fleet Sales. As a result of intense competition
from new product offerings (from both domestic and foreign manufacturers) and
the desire to maintain economic production levels, automotive manufacturers that
sell vehicles in the United States have provided marketing incentives (price
discounts) to retail and fleet customers (i.e., daily rental companies,
commercial fleets, leasing companies and governments). Marketing incentives are
particularly prevalent during periods of economic downturns, when excess
capacity in the industry tends to increase.
Ford's marketing costs in the United States as a percentage of gross sales
revenue for each of 1997, 1996, and 1995 were 8.7%, 8.0%, and 8.2%,
respectively. "Marketing costs" include (i) marketing incentives on vehicles
such as retail rebates and costs for special financing rates, (ii) reserves for
residual support on retail vehicle leases, (iii) reserves for costs and/or
losses associated with obligatory repurchases of certain vehicles sold to daily
rental companies and (iv) costs for advertising and sales promotions for
vehicles.
Sales by Ford to fleet customers were as follows for the years indicated:
Fleet sales generally are less profitable than retail sales, and sales to daily
rental companies generally are less profitable than sales to other fleet
purchasers. The mix between sales to daily rental companies and other fleet
sales has been about evenly split in recent years.
Warranty Coverage. Ford presently provides warranty coverage for defects in
factory-supplied materials and workmanship on all vehicles (other than
medium/heavy trucks) sold by it in the United States that extends for at least
36 months or 36,000 miles (whichever occurs first) and covers all components of
the vehicle, other than tires which are warranted by the tire manufacturers. In
general, different warranty coverage is provided on medium/heavy trucks and on
vehicles sold outside the United States. In addition, as discussed below under
"Governmental Standards - Mobile Source Emissions Control", the Federal Clean
Air Act requires a useful life of 10 years or 100,000 miles (whichever occurs
first) for emissions equipment on most light duty vehicles sold in the United
States. As a result of the coverage of these warranties and the increased
concern for customer satisfaction, costs for warranty repairs, emissions
equipment repairs and customer satisfaction actions ("warranty costs") can be
substantial. Estimated warranty costs for each vehicle sold by Ford are accrued
at the time of sale. Such accruals, however, are subject to adjustment from time
to time depending on actual experience.
-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 11% for 1997, increase their production capacity in Europe and import
restrictions on Japanese built-up vehicles gradually are removed in total by
December 31, 1999. Ford estimates that in 1997 the European automotive industry
had excess capacity of approximately 5.5 million units (based on a comparison of
European domestic demand and capacity).
In 1997, European car industry sales were 13.2 million units, up 5% from
1996 levels. Truck sales were 1.8 million units, up 6% from 1996 levels. Ford's
European car share for 1997 was 11.2%, down 3/10 of a point from 1996, and its
European truck share for 1997 was 12.2%, down 9/10 of a point from 1996.
For Ford, Great Britain and Germany are the most important markets within
Europe, although the Southern European countries are becoming increasingly
significant. Any adverse change in the British or German market has a
significant effect on total automotive profits. For 1997 compared with 1996,
total industry sales were up 7% in Great Britain and up 7% in Germany.
A single currency called the euro will be introduced in Europe on January
1, 1999. The increased price transparency resulting from the use of a single
currency may affect the ability of Ford and other companies to price their
products differently in the various European markets. A possible result of this
price harmonization is lower average prices for products sold in these markets.
Other Foreign Markets
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Mexico and Canada. Mexico and Canada also are important markets for Ford.
In 1997, industry sales of cars and trucks in Canada were 1.4 million units, up
18% from 1996 levels. The increase reflected economic growth and low Canadian
interest rates. Mexico had been a growing market until late 1994. However,
substantial devaluation of the Mexican peso in late 1994 created a high level of
uncertainty regarding economic activity in Mexico. In 1996 and 1997, the Mexican
economy recovered. In 1997, industry volume was 496,000 units, up 50% from 1996
levels.
South America. Brazil and Argentina are the principal markets for Ford in
South America. The economic environment in those countries has been volatile in
recent years, leading to large variations in profitability. Results also have
been influenced by government actions to reduce inflation and public deficits,
and improve the balance of payments. Industry sales in 1997 were 1.9 million
units in Brazil, up 11% from 1996, and 426,000 units in Argentina, up 13% from
1996. Brazilian government austerity measures in late 1997 adversely impacted
industry vehicle sales in that country and are expected to continue to affect
industry sales in 1998.
Asia Pacific. In the Asia Pacific region, Australia, Taiwan and Japan are
the principal markets for Ford products. Industry volumes in 1997 in this region
were as follows: 722,000 units in Australia (up 11.1% from 1996), 482,000 units
in Taiwan (up 2.3% from 1996) and 6.7 million units in Japan (down 5% from
1996). In 1997, Ford was the market share leader in Australia with an 18%
combined car and truck market share. In Taiwan (where sales of built-up vehicles
manufactured in Japan are prohibited), Ford had a combined car and truck market
share in 1997 of 16.1%. Ford's combined car and truck market share in Japan has
never exceeded 1%. Ford's principal competition in the Asia Pacific region has
been the Japanese manufacturers. It is anticipated that the continuing
relaxation of import restrictions (including duty reductions) in Australia and
Taiwan will intensify competition in those markets.
-6-
Item 1.Business (Continued)
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The financial crisis that began in Thailand in mid-year 1997, and spread to
the neighboring Southeast Asian nations, particularly Indonesia, has resulted in
a significant reduction of vehicle sales for the region. These markets had been
expanding, but economic growth is now expected to remain subdued during a period
of restructuring. Ford is positioning itself to actively participate in these
markets in recognition of their long-term growth opportunities.
Africa. Ford operates in the South African market through South African
Motor Corporation (Pty.) Limited ("SAMCOR") in which Ford has a 45% equity
interest. SAMCOR is an assembler of Ford and other manufacturers' vehicles in
South Africa. In 1997, industry volume in South Africa was 367,000 units, down
7% from 1996 levels.
Financial Services Operations
Ford Motor Credit Company
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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.
Outside the United States, Ford Credit Europe plc ("Ford Credit Europe") is
Ford Credit's largest operation. Ford Credit Europe is owned by Ford Credit
(70.4%), Ford Werke AG (19.6%) and Ford (10%). 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.
Ford Credit also conducts insurance operations through The American Road
Insurance Company ("American Road") and its subsidiaries in the United States
and Canada. American Road's business consists of extended service plan contracts
for new and used vehicles manufactured by affiliated and nonaffiliated
companies, primarily originating from Ford dealers, physical damage insurance
covering vehicles and equipment financed at wholesale by Ford Credit, and the
reinsurance of credit life and credit disability insurance for retail purchasers
of vehicles and equipment.
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 the years indicated:
-7-
Item 1. Business (Continued)
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Ford Credit's finance receivables and retained interest in sold receivables
and investments in operating leases were as follows at the dates indicated (in
millions):
The aggregated receivable balances related to accounts past due 60 days or
more 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 (in millions):
----------------
*Includes investments in operating leases.
-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 the sale 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 also can 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 1997.
The Hertz Corporation
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Hertz and its affiliates and independent licensees operate what Hertz
believes is the largest car rental business in the world based upon revenues and
volume of rental transactions and the largest industrial and construction
equipment rental business in the United States based upon revenues. Hertz,
together with its affiliates and independent licensees, rents and leases cars,
rents industrial and construction equipment and operates its other businesses
from approximately 5,500 locations throughout the United States and in
approximately 140 foreign countries and jurisdictions. In April 1997, Hertz
completed an initial public offering of common stock representing a 19.1%
economic interest in Hertz.
-9-
Item 1. Business (Continued)
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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. On March 2,
1998, Ford's Board of Directors approved the spin-off of The Associates by
declaring a dividend pursuant to which all of Ford's 279.5 million shares of The
Associates will be distributed to Ford Common and Class B stockholders in
proportion to their ownership of Common and Class B Stock. The distribution will
be made on April 7, 1998 to holders of record on March 12, 1998.
In 1996 and 1997, The Associates contributed 16.8% and 12%, respectively,
to Ford's consolidated earnings. Generally, the earnings of The Associates have
been retained by The Associates to fund its growth.
Governmental Standards
A number of governmental standards and regulations relating to safety,
corporate average fuel economy ("CAFE"), emissions control, noise control,
damageability and theft prevention are applicable to new motor vehicles,
engines, and equipment manufactured for sale in the United States, Europe and
elsewhere. In addition, manufacturing and assembly facilities in the United
States, Europe and elsewhere are subject to stringent standards regulating air
emissions, water discharges and the handling and disposal of hazardous
substances. Such facilities in the United States also are subject to a
comprehensive federal-state permit program relating to air emissions.
Mobile Source Emissions Control -- U.S. Requirements. The Federal Clean Air
Act (the "Clean Air Act" or the "Act") imposes stringent limits on the amount of
regulated pollutants that lawfully may be emitted by new motor vehicles and
engines produced for sale in the United States. Concurrently, most light duty
vehicles sold in the United States must comply with these standards for 10 years
or 100,000 miles, whichever first occurs. More stringent emissions standards
will become effective as early as the 2004 model year, unless the U.S.
Environmental Protection Agency (the "EPA") decides otherwise.
Pursuant to the Act, California has received a waiver from the EPA to
establish unique emissions control standards. New vehicles and engines sold in
California must be certified by the California Air Resources Board (the "CARB").
The CARB's emissions requirements (the "California program") for model years
1994 through 2003 require manufacturers to meet a non-methane organic gasses
fleet average requirement and are significantly more stringent than those
prescribed by the Act for the corresponding periods of time. California
initially required that a specified percentage of each manufacturer's vehicles
produced for sale in California, beginning at 2% in 1998 and increasing to 10%
in 2003, must be zero-emission vehicles ("ZEVs"), which produce no emissions of
regulated pollutants. In 1996, however, the CARB eliminated the ZEV mandate
until the 2003 model year. Around the same time, vehicle manufacturers
voluntarily entered into an agreement with CARB to provide air quality benefits
for California equivalent to a 49 state program (i.e., equivalent to providing
vehicles certified to the California low emission vehicle standard nationwide
beginning with the 2001 model year), to continue research and development of ZEV
technology and to provide specific numbers of advanced technology battery
vehicles through demonstration programs in California.
Electric vehicles are the only presently known type of zero-emission
vehicles. However, despite intensive research activities, technologies have not
been identified that would allow manufacturers to produce an electric vehicle
that either meets most customers' expectations or is commercially viable.
Compliance with the ZEV mandate may require manufacturers to curtail the sale of
non-electric vehicles or to offer substantial discounts on electric vehicles,
selling them well below cost, while increasing the price on non-electric
vehicles. The California program and ZEV mandates present significant
-10-
Item 1.Business (Continued)
---------------------------
technological challenges to manufacturers and compliance may require costly
actions that would have a substantial adverse effect on Ford's sales volume and
profits.
The Act also permits other states which do not meet national ambient air
quality standards to adopt the California program no later than two years before
the affected model year. Under the Act, twelve northeastern states and the
District of Columbia formed a group known as the Ozone Transport Commission (the
"OTC"). Based on an OTC recommendation, the EPA required each OTC jurisdiction
to adopt the California program. The OTC jurisdictions also may adopt
California's ZEV mandates, if any, but were not required to do so by the EPA. In
March 1997, the Circuit Court of Appeals for the District of Columbia vacated
the EPA's rule requiring the OTC jurisdictions to adopt the California program.
That decision did not affect California programs, including ZEV mandates,
already adopted by individual states. There are major problems with transferring
California standards to the Northeast -- many dealers sell vehicles in
neighboring states and the driving range of present ZEVs is greatly diminished
(by more than 50 percent) in cold weather. Also, the Northeast states have
refused to adopt the California reformulated gasoline requirement, which makes
the task of meeting standards even more difficult.
The California program was adopted in New York and Massachusetts and is
currently in effect for model years 1996 and beyond. In addition, these two
states adopted ZEV mandates beginning with model year 1998. New York's mandate
retains the now rescinded California ZEV requirements. The automotive industry
is seeking to have New York's pre-2003 model year ZEV mandate declared invalid,
and the case is now pending before the U.S. Court of Appeals for the Second
Circuit. Massachusetts has attempted to adopt as a standard the ZEV obligations
relating to California to which the auto manufacturers voluntarily agreed with
CARB. A federal district court has invalidated these regulations, but
Massachusetts has appealed the decision to the U.S. Court of Appeals for the
First Circuit. Connecticut adopted the California program beginning with model
year 1998. Rhode Island and Vermont have adopted the California program
beginning in model year 1999 (with a ZEV mandate to be required in Vermont after
certain determinations with respect to the advancement of ZEV technology have
been made). Maine has adopted the California program beginning with the 2001
model year. Maryland and New Jersey have laws requiring adoption of the
California program and ZEV mandates after certain conditions, relating to
actions which may be taken by other OTC jurisdictions, have been met.
In response to OTC actions, the automotive industry proposed a National Low
Emissions Vehicle (NLEV) program, which the EPA promulgated as a rule and which
has been agreed to by all manufacturers and all OTC jurisdictions except Maine,
Massachusetts, New York and Vermont. This NLEV program will require
manufacturers to sell low emission vehicles in the participating OTC
jurisdictions beginning with the 1999 model year, and throughout the remainder
of the country beginning with the 2001 model year. The OTC jurisdictions which
have agreed to the NLEV program will for its duration substitute the NLEV
program for any of their other emissions programs for passenger cars and light
duty gasoline trucks. California and the non-participating OTC jurisdictions
will retain their California-based programs. A petition seeking judicial review
of the EPA's rule establishing NLEV has been filed by a coalition of
environmental groups. The petition alleges that the rule violates the Clean Air
Act.
Under the Act, the EPA and CARB can require manufacturers to recall and
repair non-conforming vehicles. The EPA, through its testing of production
vehicles, can also halt the shipment of non-conforming vehicles. Ford may be
required to recall, or may voluntarily recall, vehicles for such purposes in the
future. The costs of related repairs or inspections associated with such recalls
can be substantial.
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.
-11-
Item 1. Business (Continued)
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In January 1998, Ford announced that it would voluntarily re-engineer all
of its 1999 model year sports utility vehicles and its 1999 model year Windstar
minivan to emit 70% less pollutants than the level required by the Clean Air
Act. Ford is certifying those vehicles under the Act's Clean Fuel Fleet Program.
European Requirements. European Union directives and related legislation
limit the amount of regulated pollutants that may be emitted by new motor
vehicles and engines sold in the European Union. In June 1996, the European
Commission published a draft proposal for new more stringent European emissions
standards for 2000 (the "Stage III Directive"). That draft includes a new
framework for emission-related fiscal incentives for the early introduction of
vehicles capable of meeting Stage III standards before 2000 and vehicles capable
of meeting newly proposed and even more stringent standards before 2005. The
common position of the European Council of Environment Ministers (the
"Environment Council") published in November 1997 provides that the European
Commission should propose mandatory standards for 2005 by June 30, 1999 based on
a study that would address air quality needs, vehicle and engine technology
developments, the need for and availability of clean fuels, and other issues.
The European Parliament has proposed various amendments to the Environment
Council's common position that would make the proposed Stage III Directive even
more stringent. The Environment Council and the European Parliament are expected
to convene a conciliation committee to agree on the final form for the Stage III
Directive.
Certain European countries are conducting in-use emissions testing to
ascertain compliance of motor vehicles with applicable emissions standards.
These actions could lead to recalls of vehicles; the future costs of related
inspection or repairs could be substantial.
Motor Vehicle Safety -- The National Traffic and Motor Vehicle Safety Act
of 1966 (the "Safety Act") regulates motor vehicles and motor vehicle equipment
in two primary ways. First, the Safety Act prohibits the sale in the United
States of any new vehicle or equipment that does not conform to applicable motor
vehicle safety standards established by the National Highway Traffic Safety
Administration (the "Safety Administration"). Meeting or exceeding many safety
standards is costly because they tend to conflict with the need to reduce
vehicle weight in order to meet emissions and fuel economy standards. Second,
the Safety Act requires that defects related to motor vehicle safety be remedied
through safety recall campaigns. There currently are pending before the Safety
Administration a number of investigations relating to alleged safety defects in
Ford vehicles. A manufacturer is also obligated to recall vehicles if it
determines they contain a defect relating to motor vehicle safety or do not
comply with a safety standard. Should Ford or the Safety Administration
determine that either a safety defect or a noncompliance exists with respect to
certain of Ford's vehicles, the costs of such recall campaigns could be
substantial.
In 1997, the Safety Administration amended a standard to permit vehicle
manufacturers to reduce the inflation power in air bags in future models to
further reduce the risk of air bag deployment-related injuries. Ford will
incorporate lower output air bags in its 1998 and later model year vehicles. In
1997, the Safety Administration also adopted a rule permitting vehicle owners
meeting certain criteria to have their air bags deactivated or have "on-off"
switches installed in their vehicles. In June 1998, the Safety Administration is
expected to initiate rulemaking relating to advanced air bags.
The issue of truck-to-car compatibility in relation to collisions has
received significant media attention recently and has been the subject of a
Safety Administration report. Ford and its suppliers are continuing to work on
this complex issue, and Ford will participate with the Safety Administration in
a conference on this subject in early summer 1998. Government regulation to
address vehicle compatibility also is possible.
Canada, the European Union, individual member countries within the European
Union and other countries in Europe, South America and the Asia Pacific markets
also have safety standards applicable to motor vehicles and are likely to adopt
additional or more stringent standards in the future.
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.
-12-
Item 1. Business (Continued)
----------------------------
The Cost Savings Act established a passenger car CAFE standard of 27.5 mpg
for the 1985 and later model years, which the Safety Administration believes it
has the authority to amend to a level it determines to be the maximum feasible
level. The Safety Administration has established a 20.7 mpg CAFE standard
applicable to light trucks.
Ford expects to be able to comply with the foregoing CAFE standards, in
some cases using credits from prior or succeeding years. However, a continued
increase in demand for larger vehicles coupled with a decline in demand for
small and middle-size vehicles could jeopardize its ability to comply.
It is anticipated that efforts may be made to raise the CAFE standard
because of concerns for carbon dioxide ("CO2") emissions, energy security or
other reasons. President Clinton's Climate Change Action Plan ("CCAP") sets a
goal to improve new vehicle fuel efficiency in an amount equivalent to at least
2% per year over a 10 to 15 year period. In addition, international concerns
over global warming due to the emission of "greenhouse gasses" have given rise
to strong pressures to increase fuel economy. During the December 1997 meeting
of the parties to the United Nations Climate Change Convention in Kyoto, Japan,
the United States agreed to reduce greenhouse gas emissions by 7% below their
1990 levels during the 2008-2012 period (the "Kyoto Protocol"). The Kyoto
Protocol is not yet binding on the United States, pending signature by the
President and ratification by the Senate. If the CCAP or Kyoto Protocol goals
are partially or fully implemented through increases in the CAFE standard, or if
significant increases in car or light truck CAFE standards for subsequent model
years otherwise are imposed, Ford would find it necessary to take various costly
actions that would have substantial adverse effects on its sales volume and
profits. For example, Ford might have to curtail or eliminate production of
larger family-size and luxury cars and full-size light trucks, restrict
offerings of engines and popular options, and continue or increase market
support programs for its most fuel-efficient cars and light trucks.
Foreign Requirements. The European Union is also a party to the Kyoto
Protocol and has agreed to reduce greenhouse gas emissions by 8% below their
1990 levels during the 2008-2012 period. In December 1997, the Environment
Council reaffirmed its goal to reduce average CO2 emissions from new cars to 120
grams per kilometer by 2010 (at the latest) and invited European motor vehicle
manufacturers to negotiate further with the European Commission on a
satisfactory voluntary environmental agreement to help achieve this goal. In
addition, the Environment Council directed the European Commission to propose
legislation with binding CO2 limit values if such an agreement is determined to
be unachievable. On March 10, 1998, representatives of the European automotive
manufacturers association met with the European Environment Commissioner to
present an industry proposal that would (among other things) reduce the average
CO2 emissions of new cars sold in the European Union to 140 grams per kilometer
by 2008, review in 2002-2003 the feasibility of further reductions for 2012, and
offer for sale by 2000 vehicles that produce no more than 120 grams of CO2 per
kilometer. This proposal assumes (among other things) that no negative measures
will be implemented against diesel-fueled cars and the full availability of
improved fuels with low sulphur content by 2005. The European Environment
Commissioner will review the proposal with the member countries at a forthcoming
Environment Council meeting. The European Parliament has considered even more
stringent proposals for reducing CO2 emissions from new cars. If adopted,
certain of the proposals being considered could have substantial adverse effects
on Ford's sales volumes and profits in Europe.
In 1995, members of the German Automobile Manufacturers Association
(including Ford Werke AG) made a voluntary pledge to reduce by 2005 the average
fuel consumption of new cars sold in Germany by 25% from 1990 levels, to review
before the year 2000 the need for and feasibility of further reductions in
average fuel consumption, to make regular reports on fuel consumption, and to
increase industry research and development efforts toward this end.
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.
-13-
Item 1. Business (Continued)
----------------------------
Japan has adopted automobile fuel consumption goals that manufacturers must
attempt to achieve by the 2000 model year. The consumption levels apply only to
gasoline-powered vehicles, vary by vehicle weight, and range from 5.8 km/I to
19.2 km/l.
U.S. Stationary Source Air Pollution Control -- The Clean Air Act limits
various emissions into the atmosphere from stationary sources as well as mobile
sources, and allows states to adopt even more stringent standards. The Act
imposes comprehensive permit requirements for manufacturing facilities in
addition to those required by various states. Regulations continue to be
promulgated under the Act, and the costs to comply with the Act could be
substantial. In addition, the enormous complexity and time-consuming nature of
the comprehensive permit program provided for by the Act may reduce operational
flexibility and may interfere with future competitive upgrading of Ford's U.S.
production facilities.
U.S. Water Pollution Control -- Pursuant to the Federal Water Pollution
Control Act (the "Clean Water Act"), Ford is required to obtain permits for its
manufacturing facilities that regulate the facilities' discharge of wastewater
into public waters and municipal sewerage systems. The EPA also requires
management standards and, in some cases, permits for the discharge of storm
water. The standards under the Clean Water Act are established by the EPA and by
the state where a facility is located. Many states have requirements that go
beyond those established under the Clean Water Act.
The EPA also adopted regulations, pursuant to the Great Lakes Critical
Programs Act of 1990, that require more restrictive standards for discharges
into waters that impact the Great Lakes. These regulations may require the
addition of costly control equipment.
U.S. Hazardous Substance and Waste Control -- Pursuant to the Federal
Resource Conservation and Recovery Act ("RCRA"), the EPA has issued regulations
establishing certain procedures and standards for persons who generate,
transport, treat, store, or dispose of hazardous wastes and requiring corrective
action for prior releases. States may adopt even more extensive requirements.
The Federal Comprehensive Environmental Response, Compensation, and Liability
Act ("CERCLA") requires notification regarding certain releases into the
environment, and creates potential liability for remediation costs and for
damage to natural resources at sites where Ford waste was taken for treatment or
disposal. A number of states have enacted separate laws of this type. In
addition, under the Federal Toxic Substances Control Act ("TSCA"), the EPA
evaluates environmental and health effects of existing chemicals and new
substances. Pursuant to TSCA, the EPA regulates the use of polychlorinated
biphenyls in transformers, capacitors and other equipment that may be located at
Ford's U.S. facilities.
European Stationary Source Environmental Control -- The European Union and
individual member countries impose requirements on waste and hazardous wastes,
incineration, packaging, landfill, soil pollution, integrated pollution control,
air emissions standards, import/export and use of dangerous substances, air and
water quality standards, noise, environmental management systems, energy
efficiency, emissions reporting, and planning and permitting. Additional or more
stringent requirements (including tax measures and civil liability schemes for
cleaning polluted sites) are likely to be adopted in the future. The cost of
complying with these standards could be substantial.
The European Commission has published a draft proposal to introduce an
obligation for motor vehicle manufacturers to take back end-of-life vehicles on
a cost-free basis beginning in 2003, to impose requirements on the proportion of
the vehicle that may be disposed of in landfills and the proportion that must be
reused or recycled beginning in 2005, and to ban the use of certain substances
in vehicles beginning in 2003. Such proposals could, if adopted, impose a
substantial cost on manufacturers. The German Automobile Association (including
Ford Werke AG) and the German Automobile Importers Association made a voluntary
pledge to establish a nationwide infrastructure network to take back passenger
cars that are at least 12 years old (and meet certain other requirements) on a
cost-free basis to their owners.
Pollution Control Costs -- During the period 1998 through 2002, Ford
expects that approximately $550 million will be spent on its North American and
European facilities to comply with air and water pollution and hazardous waste
control standards which now are in effect or are scheduled to come into effect.
Of this total, Ford estimates that approximately $100 million will be spent in
1998 and $120 million will be spent in 1999.
-14-
Item 1. Business (Continued)
----------------------------
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.
Employment Data
Average employment for Ford by geographic area was as follows for the years
indicated:
In 1997, average Ford employment decreased 2.1 percent reflecting reduced
Automotive employment offset partially by increased employment in the Company's
Financial Services operations.
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 significant work stoppages at its facilities in
recent years, but work stoppages have occurred in supplier facilities. Any
protracted work stoppages in the future, whether in Ford's facilities or those
of certain suppliers, could substantially adversely affect Ford's results of
operations.
-15-
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 1997, 1996 and 1995, $6.3 billion, $6.8 billion and $6.6 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. In addition, $20 million, $42 million and $18 million
were charged to income in 1997, 1996 and 1995, 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.
-16-
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
-------------------------
Occupant Restraint Systems. Ford is a defendant in various actions for
damages arising out of automobile accidents where plaintiffs claim that the
injuries resulted from (or were aggravated by) alleged defects in the occupant
restraint systems in vehicle lines of various model years. The damages specified
by the plaintiffs in these actions, including both actual and punitive damages,
aggregated approximately $1 billion at December 31, 1997.
Bronco II. Ford is a defendant in various actions involving the alleged
propensity of Bronco II utility vehicles to roll over. The damages specified in
these actions, including both actual and punitive damages, aggregated
approximately $979 million at December 31, 1997.
In most of the actions described in the foregoing paragraphs no dollar
amount of damages is specified or the specific amount referred to is only the
jurisdictional minimum. It has been Ford's experience that in cases that allege
a specific amount of damages in excess of the jurisdictional minimum, such
amounts, on average, bear little relation to the actual amounts of damages paid
by Ford in such cases, which generally are, on average, substantially less than
the amounts originally claimed. In addition to the pending actions, accidents
have occurred and claims have arisen which also may result in lawsuits in which
such a defect may be alleged.
Asbestos. Ford is a defendant in various actions for injuries claimed to
have resulted from alleged contact with certain Ford parts and other products
containing asbestos. Damages specified by plaintiffs in complaints in these
actions, including both actual and punitive damages, aggregated approximately
$1.4 billion at December 31, 1997. (In some of these actions no dollar amount of
damages is specified or the specific amount referred to is only the
jurisdictional minimum.) As distinguished from most lawsuits against Ford, in
most of these asbestos-related cases, Ford is but one of many defendants, and
many of these co-defendants have substantial resources.
Environmental Matters
---------------------
General. Ford has received notices from government environmental
enforcement agencies concerning four matters which potentially involve monetary
sanctions exceeding $100,000. The agencies believe that Ford facilities may have
violated regulations relating to the management of certain materials or relating
to certain emissions from facility operations. In Ford's prior reports, Ford
included another environmental matter that related to certain emissions from one
of its facilities. That matter was resolved in February 1998, with Ford paying a
civil penalty of $135,000.
-17-
Item 3. Legal Proceedings (Continued)
-------------------------------------
Ford has received notices under RCRA, CERCLA and applicable state laws that
it (along with others) may be a potentially responsible party for the costs
associated with remediating numerous hazardous substance storage, recycling or
disposal sites in many states and, in some instances, for natural resource
damages. Ford also may have been a generator of hazardous substances at a number
of other sites. The amount of any such costs or damages for which Ford may be
held responsible could be substantial. Contingent losses expected to be incurred
by Ford in connection with many of these sites have been accrued and are
reflected in Ford's financial statements in accordance with generally accepted
accounting principles. However, for many sites the remediation costs and other
damages for which Ford ultimately may be responsible are not reasonably
estimable because of uncertainties with respect to factors such as Ford's
connection to the site or to materials there, the involvement of other
potentially responsible parties, the application of laws and other standards or
regulations, site conditions, and the nature and scope of investigations,
studies and remediation to be undertaken (including the technologies to be
required and the extent, duration and success of remediation). As a result, Ford
is unable to determine or reasonably estimate the amount of costs or other
damages for which it is potentially responsible in connection with these sites,
although it could be substantial.
CCA Lawsuit. The Corporation for Clean Air, Inc., a California non-profit
group ("CCA"), filed a lawsuit in California against Ford and numerous other
engine and vehicle manufacturers and owners of vehicle fleets, under
California's Safe Drinking Water and Toxic Enforcement Act ("Proposition 65").
Under Proposition 65 any business that knowingly and intentionally exposes any
person to certain carcinogens and reproductive toxins must provide that person
with an advance clear and reasonable warning, unless the business can prove that
the exposures are insignificant. CCA's complaint alleges that manufacturers and
fleet owners of diesel powered vehicles are exposing California's citizens to
diesel exhaust in violation of Proposition 65. Maximum penalties under
Proposition 65 are $2,500 per vehicle per day of violation.
Bridgend Plant. In November 1997, the Cardiff Crown Court imposed a fine of
10,000 Pounds Sterling on Ford's British subsidiary, Ford Motor Company, Limited
("Ford Britain"), for the discharge of certain pollutants into the River Ewenny
by Ford Britain's Bridgend plant in September 1995. Ford Britain was also
required to pay the United Kingdom Environmental Agency's costs of approximately
11,000 Pounds Sterling and to pay for the restocking of fish in the river.
Class Actions
-------------
Described below are various class action lawsuits in which Ford has been
named a defendant. Class action lawsuits can involve very large classes of
plaintiffs, such as statewide or nationwide classes, if plaintiffs persuade the
court to grant class certification. Ford believes it has valid defenses in each
of these cases; however, if plaintiffs were to prevail in any of these lawsuits,
Ford could be required to pay substantial damages.
Paint. Pending against the Company are five purported class actions
alleging defects in the paint processes used on more than nine million vehicles
manufactured by the Company in model years 1984 through 1993. One case (Landry)
is nationwide in scope and is pending in the U.S. District Court for the Eastern
District of Louisiana. In January 1998, plaintiffs in Landry filed a motion for
class certification, which Ford opposed. Of the five cases that were
consolidated with Landry for pretrial proceedings, two were dismissed, and the
plaintiffs in the other three did not file motions for class certification
within the court-ordered deadline. In the remaining case (Sheldon), a Texas
state court certified two subclasses of Texas residents for trial. The Texas
Court of Appeals affirmed the class certification order. In its opinion, the
Court of Appeals approved of a bifurcated trial process that would require class
members to prove causation and damages in separate trials following a classwide
trial on the existence of a defect and the Company's knowledge thereof. Ford
will appeal the class certification to the Texas Supreme Court. In each pending
lawsuit, the plaintiffs seek unspecified compensatory damages, as well as
punitive damages, attorneys' fees and costs.
Bronco II. Currently pending against Ford are two state and one federal
purported class actions filed by Bronco II owners seeking recovery for economic
injury attributable to the alleged rollover propensity of these vehicles. Each
lawsuit expressly excludes personal injury claimants, whose claims are discussed
-18-
Item 3. Legal Proceedings (Continued)
-------------------------------------
above. Some of the lawsuits also seek recovery of unspecified punitive damages
and an order requiring the Company to recall and retrofit these vehicles. Seven
federal Bronco II cases had originally been consolidated for pretrial purposes
in a Louisiana federal court. After the court denied plaintiffs' motion for
class certification in these cases, six of the cases were dismissed either by
the court or voluntarily by the plaintiffs. Plaintiffs in these cases have
appealed the court's dismissal orders and denial of class certification to the
U.S. Court of Appeals for the Fifth Circuit. Ford's motion for summary judgment
is pending in the remaining federal case. The two state court cases are pending
in Alabama and Texas. The Texas case is dormant. In October 1997, the Alabama
court denied Ford's motion to dismiss plaintiffs' fraud claims and certified a
class consisting of Alabama residents who owned a Bronco II vehicle any time
between August 26, 1993 and May 31, 1997. The Alabama Supreme Court agreed to
hear Ford's interlocutory appeal of the trial court's denial of Ford's motion to
dismiss, but it has not yet ruled on Ford's petition to appeal the trial court's
class certification order. The trial court proceedings are stayed pending the
Supreme Court's decision on Ford's interlocutory appeal.
A separate purported class action involving the Bronco II (Goff) is pending
against Ford in federal court in the Southern District of West Virginia. The
lawsuit purports to represent a class of former plaintiffs in Bronco II personal
injury cases that have been settled or tried. Plaintiffs allege that Ford and a
Ford expert on the design history of the Bronco II conspired to fraudulently
conceal documents that would establish (a) that Ford paid the expert to offer
false testimony in favor of Ford regarding the design of the Bronco II, and (b)
that Ford knew the design of the Bronco II rendered the vehicle unstable and
prone to rollover under normal driving conditions. Plaintiffs seek compensatory
and punitive damages, prejudgment interest, costs and attorneys' fees.
Plaintiffs also seek to prevent Ford from using as a defense in this case
releases obtained in settled Bronco II personal injury lawsuits and defense
verdicts in tried Bronco II personal injury lawsuits. Plaintiffs' motion for
class certification and Ford's motion to dismiss are pending.
Ignition Switch. In 1996, the Company was served with fourteen purported
class action lawsuits alleging that certain 1983 to 1993 model year vehicles
were equipped with defective ignition switches that could cause an electrical
short circuit, resulting in smoke and fire damage. Most of the suits were
brought on behalf of plaintiffs who have not experienced a problem, but who
claim that their vehicles have diminished value because of the allegedly
defective switches. Some of the lawsuits were purportedly brought on behalf of
plaintiffs who claim to have suffered fire or smoke damage to their vehicles.
Plaintiffs seek unspecified compensatory damages, punitive damages, attorneys'
fees and costs, as well as injunctive relief requiring, among other things, that
Ford replace the allegedly defective ignition switch in all affected vehicles.
All fourteen lawsuits were consolidated for pretrial proceedings in federal
court in New Jersey. In August 1997, the court denied plaintiffs' motion for
class certification. In September 1997, the court dismissed all of the claims
brought by the non-incident class members except the implied warranty claims
brought under Louisiana law and the breach of contract claims. In October 1997,
plaintiffs filed a motion with the court to remand all of the lawsuits to state
courts and to vacate the court's ruling denying nationwide class certification
and dismissing most of the underlying claims. The court deferred ruling on the
matter pending additional discovery in the case.
In a related matter, State Farm Mutual Automobile Insurance Company ("State
Farm") filed a lawsuit in federal court in California in January 1998 against
Ford and United Technologies Automotive, Inc. State Farm seeks damages for
insurance claims it paid to cover vehicle damage caused by allegedly defective
ignition switches, the deductible amounts paid by its insureds, other
compensatory damages, and attorney's fees and costs. Ford has moved to dismiss
State Farm's claims. Upon Ford's notice of the State Farm action, the Judicial
Panel on Multidistrict Litigation conditionally transferred the action to the
New Jersey federal court where the ignition switch class actions are pending.
State Farm opposed the transfer.
TFI Module. Six purported class actions are pending in state courts on
behalf of owners and lessees of 1983 through 1995 model year Ford vehicles
containing a distributor-mounted thick film ignition (TFI) module. The
plaintiffs allege that distributor-mounted TFI modules are defective because
they have a high propensity to fail due to exposure to engine heat, causing the
engine to stumble, stall, or not start. The plaintiffs in these cases seek pre-
and post-judgment interest, attorneys' fees, disgorgement of profits,
compensatory damages, punitive damages, notice to the public, and the recall and
retrofit of all vehicles with the allegedly defective TFI modules. The cases are
-19-
Item 3. Legal Proceedings (Continued)
-------------------------------------
pending in Alabama, California, Illinois, Maryland, Tennessee and Washington.
The Alabama and Tennessee cases were conditionally certified as nationwide class
actions (excluding California). The cases in Illinois, Maryland and Washington
purport to be regional class actions, and the California case is statewide in
scope. The California case is the "lead" case and proceedings in the other cases
are stayed. The California court has certified a class of California residents
who currently own or lease the subject vehicles and California residents who
purchased such vehicles when they were new. The court also certified a sub-class
of consumers pursuing Consumer Legal Remedies Act claims. In February 1998, the
court ordered Ford to produce at its expense a mailing list for purposes of
class notification. The court reserved final decision on all other aspects of
class notice, but has indicated its intention to order the parties to share the
costs of notice. Ford estimates the costs of such notice to be approximately $1
million to $2 million. Ford appealed the California court's class certification
and class notice orders, but the appellate court has declined to hear Ford's
appeals. Ford has filed a motion for leave to appeal these orders to the
California Supreme Court. If leave to appeal is denied, Ford will have the right
to appeal those orders after entry of any final judgment in the case.
In related developments, Ford urged the Safety Administration to review
allegations by plaintiffs and the Safety Administration's former chief
investigator that Ford improperly withheld information and documents during
prior Safety Administration investigations into this matter. In September 1997,
the Safety Administration issued a Special Order requiring Ford to respond to
those allegations under oath, and Ford did so.
Air Bag. Three purported class action lawsuits were filed in Alabama,
Louisiana and Texas state courts alleging that air bags are defective because
they can cause injury, particularly to children and small adults. The Alabama
action appears to be nationwide in scope and purports to represent owners of
1993 through 1996 (and some 1997) model year cars and light trucks with
passenger air bags. The Louisiana and Texas actions purport to represent
residents who purchased vehicles with driver and/or passenger air bags, and
nonresidents who purchased such vehicles in those states. The Alabama action
names as defendants Ford, General Motors Corporation, Chrysler Corporation, and
an Alabama automobile dealership. The Louisiana action was brought against the
same manufacturers, as well as Volvo of North America, Inc., Nissan Motor
Corporation, Toyota Motor Corporation, Honda Motor Company, Ltd. and various
dealerships. The Texas action was brought against Ford, General Motors, Chrysler
and Volvo. However, in February 1998, plaintiffs in the Texas case filed an
amended complaint that did not name Ford as a defendant. The Louisiana and Texas
actions were removed to federal court and consolidated for pretrial proceedings.
Plaintiffs allege that their vehicles are unsuitable for transporting children
and small adults and, therefore, are not worth the purchase price they paid.
They seek compensatory damages, including the alleged diminution in value of
their vehicles and in the Alabama and Louisiana cases, the cost to disable the
air bags or "repair" the vehicles.
Ford/Citibank Visa. Following the June 1997 announcement of the termination
of the Ford/Citibank credit card rebate program, five purported nationwide class
actions and one purported statewide class action were filed against Ford;
Citibank is also a defendant in some of these actions. The actions allege
damages in an amount up to $3,500 for each cardholder who obtained a
Ford/Citibank credit card in reliance on the rebate program and who is precluded
from accumulating discounts toward the purchase or lease of new Ford vehicles
after December 1997 as a result of the termination of the rebate program.
Plaintiffs contend that defendants deceptively breached their contract by
unilaterally terminating the program, that defendants have been unjustly
enriched as a result of the interest charges and fees collected from
cardholders, and further, that defendants conspired to deprive plaintiffs of the
benefits of their credit card agreement. Plaintiffs seek compensatory damages,
or alternatively, reinstatement of the rebate program, and punitive damages,
costs, expenses and attorneys' fees. The five purported nationwide class actions
were filed in state courts in Alabama, Illinois, New York, Oregon and
Washington, and the purported statewide class action was filed in a California
state court. The Alabama court has conditionally certified a class consisting of
Alabama residents. Ford removed all of the cases to federal court and requested
that the Judicial Panel on Multidistrict Litigation consolidate and transfer the
cases to federal court in Washington for pretrial proceedings. Five of the cases
were consolidated and transferred to federal court in Washington. Ford's request
to consolidate and transfer the remaining case is pending. The plaintiff in the
Oregon case has moved to remand the case to state court.
-20-
Item 3. Legal Proceedings (Continued)
-------------------------------------
Flat Glass. The Company has been named as a defendant in thirteen purported
class actions brought on behalf of purchasers of flat glass alleging that Ford
and other manufacturers fixed prices and allocated markets in
violation of federal and state antitrust laws. Eleven of the class actions are
nationwide in scope and are pending in federal court and the other two class
actions are statewide in scope and are pending in state courts. The other
defendants include Pilkington plc; Libbey-Owens Ford Co., Inc.; AFG Industries;
PPG Industries, Inc.; Asahi Glass Co., Ltd.; and Guardian Industries Corp. There
are nineteen similar purported class actions pending in various courts in which
the Company is not currently named as a defendant. A total of 27 federal cases
have been consolidated in a single federal court in Pennsylvania for pretrial
proceedings under the multidistrict litigation rules. In the actions involving
Ford, the plaintiffs are seeking economic and treble damages.
Lease Residual. In January 1998 in connection with a case pending in
Illinois state court, Ford and Ford Credit were served with a summons and
intervention counterclaim complaint relating to Ford Credit's leasing practices
(Higginbotham v. Ford Credit). The counterclaim plaintiff, Carla Higginbotham,
is a member of a class that has been conditionally certified for settlement
purposes in Shore v. Ford Credit. In the Shore case, Ford Credit commenced an
action for deficiency against Virginia Shore, a Ford Credit lessee. Shore
counterclaimed for purported violations of the Truth-in-Leasing Act (alleging
that certain lease charges were excessive) and the Truth-in-Lending Act
(alleging that the lease lacked clarity). Shore purported to represent a class
of all similarly situated lessees. Ford was not a party to the Shore case.
Higginbotham objected to the proposed settlement of the Shore case, intervened
as a named defendant, filed separate counterclaims against Ford Credit, and
joined Ford as an additional counterclaim defendant. Higginbotham asserts claims
against Ford Credit for violations of the Consumer Leasing Act, declaratory
judgment concerning the enforceability of early termination provisions in Ford
Credit's leases, and fraud. She also asserts a claim against Ford Credit and
Ford for conspiracy to violate the Truth-in-Lending Act. The Higginbotham
counterclaims allege that Ford Credit inflates the residual values of its leased
vehicles, which results in lower monthly lease payments but higher termination
fees for lessees who exercise their right of early termination. Higginbotham
claims that the early termination fees were not adequately disclosed on the
lease form and that the fees are excessive and illegal because of the allegedly
inflated residual values. She also alleges that Ford dictated the residual
values to Ford Credit and thereby participated in an unlawful conspiracy.
Other Matters
-------------
Patents--General. A number of claims have been made or may be asserted in
the future against Ford alleging infringement of patents held by others. Ford
believes that it has valid defenses with respect to the claims that have been
asserted. If some of such claims should lead to litigation, however, and if the
claimant were to prevail, Ford could be required to pay substantial damages.
Lemelson Patent Case. In 1992, Ford was sued in federal court in Nevada by
an individual patent owner (Lemelson) seeking damages and an injunction for
alleged infringement of four U.S. patents characterized by Lemelson as covering
machine vision inspection technologies, including bar code reading. Ford filed a
declaratory judgment action in the same court to have these four patents as well
as others of Lemelson's patents directed to machine vision and laser uses
declared invalid, unenforceable and not infringed. Lemelson filed a counterclaim
alleging infringement of the patents added by Ford and several additional
patents. In 1995, Ford filed twelve summary judgment motions to dispose of large
portions of the case. One motion to have the case dismissed was granted in 1996
and reversed in 1997. The U.S. Court of Appeals refused to hear Ford's appeal of
the 1997 reversal until the case is tried. Ford and Lemelson then filed opposing
motions for further proceedings. Lemelson requested that the case be scheduled
for an immediate trial. Ford moved to have the case sent back to the magistrate
judge for consideration of Ford's eleven pending motions for summary judgment.
Mr. Lemelson died in October 1997. In January 1998 the court permitted the
Lemelson Medical, Education & Research Foundation, Limited Partnership to be
substituted as party to the lawsuit. The court also granted Ford's motion to
have the case remanded back to the magistrate judge for further proceedings to
recommend disposition of Ford's remaining summary judgment motions. If Lemelson
were to prevail in this lawsuit, Ford could be required to pay substantial
damages of an as yet indeterminate amount and could become subject to an
injunction preventing future use of any process or product found to be covered
by a valid patent.
-21-
Item 3. Legal Proceedings (Continued)
-------------------------------------
OFCCP Proceeding. In April 1997, Ford became the subject of a Department of
Labor administrative enforcement proceeding challenging Ford's compliance with
obligations imposed by Executive Order 11246, which prohibits employment
discrimination and requires affirmative action by government contractors and
subcontractors. The Office of Federal Contract Compliance Programs ("OFCCP")
claims that Ford's Kentucky Truck Plant used a hiring process in 1993 for
entry-level hourly laborer positions that discriminated against female
applicants. OFCCP further claims that Ford failed to make available required
records and otherwise cooperate with the agency during a 1993 compliance review.
OFCCP seeks to cancel Ford's government contracts and to bar Ford from obtaining
future government contracts and seeks an order awarding back pay to the
"affected class of women." If OFCCP prevails, Ford's results of operations could
be substantially adversely effected. Ford believes that, although the offer rate
for women at the Kentucky Truck Plant was less than the percentage of female
applicants in the 1993 interview process, there are sound gender-neutral
explanations for this difference. The Department of Labor has indicated it has
similar concerns about the hourly hiring practices at other Ford facilities and
would like to resolve those concerns as part of a resolution of the Kentucky
Truck proceeding.
FTC Investigation. The Federal Trade Commission and the Department of
Justice are continuing their investigation, commenced in 1995, of the retail
vehicle financing credit practices of Ford Credit for compliance with the Equal
Credit Opportunity Act and Regulation B.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
Not required.
-22-
Item 4A. Executive Officers of the Registrant
----------------------------------------------
The executive officers of the Registrant and their respective positions and
ages at March 15, 1998 are shown in the table below:
-23-
Item 4A. Executive Officers of the Registrant (Continued)
---------------------------------------------------------
-24-
Item 4A. Executive Officers of the Registrant (Continued)
---------------------------------------------------------
-25-
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 Messrs. Mays and Ross, have been
employed by the Registrant or its subsidiaries in one or more capacities during
the past five years. Immediately prior to joining Ford, Mr. Mays served as Vice
President of Design Development at SHR Perceptual Management in Scottsdale,
Arizona. Previously, and since 1993, Mr. Mays was design director responsible
for worldwide design strategy, development and execution for Audi AG in Germany.
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.
-26-
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. Ford is in the
process of delisting its stock from stock exchanges in Belgium, France, Germany
and Switzerland.
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 27, 1998, stockholders of record of Ford included 241,815
holders of Common Stock and 109 holders of Class B Stock.
-27-
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):
- - - - -
a/ 1989 includes an after-tax loss of $424 million from the sale of Rouge
Steel Company.
b/ 1994 includes an after-tax loss of $440 million from the sale of Granite
Savings Bank (formerly First Nationwide Bank).
c/ 1995 includes a gain of $230 million from the dissolution of Autolatina,
the company's joint venture with Volkswagen AG in Brazil and Argentina.
d/ 1996 includes gains of $650 million on the sale of The Associates' common
stock and $95 million on the sale of USL Capital's assets, offset partially
by a net write-down of $233 million for Budget Rent a Car Corporation.
e/ 1997 includes a gain of $269 million on the sale of Hertz common stock.
f/ Share data have been adjusted to reflect stock dividends and stock splits.
-28-
Item 6. Selected Financial Data (Continued)
--------------------------------------------
g/ The cumulative effects of changes in accounting principles reduced equity
by $6,883 million in 1992.
h/ Per hour worked (in dollars). Excludes data for subsidiary companies.
-29-
Item 6. Selected Financial Data (Continued)
--------------------------------------------
- - - - -
i/ Vehicle unit sales generally are reported worldwide on a "where sold"
basis and include sales of all Ford-badged units, as well as units
manufactured by Ford and sold to other manufacturers.
j/ Ford's tractor operation, Ford New Holland, was sold on May 6, 1991.
-30-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
------------------------------------------------------------------------
OVERVIEW
The Company's worldwide net income was a record $6,920 million in 1997, or
$5.62 per diluted share of Common and Class B Stock, compared with $4,446
million, or $3.64 per diluted share in 1996.
The Company's earnings in 1997 were up $2,474 million or 56% from 1996,
reflecting primarily improved Automotive operating results in North America,
South America and Europe, offset partially by lower earnings in Financial
Services. The Company's worldwide sales and revenues were a record $153.6
billion in 1997, up $6.6 billion or 5% from 1996. Vehicle unit sales of cars and
trucks were a record 6,943,000, up 290,000 units or 4% from a year ago.
Stockholders' equity was $30.7 billion at December 31, 1997, compared with $26.8
billion at December 31, 1996.
In 1997, Automotive capital expenditures for new products and facilities
totaled $8.1 billion, down $67 million from 1996. Automotive cash and marketable
securities were a record $20.8 billion at December 31, 1997, up $5.4 billion
from December 31, 1996. Automotive debt at December 31, 1997 totaled $8.1
billion, unchanged from a year ago. Automotive net cash was a record $12.7
billion at December 31, 1997.
The Company's Financial Statements and Notes to Financial Statements on
pages FS-1 through FS-34, including the Report of Independent Accountants,
should be read as an integral part of this review.
Fourth Quarter 1997
-------------------
In fourth quarter 1997, Ford earned a record $1,796 million, or $1.45 per
diluted share of Common and Class B Stock, compared with $1,204 million, or
$0.99 per diluted share in fourth quarter 1996.
The Company's net income for fourth quarter 1997 and 1996 was as follows
(in millions):
Earnings for Automotive operations in the U.S. improved in fourth quarter
1997, compared with fourth quarter 1996, primarily as a result of cost
reductions (at constant volume and mix).
-31-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
------------------------------------------------------------------------
Automotive operations in Europe earned a profit in fourth quarter 1997,
compared with a loss a year ago. The improvement reflected primarily increased
volume and nonrecurrence of 1996 separation costs. Lower losses in South America
in fourth quarter 1997 reflected primarily nonrecurrence of 1996 separation
costs, improved volume and mix, and cost reductions.
Lower earnings for Financial Services operations reflected nonrecurrence of
1996 one-time actions and a higher effective tax rate.
RESULTS OF OPERATIONS
The Company's full year net income for worldwide Automotive operations in
1997, 1996 and 1995, was as follows (in millions):
The Company's full year net income for worldwide Financial Services
operations in 1997, 1996 and 1995, was as follows (in millions):
-32-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
-----------------------------------------------------------------------
1997 COMPARED WITH 1996
Automotive Operations
---------------------
Earnings for Automotive operations in the U.S. were a record $3,706
million, up $1,699 million in 1997 compared with a year ago. The increase
reflected higher margins from ongoing cost, quality, and vehicle mix
improvements. The after-tax return on sales was 4.6% in 1997, up 1.9 points from
a year ago.
The U.S. economy continued on a path of strong growth, low unemployment,
and moderate inflation in 1997. Car and truck industry volumes totaled 15.5
million units in 1997, about the same level as 1996. Ford's combined U.S. car
and truck share was 25%, down 2/10 of a point from 1996.
Automotive operations in Europe returned to profitability in 1997 with
earnings of $273 million compared with a loss of $291 million a year ago. The
improvement reflected primarily lower operating costs (at constant volume and
mix), offset partially by lower volume.
European car and truck industry volumes totaled 15 million units in 1997,
compared with 14.3 million units in 1996. Ford's combined European car and truck
share was 11.4%, down 4/10 of a point from 1996.
Automotive operations in South America returned to profitability, earning
$40 million in 1997 compared with a loss of $642 million a year ago. Higher
earnings reflected primarily improved volume and mix, and lower material costs
(at constant volume and mix). In 1997, car and truck industry volumes in Brazil
(the largest market in South America) totaled 1.9 million units. Ford's combined
car and truck market share in Brazil was 14.5% in 1997, up 3.8 points from 1996.
Automotive Sales and Total Costs
--------------------------------
Automotive sales totaled $123 billion in 1997, up 4.2% from 1996. Sales in
the U.S. were $81 billion in 1997 compared with $76 billion in 1996; sales
outside the U.S. totaled $42 billion in 1997, unchanged from 1996. Total costs
and expenses were $116 billion in 1997, up $482 million or 4/10 of one percent
from 1996. The increases in sales and total costs and expenses were attributable
to the effects of higher unit volume and a richer sales mix. Adjusted for
constant volume and mix, total automotive costs declined $3 billion in 1997.
Financial Services Operations
-----------------------------
Earnings for Financial Services operations in 1997 were down $585 million,
compared with a year ago. Excluding the one-time actions in 1997 and 1996 shown
above, results from operations were down $342 million from a year ago.
Lower earnings at Ford Credit in 1997, compared with 1996, resulted
primarily from lower net financing margins, higher credit losses and loss
reserve requirements, and a higher effective tax rate; improved operating costs
and higher financing volumes were a partial offset. Net financing margins
decreased from a year ago, reflecting higher depreciation costs on leased
vehicles (as a result of lower-than-anticipated residuals). These factors have
continued to adversely affect Ford Credit's earnings in 1998. Credit losses as a
percent of average net finance receivables (including net investment in
operating leases) were 0.89% in 1997, compared with 0.78% a year ago, reflecting
higher losses per repossession.
Record earnings at The Associates reflected primarily higher levels of
earning assets and improved net interest margins, offset partially by higher
credit losses. Credit losses as a percent of average net finance receivables
were 2.40% in 1997, compared with 2.03% in 1996.
-33-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
-----------------------------------------------------------------------
Record earnings at Hertz reflected continued strong performance in the U.S.
car rental market both in terms of increased transaction volume and more
favorable pricing.
1996 COMPARED WITH 1995
The Company's worldwide net income was $4,446 million in 1996, or $3.64 per
diluted share of Common and Class B Stock, compared with $4,139 million, or
$3.33 per diluted share in 1995. 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.
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.
Automotive Operations
---------------------
Earnings for Automotive operations in the U.S. were up $164 million in 1996
compared with 1995. 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 1995.
The U.S. economy grew 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 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 accounted for the
decline.
Unfavorable results for Automotive operations in Europe in 1996, compared
with 1995, 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.
European car and truck industry volumes totaled 14.3 million units in 1996,
compared with 13.4 million units in 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.
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
reestablished operations in Brazil and Argentina in 1996.
Financial Services Operations
-----------------------------
Earnings for Financial Services operations were up $708 million in 1996,
compared with 1995, including $512 million from one-time actions for the sale of
The Associates' common stock, the sale of USL Capital's assets, and the net
write-down for Budget Rent A Car Corporation. Improvements from operations
totaled $196 million.
-34-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
-----------------------------------------------------------------------
Ford Credit's earnings in 1996 include a majority ownership (78%) of Ford
Credit Europe, and results for 1995 were 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 (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 in 1996 owned primarily USL Capital and,
until December 1995, also owned The Associates. Presently, Ford Holdings
primarily owns a minority interest in Ford FSG, Inc.) 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.
Record earnings at The Associates in 1996 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.
Record earnings at Hertz in 1996 reflected primarily higher volume in U.S.
car rental and equipment rental operations, compared with 1995.
LIQUIDITY AND CAPITAL RESOURCES
Automotive Operations
---------------------
Automotive cash and marketable securities were $20.8 billion at December
31, 1997, up $5.4 billion from December 31, 1996. The Company paid $2 billion in
cash dividends on its Common Stock, Class B Stock and Preferred Stock during
1997.
Automotive capital expenditures totaled $8.1 billion in 1997, down $67
million from 1996. Capital expenditures were 6.6% of sales in 1997, down 4/10 of
a point from 1996. Ford's spending in 1998 for product change is expected to be
at lower levels.
Automotive debt at December 31, 1997 totaled $8.1 billion, which was 21% of
total capitalization (stockholders' equity and Automotive debt), down from 23%
of total capitalization a year ago.
For a discussion of Ford's support facilities at December 31, 1997, see
Note 9 (pages FS-22 and 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 agreements.
Outstanding commercial paper at December 31, 1997 totaled $40.9 billion at
Ford Credit, $19.5 billion at The Associates, and $1.4 billion at Hertz, with an
average remaining maturity of 24 days, 28 days, and 18 days, respectively.
Support facilities represent additional sources of funds, if required.
-35-
Item 7. Management's Discussion and Analysis of Financial Contition and
Results of Operations (Continued)
-----------------------------------------------------------------------
For a discussion of support facilities of Ford Credit and other Financial
Services subsidiaries at December 31, 1997, see Note 9 (pages FS-22 and FS-23)
of the Notes to Financial Statements.
SPIN-OFF OF THE ASSOCIATES
On March 2, 1998, the Board of Directors of the Company approved the
spin-off of The Associates by declaring a dividend on Ford's outstanding shares
of Common and Class B Stock consisting in the aggregate of Ford's 80.7% interest
(279.5 million shares) in The Associates. The Board of Directors also declared a
dividend in cash on shares of the Company stock held in employee savings plans
equal to the market value of The Associates stock to be distributed per share of
the Company's Common and Class B Stock. Both the spin-off dividend and the cash
dividend are payable on April 7, 1998 to stockholders of record on March 12,
1998.
Holders of Ford Common and Class B Stock on the record date will be
entitled to receive 0.262085 shares of The Associates common stock for each
share of Ford stock. Based on the closing sale price of The Associates stock of
$81.25 per share on March 2, 1998, the total value of the distribution
(including the cash dividend) will be $25.8 billion or $21.30 per share of Ford
stock. The actual value of the total distribution will depend on the market
value of The Associates stock on the distribution date.
As a result of the spin-off of The Associates, Ford will realize a
one-time, non-taxable gain of about $16.5 billion in first quarter 1998.
In 1996 and 1997, The Associates contributed 16.8% and 12%, respectively,
to Ford's consolidated earnings. Generally, the earnings of The Associates have
been retained by The Associates to fund its growth.
YEAR 2000 DATE CONVERSION
An issue affecting Ford and most other companies is whether computer
systems and applications will recognize and process the year 2000 and beyond.
Ford has a central office to coordinate the identification, evaluation and
implementation of changes to systems and applications to achieve compliance with
the year 2000 date conversion. The Company is in the process of assessing and
implementing necessary changes for all areas of the Company's business which
could be impacted; these include such areas as business computer systems,
technical infrastructure, dealership systems, plant floor equipment, building
infrastructure, end-user computing, affiliates, suppliers and vehicle
components.
The Company has investigated the impact of the year 2000 issue on its
vehicle components and does not anticipate any effect on the operational safety
or performance of its vehicles. The electronic functionality of such components
generally is based on engine cycles or the time elapsed since the vehicle was
started, not any particular date. While the Company will continue to investigate
its vehicle components, at present it does not anticipate any significant
exposure related to the year 2000 issue for its current or future products.
Ford has established accelerated conversion centers in various regions of
the world, and is using these centers, as well as external resources, to address
the year 2000 issue. The Company plans to have necessary modifications made to
most of its critical systems and applications by the end of 1998 and to complete
testing during 1999. The Company, however, has little to no control over whether
its suppliers or dealers will make the appropriate modifications to their
systems and applications on a timely basis. Ford is working actively through the
Automotive Industry Action Group with other manufacturers in assessing and
monitoring supplier readiness. In addition, Ford will rely to a certain extent
on equipment suppliers for the modifications that must be made to certain Ford
manufacturing equipment.
-36-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
-----------------------------------------------------------------------
Based on assessments completed to date and compliance plans in process,
Ford does not expect that the year 2000 issue, including the cost of making its
critical systems and applications compliant, will have a material effect on its
business operations, consolidated financial condition, cash flows, or results of
operations. However, if appropriate modifications are not made by the Company's
suppliers or dealers on a timely basis, or if the Company's actual costs or
timing for the year 2000 date conversion differ materially from its present
estimates, the Company's operations and financial results could be significantly
adversely affected.
NEW ACCOUNTING STANDARDS AND INTERPRETATIONS
New Standards
-------------
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings
per Share," was issued by the Financial Accounting Standards Board in February
1997. Ford adopted SFAS 128 effective with the 1997 financial statements.
Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income," was issued by the Financial Accounting
Standards Board in June 1997. This Statement requires all items that must be
recognized under accounting standards as components of comprehensive income to
be reported in a financial statement that is displayed with the same prominence
as other financial statements. Ford will adopt SFAS 130 for 1998.
Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information," was
issued by the Financial Accounting Standards Board in June 1997. This Statement
establishes standards for reporting information about operating segments in
annual financial statements and requires reporting of selected information about
operating segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. Ford will adopt SFAS 131 for 1998.
Management is evaluating the impact, if any, the Standard will have on the
Company's present segment reporting.
Interpretations
---------------
Brazil has been considered a highly inflationary economy since the
implementation of Statement of Financial Accounting Standards No. 52 ("SFAS
52"), "Foreign Currency Translation," for fiscal years beginning on or after
December 15, 1982. The instability of the local currency in a hyperinflationary
economy precludes its use as the functional currency for the measurement of
business operations. Ford has used the U.S. dollar as the functional currency
for its Brazilian operations during this hyperinflationary period.
Beginning January 1, 1998, Brazil no longer is considered a highly
inflationary economy under SFAS 52. The U.S. dollar will continue to be the
designated functional currency for Ford's Brazilian operations in 1998 because
business transactions primarily are U.S. dollar based. Therefore, the change to
a non-highly inflationary designation will have no effect on Ford's consolidated
financial statements in 1998.
The designated functional currency for Ford Brazil will be reviewed
periodically.
-37-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
-----------------------------------------------------------------------
OUTLOOK
Industry Sales Volumes
----------------------
The Company's outlook for car and truck industry sales in 1998 in its major
markets is as follows:
United States - The Company expects car and truck industry
sales in the U.S. in 1998 to be slightly
lower than the 15.5 million units in 1997.
Europe - European car and truck industry sales in 1998
are expected to be about equal to 1997, or
about 15 million units.
Brazil - Fiscal austerity measures implemented in late
1997 by the Brazilian government are expected to
adversely impact 1998 car and truck industry sales
in the region.
1998 Financial Targets
----------------------
Ford's management has set and communicated certain Automotive financial
targets for 1998. While the Company hopes to achieve these goals, they should
not be interpreted as projections, expectations or forecasts of 1998 results.
The Automotive financial targets for 1998 are as follows:
Risk Factors
------------
Statements included in this report may constitute "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements involve a number of risks, uncertainties, and other
factors that could cause actual results to differ materially from those stated,
including, without limitation: greater price competition in the U.S. and Europe
resulting from further weakening of Asian currencies or industry overcapacity; a
significant decline in U.S. or European industry sales resulting from slowing
economic growth; economic difficulties in South America resulting from Brazilian
government austerity programs; a market shift from truck sales in the U.S.;
lower-than-anticipated residual values for leased vehicles; increased safety or
emissions regulation resulting in higher costs and/or sales restrictions; work
stoppages at key Company or supplier facilities; and the discovery of defects in
vehicles resulting in recall campaigns or litigation.
-38-
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
--------------------------------------------------------------------
Ford is exposed to a variety of market risks, including the effects of
changes in foreign currency exchange rates, interest rates and commodity prices.
For Automotive operations, purchases and sales of finished vehicles and
production parts, debt and other payables, subsidiary dividends, and investments
in subsidiaries are frequently denominated in foreign currencies, thereby
creating exposures to changes in exchange rates. In addition, Ford also is
exposed to changes in prices of commodities used in its Automotive operations.
To ensure funding over business and economic cycles and to minimize overall
borrowing costs, Financial Services operations issue debt and other payables
with various maturity and interest rate structures. The maturity and interest
rate structures frequently differ from the invested assets. Exposures to
fluctuations in interest rates are created by the difference in maturities of
liabilities versus the maturities of assets.
These financial exposures are monitored and managed by 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 (pages FS-9 and FS-10) and Note 14 (pages FS-27 and FS-28) of the Notes
to Financial Statements.
The Company's interest rate risk and its foreign currency exchange rate
risk (risks related to commodity derivative positions are not material) is
quantified as follows.
Interest Rate Risk -- Interest rate swaps (including those with a
currency swap component) are used by Ford, primarily in its Financial
Services operations, to mitigate the effects of interest rate
fluctuations on earnings by changing the characteristics of debt to
match the characteristics of assets. The Company uses a model to
assess the sensitivity of its earnings to changes in market interest
rates. The model recalculates earnings by adjusting the rates
associated with variable rate instruments on the repricing date and
adjusting the rates on fixed rate instruments scheduled to mature in
the subsequent twelve months, effective on their scheduled maturity
date. Interest income and interest expense are then recalculated based
on the revised rates. Assuming an instantaneous increase or decrease
of one percentage point in interest rates applied to all financial
instruments and leased assets, Ford's after-tax earnings would change
by $30 million over a 12-month period.
Foreign Currency Risk -- The Company principally uses derivative
financial instruments to hedge assets, liabilities and firm
commitments denominated in foreign currencies. The Company uses a
value-at-risk (VAR) analysis to assess its exposure to changes in
foreign currency exchange rates. The primary assumptions used in the
VAR analysis are as follows:
- A Monte Carlo simulation was used to calculate changes in the
value of currency derivative instruments (forwards and options)
and all significant underlying exposures. The simulation
generated currency rate scenarios over an 18-month exposure
horizon and a one-month holding period.
-39-
Item 7A. Quantitative and Qualitative Disclosures About Market Risk (Continued)
--------------------------------------------------------------------------------
- The VAR analysis calculates the potential risk, with a 99%
confidence level, on firm commitment exposures (cash flows),
including the effects of foreign currency derivatives.
(Translation exposures were not included in the VAR analysis.)
The model assumes currency prices are generally normally
distributed and draws volatility data from the currency markets.
- Estimates of correlations of market factors primarily are drawn
from the JP Morgan RiskMetrics(TM) dataset as of December 31,
1997.
Based on the overall Company currency exposure at December 31, 1997, including
derivative positions, currency movements are projected to affect pre-tax cash
flow by less than $250 million, with a 99% confidence level.
Item 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-34
immediately following the signature pages of this Report.
Selected quarterly financial data of Ford and its consolidated subsidiaries
for 1997 and 1996 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.
-40-
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.
-41-
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, 1997,
1996 and 1995.
Consolidated Balance Sheet at December 31, 1997 and 1996.
Consolidated Statement of Cash Flows for the years ended December 31,
1997, 1996 and 1995.
Consolidated Statement of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995.
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-34 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-34. 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.
-42-
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
-------------------------------------------------------------------------
(a) 3. Exhibits
-----------------
-43-
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 10-K
(Continued)
-------------------------------------------------------------------------
-44-
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
-------------------------------------------------------------------------
-45-
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
-------------------------------------------------------------------------
-46-
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
-------------------------------------------------------------------------
--------------------------
* Incorporated by reference as an exhibit hereto (file number reference 1-3950,
unless otherwise indicated)
** Management contract or compensatory plan or arrangement
-47-
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, 1997, the Registrant filed the
following Current Reports on Form 8-K:
1. Current Report on Form 8-K dated October 8, 1997 concerning the
Registrant's plan to spin off The Associates.
2. Current Report on Form 8-K dated October 9, 1997 concerning certain lowered
debt ratings of the Registrant and certain of its affiliates.
3. Current Report on Form 8-K dated October 15, 1997 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, 1997.
-48-
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 17, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities on the date indicated.
-49-
FS-1
Vehicle unit sales generally 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
The accompanying notes are part of the financial statements.
FS-3
The accompanying notes are part of the financial statements.
FS-4
The accompanying notes are part of the financial statements.
FS-5
*The balances at the beginning and end of each period were less than $500,000.
The accompanying notes are part of the financial statements.
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. 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. 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 are reclassified, if required, to conform with
present period presentations.
Automotive revenues and costs for 1997 and 1996 include new entities in Brazil
and Argentina resulting from the dissolution of Autolatina; amounts for 1995
exclude these entities (Note 15).
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 $2,170 million at December 31,
1997, and $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 in the same manner as sales incentives described above.
Other Costs
-----------
Advertising and sales promotion costs are expensed as incurred. Advertising
costs were $2,315 million in 1997, $2,155 million in 1996 and $2,024 million in
1995.
Estimated costs related to product warranty are accrued at the time of sale.
Research and development costs are expensed as incurred and were $6,327 million
in 1997, $6,821 million in 1996 and $6,624 million in 1995.
Income Per Share of Common and Class B Stock
--------------------------------------------
The company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share," for financial statements for the year ended December 31,
1997. Adoption of this standard did not have a material effect on reported
income per share.
Basic 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, adjusted
for issuable shares and uncommitted ESOP shares.
The company had Series A Preferred Stock convertible to Common Stock. Other
obligations, such as stock options, are considered to be potentially dilutive
common stock. The calculation of diluted income per share of Common and Class B
Stock takes into account the effect of these convertible securities and
potentially dilutive common stock.
FS-8
NOTE 1. Accounting Policies (continued)
----------------------------
Income per share of Common and Class B Stock were 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
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.
FS-9
NOTE 1. Accounting Policies (continued)
----------------------------
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
consistent with underlying debt issues as identified in Note 9. 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.
Foreign Currency Translation
----------------------------
Assets and liabilities of foreign subsidiaries generally are translated to U.S.
dollars at end-of-period exchange rates. The effects of this translation for
most foreign subsidiaries are reported in a separate component of stockholders'
equity. Remeasurement of assets and liabilities of foreign subsidiaries that use
the U.S. dollar as their functional currency are included in income as
transaction gains and losses. Income statement elements of all foreign
subsidiaries are translated to U.S. dollars at average-period exchange rates and
are recognized as part of revenues, costs and expenses. Also included in income
are gains and losses arising from transactions denominated in a currency other
than the functional currency of the subsidiary involved.
Net transaction gains and losses, as described above, decreased net income by
$164 million in 1997 and by $156 million in 1996, and increased net income by
$13 million in 1995.
Impairment of Long-Lived Assets and Certain Identifiable Intangibles
--------------------------------------------------------------------
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
periodically. The company considers projected future operating results, cash
flows, 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 other assets
was $2.1 billion at December 31, 1997, and $2.3 billion at December 31, 1996.
Total goodwill included in Financial Services other assets was $2.7 billion at
December 31, 1997, and $2.9 billion at December 31, 1996.
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.
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.
Automotive
----------
Investments in securities at December 31 were as follows (in millions):
FS-11
NOTE 2. Marketable and Other Securities (continued)
----------------------------------------
During 1997, $365 million of bonds issued by affiliates were reclassified from
equity in net assets of affiliated companies to available-for-sale marketable
securities. In 1997, proceeds from sales of available-for-sale securities were
$8 million; no gross gains or losses were realized on those sales. Stockholders'
equity included, net of tax, net unrealized gains of $28 million in 1997 and $96
million in 1996 on securities owned by certain unconsolidated affiliates. The
available-for-sale securities at December 31 by contractual maturity were due
between one and five years.
Financial Services
------------------
Investments in securities at December 31, 1997 were as follows (in millions):
Investments in securities at December 31, 1996 were as follows (in millions):
FS-12
NOTE 2. Marketable and Other Securities (continued)
----------------------------------------
Financial Services (continued)
------------------
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 $2.9 billion in 1997,
$8.4 billion in 1996 and $2.4 billion in 1995. In 1997, gross gains of $98
million and gross losses of $8 million were realized on those sales; gross gains
of $43 million and gross losses of $21 million were realized in 1996, and gross
gains of $39 million and gross losses of $18 million were realized in 1995.
Stockholders' equity included, net of tax, net unrealized gains of $50 million
and $54 million at December 31, 1997 and 1996, respectively.
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):
*Excludes certain diversified and other receivables of $197
million and $304 million at December 31, 1997 and 1996,
respectively
FS-13
NOTE 3. Receivables - Financial Services (continued)
-----------------------------------------
Included in finance receivables at December 31, 1997 and 1996 were a total of $1
billion and $1.2 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, 1997 and 1996 were $3.7 billion and $4 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): 1998 - $62,057; 1999 - $22,318; 2000 - $13,625; thereafter - $32,728.
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.
Investments in direct financing leases at December 31 were as follows (in
millions):
Minimum direct financing lease rentals are contractually due as follows
(in millions): 1998 - $2,843; 1999 - $2,152; 2000 - $1,551; 2001 - $843;
2002 - $347; thereafter - $138.
Investments in operating leases at December 31 were as follows (in millions):
Minimum rentals on operating leases are contractually due as follows (in
millions): 1998 - $12,773; 1999 - $9,183; 2000 - $1,462; 2001 - $156;
2002 - $73; thereafter - $349.
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): 1997 -
$6,505; 1996 - $5,867; 1995 - $5,508.
Allowances for credit losses are estimated and established as required based on
historical experience and other factors that affect collectibility. 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.
FS-14
NOTE 3. Receivables - Financial Services (continued)
-----------------------------------------
Changes in the allowances for credit losses were as follows (in millions):
Statement of Financial Accounting Standards No. 125 ("SFAS 125") for sales
of receivables was adopted January 1, 1997, and the effect was not material.
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 $1,397 million and $1,445 million at December 31, 1997 and
1996, 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.
FS-15
NOTE 5. Net Property, Depreciation and Amortization - Automotive (continued)
-----------------------------------------------------------------------------
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 $2,294 million in 1997, $2,325 million in 1996 and $2,206
million in 1995. Expenditures that increase the value or productive capacity of
assets are capitalized. Preproduction costs related to new facilities are
expensed as incurred.
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 $2.1 billion of retained earnings at December 31, 1997
that have been retained for use 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-16
NOTE 6. Income Taxes (continued)
---------------------
Deferred income taxes reflect the estimated tax effect of accumulated 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 $2.3 billion at
December 31, 1997. A substantial portion of these losses has an indefinite
carryforward period; the remaining losses have expiration dates beginning in
2000. 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 projected
future operating results, the eligible carryforward period and other
circumstances.
FS-17
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, and government and other
fixed income securities. 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-18
NOTE 8. Employee Retirement Benefits (continued)
-------------------------------------
Pension expense in 1997 decreased for U.S. and non-U.S. plans as a result of
increased return on plan assets and the year-to-year change in the cost of
employee separation programs, offset by higher costs for pension benefit
improvements and, for non-U.S. plans, lower discount rates. Pension expense
in 1996 increased for U.S. and non-U.S. plans as a result of employee
separation programs and lower discount rates.
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, 1997, the unfunded liability in excess of $500 million resulted in
an increase in the charge to stockholders' equity of $70 million net of
deferred taxes; at December 31, 1996, the charge to stockholders' equity
was $159 million.
FS-19
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.
In June 1997, the company prepaid certain 1998 and 1999 hourly health benefits
by contributing $1,590 million to a Voluntary Employees' Beneficiary Association
(VEBA) trust; $736 million of this amount applies to retirees.
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 1997 by about $190 million and the
accumulated postretirement benefit obligation at December 31, 1997 by about $2
billion.
FS-20
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
----------
Debt at December 31 was as follows (in millions):
Long-term debt at December 31, 1997 included maturities as follows (in
millions): 1998 - $537 (included in current liabilities); 1999 - $144; 2000 -
$984; 2001 - $1,138; 2002 - $436; thereafter - $4,345.
Included in long-term debt at December 31, 1997 and 1996 were obligations of
$6,864 million and $5,961 million, respectively, with fixed interest rates and
$183 million and $534 million, respectively, with variable interest rates
(generally based on LIBOR or other short-term rates). Obligations payable in
foreign currencies at December 31, 1997 and 1996 were $372 million and $756
million, respectively.
Agreements to manage exposures to fluctuations in interest rates, which include
primarily interest rate swap agreements and futures contracts, did not change
the overall weighted-average interest rate on long-term debt and the obligations
subject to variable interest rates of $183 million at December 31, 1997. At
December 31, 1996, these agreements decreased the weighted-average interest rate
on long-term debt and effectively decreased the obligations subject to variable
rates to $363 million.
Financial Services
------------------
Debt at December 31 was as follows (in millions):
FS-21
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, 1997 included maturities as follows (in
millions): 1998 - $15,370; 1999 - $16,343; 2000 - $13,474; 2001 - $12,258; 2002
- 13,475; thereafter - $17,648.
Included in long-term debt at December 31, 1997 and 1996 were obligations of
$56.7 billion and $55.8 billion, respectively, with fixed interest rates and
$16.5 billion and $14.8 billion, respectively, with variable interest rates
(generally based on LIBOR or other short-term rates). Obligations payable in
foreign currencies at December 31, 1997 and 1996 were $27 billion and $28
billion, respectively. These obligations were issued primarily to fund foreign
business operations.
Outstanding commercial paper at December 31, 1997 totaled $40.9 billion at Ford
Credit, $19.5 billion at The Associates, and $1.4 billion at Hertz, with an
average remaining maturity of 24 days, 28 days, and 18 days, respectively.
Agreements to manage exposures to fluctuations in interest rates include
primarily interest rate swap agreements. At December 31, 1997, these agreements
decreased the weighted-average interest rate on long-term debt to 6.5%, compared
with 6.6% excluding these agreements, and effectively decreased the obligations
subject to variable interest rates to $11.8 billion; the weighted-average
interest rate on short-term debt excluding these agreements did not change
materially. 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 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.
Support Facilities
------------------
At December 31, 1997 Ford had long-term contractually committed global credit
agreements under which $8.3 billion is available from various banks at least
through June 30, 2002. The entire $8.3 billion may be used, at Ford's option, by
any affiliate of Ford; however, any borrowing by an affiliate will be guaranteed
by Ford. Ford also has the ability to transfer on a nonguaranteed basis $8
billion of such credit lines 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. In addition, at December 31, 1997,
$471 million of contractually committed credit facilities were available to
various Automotive affiliates outside the U.S. Approximately $66 million of
these facilities were in use at December 31, 1997.
FS-22
NOTE 9. Debt (continued)
-------------
At December 31, 1997, Financial Services had a total of $42.9 billion of
contractually committed support facilities (excluding the $8 billion available
under Ford's global credit agreements). Of these facilities, $23.8 billion are
contractually committed global credit agreements under which $19.2 billion and
$4.6 billion are available to Ford Credit and Ford Credit Europe, respectively,
from various banks; 61% and 77%, respectively, of such facilities are available
through June 30, 2002. The entire $19.2 billion may be used, at Ford Credit's
option, by any subsidiary of Ford Credit, and the entire $4.6 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, 1997, $154 million of the
Ford Credit global facilities were in use; $597 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, 1997 consisted of $17 billion of contractually committed support facilities
available to various affiliates in the U.S. and $2.1 billion of contractually
committed support facilities available to various affiliates outside the U.S.;
at December 31, 1997, approximately $1 billion of these facilities were in use.
Furthermore, banks provide $1.6 billion of liquidity facilities to support the
asset-backed commercial paper program of a Ford Credit sponsored special purpose
entity.
FS-23
NOTE 10. Capital Stock
-----------------------
At December 31, 1997, 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.
Information concerning the Preferred Stock of the company is as follows:
On January 9, 1998, all outstanding shares of Series A Preferred Stock were
redeemed at an amount equivalent to $51.68 per Depositary Share plus unpaid
dividends.
On January 22, 1998, the company announced an offer to purchase all Depositary
Shares representing its Series B Cumulative Preferred Stock at a price of $31.40
per Depositary Share. The offer to purchase was in effect until February 26,
1998.
The Series B Preferred Stock ranks (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. Options granted in 1997 and
subsequent years under the 1990 Plan become exercisable 33% after one year from
the date of grant, 67% after two years and in full after three years. In
general, options granted under the 1985 Plan and options granted prior to 1997
under the 1990 Plan become exercisable 25% after one year from the date of
grant, 50% after two years, 75% after three years and in full after four years.
Options under both Plans expire after 10 years. Certain options outstanding
under the Plans were granted 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 936,300 shares in
1997, 865,100 shares in 1996 and 884,500 shares in 1995 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.
Under the 1990 Plan, 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. Any
unused portion of the 1% limit for any calendar year may be carried forward and
made available for Plan awards in succeeding calendar years. At December 31,
1997, the number of unused shares carried forward aggregated to 1,130,322
shares.
Information concerning stock options is as follows (shares in millions):
- - - - -
* Exercised at option prices ranging from $15.00 to $32.69 during 1997,
$13.42 to $29.06 during 1996, and $9.09 to $29.06 during 1995
** Included 2.0 and 48.0 million shares under the 1985 and 1990 Plans,
respectively, at option prices ranging from $15.00 to $45.84 per share.
At December 31, 1997, 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 1997, 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 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 1997, 1996 and 1995, the company's net income and income per
share would have been reduced to the pro forma amounts indicated below:
- - - - -
* The pro forma disclosures may not be representative of the effects on reported
net income and income per share for future periods because only stock options
that were granted beginning in 1995 are included in the above table. The
estimated fair value, before tax, of options granted in 1997, 1996 and 1995
was $48 million, $54 million and $68 million respectively.
FS-26
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, 1997. 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, 1997, the company had the following minimum rental commitments
under non-cancelable operating leases (in millions): 1998 - $524; 1999 - $400;
2000 - $301; 2001 - $182; 2002 - $132; thereafter -$254. These amounts include
rental commitments related to the sale and leaseback of certain Automotive
machinery and equipment.
Ford in the U.S. and Ford of Canada have entered into agreements with 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, 1997 and 1996 was $1.8 billion and $1.6
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. The U.S. program was
discontinued December 31, 1997; rebates earned prior to program discontinuance
will be valid for up to five years following the calendar year in which earned,
subject to certain restrictions.
Certain Financial Services subsidiaries make credit lines available to holders
of their credit cards. At December 31, 1997 and 1996, the unused portion of
available credit was approximately $29.3 billion and $18.8 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.
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.
FS-27
NOTE 14. Financial Instruments (continued)
-------------------------------
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):
The notional amount represents the contract amount, not the amount at risk. The
notional amount for foreign currency instruments was $30,977 million at December
31 1997, and $29,700 million at December 31, 1996. The notional amount for
interest rate instruments was $90,428 million at December 31, 1997, and $76,200
million at December 31, 1996.
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, 1997, the notional amount of commodity hedging contracts
outstanding totaled $496 million; the notional amount at December 31, 1996 was
$505 million. The company also had guaranteed $860 million of debt of
unconsolidated subsidiaries, affiliates and others. The risk of loss under these
financial agreements is not material.
FS-28
NOTE 15. Acquisitions, Dispositions and Restructuring
------------------------------------------------------
Asset Write-Downs and Dispositions - Financial Services
-------------------------------------------------------
During third quarter 1996, Ford Leasing Corporation, then known as 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.
During 1997, Team Rental Group, Inc. ("Team Rental") acquired all of the
outstanding common stock of BRAC; Ford became the owner of approximately 22% of
Team Rental as a result of the partial repayment in Team Rental stock of Ford's
loans to BRAC. In fourth quarter 1997, Ford sold its shares of Budget Group
(formerly "Team Rental") stock. The gain on sale was not material.
The effect of the USL Capital disposition and BRAC write-down on the company's
results from operations are summarized below (in millions):
Sale of Common Stock of a Subsidiary
------------------------------------
During April 1997, The Hertz Corporation ("Hertz"), a subsidiary of Ford,
completed an initial public offering ("IPO") of its common stock representing a
19.1% economic interest in Hertz. Ford recorded in second quarter 1997 a
non-operating gain of $269 million resulting from the IPO; the gain was not
subject to income taxes.
During May 1996, Associates First Capital Corporation ("The Associates"), a
subsidiary of Ford, completed an IPO of its common stock representing a 19.3%
economic interest in The Associates. Ford recorded in second quarter 1996 a
non-operating gain of $650 million resulting from the IPO; the gain was not
subject to income taxes.
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.
FS-29
NOTE 15. Acquisitions, Dispositions and Restructuring (continued)
-----------------------------------------------------
Dissolution of Autolatina Joint Venture
---------------------------------------
During fourth quarter 1995, the company's joint venture with Volkswagen AG in
Brazil and Argentina (Autolatina) 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 exclude these
entities; the company's income statement for 1995 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.
Restructurings
--------------
The company recorded a pre-tax charge in second quarter 1997 totaling $272
million ($169 million after taxes) reflecting actions that will be completed
during 1997 and 1998. These include primarily the discontinuation of passenger
car production at the Lorain Assembly Plant resulting in a write-down of surplus
assets. The charge also included employee termination costs related to the
elimination of a shift at the Halewood (England) Plant, and a loss on the sale
of the Heavy Truck business.
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-30
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, 1997 and 1996 were $5.8 billion and $2.8 billion, respectively;
Financial Services cash equivalents at December 31, 1997 and 1996 were $0.8
billion and $2.8 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-31
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-32
NOTE 17. Segment Information (continued)
-----------------------------
Financial Services (continued)
------------------
NOTE 18. Summary Quarterly Financial Data (Unaudited)
------------------------------------------------------
(in millions, except amounts per share)
* Restated to reflect accounting adjustments to revenues (and costs) with no
effect on operating or net income
** Amounts for prior periods have been restated, where applicable, to reflect
adoption of Statement of Financial Accounting Standards No. 128, "Earnings
per Share"
FS-33
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Ford Motor Company
We have audited the consolidated balance sheet of Ford Motor Company and
Subsidiaries at December 31, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Ford Motor Company
and Subsidiaries at December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
400 Renaissance Center
Detroit, Michigan 48243
313-446-7100
January 26, 1998
FS-34
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
EXHIBIT INDEX (Continued)
-2-
-3-
-4-
-5-
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, 1997
or
Transition report pursuant to Section 13 or 15(d) of the Securities
---- Exchange Act of 1934 (No Fee Required)
For the transition period from to
------- -------
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
1/2,000 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 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 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 27, 1998, the Registrant had outstanding 1,141,127,738 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
($56 9/16 a share), the aggregate market value of such Common Stock was
$64,545,037,681. 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 27, 1998 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 14, 1998 (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 and its subsidiaries also engage in automotive-related
businesses, such as, financing and renting vehicles and manufacturing automotive
components and systems.
General
The Company's two principal business segments are Automotive and Financial
Services. The activities of the Automotive segment consist of the design,
manufacture, assembly and sale of cars and trucks and related parts and
accessories. Substantially all of Ford's automotive products are marketed
through retail dealerships, most of which are privately owned and financed.
The primary activities of the Financial Services segment consist of
financing operations, vehicle and equipment leasing and rental operations, and
insurance operations. These activities are conducted primarily through the
Company's subsidiaries, Ford Motor Credit Company ("Ford Credit") and The Hertz
Corporation ("Hertz"). Ford also owns an 80.7% economic interest in Associates
First Capital Corporation ("The Associates"), which, as Ford has recently
announced, will be spun-off on April 7, 1998 to holders of Ford's Common and
Class B Stock.
See Note 17 (pages FS-32 and FS-33) 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 from relatively small changes in unit volume.
United States
-------------
Sales Data. The following table shows U.S. industry demand for the years
indicated:
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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:
---------------------
*In May 1997, Ford and Freightliner Corporation ("Freightliner") entered into an
agreement for the sale to Freightliner of Ford's heavy truck business in North
America and Australia. Ford ceased production of heavy trucks in North America
in December 1997. The transfer of the North American heavy truck business is
expected to be completed by the end of the first quarter of 1998, and the
transfer of the Australian business is expect to be completed by year-end 1998.
As shown in the tables above, since 1993 there has been a steady shift from
cars to trucks for both industry sales and Ford sales. Most of the shift
reflects fewer sales of cars in the middle and large segments for the industry
and in the small and middle segments for Ford, as well as increased sales of
trucks in all segments with the exception of compact pickups and medium/heavy
trucks.
-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 22.8% in
1993 to 22.4% in 1996. This trend reflected in part the effects of a
strengthening Japanese yen, which put an upward pressure on the prices of
vehicles produced by Japanese manufacturers, as well as the overall market shift
from cars to trucks and improvements in vehicles produced by U.S. manufacturers.
During 1997, however, the share of the U.S. combined car and truck market held
by Japanese manufacturers increased to 23.2% as the Japanese yen weakened
against the dollar. The recent disruption in Asian financial markets and
associated further weakening of the yen creates additional competitive pressures
in the United States by Japanese manufacturers.
In the 1980s and continuing in the 1990s, Japanese manufacturers added
assembly capacity in North America (frequently referred to as "transplants") in
response to a variety of factors, including export restraints, movements in the
exchange rate between the Japanese yen and the U.S. dollar, the significant
growth of Japanese car sales in the United States and international trade
considerations. Ford estimates that production in the United States by Japanese
transplants was approximately 2.3 million units in 1997.
Marketing Incentives and Fleet Sales. As a result of intense competition
from new product offerings (from both domestic and foreign manufacturers) and
the desire to maintain economic production levels, automotive manufacturers that
sell vehicles in the United States have provided marketing incentives (price
discounts) to retail and fleet customers (i.e., daily rental companies,
commercial fleets, leasing companies and governments). Marketing incentives are
particularly prevalent during periods of economic downturns, when excess
capacity in the industry tends to increase.
Ford's marketing costs in the United States as a percentage of gross sales
revenue for each of 1997, 1996, and 1995 were 8.7%, 8.0%, and 8.2%,
respectively. "Marketing costs" include (i) marketing incentives on vehicles
such as retail rebates and costs for special financing rates, (ii) reserves for
residual support on retail vehicle leases, (iii) reserves for costs and/or
losses associated with obligatory repurchases of certain vehicles sold to daily
rental companies and (iv) costs for advertising and sales promotions for
vehicles.
Sales by Ford to fleet customers were as follows for the years indicated:
Fleet sales generally are less profitable than retail sales, and sales to daily
rental companies generally are less profitable than sales to other fleet
purchasers. The mix between sales to daily rental companies and other fleet
sales has been about evenly split in recent years.
Warranty Coverage. Ford presently provides warranty coverage for defects in
factory-supplied materials and workmanship on all vehicles (other than
medium/heavy trucks) sold by it in the United States that extends for at least
36 months or 36,000 miles (whichever occurs first) and covers all components of
the vehicle, other than tires which are warranted by the tire manufacturers. In
general, different warranty coverage is provided on medium/heavy trucks and on
vehicles sold outside the United States. In addition, as discussed below under
"Governmental Standards - Mobile Source Emissions Control", the Federal Clean
Air Act requires a useful life of 10 years or 100,000 miles (whichever occurs
first) for emissions equipment on most light duty vehicles sold in the United
States. As a result of the coverage of these warranties and the increased
concern for customer satisfaction, costs for warranty repairs, emissions
equipment repairs and customer satisfaction actions ("warranty costs") can be
substantial. Estimated warranty costs for each vehicle sold by Ford are accrued
at the time of sale. Such accruals, however, are subject to adjustment from time
to time depending on actual experience.
-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 11% for 1997, increase their production capacity in Europe and import
restrictions on Japanese built-up vehicles gradually are removed in total by
December 31, 1999. Ford estimates that in 1997 the European automotive industry
had excess capacity of approximately 5.5 million units (based on a comparison of
European domestic demand and capacity).
In 1997, European car industry sales were 13.2 million units, up 5% from
1996 levels. Truck sales were 1.8 million units, up 6% from 1996 levels. Ford's
European car share for 1997 was 11.2%, down 3/10 of a point from 1996, and its
European truck share for 1997 was 12.2%, down 9/10 of a point from 1996.
For Ford, Great Britain and Germany are the most important markets within
Europe, although the Southern European countries are becoming increasingly
significant. Any adverse change in the British or German market has a
significant effect on total automotive profits. For 1997 compared with 1996,
total industry sales were up 7% in Great Britain and up 7% in Germany.
A single currency called the euro will be introduced in Europe on January
1, 1999. The increased price transparency resulting from the use of a single
currency may affect the ability of Ford and other companies to price their
products differently in the various European markets. A possible result of this
price harmonization is lower average prices for products sold in these markets.
Other Foreign Markets
---------------------
Mexico and Canada. Mexico and Canada also are important markets for Ford.
In 1997, industry sales of cars and trucks in Canada were 1.4 million units, up
18% from 1996 levels. The increase reflected economic growth and low Canadian
interest rates. Mexico had been a growing market until late 1994. However,
substantial devaluation of the Mexican peso in late 1994 created a high level of
uncertainty regarding economic activity in Mexico. In 1996 and 1997, the Mexican
economy recovered. In 1997, industry volume was 496,000 units, up 50% from 1996
levels.
South America. Brazil and Argentina are the principal markets for Ford in
South America. The economic environment in those countries has been volatile in
recent years, leading to large variations in profitability. Results also have
been influenced by government actions to reduce inflation and public deficits,
and improve the balance of payments. Industry sales in 1997 were 1.9 million
units in Brazil, up 11% from 1996, and 426,000 units in Argentina, up 13% from
1996. Brazilian government austerity measures in late 1997 adversely impacted
industry vehicle sales in that country and are expected to continue to affect
industry sales in 1998.
Asia Pacific. In the Asia Pacific region, Australia, Taiwan and Japan are
the principal markets for Ford products. Industry volumes in 1997 in this region
were as follows: 722,000 units in Australia (up 11.1% from 1996), 482,000 units
in Taiwan (up 2.3% from 1996) and 6.7 million units in Japan (down 5% from
1996). In 1997, Ford was the market share leader in Australia with an 18%
combined car and truck market share. In Taiwan (where sales of built-up vehicles
manufactured in Japan are prohibited), Ford had a combined car and truck market
share in 1997 of 16.1%. Ford's combined car and truck market share in Japan has
never exceeded 1%. Ford's principal competition in the Asia Pacific region has
been the Japanese manufacturers. It is anticipated that the continuing
relaxation of import restrictions (including duty reductions) in Australia and
Taiwan will intensify competition in those markets.
-6-
Item 1.Business (Continued)
---------------------------
The financial crisis that began in Thailand in mid-year 1997, and spread to
the neighboring Southeast Asian nations, particularly Indonesia, has resulted in
a significant reduction of vehicle sales for the region. These markets had been
expanding, but economic growth is now expected to remain subdued during a period
of restructuring. Ford is positioning itself to actively participate in these
markets in recognition of their long-term growth opportunities.
Africa. Ford operates in the South African market through South African
Motor Corporation (Pty.) Limited ("SAMCOR") in which Ford has a 45% equity
interest. SAMCOR is an assembler of Ford and other manufacturers' vehicles in
South Africa. In 1997, industry volume in South Africa was 367,000 units, down
7% from 1996 levels.
Financial Services Operations
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.
Outside the United States, Ford Credit Europe plc ("Ford Credit Europe") is
Ford Credit's largest operation. Ford Credit Europe is owned by Ford Credit
(70.4%), Ford Werke AG (19.6%) and Ford (10%). 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.
Ford Credit also conducts insurance operations through The American Road
Insurance Company ("American Road") and its subsidiaries in the United States
and Canada. American Road's business consists of extended service plan contracts
for new and used vehicles manufactured by affiliated and nonaffiliated
companies, primarily originating from Ford dealers, physical damage insurance
covering vehicles and equipment financed at wholesale by Ford Credit, and the
reinsurance of credit life and credit disability insurance for retail purchasers
of vehicles and equipment.
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 the years indicated:
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Item 1. Business (Continued)
-----------------------------
Ford Credit's finance receivables and retained interest in sold receivables
and investments in operating leases were as follows at the dates indicated (in
millions):
The aggregated receivable balances related to accounts past due 60 days or
more 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 (in millions):
----------------
*Includes investments in operating leases.
-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 the sale 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 also can 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 1997.
The Hertz Corporation
---------------------
Hertz and its affiliates and independent licensees operate what Hertz
believes is the largest car rental business in the world based upon revenues and
volume of rental transactions and the largest industrial and construction
equipment rental business in the United States based upon revenues. Hertz,
together with its affiliates and independent licensees, rents and leases cars,
rents industrial and construction equipment and operates its other businesses
from approximately 5,500 locations throughout the United States and in
approximately 140 foreign countries and jurisdictions. In April 1997, Hertz
completed an initial public offering of common stock representing a 19.1%
economic interest in Hertz.
-9-
Item 1. Business (Continued)
----------------------------
Associates First Capital Corporation
------------------------------------
The Associates is a leading, diversified consumer and commercial finance
organization which provides finance, leasing and related services to individual
consumers and businesses in the United States and internationally. On March 2,
1998, Ford's Board of Directors approved the spin-off of The Associates by
declaring a dividend pursuant to which all of Ford's 279.5 million shares of The
Associates will be distributed to Ford Common and Class B stockholders in
proportion to their ownership of Common and Class B Stock. The distribution will
be made on April 7, 1998 to holders of record on March 12, 1998.
In 1996 and 1997, The Associates contributed 16.8% and 12%, respectively,
to Ford's consolidated earnings. Generally, the earnings of The Associates have
been retained by The Associates to fund its growth.
Governmental Standards
A number of governmental standards and regulations relating to safety,
corporate average fuel economy ("CAFE"), emissions control, noise control,
damageability and theft prevention are applicable to new motor vehicles,
engines, and equipment manufactured for sale in the United States, Europe and
elsewhere. In addition, manufacturing and assembly facilities in the United
States, Europe and elsewhere are subject to stringent standards regulating air
emissions, water discharges and the handling and disposal of hazardous
substances. Such facilities in the United States also are subject to a
comprehensive federal-state permit program relating to air emissions.
Mobile Source Emissions Control -- U.S. Requirements. The Federal Clean Air
Act (the "Clean Air Act" or the "Act") imposes stringent limits on the amount of
regulated pollutants that lawfully may be emitted by new motor vehicles and
engines produced for sale in the United States. Concurrently, most light duty
vehicles sold in the United States must comply with these standards for 10 years
or 100,000 miles, whichever first occurs. More stringent emissions standards
will become effective as early as the 2004 model year, unless the U.S.
Environmental Protection Agency (the "EPA") decides otherwise.
Pursuant to the Act, California has received a waiver from the EPA to
establish unique emissions control standards. New vehicles and engines sold in
California must be certified by the California Air Resources Board (the "CARB").
The CARB's emissions requirements (the "California program") for model years
1994 through 2003 require manufacturers to meet a non-methane organic gasses
fleet average requirement and are significantly more stringent than those
prescribed by the Act for the corresponding periods of time. California
initially required that a specified percentage of each manufacturer's vehicles
produced for sale in California, beginning at 2% in 1998 and increasing to 10%
in 2003, must be zero-emission vehicles ("ZEVs"), which produce no emissions of
regulated pollutants. In 1996, however, the CARB eliminated the ZEV mandate
until the 2003 model year. Around the same time, vehicle manufacturers
voluntarily entered into an agreement with CARB to provide air quality benefits
for California equivalent to a 49 state program (i.e., equivalent to providing
vehicles certified to the California low emission vehicle standard nationwide
beginning with the 2001 model year), to continue research and development of ZEV
technology and to provide specific numbers of advanced technology battery
vehicles through demonstration programs in California.
Electric vehicles are the only presently known type of zero-emission
vehicles. However, despite intensive research activities, technologies have not
been identified that would allow manufacturers to produce an electric vehicle
that either meets most customers' expectations or is commercially viable.
Compliance with the ZEV mandate may require manufacturers to curtail the sale of
non-electric vehicles or to offer substantial discounts on electric vehicles,
selling them well below cost, while increasing the price on non-electric
vehicles. The California program and ZEV mandates present significant
-10-
Item 1.Business (Continued)
---------------------------
technological challenges to manufacturers and compliance may require costly
actions that would have a substantial adverse effect on Ford's sales volume and
profits.
The Act also permits other states which do not meet national ambient air
quality standards to adopt the California program no later than two years before
the affected model year. Under the Act, twelve northeastern states and the
District of Columbia formed a group known as the Ozone Transport Commission (the
"OTC"). Based on an OTC recommendation, the EPA required each OTC jurisdiction
to adopt the California program. The OTC jurisdictions also may adopt
California's ZEV mandates, if any, but were not required to do so by the EPA. In
March 1997, the Circuit Court of Appeals for the District of Columbia vacated
the EPA's rule requiring the OTC jurisdictions to adopt the California program.
That decision did not affect California programs, including ZEV mandates,
already adopted by individual states. There are major problems with transferring
California standards to the Northeast -- many dealers sell vehicles in
neighboring states and the driving range of present ZEVs is greatly diminished
(by more than 50 percent) in cold weather. Also, the Northeast states have
refused to adopt the California reformulated gasoline requirement, which makes
the task of meeting standards even more difficult.
The California program was adopted in New York and Massachusetts and is
currently in effect for model years 1996 and beyond. In addition, these two
states adopted ZEV mandates beginning with model year 1998. New York's mandate
retains the now rescinded California ZEV requirements. The automotive industry
is seeking to have New York's pre-2003 model year ZEV mandate declared invalid,
and the case is now pending before the U.S. Court of Appeals for the Second
Circuit. Massachusetts has attempted to adopt as a standard the ZEV obligations
relating to California to which the auto manufacturers voluntarily agreed with
CARB. A federal district court has invalidated these regulations, but
Massachusetts has appealed the decision to the U.S. Court of Appeals for the
First Circuit. Connecticut adopted the California program beginning with model
year 1998. Rhode Island and Vermont have adopted the California program
beginning in model year 1999 (with a ZEV mandate to be required in Vermont after
certain determinations with respect to the advancement of ZEV technology have
been made). Maine has adopted the California program beginning with the 2001
model year. Maryland and New Jersey have laws requiring adoption of the
California program and ZEV mandates after certain conditions, relating to
actions which may be taken by other OTC jurisdictions, have been met.
In response to OTC actions, the automotive industry proposed a National Low
Emissions Vehicle (NLEV) program, which the EPA promulgated as a rule and which
has been agreed to by all manufacturers and all OTC jurisdictions except Maine,
Massachusetts, New York and Vermont. This NLEV program will require
manufacturers to sell low emission vehicles in the participating OTC
jurisdictions beginning with the 1999 model year, and throughout the remainder
of the country beginning with the 2001 model year. The OTC jurisdictions which
have agreed to the NLEV program will for its duration substitute the NLEV
program for any of their other emissions programs for passenger cars and light
duty gasoline trucks. California and the non-participating OTC jurisdictions
will retain their California-based programs. A petition seeking judicial review
of the EPA's rule establishing NLEV has been filed by a coalition of
environmental groups. The petition alleges that the rule violates the Clean Air
Act.
Under the Act, the EPA and CARB can require manufacturers to recall and
repair non-conforming vehicles. The EPA, through its testing of production
vehicles, can also halt the shipment of non-conforming vehicles. Ford may be
required to recall, or may voluntarily recall, vehicles for such purposes in the
future. The costs of related repairs or inspections associated with such recalls
can be substantial.
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.
-11-
Item 1. Business (Continued)
----------------------------
In January 1998, Ford announced that it would voluntarily re-engineer all
of its 1999 model year sports utility vehicles and its 1999 model year Windstar
minivan to emit 70% less pollutants than the level required by the Clean Air
Act. Ford is certifying those vehicles under the Act's Clean Fuel Fleet Program.
European Requirements. European Union directives and related legislation
limit the amount of regulated pollutants that may be emitted by new motor
vehicles and engines sold in the European Union. In June 1996, the European
Commission published a draft proposal for new more stringent European emissions
standards for 2000 (the "Stage III Directive"). That draft includes a new
framework for emission-related fiscal incentives for the early introduction of
vehicles capable of meeting Stage III standards before 2000 and vehicles capable
of meeting newly proposed and even more stringent standards before 2005. The
common position of the European Council of Environment Ministers (the
"Environment Council") published in November 1997 provides that the European
Commission should propose mandatory standards for 2005 by June 30, 1999 based on
a study that would address air quality needs, vehicle and engine technology
developments, the need for and availability of clean fuels, and other issues.
The European Parliament has proposed various amendments to the Environment
Council's common position that would make the proposed Stage III Directive even
more stringent. The Environment Council and the European Parliament are expected
to convene a conciliation committee to agree on the final form for the Stage III
Directive.
Certain European countries are conducting in-use emissions testing to
ascertain compliance of motor vehicles with applicable emissions standards.
These actions could lead to recalls of vehicles; the future costs of related
inspection or repairs could be substantial.
Motor Vehicle Safety -- The National Traffic and Motor Vehicle Safety Act
of 1966 (the "Safety Act") regulates motor vehicles and motor vehicle equipment
in two primary ways. First, the Safety Act prohibits the sale in the United
States of any new vehicle or equipment that does not conform to applicable motor
vehicle safety standards established by the National Highway Traffic Safety
Administration (the "Safety Administration"). Meeting or exceeding many safety
standards is costly because they tend to conflict with the need to reduce
vehicle weight in order to meet emissions and fuel economy standards. Second,
the Safety Act requires that defects related to motor vehicle safety be remedied
through safety recall campaigns. There currently are pending before the Safety
Administration a number of investigations relating to alleged safety defects in
Ford vehicles. A manufacturer is also obligated to recall vehicles if it
determines they contain a defect relating to motor vehicle safety or do not
comply with a safety standard. Should Ford or the Safety Administration
determine that either a safety defect or a noncompliance exists with respect to
certain of Ford's vehicles, the costs of such recall campaigns could be
substantial.
In 1997, the Safety Administration amended a standard to permit vehicle
manufacturers to reduce the inflation power in air bags in future models to
further reduce the risk of air bag deployment-related injuries. Ford will
incorporate lower output air bags in its 1998 and later model year vehicles. In
1997, the Safety Administration also adopted a rule permitting vehicle owners
meeting certain criteria to have their air bags deactivated or have "on-off"
switches installed in their vehicles. In June 1998, the Safety Administration is
expected to initiate rulemaking relating to advanced air bags.
The issue of truck-to-car compatibility in relation to collisions has
received significant media attention recently and has been the subject of a
Safety Administration report. Ford and its suppliers are continuing to work on
this complex issue, and Ford will participate with the Safety Administration in
a conference on this subject in early summer 1998. Government regulation to
address vehicle compatibility also is possible.
Canada, the European Union, individual member countries within the European
Union and other countries in Europe, South America and the Asia Pacific markets
also have safety standards applicable to motor vehicles and are likely to adopt
additional or more stringent standards in the future.
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.
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Item 1. Business (Continued)
----------------------------
The Cost Savings Act established a passenger car CAFE standard of 27.5 mpg
for the 1985 and later model years, which the Safety Administration believes it
has the authority to amend to a level it determines to be the maximum feasible
level. The Safety Administration has established a 20.7 mpg CAFE standard
applicable to light trucks.
Ford expects to be able to comply with the foregoing CAFE standards, in
some cases using credits from prior or succeeding years. However, a continued
increase in demand for larger vehicles coupled with a decline in demand for
small and middle-size vehicles could jeopardize its ability to comply.
It is anticipated that efforts may be made to raise the CAFE standard
because of concerns for carbon dioxide ("CO2") emissions, energy security or
other reasons. President Clinton's Climate Change Action Plan ("CCAP") sets a
goal to improve new vehicle fuel efficiency in an amount equivalent to at least
2% per year over a 10 to 15 year period. In addition, international concerns
over global warming due to the emission of "greenhouse gasses" have given rise
to strong pressures to increase fuel economy. During the December 1997 meeting
of the parties to the United Nations Climate Change Convention in Kyoto, Japan,
the United States agreed to reduce greenhouse gas emissions by 7% below their
1990 levels during the 2008-2012 period (the "Kyoto Protocol"). The Kyoto
Protocol is not yet binding on the United States, pending signature by the
President and ratification by the Senate. If the CCAP or Kyoto Protocol goals
are partially or fully implemented through increases in the CAFE standard, or if
significant increases in car or light truck CAFE standards for subsequent model
years otherwise are imposed, Ford would find it necessary to take various costly
actions that would have substantial adverse effects on its sales volume and
profits. For example, Ford might have to curtail or eliminate production of
larger family-size and luxury cars and full-size light trucks, restrict
offerings of engines and popular options, and continue or increase market
support programs for its most fuel-efficient cars and light trucks.
Foreign Requirements. The European Union is also a party to the Kyoto
Protocol and has agreed to reduce greenhouse gas emissions by 8% below their
1990 levels during the 2008-2012 period. In December 1997, the Environment
Council reaffirmed its goal to reduce average CO2 emissions from new cars to 120
grams per kilometer by 2010 (at the latest) and invited European motor vehicle
manufacturers to negotiate further with the European Commission on a
satisfactory voluntary environmental agreement to help achieve this goal. In
addition, the Environment Council directed the European Commission to propose
legislation with binding CO2 limit values if such an agreement is determined to
be unachievable. On March 10, 1998, representatives of the European automotive
manufacturers association met with the European Environment Commissioner to
present an industry proposal that would (among other things) reduce the average
CO2 emissions of new cars sold in the European Union to 140 grams per kilometer
by 2008, review in 2002-2003 the feasibility of further reductions for 2012, and
offer for sale by 2000 vehicles that produce no more than 120 grams of CO2 per
kilometer. This proposal assumes (among other things) that no negative measures
will be implemented against diesel-fueled cars and the full availability of
improved fuels with low sulphur content by 2005. The European Environment
Commissioner will review the proposal with the member countries at a forthcoming
Environment Council meeting. The European Parliament has considered even more
stringent proposals for reducing CO2 emissions from new cars. If adopted,
certain of the proposals being considered could have substantial adverse effects
on Ford's sales volumes and profits in Europe.
In 1995, members of the German Automobile Manufacturers Association
(including Ford Werke AG) made a voluntary pledge to reduce by 2005 the average
fuel consumption of new cars sold in Germany by 25% from 1990 levels, to review
before the year 2000 the need for and feasibility of further reductions in
average fuel consumption, to make regular reports on fuel consumption, and to
increase industry research and development efforts toward this end.
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.
-13-
Item 1. Business (Continued)
----------------------------
Japan has adopted automobile fuel consumption goals that manufacturers must
attempt to achieve by the 2000 model year. The consumption levels apply only to
gasoline-powered vehicles, vary by vehicle weight, and range from 5.8 km/I to
19.2 km/l.
U.S. Stationary Source Air Pollution Control -- The Clean Air Act limits
various emissions into the atmosphere from stationary sources as well as mobile
sources, and allows states to adopt even more stringent standards. The Act
imposes comprehensive permit requirements for manufacturing facilities in
addition to those required by various states. Regulations continue to be
promulgated under the Act, and the costs to comply with the Act could be
substantial. In addition, the enormous complexity and time-consuming nature of
the comprehensive permit program provided for by the Act may reduce operational
flexibility and may interfere with future competitive upgrading of Ford's U.S.
production facilities.
U.S. Water Pollution Control -- Pursuant to the Federal Water Pollution
Control Act (the "Clean Water Act"), Ford is required to obtain permits for its
manufacturing facilities that regulate the facilities' discharge of wastewater
into public waters and municipal sewerage systems. The EPA also requires
management standards and, in some cases, permits for the discharge of storm
water. The standards under the Clean Water Act are established by the EPA and by
the state where a facility is located. Many states have requirements that go
beyond those established under the Clean Water Act.
The EPA also adopted regulations, pursuant to the Great Lakes Critical
Programs Act of 1990, that require more restrictive standards for discharges
into waters that impact the Great Lakes. These regulations may require the
addition of costly control equipment.
U.S. Hazardous Substance and Waste Control -- Pursuant to the Federal
Resource Conservation and Recovery Act ("RCRA"), the EPA has issued regulations
establishing certain procedures and standards for persons who generate,
transport, treat, store, or dispose of hazardous wastes and requiring corrective
action for prior releases. States may adopt even more extensive requirements.
The Federal Comprehensive Environmental Response, Compensation, and Liability
Act ("CERCLA") requires notification regarding certain releases into the
environment, and creates potential liability for remediation costs and for
damage to natural resources at sites where Ford waste was taken for treatment or
disposal. A number of states have enacted separate laws of this type. In
addition, under the Federal Toxic Substances Control Act ("TSCA"), the EPA
evaluates environmental and health effects of existing chemicals and new
substances. Pursuant to TSCA, the EPA regulates the use of polychlorinated
biphenyls in transformers, capacitors and other equipment that may be located at
Ford's U.S. facilities.
European Stationary Source Environmental Control -- The European Union and
individual member countries impose requirements on waste and hazardous wastes,
incineration, packaging, landfill, soil pollution, integrated pollution control,
air emissions standards, import/export and use of dangerous substances, air and
water quality standards, noise, environmental management systems, energy
efficiency, emissions reporting, and planning and permitting. Additional or more
stringent requirements (including tax measures and civil liability schemes for
cleaning polluted sites) are likely to be adopted in the future. The cost of
complying with these standards could be substantial.
The European Commission has published a draft proposal to introduce an
obligation for motor vehicle manufacturers to take back end-of-life vehicles on
a cost-free basis beginning in 2003, to impose requirements on the proportion of
the vehicle that may be disposed of in landfills and the proportion that must be
reused or recycled beginning in 2005, and to ban the use of certain substances
in vehicles beginning in 2003. Such proposals could, if adopted, impose a
substantial cost on manufacturers. The German Automobile Association (including
Ford Werke AG) and the German Automobile Importers Association made a voluntary
pledge to establish a nationwide infrastructure network to take back passenger
cars that are at least 12 years old (and meet certain other requirements) on a
cost-free basis to their owners.
Pollution Control Costs -- During the period 1998 through 2002, Ford
expects that approximately $550 million will be spent on its North American and
European facilities to comply with air and water pollution and hazardous waste
control standards which now are in effect or are scheduled to come into effect.
Of this total, Ford estimates that approximately $100 million will be spent in
1998 and $120 million will be spent in 1999.
-14-
Item 1. Business (Continued)
----------------------------
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.
Employment Data
Average employment for Ford by geographic area was as follows for the years
indicated:
In 1997, average Ford employment decreased 2.1 percent reflecting reduced
Automotive employment offset partially by increased employment in the Company's
Financial Services operations.
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 significant work stoppages at its facilities in
recent years, but work stoppages have occurred in supplier facilities. Any
protracted work stoppages in the future, whether in Ford's facilities or those
of certain suppliers, could substantially adversely affect Ford's results of
operations.
-15-
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 1997, 1996 and 1995, $6.3 billion, $6.8 billion and $6.6 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. In addition, $20 million, $42 million and $18 million
were charged to income in 1997, 1996 and 1995, 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.
-16-
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
-------------------------
Occupant Restraint Systems. Ford is a defendant in various actions for
damages arising out of automobile accidents where plaintiffs claim that the
injuries resulted from (or were aggravated by) alleged defects in the occupant
restraint systems in vehicle lines of various model years. The damages specified
by the plaintiffs in these actions, including both actual and punitive damages,
aggregated approximately $1 billion at December 31, 1997.
Bronco II. Ford is a defendant in various actions involving the alleged
propensity of Bronco II utility vehicles to roll over. The damages specified in
these actions, including both actual and punitive damages, aggregated
approximately $979 million at December 31, 1997.
In most of the actions described in the foregoing paragraphs no dollar
amount of damages is specified or the specific amount referred to is only the
jurisdictional minimum. It has been Ford's experience that in cases that allege
a specific amount of damages in excess of the jurisdictional minimum, such
amounts, on average, bear little relation to the actual amounts of damages paid
by Ford in such cases, which generally are, on average, substantially less than
the amounts originally claimed. In addition to the pending actions, accidents
have occurred and claims have arisen which also may result in lawsuits in which
such a defect may be alleged.
Asbestos. Ford is a defendant in various actions for injuries claimed to
have resulted from alleged contact with certain Ford parts and other products
containing asbestos. Damages specified by plaintiffs in complaints in these
actions, including both actual and punitive damages, aggregated approximately
$1.4 billion at December 31, 1997. (In some of these actions no dollar amount of
damages is specified or the specific amount referred to is only the
jurisdictional minimum.) As distinguished from most lawsuits against Ford, in
most of these asbestos-related cases, Ford is but one of many defendants, and
many of these co-defendants have substantial resources.
Environmental Matters
---------------------
General. Ford has received notices from government environmental
enforcement agencies concerning four matters which potentially involve monetary
sanctions exceeding $100,000. The agencies believe that Ford facilities may have
violated regulations relating to the management of certain materials or relating
to certain emissions from facility operations. In Ford's prior reports, Ford
included another environmental matter that related to certain emissions from one
of its facilities. That matter was resolved in February 1998, with Ford paying a
civil penalty of $135,000.
-17-
Item 3. Legal Proceedings (Continued)
-------------------------------------
Ford has received notices under RCRA, CERCLA and applicable state laws that
it (along with others) may be a potentially responsible party for the costs
associated with remediating numerous hazardous substance storage, recycling or
disposal sites in many states and, in some instances, for natural resource
damages. Ford also may have been a generator of hazardous substances at a number
of other sites. The amount of any such costs or damages for which Ford may be
held responsible could be substantial. Contingent losses expected to be incurred
by Ford in connection with many of these sites have been accrued and are
reflected in Ford's financial statements in accordance with generally accepted
accounting principles. However, for many sites the remediation costs and other
damages for which Ford ultimately may be responsible are not reasonably
estimable because of uncertainties with respect to factors such as Ford's
connection to the site or to materials there, the involvement of other
potentially responsible parties, the application of laws and other standards or
regulations, site conditions, and the nature and scope of investigations,
studies and remediation to be undertaken (including the technologies to be
required and the extent, duration and success of remediation). As a result, Ford
is unable to determine or reasonably estimate the amount of costs or other
damages for which it is potentially responsible in connection with these sites,
although it could be substantial.
CCA Lawsuit. The Corporation for Clean Air, Inc., a California non-profit
group ("CCA"), filed a lawsuit in California against Ford and numerous other
engine and vehicle manufacturers and owners of vehicle fleets, under
California's Safe Drinking Water and Toxic Enforcement Act ("Proposition 65").
Under Proposition 65 any business that knowingly and intentionally exposes any
person to certain carcinogens and reproductive toxins must provide that person
with an advance clear and reasonable warning, unless the business can prove that
the exposures are insignificant. CCA's complaint alleges that manufacturers and
fleet owners of diesel powered vehicles are exposing California's citizens to
diesel exhaust in violation of Proposition 65. Maximum penalties under
Proposition 65 are $2,500 per vehicle per day of violation.
Bridgend Plant. In November 1997, the Cardiff Crown Court imposed a fine of
10,000 Pounds Sterling on Ford's British subsidiary, Ford Motor Company, Limited
("Ford Britain"), for the discharge of certain pollutants into the River Ewenny
by Ford Britain's Bridgend plant in September 1995. Ford Britain was also
required to pay the United Kingdom Environmental Agency's costs of approximately
11,000 Pounds Sterling and to pay for the restocking of fish in the river.
Class Actions
-------------
Described below are various class action lawsuits in which Ford has been
named a defendant. Class action lawsuits can involve very large classes of
plaintiffs, such as statewide or nationwide classes, if plaintiffs persuade the
court to grant class certification. Ford believes it has valid defenses in each
of these cases; however, if plaintiffs were to prevail in any of these lawsuits,
Ford could be required to pay substantial damages.
Paint. Pending against the Company are five purported class actions
alleging defects in the paint processes used on more than nine million vehicles
manufactured by the Company in model years 1984 through 1993. One case (Landry)
is nationwide in scope and is pending in the U.S. District Court for the Eastern
District of Louisiana. In January 1998, plaintiffs in Landry filed a motion for
class certification, which Ford opposed. Of the five cases that were
consolidated with Landry for pretrial proceedings, two were dismissed, and the
plaintiffs in the other three did not file motions for class certification
within the court-ordered deadline. In the remaining case (Sheldon), a Texas
state court certified two subclasses of Texas residents for trial. The Texas
Court of Appeals affirmed the class certification order. In its opinion, the
Court of Appeals approved of a bifurcated trial process that would require class
members to prove causation and damages in separate trials following a classwide
trial on the existence of a defect and the Company's knowledge thereof. Ford
will appeal the class certification to the Texas Supreme Court. In each pending
lawsuit, the plaintiffs seek unspecified compensatory damages, as well as
punitive damages, attorneys' fees and costs.
Bronco II. Currently pending against Ford are two state and one federal
purported class actions filed by Bronco II owners seeking recovery for economic
injury attributable to the alleged rollover propensity of these vehicles. Each
lawsuit expressly excludes personal injury claimants, whose claims are discussed
-18-
Item 3. Legal Proceedings (Continued)
-------------------------------------
above. Some of the lawsuits also seek recovery of unspecified punitive damages
and an order requiring the Company to recall and retrofit these vehicles. Seven
federal Bronco II cases had originally been consolidated for pretrial purposes
in a Louisiana federal court. After the court denied plaintiffs' motion for
class certification in these cases, six of the cases were dismissed either by
the court or voluntarily by the plaintiffs. Plaintiffs in these cases have
appealed the court's dismissal orders and denial of class certification to the
U.S. Court of Appeals for the Fifth Circuit. Ford's motion for summary judgment
is pending in the remaining federal case. The two state court cases are pending
in Alabama and Texas. The Texas case is dormant. In October 1997, the Alabama
court denied Ford's motion to dismiss plaintiffs' fraud claims and certified a
class consisting of Alabama residents who owned a Bronco II vehicle any time
between August 26, 1993 and May 31, 1997. The Alabama Supreme Court agreed to
hear Ford's interlocutory appeal of the trial court's denial of Ford's motion to
dismiss, but it has not yet ruled on Ford's petition to appeal the trial court's
class certification order. The trial court proceedings are stayed pending the
Supreme Court's decision on Ford's interlocutory appeal.
A separate purported class action involving the Bronco II (Goff) is pending
against Ford in federal court in the Southern District of West Virginia. The
lawsuit purports to represent a class of former plaintiffs in Bronco II personal
injury cases that have been settled or tried. Plaintiffs allege that Ford and a
Ford expert on the design history of the Bronco II conspired to fraudulently
conceal documents that would establish (a) that Ford paid the expert to offer
false testimony in favor of Ford regarding the design of the Bronco II, and (b)
that Ford knew the design of the Bronco II rendered the vehicle unstable and
prone to rollover under normal driving conditions. Plaintiffs seek compensatory
and punitive damages, prejudgment interest, costs and attorneys' fees.
Plaintiffs also seek to prevent Ford from using as a defense in this case
releases obtained in settled Bronco II personal injury lawsuits and defense
verdicts in tried Bronco II personal injury lawsuits. Plaintiffs' motion for
class certification and Ford's motion to dismiss are pending.
Ignition Switch. In 1996, the Company was served with fourteen purported
class action lawsuits alleging that certain 1983 to 1993 model year vehicles
were equipped with defective ignition switches that could cause an electrical
short circuit, resulting in smoke and fire damage. Most of the suits were
brought on behalf of plaintiffs who have not experienced a problem, but who
claim that their vehicles have diminished value because of the allegedly
defective switches. Some of the lawsuits were purportedly brought on behalf of
plaintiffs who claim to have suffered fire or smoke damage to their vehicles.
Plaintiffs seek unspecified compensatory damages, punitive damages, attorneys'
fees and costs, as well as injunctive relief requiring, among other things, that
Ford replace the allegedly defective ignition switch in all affected vehicles.
All fourteen lawsuits were consolidated for pretrial proceedings in federal
court in New Jersey. In August 1997, the court denied plaintiffs' motion for
class certification. In September 1997, the court dismissed all of the claims
brought by the non-incident class members except the implied warranty claims
brought under Louisiana law and the breach of contract claims. In October 1997,
plaintiffs filed a motion with the court to remand all of the lawsuits to state
courts and to vacate the court's ruling denying nationwide class certification
and dismissing most of the underlying claims. The court deferred ruling on the
matter pending additional discovery in the case.
In a related matter, State Farm Mutual Automobile Insurance Company ("State
Farm") filed a lawsuit in federal court in California in January 1998 against
Ford and United Technologies Automotive, Inc. State Farm seeks damages for
insurance claims it paid to cover vehicle damage caused by allegedly defective
ignition switches, the deductible amounts paid by its insureds, other
compensatory damages, and attorney's fees and costs. Ford has moved to dismiss
State Farm's claims. Upon Ford's notice of the State Farm action, the Judicial
Panel on Multidistrict Litigation conditionally transferred the action to the
New Jersey federal court where the ignition switch class actions are pending.
State Farm opposed the transfer.
TFI Module. Six purported class actions are pending in state courts on
behalf of owners and lessees of 1983 through 1995 model year Ford vehicles
containing a distributor-mounted thick film ignition (TFI) module. The
plaintiffs allege that distributor-mounted TFI modules are defective because
they have a high propensity to fail due to exposure to engine heat, causing the
engine to stumble, stall, or not start. The plaintiffs in these cases seek pre-
and post-judgment interest, attorneys' fees, disgorgement of profits,
compensatory damages, punitive damages, notice to the public, and the recall and
retrofit of all vehicles with the allegedly defective TFI modules. The cases are
-19-
Item 3. Legal Proceedings (Continued)
-------------------------------------
pending in Alabama, California, Illinois, Maryland, Tennessee and Washington.
The Alabama and Tennessee cases were conditionally certified as nationwide class
actions (excluding California). The cases in Illinois, Maryland and Washington
purport to be regional class actions, and the California case is statewide in
scope. The California case is the "lead" case and proceedings in the other cases
are stayed. The California court has certified a class of California residents
who currently own or lease the subject vehicles and California residents who
purchased such vehicles when they were new. The court also certified a sub-class
of consumers pursuing Consumer Legal Remedies Act claims. In February 1998, the
court ordered Ford to produce at its expense a mailing list for purposes of
class notification. The court reserved final decision on all other aspects of
class notice, but has indicated its intention to order the parties to share the
costs of notice. Ford estimates the costs of such notice to be approximately $1
million to $2 million. Ford appealed the California court's class certification
and class notice orders, but the appellate court has declined to hear Ford's
appeals. Ford has filed a motion for leave to appeal these orders to the
California Supreme Court. If leave to appeal is denied, Ford will have the right
to appeal those orders after entry of any final judgment in the case.
In related developments, Ford urged the Safety Administration to review
allegations by plaintiffs and the Safety Administration's former chief
investigator that Ford improperly withheld information and documents during
prior Safety Administration investigations into this matter. In September 1997,
the Safety Administration issued a Special Order requiring Ford to respond to
those allegations under oath, and Ford did so.
Air Bag. Three purported class action lawsuits were filed in Alabama,
Louisiana and Texas state courts alleging that air bags are defective because
they can cause injury, particularly to children and small adults. The Alabama
action appears to be nationwide in scope and purports to represent owners of
1993 through 1996 (and some 1997) model year cars and light trucks with
passenger air bags. The Louisiana and Texas actions purport to represent
residents who purchased vehicles with driver and/or passenger air bags, and
nonresidents who purchased such vehicles in those states. The Alabama action
names as defendants Ford, General Motors Corporation, Chrysler Corporation, and
an Alabama automobile dealership. The Louisiana action was brought against the
same manufacturers, as well as Volvo of North America, Inc., Nissan Motor
Corporation, Toyota Motor Corporation, Honda Motor Company, Ltd. and various
dealerships. The Texas action was brought against Ford, General Motors, Chrysler
and Volvo. However, in February 1998, plaintiffs in the Texas case filed an
amended complaint that did not name Ford as a defendant. The Louisiana and Texas
actions were removed to federal court and consolidated for pretrial proceedings.
Plaintiffs allege that their vehicles are unsuitable for transporting children
and small adults and, therefore, are not worth the purchase price they paid.
They seek compensatory damages, including the alleged diminution in value of
their vehicles and in the Alabama and Louisiana cases, the cost to disable the
air bags or "repair" the vehicles.
Ford/Citibank Visa. Following the June 1997 announcement of the termination
of the Ford/Citibank credit card rebate program, five purported nationwide class
actions and one purported statewide class action were filed against Ford;
Citibank is also a defendant in some of these actions. The actions allege
damages in an amount up to $3,500 for each cardholder who obtained a
Ford/Citibank credit card in reliance on the rebate program and who is precluded
from accumulating discounts toward the purchase or lease of new Ford vehicles
after December 1997 as a result of the termination of the rebate program.
Plaintiffs contend that defendants deceptively breached their contract by
unilaterally terminating the program, that defendants have been unjustly
enriched as a result of the interest charges and fees collected from
cardholders, and further, that defendants conspired to deprive plaintiffs of the
benefits of their credit card agreement. Plaintiffs seek compensatory damages,
or alternatively, reinstatement of the rebate program, and punitive damages,
costs, expenses and attorneys' fees. The five purported nationwide class actions
were filed in state courts in Alabama, Illinois, New York, Oregon and
Washington, and the purported statewide class action was filed in a California
state court. The Alabama court has conditionally certified a class consisting of
Alabama residents. Ford removed all of the cases to federal court and requested
that the Judicial Panel on Multidistrict Litigation consolidate and transfer the
cases to federal court in Washington for pretrial proceedings. Five of the cases
were consolidated and transferred to federal court in Washington. Ford's request
to consolidate and transfer the remaining case is pending. The plaintiff in the
Oregon case has moved to remand the case to state court.
-20-
Item 3. Legal Proceedings (Continued)
-------------------------------------
Flat Glass. The Company has been named as a defendant in thirteen purported
class actions brought on behalf of purchasers of flat glass alleging that Ford
and other manufacturers fixed prices and allocated markets in
violation of federal and state antitrust laws. Eleven of the class actions are
nationwide in scope and are pending in federal court and the other two class
actions are statewide in scope and are pending in state courts. The other
defendants include Pilkington plc; Libbey-Owens Ford Co., Inc.; AFG Industries;
PPG Industries, Inc.; Asahi Glass Co., Ltd.; and Guardian Industries Corp. There
are nineteen similar purported class actions pending in various courts in which
the Company is not currently named as a defendant. A total of 27 federal cases
have been consolidated in a single federal court in Pennsylvania for pretrial
proceedings under the multidistrict litigation rules. In the actions involving
Ford, the plaintiffs are seeking economic and treble damages.
Lease Residual. In January 1998 in connection with a case pending in
Illinois state court, Ford and Ford Credit were served with a summons and
intervention counterclaim complaint relating to Ford Credit's leasing practices
(Higginbotham v. Ford Credit). The counterclaim plaintiff, Carla Higginbotham,
is a member of a class that has been conditionally certified for settlement
purposes in Shore v. Ford Credit. In the Shore case, Ford Credit commenced an
action for deficiency against Virginia Shore, a Ford Credit lessee. Shore
counterclaimed for purported violations of the Truth-in-Leasing Act (alleging
that certain lease charges were excessive) and the Truth-in-Lending Act
(alleging that the lease lacked clarity). Shore purported to represent a class
of all similarly situated lessees. Ford was not a party to the Shore case.
Higginbotham objected to the proposed settlement of the Shore case, intervened
as a named defendant, filed separate counterclaims against Ford Credit, and
joined Ford as an additional counterclaim defendant. Higginbotham asserts claims
against Ford Credit for violations of the Consumer Leasing Act, declaratory
judgment concerning the enforceability of early termination provisions in Ford
Credit's leases, and fraud. She also asserts a claim against Ford Credit and
Ford for conspiracy to violate the Truth-in-Lending Act. The Higginbotham
counterclaims allege that Ford Credit inflates the residual values of its leased
vehicles, which results in lower monthly lease payments but higher termination
fees for lessees who exercise their right of early termination. Higginbotham
claims that the early termination fees were not adequately disclosed on the
lease form and that the fees are excessive and illegal because of the allegedly
inflated residual values. She also alleges that Ford dictated the residual
values to Ford Credit and thereby participated in an unlawful conspiracy.
Other Matters
-------------
Patents--General. A number of claims have been made or may be asserted in
the future against Ford alleging infringement of patents held by others. Ford
believes that it has valid defenses with respect to the claims that have been
asserted. If some of such claims should lead to litigation, however, and if the
claimant were to prevail, Ford could be required to pay substantial damages.
Lemelson Patent Case. In 1992, Ford was sued in federal court in Nevada by
an individual patent owner (Lemelson) seeking damages and an injunction for
alleged infringement of four U.S. patents characterized by Lemelson as covering
machine vision inspection technologies, including bar code reading. Ford filed a
declaratory judgment action in the same court to have these four patents as well
as others of Lemelson's patents directed to machine vision and laser uses
declared invalid, unenforceable and not infringed. Lemelson filed a counterclaim
alleging infringement of the patents added by Ford and several additional
patents. In 1995, Ford filed twelve summary judgment motions to dispose of large
portions of the case. One motion to have the case dismissed was granted in 1996
and reversed in 1997. The U.S. Court of Appeals refused to hear Ford's appeal of
the 1997 reversal until the case is tried. Ford and Lemelson then filed opposing
motions for further proceedings. Lemelson requested that the case be scheduled
for an immediate trial. Ford moved to have the case sent back to the magistrate
judge for consideration of Ford's eleven pending motions for summary judgment.
Mr. Lemelson died in October 1997. In January 1998 the court permitted the
Lemelson Medical, Education & Research Foundation, Limited Partnership to be
substituted as party to the lawsuit. The court also granted Ford's motion to
have the case remanded back to the magistrate judge for further proceedings to
recommend disposition of Ford's remaining summary judgment motions. If Lemelson
were to prevail in this lawsuit, Ford could be required to pay substantial
damages of an as yet indeterminate amount and could become subject to an
injunction preventing future use of any process or product found to be covered
by a valid patent.
-21-
Item 3. Legal Proceedings (Continued)
-------------------------------------
OFCCP Proceeding. In April 1997, Ford became the subject of a Department of
Labor administrative enforcement proceeding challenging Ford's compliance with
obligations imposed by Executive Order 11246, which prohibits employment
discrimination and requires affirmative action by government contractors and
subcontractors. The Office of Federal Contract Compliance Programs ("OFCCP")
claims that Ford's Kentucky Truck Plant used a hiring process in 1993 for
entry-level hourly laborer positions that discriminated against female
applicants. OFCCP further claims that Ford failed to make available required
records and otherwise cooperate with the agency during a 1993 compliance review.
OFCCP seeks to cancel Ford's government contracts and to bar Ford from obtaining
future government contracts and seeks an order awarding back pay to the
"affected class of women." If OFCCP prevails, Ford's results of operations could
be substantially adversely effected. Ford believes that, although the offer rate
for women at the Kentucky Truck Plant was less than the percentage of female
applicants in the 1993 interview process, there are sound gender-neutral
explanations for this difference. The Department of Labor has indicated it has
similar concerns about the hourly hiring practices at other Ford facilities and
would like to resolve those concerns as part of a resolution of the Kentucky
Truck proceeding.
FTC Investigation. The Federal Trade Commission and the Department of
Justice are continuing their investigation, commenced in 1995, of the retail
vehicle financing credit practices of Ford Credit for compliance with the Equal
Credit Opportunity Act and Regulation B.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
Not required.
-22-
Item 4A. Executive Officers of the Registrant
----------------------------------------------
The executive officers of the Registrant and their respective positions and
ages at March 15, 1998 are shown in the table below:
-23-
Item 4A. Executive Officers of the Registrant (Continued)
---------------------------------------------------------
-24-
Item 4A. Executive Officers of the Registrant (Continued)
---------------------------------------------------------
-25-
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 Messrs. Mays and Ross, have been
employed by the Registrant or its subsidiaries in one or more capacities during
the past five years. Immediately prior to joining Ford, Mr. Mays served as Vice
President of Design Development at SHR Perceptual Management in Scottsdale,
Arizona. Previously, and since 1993, Mr. Mays was design director responsible
for worldwide design strategy, development and execution for Audi AG in Germany.
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.
-26-
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. Ford is in the
process of delisting its stock from stock exchanges in Belgium, France, Germany
and Switzerland.
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 27, 1998, stockholders of record of Ford included 241,815
holders of Common Stock and 109 holders of Class B Stock.
-27-
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):
- - - - -
a/ 1989 includes an after-tax loss of $424 million from the sale of Rouge
Steel Company.
b/ 1994 includes an after-tax loss of $440 million from the sale of Granite
Savings Bank (formerly First Nationwide Bank).
c/ 1995 includes a gain of $230 million from the dissolution of Autolatina,
the company's joint venture with Volkswagen AG in Brazil and Argentina.
d/ 1996 includes gains of $650 million on the sale of The Associates' common
stock and $95 million on the sale of USL Capital's assets, offset partially
by a net write-down of $233 million for Budget Rent a Car Corporation.
e/ 1997 includes a gain of $269 million on the sale of Hertz common stock.
f/ Share data have been adjusted to reflect stock dividends and stock splits.
-28-
Item 6. Selected Financial Data (Continued)
--------------------------------------------
g/ The cumulative effects of changes in accounting principles reduced equity
by $6,883 million in 1992.
h/ Per hour worked (in dollars). Excludes data for subsidiary companies.
-29-
Item 6. Selected Financial Data (Continued)
--------------------------------------------
- - - - -
i/ Vehicle unit sales generally are reported worldwide on a "where sold"
basis and include sales of all Ford-badged units, as well as units
manufactured by Ford and sold to other manufacturers.
j/ Ford's tractor operation, Ford New Holland, was sold on May 6, 1991.
-30-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
------------------------------------------------------------------------
OVERVIEW
The Company's worldwide net income was a record $6,920 million in 1997, or
$5.62 per diluted share of Common and Class B Stock, compared with $4,446
million, or $3.64 per diluted share in 1996.
The Company's earnings in 1997 were up $2,474 million or 56% from 1996,
reflecting primarily improved Automotive operating results in North America,
South America and Europe, offset partially by lower earnings in Financial
Services. The Company's worldwide sales and revenues were a record $153.6
billion in 1997, up $6.6 billion or 5% from 1996. Vehicle unit sales of cars and
trucks were a record 6,943,000, up 290,000 units or 4% from a year ago.
Stockholders' equity was $30.7 billion at December 31, 1997, compared with $26.8
billion at December 31, 1996.
In 1997, Automotive capital expenditures for new products and facilities
totaled $8.1 billion, down $67 million from 1996. Automotive cash and marketable
securities were a record $20.8 billion at December 31, 1997, up $5.4 billion
from December 31, 1996. Automotive debt at December 31, 1997 totaled $8.1
billion, unchanged from a year ago. Automotive net cash was a record $12.7
billion at December 31, 1997.
The Company's Financial Statements and Notes to Financial Statements on
pages FS-1 through FS-34, including the Report of Independent Accountants,
should be read as an integral part of this review.
Fourth Quarter 1997
-------------------
In fourth quarter 1997, Ford earned a record $1,796 million, or $1.45 per
diluted share of Common and Class B Stock, compared with $1,204 million, or
$0.99 per diluted share in fourth quarter 1996.
The Company's net income for fourth quarter 1997 and 1996 was as follows
(in millions):
Earnings for Automotive operations in the U.S. improved in fourth quarter
1997, compared with fourth quarter 1996, primarily as a result of cost
reductions (at constant volume and mix).
-31-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
------------------------------------------------------------------------
Automotive operations in Europe earned a profit in fourth quarter 1997,
compared with a loss a year ago. The improvement reflected primarily increased
volume and nonrecurrence of 1996 separation costs. Lower losses in South America
in fourth quarter 1997 reflected primarily nonrecurrence of 1996 separation
costs, improved volume and mix, and cost reductions.
Lower earnings for Financial Services operations reflected nonrecurrence of
1996 one-time actions and a higher effective tax rate.
RESULTS OF OPERATIONS
The Company's full year net income for worldwide Automotive operations in
1997, 1996 and 1995, was as follows (in millions):
The Company's full year net income for worldwide Financial Services
operations in 1997, 1996 and 1995, was as follows (in millions):
-32-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
-----------------------------------------------------------------------
1997 COMPARED WITH 1996
Automotive Operations
---------------------
Earnings for Automotive operations in the U.S. were a record $3,706
million, up $1,699 million in 1997 compared with a year ago. The increase
reflected higher margins from ongoing cost, quality, and vehicle mix
improvements. The after-tax return on sales was 4.6% in 1997, up 1.9 points from
a year ago.
The U.S. economy continued on a path of strong growth, low unemployment,
and moderate inflation in 1997. Car and truck industry volumes totaled 15.5
million units in 1997, about the same level as 1996. Ford's combined U.S. car
and truck share was 25%, down 2/10 of a point from 1996.
Automotive operations in Europe returned to profitability in 1997 with
earnings of $273 million compared with a loss of $291 million a year ago. The
improvement reflected primarily lower operating costs (at constant volume and
mix), offset partially by lower volume.
European car and truck industry volumes totaled 15 million units in 1997,
compared with 14.3 million units in 1996. Ford's combined European car and truck
share was 11.4%, down 4/10 of a point from 1996.
Automotive operations in South America returned to profitability, earning
$40 million in 1997 compared with a loss of $642 million a year ago. Higher
earnings reflected primarily improved volume and mix, and lower material costs
(at constant volume and mix). In 1997, car and truck industry volumes in Brazil
(the largest market in South America) totaled 1.9 million units. Ford's combined
car and truck market share in Brazil was 14.5% in 1997, up 3.8 points from 1996.
Automotive Sales and Total Costs
--------------------------------
Automotive sales totaled $123 billion in 1997, up 4.2% from 1996. Sales in
the U.S. were $81 billion in 1997 compared with $76 billion in 1996; sales
outside the U.S. totaled $42 billion in 1997, unchanged from 1996. Total costs
and expenses were $116 billion in 1997, up $482 million or 4/10 of one percent
from 1996. The increases in sales and total costs and expenses were attributable
to the effects of higher unit volume and a richer sales mix. Adjusted for
constant volume and mix, total automotive costs declined $3 billion in 1997.
Financial Services Operations
-----------------------------
Earnings for Financial Services operations in 1997 were down $585 million,
compared with a year ago. Excluding the one-time actions in 1997 and 1996 shown
above, results from operations were down $342 million from a year ago.
Lower earnings at Ford Credit in 1997, compared with 1996, resulted
primarily from lower net financing margins, higher credit losses and loss
reserve requirements, and a higher effective tax rate; improved operating costs
and higher financing volumes were a partial offset. Net financing margins
decreased from a year ago, reflecting higher depreciation costs on leased
vehicles (as a result of lower-than-anticipated residuals). These factors have
continued to adversely affect Ford Credit's earnings in 1998. Credit losses as a
percent of average net finance receivables (including net investment in
operating leases) were 0.89% in 1997, compared with 0.78% a year ago, reflecting
higher losses per repossession.
Record earnings at The Associates reflected primarily higher levels of
earning assets and improved net interest margins, offset partially by higher
credit losses. Credit losses as a percent of average net finance receivables
were 2.40% in 1997, compared with 2.03% in 1996.
-33-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
-----------------------------------------------------------------------
Record earnings at Hertz reflected continued strong performance in the U.S.
car rental market both in terms of increased transaction volume and more
favorable pricing.
1996 COMPARED WITH 1995
The Company's worldwide net income was $4,446 million in 1996, or $3.64 per
diluted share of Common and Class B Stock, compared with $4,139 million, or
$3.33 per diluted share in 1995. 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.
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.
Automotive Operations
---------------------
Earnings for Automotive operations in the U.S. were up $164 million in 1996
compared with 1995. 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 1995.
The U.S. economy grew 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 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 accounted for the
decline.
Unfavorable results for Automotive operations in Europe in 1996, compared
with 1995, 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.
European car and truck industry volumes totaled 14.3 million units in 1996,
compared with 13.4 million units in 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.
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
reestablished operations in Brazil and Argentina in 1996.
Financial Services Operations
-----------------------------
Earnings for Financial Services operations were up $708 million in 1996,
compared with 1995, including $512 million from one-time actions for the sale of
The Associates' common stock, the sale of USL Capital's assets, and the net
write-down for Budget Rent A Car Corporation. Improvements from operations
totaled $196 million.
-34-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
-----------------------------------------------------------------------
Ford Credit's earnings in 1996 include a majority ownership (78%) of Ford
Credit Europe, and results for 1995 were 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 (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 in 1996 owned primarily USL Capital and,
until December 1995, also owned The Associates. Presently, Ford Holdings
primarily owns a minority interest in Ford FSG, Inc.) 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.
Record earnings at The Associates in 1996 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.
Record earnings at Hertz in 1996 reflected primarily higher volume in U.S.
car rental and equipment rental operations, compared with 1995.
LIQUIDITY AND CAPITAL RESOURCES
Automotive Operations
---------------------
Automotive cash and marketable securities were $20.8 billion at December
31, 1997, up $5.4 billion from December 31, 1996. The Company paid $2 billion in
cash dividends on its Common Stock, Class B Stock and Preferred Stock during
1997.
Automotive capital expenditures totaled $8.1 billion in 1997, down $67
million from 1996. Capital expenditures were 6.6% of sales in 1997, down 4/10 of
a point from 1996. Ford's spending in 1998 for product change is expected to be
at lower levels.
Automotive debt at December 31, 1997 totaled $8.1 billion, which was 21% of
total capitalization (stockholders' equity and Automotive debt), down from 23%
of total capitalization a year ago.
For a discussion of Ford's support facilities at December 31, 1997, see
Note 9 (pages FS-22 and 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 agreements.
Outstanding commercial paper at December 31, 1997 totaled $40.9 billion at
Ford Credit, $19.5 billion at The Associates, and $1.4 billion at Hertz, with an
average remaining maturity of 24 days, 28 days, and 18 days, respectively.
Support facilities represent additional sources of funds, if required.
-35-
Item 7. Management's Discussion and Analysis of Financial Contition and
Results of Operations (Continued)
-----------------------------------------------------------------------
For a discussion of support facilities of Ford Credit and other Financial
Services subsidiaries at December 31, 1997, see Note 9 (pages FS-22 and FS-23)
of the Notes to Financial Statements.
SPIN-OFF OF THE ASSOCIATES
On March 2, 1998, the Board of Directors of the Company approved the
spin-off of The Associates by declaring a dividend on Ford's outstanding shares
of Common and Class B Stock consisting in the aggregate of Ford's 80.7% interest
(279.5 million shares) in The Associates. The Board of Directors also declared a
dividend in cash on shares of the Company stock held in employee savings plans
equal to the market value of The Associates stock to be distributed per share of
the Company's Common and Class B Stock. Both the spin-off dividend and the cash
dividend are payable on April 7, 1998 to stockholders of record on March 12,
1998.
Holders of Ford Common and Class B Stock on the record date will be
entitled to receive 0.262085 shares of The Associates common stock for each
share of Ford stock. Based on the closing sale price of The Associates stock of
$81.25 per share on March 2, 1998, the total value of the distribution
(including the cash dividend) will be $25.8 billion or $21.30 per share of Ford
stock. The actual value of the total distribution will depend on the market
value of The Associates stock on the distribution date.
As a result of the spin-off of The Associates, Ford will realize a
one-time, non-taxable gain of about $16.5 billion in first quarter 1998.
In 1996 and 1997, The Associates contributed 16.8% and 12%, respectively,
to Ford's consolidated earnings. Generally, the earnings of The Associates have
been retained by The Associates to fund its growth.
YEAR 2000 DATE CONVERSION
An issue affecting Ford and most other companies is whether computer
systems and applications will recognize and process the year 2000 and beyond.
Ford has a central office to coordinate the identification, evaluation and
implementation of changes to systems and applications to achieve compliance with
the year 2000 date conversion. The Company is in the process of assessing and
implementing necessary changes for all areas of the Company's business which
could be impacted; these include such areas as business computer systems,
technical infrastructure, dealership systems, plant floor equipment, building
infrastructure, end-user computing, affiliates, suppliers and vehicle
components.
The Company has investigated the impact of the year 2000 issue on its
vehicle components and does not anticipate any effect on the operational safety
or performance of its vehicles. The electronic functionality of such components
generally is based on engine cycles or the time elapsed since the vehicle was
started, not any particular date. While the Company will continue to investigate
its vehicle components, at present it does not anticipate any significant
exposure related to the year 2000 issue for its current or future products.
Ford has established accelerated conversion centers in various regions of
the world, and is using these centers, as well as external resources, to address
the year 2000 issue. The Company plans to have necessary modifications made to
most of its critical systems and applications by the end of 1998 and to complete
testing during 1999. The Company, however, has little to no control over whether
its suppliers or dealers will make the appropriate modifications to their
systems and applications on a timely basis. Ford is working actively through the
Automotive Industry Action Group with other manufacturers in assessing and
monitoring supplier readiness. In addition, Ford will rely to a certain extent
on equipment suppliers for the modifications that must be made to certain Ford
manufacturing equipment.
-36-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
-----------------------------------------------------------------------
Based on assessments completed to date and compliance plans in process,
Ford does not expect that the year 2000 issue, including the cost of making its
critical systems and applications compliant, will have a material effect on its
business operations, consolidated financial condition, cash flows, or results of
operations. However, if appropriate modifications are not made by the Company's
suppliers or dealers on a timely basis, or if the Company's actual costs or
timing for the year 2000 date conversion differ materially from its present
estimates, the Company's operations and financial results could be significantly
adversely affected.
NEW ACCOUNTING STANDARDS AND INTERPRETATIONS
New Standards
-------------
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings
per Share," was issued by the Financial Accounting Standards Board in February
1997. Ford adopted SFAS 128 effective with the 1997 financial statements.
Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income," was issued by the Financial Accounting
Standards Board in June 1997. This Statement requires all items that must be
recognized under accounting standards as components of comprehensive income to
be reported in a financial statement that is displayed with the same prominence
as other financial statements. Ford will adopt SFAS 130 for 1998.
Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information," was
issued by the Financial Accounting Standards Board in June 1997. This Statement
establishes standards for reporting information about operating segments in
annual financial statements and requires reporting of selected information about
operating segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. Ford will adopt SFAS 131 for 1998.
Management is evaluating the impact, if any, the Standard will have on the
Company's present segment reporting.
Interpretations
---------------
Brazil has been considered a highly inflationary economy since the
implementation of Statement of Financial Accounting Standards No. 52 ("SFAS
52"), "Foreign Currency Translation," for fiscal years beginning on or after
December 15, 1982. The instability of the local currency in a hyperinflationary
economy precludes its use as the functional currency for the measurement of
business operations. Ford has used the U.S. dollar as the functional currency
for its Brazilian operations during this hyperinflationary period.
Beginning January 1, 1998, Brazil no longer is considered a highly
inflationary economy under SFAS 52. The U.S. dollar will continue to be the
designated functional currency for Ford's Brazilian operations in 1998 because
business transactions primarily are U.S. dollar based. Therefore, the change to
a non-highly inflationary designation will have no effect on Ford's consolidated
financial statements in 1998.
The designated functional currency for Ford Brazil will be reviewed
periodically.
-37-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
-----------------------------------------------------------------------
OUTLOOK
Industry Sales Volumes
----------------------
The Company's outlook for car and truck industry sales in 1998 in its major
markets is as follows:
United States - The Company expects car and truck industry
sales in the U.S. in 1998 to be slightly
lower than the 15.5 million units in 1997.
Europe - European car and truck industry sales in 1998
are expected to be about equal to 1997, or
about 15 million units.
Brazil - Fiscal austerity measures implemented in late
1997 by the Brazilian government are expected to
adversely impact 1998 car and truck industry sales
in the region.
1998 Financial Targets
----------------------
Ford's management has set and communicated certain Automotive financial
targets for 1998. While the Company hopes to achieve these goals, they should
not be interpreted as projections, expectations or forecasts of 1998 results.
The Automotive financial targets for 1998 are as follows:
Risk Factors
------------
Statements included in this report may constitute "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements involve a number of risks, uncertainties, and other
factors that could cause actual results to differ materially from those stated,
including, without limitation: greater price competition in the U.S. and Europe
resulting from further weakening of Asian currencies or industry overcapacity; a
significant decline in U.S. or European industry sales resulting from slowing
economic growth; economic difficulties in South America resulting from Brazilian
government austerity programs; a market shift from truck sales in the U.S.;
lower-than-anticipated residual values for leased vehicles; increased safety or
emissions regulation resulting in higher costs and/or sales restrictions; work
stoppages at key Company or supplier facilities; and the discovery of defects in
vehicles resulting in recall campaigns or litigation.
-38-
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
--------------------------------------------------------------------
Ford is exposed to a variety of market risks, including the effects of
changes in foreign currency exchange rates, interest rates and commodity prices.
For Automotive operations, purchases and sales of finished vehicles and
production parts, debt and other payables, subsidiary dividends, and investments
in subsidiaries are frequently denominated in foreign currencies, thereby
creating exposures to changes in exchange rates. In addition, Ford also is
exposed to changes in prices of commodities used in its Automotive operations.
To ensure funding over business and economic cycles and to minimize overall
borrowing costs, Financial Services operations issue debt and other payables
with various maturity and interest rate structures. The maturity and interest
rate structures frequently differ from the invested assets. Exposures to
fluctuations in interest rates are created by the difference in maturities of
liabilities versus the maturities of assets.
These financial exposures are monitored and managed by 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 (pages FS-9 and FS-10) and Note 14 (pages FS-27 and FS-28) of the Notes
to Financial Statements.
The Company's interest rate risk and its foreign currency exchange rate
risk (risks related to commodity derivative positions are not material) is
quantified as follows.
Interest Rate Risk -- Interest rate swaps (including those with a
currency swap component) are used by Ford, primarily in its Financial
Services operations, to mitigate the effects of interest rate
fluctuations on earnings by changing the characteristics of debt to
match the characteristics of assets. The Company uses a model to
assess the sensitivity of its earnings to changes in market interest
rates. The model recalculates earnings by adjusting the rates
associated with variable rate instruments on the repricing date and
adjusting the rates on fixed rate instruments scheduled to mature in
the subsequent twelve months, effective on their scheduled maturity
date. Interest income and interest expense are then recalculated based
on the revised rates. Assuming an instantaneous increase or decrease
of one percentage point in interest rates applied to all financial
instruments and leased assets, Ford's after-tax earnings would change
by $30 million over a 12-month period.
Foreign Currency Risk -- The Company principally uses derivative
financial instruments to hedge assets, liabilities and firm
commitments denominated in foreign currencies. The Company uses a
value-at-risk (VAR) analysis to assess its exposure to changes in
foreign currency exchange rates. The primary assumptions used in the
VAR analysis are as follows:
- A Monte Carlo simulation was used to calculate changes in the
value of currency derivative instruments (forwards and options)
and all significant underlying exposures. The simulation
generated currency rate scenarios over an 18-month exposure
horizon and a one-month holding period.
-39-
Item 7A. Quantitative and Qualitative Disclosures About Market Risk (Continued)
--------------------------------------------------------------------------------
- The VAR analysis calculates the potential risk, with a 99%
confidence level, on firm commitment exposures (cash flows),
including the effects of foreign currency derivatives.
(Translation exposures were not included in the VAR analysis.)
The model assumes currency prices are generally normally
distributed and draws volatility data from the currency markets.
- Estimates of correlations of market factors primarily are drawn
from the JP Morgan RiskMetrics(TM) dataset as of December 31,
1997.
Based on the overall Company currency exposure at December 31, 1997, including
derivative positions, currency movements are projected to affect pre-tax cash
flow by less than $250 million, with a 99% confidence level.
Item 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-34
immediately following the signature pages of this Report.
Selected quarterly financial data of Ford and its consolidated subsidiaries
for 1997 and 1996 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.
-40-
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.
-41-
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, 1997,
1996 and 1995.
Consolidated Balance Sheet at December 31, 1997 and 1996.
Consolidated Statement of Cash Flows for the years ended December 31,
1997, 1996 and 1995.
Consolidated Statement of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995.
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-34 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-34. 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.
-42-
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
-------------------------------------------------------------------------
(a) 3. Exhibits
-----------------
-43-
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 10-K
(Continued)
-------------------------------------------------------------------------
-44-
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
-------------------------------------------------------------------------
-45-
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
-------------------------------------------------------------------------
-46-
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
-------------------------------------------------------------------------
--------------------------
* Incorporated by reference as an exhibit hereto (file number reference 1-3950,
unless otherwise indicated)
** Management contract or compensatory plan or arrangement
-47-
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, 1997, the Registrant filed the
following Current Reports on Form 8-K:
1. Current Report on Form 8-K dated October 8, 1997 concerning the
Registrant's plan to spin off The Associates.
2. Current Report on Form 8-K dated October 9, 1997 concerning certain lowered
debt ratings of the Registrant and certain of its affiliates.
3. Current Report on Form 8-K dated October 15, 1997 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, 1997.
-48-
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 17, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities on the date indicated.
-49-
FS-1
Vehicle unit sales generally 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
The accompanying notes are part of the financial statements.
FS-3
The accompanying notes are part of the financial statements.
FS-4
The accompanying notes are part of the financial statements.
FS-5
*The balances at the beginning and end of each period were less than $500,000.
The accompanying notes are part of the financial statements.
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. 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. 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 are reclassified, if required, to conform with
present period presentations.
Automotive revenues and costs for 1997 and 1996 include new entities in Brazil
and Argentina resulting from the dissolution of Autolatina; amounts for 1995
exclude these entities (Note 15).
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 $2,170 million at December 31,
1997, and $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 in the same manner as sales incentives described above.
Other Costs
-----------
Advertising and sales promotion costs are expensed as incurred. Advertising
costs were $2,315 million in 1997, $2,155 million in 1996 and $2,024 million in
1995.
Estimated costs related to product warranty are accrued at the time of sale.
Research and development costs are expensed as incurred and were $6,327 million
in 1997, $6,821 million in 1996 and $6,624 million in 1995.
Income Per Share of Common and Class B Stock
--------------------------------------------
The company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share," for financial statements for the year ended December 31,
1997. Adoption of this standard did not have a material effect on reported
income per share.
Basic 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, adjusted
for issuable shares and uncommitted ESOP shares.
The company had Series A Preferred Stock convertible to Common Stock. Other
obligations, such as stock options, are considered to be potentially dilutive
common stock. The calculation of diluted income per share of Common and Class B
Stock takes into account the effect of these convertible securities and
potentially dilutive common stock.
FS-8
NOTE 1. Accounting Policies (continued)
----------------------------
Income per share of Common and Class B Stock were 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
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.
FS-9
NOTE 1. Accounting Policies (continued)
----------------------------
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
consistent with underlying debt issues as identified in Note 9. 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.
Foreign Currency Translation
----------------------------
Assets and liabilities of foreign subsidiaries generally are translated to U.S.
dollars at end-of-period exchange rates. The effects of this translation for
most foreign subsidiaries are reported in a separate component of stockholders'
equity. Remeasurement of assets and liabilities of foreign subsidiaries that use
the U.S. dollar as their functional currency are included in income as
transaction gains and losses. Income statement elements of all foreign
subsidiaries are translated to U.S. dollars at average-period exchange rates and
are recognized as part of revenues, costs and expenses. Also included in income
are gains and losses arising from transactions denominated in a currency other
than the functional currency of the subsidiary involved.
Net transaction gains and losses, as described above, decreased net income by
$164 million in 1997 and by $156 million in 1996, and increased net income by
$13 million in 1995.
Impairment of Long-Lived Assets and Certain Identifiable Intangibles
--------------------------------------------------------------------
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
periodically. The company considers projected future operating results, cash
flows, 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 other assets
was $2.1 billion at December 31, 1997, and $2.3 billion at December 31, 1996.
Total goodwill included in Financial Services other assets was $2.7 billion at
December 31, 1997, and $2.9 billion at December 31, 1996.
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.
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.
Automotive
----------
Investments in securities at December 31 were as follows (in millions):
FS-11
NOTE 2. Marketable and Other Securities (continued)
----------------------------------------
During 1997, $365 million of bonds issued by affiliates were reclassified from
equity in net assets of affiliated companies to available-for-sale marketable
securities. In 1997, proceeds from sales of available-for-sale securities were
$8 million; no gross gains or losses were realized on those sales. Stockholders'
equity included, net of tax, net unrealized gains of $28 million in 1997 and $96
million in 1996 on securities owned by certain unconsolidated affiliates. The
available-for-sale securities at December 31 by contractual maturity were due
between one and five years.
Financial Services
------------------
Investments in securities at December 31, 1997 were as follows (in millions):
Investments in securities at December 31, 1996 were as follows (in millions):
FS-12
NOTE 2. Marketable and Other Securities (continued)
----------------------------------------
Financial Services (continued)
------------------
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 $2.9 billion in 1997,
$8.4 billion in 1996 and $2.4 billion in 1995. In 1997, gross gains of $98
million and gross losses of $8 million were realized on those sales; gross gains
of $43 million and gross losses of $21 million were realized in 1996, and gross
gains of $39 million and gross losses of $18 million were realized in 1995.
Stockholders' equity included, net of tax, net unrealized gains of $50 million
and $54 million at December 31, 1997 and 1996, respectively.
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):
*Excludes certain diversified and other receivables of $197
million and $304 million at December 31, 1997 and 1996,
respectively
FS-13
NOTE 3. Receivables - Financial Services (continued)
-----------------------------------------
Included in finance receivables at December 31, 1997 and 1996 were a total of $1
billion and $1.2 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, 1997 and 1996 were $3.7 billion and $4 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): 1998 - $62,057; 1999 - $22,318; 2000 - $13,625; thereafter - $32,728.
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.
Investments in direct financing leases at December 31 were as follows (in
millions):
Minimum direct financing lease rentals are contractually due as follows
(in millions): 1998 - $2,843; 1999 - $2,152; 2000 - $1,551; 2001 - $843;
2002 - $347; thereafter - $138.
Investments in operating leases at December 31 were as follows (in millions):
Minimum rentals on operating leases are contractually due as follows (in
millions): 1998 - $12,773; 1999 - $9,183; 2000 - $1,462; 2001 - $156;
2002 - $73; thereafter - $349.
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): 1997 -
$6,505; 1996 - $5,867; 1995 - $5,508.
Allowances for credit losses are estimated and established as required based on
historical experience and other factors that affect collectibility. 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.
FS-14
NOTE 3. Receivables - Financial Services (continued)
-----------------------------------------
Changes in the allowances for credit losses were as follows (in millions):
Statement of Financial Accounting Standards No. 125 ("SFAS 125") for sales
of receivables was adopted January 1, 1997, and the effect was not material.
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 $1,397 million and $1,445 million at December 31, 1997 and
1996, 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.
FS-15
NOTE 5. Net Property, Depreciation and Amortization - Automotive (continued)
-----------------------------------------------------------------------------
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 $2,294 million in 1997, $2,325 million in 1996 and $2,206
million in 1995. Expenditures that increase the value or productive capacity of
assets are capitalized. Preproduction costs related to new facilities are
expensed as incurred.
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 $2.1 billion of retained earnings at December 31, 1997
that have been retained for use 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-16
NOTE 6. Income Taxes (continued)
---------------------
Deferred income taxes reflect the estimated tax effect of accumulated 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 $2.3 billion at
December 31, 1997. A substantial portion of these losses has an indefinite
carryforward period; the remaining losses have expiration dates beginning in
2000. 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 projected
future operating results, the eligible carryforward period and other
circumstances.
FS-17
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, and government and other
fixed income securities. 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-18
NOTE 8. Employee Retirement Benefits (continued)
-------------------------------------
Pension expense in 1997 decreased for U.S. and non-U.S. plans as a result of
increased return on plan assets and the year-to-year change in the cost of
employee separation programs, offset by higher costs for pension benefit
improvements and, for non-U.S. plans, lower discount rates. Pension expense
in 1996 increased for U.S. and non-U.S. plans as a result of employee
separation programs and lower discount rates.
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, 1997, the unfunded liability in excess of $500 million resulted in
an increase in the charge to stockholders' equity of $70 million net of
deferred taxes; at December 31, 1996, the charge to stockholders' equity
was $159 million.
FS-19
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.
In June 1997, the company prepaid certain 1998 and 1999 hourly health benefits
by contributing $1,590 million to a Voluntary Employees' Beneficiary Association
(VEBA) trust; $736 million of this amount applies to retirees.
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 1997 by about $190 million and the
accumulated postretirement benefit obligation at December 31, 1997 by about $2
billion.
FS-20
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
----------
Debt at December 31 was as follows (in millions):
Long-term debt at December 31, 1997 included maturities as follows (in
millions): 1998 - $537 (included in current liabilities); 1999 - $144; 2000 -
$984; 2001 - $1,138; 2002 - $436; thereafter - $4,345.
Included in long-term debt at December 31, 1997 and 1996 were obligations of
$6,864 million and $5,961 million, respectively, with fixed interest rates and
$183 million and $534 million, respectively, with variable interest rates
(generally based on LIBOR or other short-term rates). Obligations payable in
foreign currencies at December 31, 1997 and 1996 were $372 million and $756
million, respectively.
Agreements to manage exposures to fluctuations in interest rates, which include
primarily interest rate swap agreements and futures contracts, did not change
the overall weighted-average interest rate on long-term debt and the obligations
subject to variable interest rates of $183 million at December 31, 1997. At
December 31, 1996, these agreements decreased the weighted-average interest rate
on long-term debt and effectively decreased the obligations subject to variable
rates to $363 million.
Financial Services
------------------
Debt at December 31 was as follows (in millions):
FS-21
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, 1997 included maturities as follows (in
millions): 1998 - $15,370; 1999 - $16,343; 2000 - $13,474; 2001 - $12,258; 2002
- 13,475; thereafter - $17,648.
Included in long-term debt at December 31, 1997 and 1996 were obligations of
$56.7 billion and $55.8 billion, respectively, with fixed interest rates and
$16.5 billion and $14.8 billion, respectively, with variable interest rates
(generally based on LIBOR or other short-term rates). Obligations payable in
foreign currencies at December 31, 1997 and 1996 were $27 billion and $28
billion, respectively. These obligations were issued primarily to fund foreign
business operations.
Outstanding commercial paper at December 31, 1997 totaled $40.9 billion at Ford
Credit, $19.5 billion at The Associates, and $1.4 billion at Hertz, with an
average remaining maturity of 24 days, 28 days, and 18 days, respectively.
Agreements to manage exposures to fluctuations in interest rates include
primarily interest rate swap agreements. At December 31, 1997, these agreements
decreased the weighted-average interest rate on long-term debt to 6.5%, compared
with 6.6% excluding these agreements, and effectively decreased the obligations
subject to variable interest rates to $11.8 billion; the weighted-average
interest rate on short-term debt excluding these agreements did not change
materially. 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 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.
Support Facilities
------------------
At December 31, 1997 Ford had long-term contractually committed global credit
agreements under which $8.3 billion is available from various banks at least
through June 30, 2002. The entire $8.3 billion may be used, at Ford's option, by
any affiliate of Ford; however, any borrowing by an affiliate will be guaranteed
by Ford. Ford also has the ability to transfer on a nonguaranteed basis $8
billion of such credit lines 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. In addition, at December 31, 1997,
$471 million of contractually committed credit facilities were available to
various Automotive affiliates outside the U.S. Approximately $66 million of
these facilities were in use at December 31, 1997.
FS-22
NOTE 9. Debt (continued)
-------------
At December 31, 1997, Financial Services had a total of $42.9 billion of
contractually committed support facilities (excluding the $8 billion available
under Ford's global credit agreements). Of these facilities, $23.8 billion are
contractually committed global credit agreements under which $19.2 billion and
$4.6 billion are available to Ford Credit and Ford Credit Europe, respectively,
from various banks; 61% and 77%, respectively, of such facilities are available
through June 30, 2002. The entire $19.2 billion may be used, at Ford Credit's
option, by any subsidiary of Ford Credit, and the entire $4.6 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, 1997, $154 million of the
Ford Credit global facilities were in use; $597 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, 1997 consisted of $17 billion of contractually committed support facilities
available to various affiliates in the U.S. and $2.1 billion of contractually
committed support facilities available to various affiliates outside the U.S.;
at December 31, 1997, approximately $1 billion of these facilities were in use.
Furthermore, banks provide $1.6 billion of liquidity facilities to support the
asset-backed commercial paper program of a Ford Credit sponsored special purpose
entity.
FS-23
NOTE 10. Capital Stock
-----------------------
At December 31, 1997, 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.
Information concerning the Preferred Stock of the company is as follows:
On January 9, 1998, all outstanding shares of Series A Preferred Stock were
redeemed at an amount equivalent to $51.68 per Depositary Share plus unpaid
dividends.
On January 22, 1998, the company announced an offer to purchase all Depositary
Shares representing its Series B Cumulative Preferred Stock at a price of $31.40
per Depositary Share. The offer to purchase was in effect until February 26,
1998.
The Series B Preferred Stock ranks (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. Options granted in 1997 and
subsequent years under the 1990 Plan become exercisable 33% after one year from
the date of grant, 67% after two years and in full after three years. In
general, options granted under the 1985 Plan and options granted prior to 1997
under the 1990 Plan become exercisable 25% after one year from the date of
grant, 50% after two years, 75% after three years and in full after four years.
Options under both Plans expire after 10 years. Certain options outstanding
under the Plans were granted 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 936,300 shares in
1997, 865,100 shares in 1996 and 884,500 shares in 1995 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.
Under the 1990 Plan, 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. Any
unused portion of the 1% limit for any calendar year may be carried forward and
made available for Plan awards in succeeding calendar years. At December 31,
1997, the number of unused shares carried forward aggregated to 1,130,322
shares.
Information concerning stock options is as follows (shares in millions):
- - - - -
* Exercised at option prices ranging from $15.00 to $32.69 during 1997,
$13.42 to $29.06 during 1996, and $9.09 to $29.06 during 1995
** Included 2.0 and 48.0 million shares under the 1985 and 1990 Plans,
respectively, at option prices ranging from $15.00 to $45.84 per share.
At December 31, 1997, 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 1997, 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 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 1997, 1996 and 1995, the company's net income and income per
share would have been reduced to the pro forma amounts indicated below:
- - - - -
* The pro forma disclosures may not be representative of the effects on reported
net income and income per share for future periods because only stock options
that were granted beginning in 1995 are included in the above table. The
estimated fair value, before tax, of options granted in 1997, 1996 and 1995
was $48 million, $54 million and $68 million respectively.
FS-26
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, 1997. 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, 1997, the company had the following minimum rental commitments
under non-cancelable operating leases (in millions): 1998 - $524; 1999 - $400;
2000 - $301; 2001 - $182; 2002 - $132; thereafter -$254. These amounts include
rental commitments related to the sale and leaseback of certain Automotive
machinery and equipment.
Ford in the U.S. and Ford of Canada have entered into agreements with 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, 1997 and 1996 was $1.8 billion and $1.6
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. The U.S. program was
discontinued December 31, 1997; rebates earned prior to program discontinuance
will be valid for up to five years following the calendar year in which earned,
subject to certain restrictions.
Certain Financial Services subsidiaries make credit lines available to holders
of their credit cards. At December 31, 1997 and 1996, the unused portion of
available credit was approximately $29.3 billion and $18.8 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.
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.
FS-27
NOTE 14. Financial Instruments (continued)
-------------------------------
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):
The notional amount represents the contract amount, not the amount at risk. The
notional amount for foreign currency instruments was $30,977 million at December
31 1997, and $29,700 million at December 31, 1996. The notional amount for
interest rate instruments was $90,428 million at December 31, 1997, and $76,200
million at December 31, 1996.
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, 1997, the notional amount of commodity hedging contracts
outstanding totaled $496 million; the notional amount at December 31, 1996 was
$505 million. The company also had guaranteed $860 million of debt of
unconsolidated subsidiaries, affiliates and others. The risk of loss under these
financial agreements is not material.
FS-28
NOTE 15. Acquisitions, Dispositions and Restructuring
------------------------------------------------------
Asset Write-Downs and Dispositions - Financial Services
-------------------------------------------------------
During third quarter 1996, Ford Leasing Corporation, then known as 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.
During 1997, Team Rental Group, Inc. ("Team Rental") acquired all of the
outstanding common stock of BRAC; Ford became the owner of approximately 22% of
Team Rental as a result of the partial repayment in Team Rental stock of Ford's
loans to BRAC. In fourth quarter 1997, Ford sold its shares of Budget Group
(formerly "Team Rental") stock. The gain on sale was not material.
The effect of the USL Capital disposition and BRAC write-down on the company's
results from operations are summarized below (in millions):
Sale of Common Stock of a Subsidiary
------------------------------------
During April 1997, The Hertz Corporation ("Hertz"), a subsidiary of Ford,
completed an initial public offering ("IPO") of its common stock representing a
19.1% economic interest in Hertz. Ford recorded in second quarter 1997 a
non-operating gain of $269 million resulting from the IPO; the gain was not
subject to income taxes.
During May 1996, Associates First Capital Corporation ("The Associates"), a
subsidiary of Ford, completed an IPO of its common stock representing a 19.3%
economic interest in The Associates. Ford recorded in second quarter 1996 a
non-operating gain of $650 million resulting from the IPO; the gain was not
subject to income taxes.
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.
FS-29
NOTE 15. Acquisitions, Dispositions and Restructuring (continued)
-----------------------------------------------------
Dissolution of Autolatina Joint Venture
---------------------------------------
During fourth quarter 1995, the company's joint venture with Volkswagen AG in
Brazil and Argentina (Autolatina) 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 exclude these
entities; the company's income statement for 1995 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.
Restructurings
--------------
The company recorded a pre-tax charge in second quarter 1997 totaling $272
million ($169 million after taxes) reflecting actions that will be completed
during 1997 and 1998. These include primarily the discontinuation of passenger
car production at the Lorain Assembly Plant resulting in a write-down of surplus
assets. The charge also included employee termination costs related to the
elimination of a shift at the Halewood (England) Plant, and a loss on the sale
of the Heavy Truck business.
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-30
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, 1997 and 1996 were $5.8 billion and $2.8 billion, respectively;
Financial Services cash equivalents at December 31, 1997 and 1996 were $0.8
billion and $2.8 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-31
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-32
NOTE 17. Segment Information (continued)
-----------------------------
Financial Services (continued)
------------------
NOTE 18. Summary Quarterly Financial Data (Unaudited)
------------------------------------------------------
(in millions, except amounts per share)
* Restated to reflect accounting adjustments to revenues (and costs) with no
effect on operating or net income
** Amounts for prior periods have been restated, where applicable, to reflect
adoption of Statement of Financial Accounting Standards No. 128, "Earnings
per Share"
FS-33
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Ford Motor Company
We have audited the consolidated balance sheet of Ford Motor Company and
Subsidiaries at December 31, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Ford Motor Company
and Subsidiaries at December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
400 Renaissance Center
Detroit, Michigan 48243
313-446-7100
January 26, 1998
FS-34
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
EXHIBIT INDEX (Continued)
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