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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 1-6368
FORD MOTOR CREDIT COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 38-1612444
(State of incorporation) (I.R.S. employer identification no.)
THE AMERICAN ROAD, DEARBORN, MICHIGAN 48121
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (313) 322-3000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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6 3/8% Notes due November 5, 2008 New York Stock Exchange
8 3/4% Senior Notes due December 1, 2001 The American Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
As of February 28, 1998, the registrant had outstanding 250,000 shares of
Common Stock. No voting stock of the registrant is held by non-affiliates of the
registrant.
THE REGISTRANT MEETS THE CONDITION SET FORTH IN GENERAL INSTRUCTION I(1)(a)
AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
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PART I
ITEM 1. BUSINESS
The registrant, Ford Motor Credit Company, was incorporated in Delaware in
1959 and is an indirect wholly owned subsidiary of Ford Motor Company (the
"Company" or "Ford"). As used herein "Ford Credit" refers to Ford Motor Credit
Company and its subsidiaries unless the context otherwise requires.
Ford Credit and its subsidiaries provide wholesale financing and capital
loans to Ford Motor Company retail dealerships and associated non-Ford
dealerships throughout the world, most of which are privately owned and
financed, and purchase retail installment sale contracts and retail leases from
them. Ford Credit also makes loans to vehicle leasing companies, the majority of
which are affiliated with such dealerships. In addition, subsidiaries of Ford
Credit provide these financing services in the United States, Europe, Canada and
Australia to non-Ford dealerships. A substantial majority of all new vehicles
financed by Ford Credit are manufactured by Ford and its affiliates. Ford Credit
also provides retail financing for used vehicles built by Ford and other
manufacturers. In addition to vehicle financing, Ford Credit makes loans to
affiliates of Ford and finances certain receivables of Ford and its
subsidiaries.
In both 1997 and 1996, United States operations, conducted in all 50
states, the District of Columbia and Puerto Rico, accounted for 79% of Ford
Credit's total revenue. European operations, conducted by Ford Credit Europe plc
("Ford Credit Europe"), accounted for 12% and 13%, respectively, of Ford
Credit's total revenue in these periods. The balance was in Canada, Australia,
Japan, Mexico, New Zealand, Indonesia, Thailand, Taiwan, India and Argentina. In
addition, Ford Credit manages the vehicle financing operations of Ford in other
foreign countries which are conducted through other subsidiaries of Ford.
Outside the United States, Ford Credit Europe is Ford Credit's largest
operation. Ford Credit Europe, which was originally incorporated in 1963 in
England as a private limited company, is owned by Ford Credit (70.4%), Ford
Werke AG (19.6%) and Ford (10.0%). Ford Credit Europe's primary business is to
support the sale of Ford vehicles in Europe through the Ford dealer network. A
variety of retail, leasing and wholesale finance plans is provided in most
countries in which it operates. Retail financing is provided by means of a
number of title retention plans, including conditional sale and hire purchase
agreements, and personal loans. Operating and finance leases are provided to
individual, corporate and other institutional customers, covering individual
vehicles and large and small fleets. Wholesale financing is provided to Ford
dealers for the stocking of new and used vehicles. In addition, Ford Credit
Europe provides loans to dealers for working capital and property acquisitions
and for a variety of finance plans.
Ford Credit also conducts insurance operations through The American Road
Insurance Company ("American Road") and its subsidiaries in the United States
and Canada. American Road's business consists of extended service plan contracts
for new and used vehicles manufactured by affiliated and nonaffiliated
companies, primarily originating from Ford dealers, physical damage insurance
covering vehicles and equipment financed at wholesale by Ford Credit, and the
reinsurance of credit life and credit disability insurance for retail purchasers
of vehicles and equipment.
The business of Ford Credit is substantially dependent upon Ford Motor
Company. See "Vehicle Financing" and "Borrowings and Other Sources of Funds"
under the caption "Business of Ford Credit". Also see Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations". Any
protracted reduction or suspension of Ford's production or sale of vehicles,
resulting from a decline in demand, a work stoppage, governmental action,
adverse publicity, or other event, could have a substantial adverse effect on
Ford Credit. For additional information concerning Ford's results of operations,
see Ford Motor Company's Annual Report on Form 10-K for the year ended December
31, 1997 filed with the Securities and Exchange Commission.
The mailing address of Ford Credit's executive offices is The American
Road, Dearborn, Michigan 48121. The telephone number of such offices is (313)
322-3000.
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SEGMENT INFORMATION
Segment information called for by Item 1 is set forth in Note 16 of Notes
to Financial Statements and is incorporated herein by reference.
BUSINESS OF FORD CREDIT
Ford Credit accounts for its financing business in three categories --
retail (which consists of vehicle installment sale financing and vehicle lease
financing), wholesale and other. Total net finance receivables, retained
interest in sold receivables and net investment in operating leases outstanding
in these three categories and geographic regions were as follows at the end of
the years indicated:
1997 1996 1995
---- ---- ----
(IN MILLIONS)
Retail
Installment sale/finance lease....................... $ 54,545.3 $ 52,352.1 $ 47,087.0
Operating Lease...................................... 34,746.0 30,645.2 25,680.2
Wholesale.............................................. 21,519.7 22,621.9 22,043.8
Other.................................................. 5,247.6 5,874.0 7,245.9
---------- ---------- ----------
Finance receivables, net.......................... $116,058.6 $111,493.2 $102,056.9
Retained interest in sold receivables.................. 998.6 1,124.1 1,149.2
---------- ---------- ----------
Finance receivables, net and retained interest in sold
receivables.......................................... $117,057.2 $112,617.3 $103,206.1
========== ========== ==========
United States.......................................... $ 88,721.0 $ 85,387.6 $ 79,801.5
Europe................................................. 17,148.1 18,099.9 16,202.3
Other international.................................... 11,188.1 9,129.8 7,202.3
---------- ---------- ----------
Finance receivables, net and retained interest in sold
receivables.......................................... $117,057.2 $112,617.3 $103,206.1
========== ========== ==========
VEHICLE FINANCING
Retail. Retail financing consists primarily of installment sale financing
and retail lease financing of new and used vehicles and loans to vehicle leasing
companies, most of which are affiliated with franchised Ford Motor Company
dealerships. The number of installment sale and lease vehicles financed by Ford
Credit was as follows during the years indicated:
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
Installment sale/finance lease.............................. 2,574 2,740 2,557
Operating lease............................................. 1,246 1,063 965
----- ----- -----
Total retail........................................... 3,820 3,803 3,522
===== ===== =====
United States............................................... 2,549 2,674 2,499
Europe...................................................... 727 720 723
Other international......................................... 544 409 300
----- ----- -----
Total retail........................................... 3,820 3,803 3,522
===== ===== =====
The levels of Ford Credit's retail financing volumes and outstanding
finance receivables and net investment in operating leases are dependent on
several factors, including new and used vehicle sales and leases, Ford Credit's
share of those vehicle sales and leases and the average cost of vehicles
financed. See "Competition in Vehicle Financing". In addition, receivables
levels may vary depending on sales of receivables.
Installment sale and retail lease financing consist principally of
purchasing and servicing installment sale contracts and leases covering the sale
or lease of new and used vehicles by vehicle dealers to retail customers. The
amount paid by Ford Credit to the dealer for an installment sale contract or
lease generally represents a negotiated amount agreed to between the dealer and
the customer, less any trade-in or downpayment. In addition, a portion of the
finance charge or lease charge is paid or credited to the dealer. Ford Credit
requires a
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retail purchaser or lessee to carry fire, theft and collision insurance on the
vehicle. In addition, retail lessees are required to carry liability insurance.
Installment sales contract terms range up to 60 months. In the U.S., the
average repayment obligation for new vehicles covered by installment sale
contracts purchased by Ford Credit in 1997 was $21,307. The corresponding
average monthly payment was $412 and the average original term was 54 months.
The monthly lease payment equals the amount paid to the dealer for the
vehicle and lease (the "acquisition cost") less the residual value of the
vehicle established by Ford Credit, amortized over the lease term, plus the
lease charge. The acquisition cost to Ford Credit of the vehicle, less the
residual value, is depreciated on a straight line basis over the life of the
lease. Residual values are determined by Ford Credit after analyzing published
residual values and Ford Credit's own historical experience in the used vehicle
market. In addition, joint marketing programs with Ford's sales divisions can
affect established residual values. At lease termination, Ford Credit either
sells the vehicle to the dealer for the established residual value or sells the
vehicle at auction for the market price.
Retail lease terms range from 12 to 48 months. In the U.S., the average
monthly payment of retail lease contracts purchased by Ford Credit in 1997 was
$390 and the average original term was 27 months.
Ford Credit extends financing to leasing companies and daily rental
companies. Financing charges in connection with such lease financing either are
fixed or floating based on short-term interest rates in effect at the time
financing is extended. These rates may be supplemented by payments from Ford
whenever the rate payable is less than the specified minimum rate agreed between
Ford Credit and Ford.
Wholesale. Wholesale financing consists of loans, under approved lines of
credit, to dealers to assist them in carrying inventories of new and used
vehicles. Ford Credit generally finances 100% of the wholesale price. Vehicles
are insured against fire, theft and other risks under policies issued to Ford
Credit. Ford Credit's United States car and truck wholesale receivables that
liquidated were outstanding an average of about 77 days in both 1997 and 1996.
The levels of Ford Credit's wholesale financing volume and outstanding
wholesale receivables are dependent on several factors, including sales by Ford
to dealers, the level of dealer inventories, Ford Credit's share of Ford's sales
to dealers, vehicle prices and sales of wholesale receivables.
Competition In Vehicle Financing. The vehicle financing business is highly
competitive. Ford Credit's principal competitors are banks, credit unions and
leasing companies.
Ford Credit financed the following percentages of new Ford cars and trucks
sold or leased at retail and sold at wholesale in the United States and Europe
during each of the years indicated:
1997 1996 1995
---- ---- ----
United States
Retail*........................................... 37.5% 37.6% 36.9%
Wholesale......................................... 79.8 79.5 79.7
Europe
Retail*........................................... 29.1 29.3 30.2
Wholesale......................................... 95.0 90.8 89.2
- -------------------------
* As a percentage of total sales and leases, including cash sales
OTHER FINANCING ACTIVITIES
Ford Credit makes capital loans to vehicle dealers for facilities expansion
and working capital and to enable them to purchase dealership real estate. Such
loans totaled $2,268.6 million at December 31, 1997. From time to time, Ford
Credit purchases accounts receivable of certain divisions and affiliates of
Ford. At December 31, 1997, such receivables totaled $3,664.4 million, all of
which represent accounts receivable
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purchased by Ford Credit from Ford pursuant to agreements under which Ford
Credit may purchase such receivables.
As a part of Ford's sale of certain diversified assets of Ford Credit
managed by USL Capital Corporation ("USL Capital") during 1996, the majority of
such assets (except leveraged leases) was sold. Ford Credit formed a partnership
with Bank of America to manage a significant portion of the leveraged lease
portfolio and certain leveraged leases were transferred to the partnership. On
December 31, 1997, Ford Credit sold its partnership interest to Ford Leasing
Corporation, an affiliated company.
In early 1997, Ford Credit completed the sale of its majority interest in
Ford New Holland Credit Company to FiatAllis North America, Inc. and its
affiliates.
CREDIT LOSS EXPERIENCE
The following table sets forth information concerning Ford Credit's credit
loss experience with respect to the various categories and geographic regions of
financing during the years indicated:
1997 1996 1995
---- ---- ----
(DOLLAR AMOUNTS IN MILLIONS)
Net credit losses/(recoveries)
Retail*.................................................. $1,004.4 $803.6 $466.7
Wholesale................................................ (1.1) 18.6 9.9
Other.................................................... 3.8 7.8 9.3
-------- ------ ------
Total................................................. $1,007.1 $830.0 $485.9
======== ====== ======
United States............................................ $ 900.4 $707.0 $371.6
Europe................................................... 66.5 95.5 92.0
Other international...................................... 40.2 27.5 22.3
-------- ------ ------
Total................................................. $1,007.1 $830.0 $485.9
======== ====== ======
- -------------------------
* Includes net credit losses on operating leases
Net losses as a percent of average net receivables*
Retail................................................... 1.17% 1.03% 0.68%
Total finance receivables................................ 0.89 0.78 0.51
Provision for credit losses................................ $1,338.2 $ 993.3 $ 480.4
Allowance for credit losses................................ 1,471.4 1,217.6 1,054.9
As percent of net receivables*........................... 1.27% 1.09% 1.03%
- -------------------------
* Includes net investment in operating leases
Allowances for estimated credit losses are established as required based on
historical experience. Other factors that affect collectibility also are
evaluated and additional allowances may be provided. The provision for credit
losses generally varies with changes in the amount of loss exposure and the
absolute level of financing. Ford Credit's retail loss experience is dependent
upon the number of repossessions, the unpaid balance outstanding at the time of
repossession, and the net resale value of repossessed vehicles. Wholesale losses
generally reflect the financial condition of dealers. For additional information
regarding credit losses, see Notes 1 and 6 of Notes to Financial Statements and
see Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
SECURITY
Ford Credit generally either holds security interests in or is the title
owner of the vehicles which it finances or leases and generally is able to
repossess a vehicle in the event of a default. The right to repossess under a
security interest securing wholesale obligations generally is ineffectual, as a
matter of law, against a retail buyer of a vehicle from a dealer. Under the
wholesale installment sale plan, dealers are permitted to
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delay payment of up to 10% of a vehicle's financed balance for up to 60 days
after the dealer sells the vehicle. A portion of such delayed payments may,
under certain circumstances, be unsecured. Obligations arising from lease
financing extended to leasing companies are collateralized to the extent
practicable by assignments of rentals under the related leases and, in almost
all instances, by liens on the vehicles (which liens are not perfected against
third parties in some cases).
BORROWINGS AND OTHER SOURCES OF FUNDS
Ford Credit relies heavily on its ability to raise substantial amounts of
funds. These funds are obtained primarily by the sale of commercial paper, the
issuance of term debt and, in the case of Ford Credit Europe, the issuance of
certificates of deposit. Funds also are provided by retained earnings and sales
of receivables. The level of funds can be affected by certain transactions with
Ford, such as capital contributions, interest supplements and other support
costs from Ford for vehicles financed and leased by Ford Credit under Ford-
sponsored special financing and leasing programs, and dividend payments, and the
timing of payments for the financing of dealers' wholesale inventories and for
income taxes. Ford Credit's ability to obtain funds is affected by its debt
ratings, which are closely related to the outlook for, and financial condition
of, Ford, and the nature and availability of support facilities. The long-term
senior debt of Ford, Ford Credit and Ford Credit Europe are rated "A1" and "A"
and the commercial paper of Ford Credit and Ford Credit Europe are rated
"Prime-1" and "A-1" by Moody's Investors Service and Standard & Poor's Ratings
Group, respectively. For additional information regarding Ford Credit's
association with Ford, see "Certain Transactions with Ford and Affiliates".
Ford Credit's outstanding debt at the end of each of the last three years
was as follows:
1997 1996 1995
---- ---- ----
(IN MILLIONS)
Commercial paper and STBAs(a)............................... $ 42,311 $38,774 $40,419
Other short-term debt(b).................................... 3,897 4,243 1,781
Long-term debt (including current portion)(c)............... 54,517 55,007 49,980
-------- ------- -------
Total debt................................................ $100,725 $98,024 $92,180
======== ======= =======
United States............................................... 78,443 $76,635 $73,178
Europe...................................................... 12,491 14,028 13,013
Other international......................................... 9,791 7,361 5,989
-------- ------- -------
Total debt................................................ $100,725 $98,024 $92,180
======== ======= =======
Memo:
Total support facilities (billions) as of December 31:
Ford Credit............................................ $ 26.6 $ 27.2 $ 27.4
Ford Credit Europe..................................... 5.2 5.7 4.7
- -------------------------
(a) Short-term borrowing agreements with bank trust departments
(b) Includes $831 million, $2,478 million and $176 million with affiliated
companies at December 31, 1997, December 31, 1996 and December 31, 1995,
respectively
(c) Includes $3,547 million, $4,237 million, and $1,174 million with affiliated
companies at December 31, 1997, December 31, 1996, and December 31, 1995,
respectively
Outstanding commercial paper totaled $40.9 billion at December 31, 1997, up
$2.7 billion from a year earlier. In 1997, long-term debt placements were $11.8
billion compared with maturities and early redemptions of $10.3 billion.
Long-term debt placements in 1996 were $13.4 billion. In 1997, Ford Credit also
received $4.0 billion from sales of receivables and operating leases compared
with $4.7 billion in 1996.
Support facilities represent additional sources of funds, if required. At
December 31, 1997, Ford Credit had approximately $19.2 billion of contractually
committed facilities. In addition, $7.4 billion of Ford bank
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lines may be used by Ford Credit at Ford's option. The lines have various
maturity dates through June 30, 2002 and may be used, at Ford Credit's option,
by any of its direct or indirect majority-owned subsidiaries. Any such
borrowings will be guaranteed by Ford Credit. Banks also provide $1.6 billion of
contractually committed liquidity facilities to support Ford Credit's asset
backed commercial paper program.
Additionally, at December 31, 1997, there was approximately $4.6 billion of
contractually committed facilities available for Ford Credit Europe's use. In
addition, $615 million of Ford bank lines may be used by Ford Credit Europe at
Ford's option. The lines have various maturity dates through June 30, 2002 and
may be used, at Ford Credit Europe's option, by any of its direct or indirect
majority-owned subsidiaries. Any such borrowing will be guaranteed by Ford
Credit Europe.
FORD CREDIT EMPLOYEE RELATIONS
At December 31, 1997, Ford Credit and its subsidiaries had 14,730
employees. All such employees are salaried, and none is represented by a union.
Ford Credit considers its employee relations to be satisfactory.
FORD CREDIT GOVERNMENTAL REGULATIONS
Various aspects of Ford Credit's U.S. financing operations are regulated in
the various jurisdictions in which it operates. Many jurisdictions require
licenses to conduct retail financing. Interest rates, particularly those with
respect to consumer financing, generally are limited by law and, in periods of
high interest rates, these limitations can have a substantial adverse effect on
operations in certain jurisdictions if Ford Credit is unable to pass on its
increased interest costs to its customers.
During the past several years, legislative, judicial, and administrative
authorities have evidenced a growing concern for the protection of the interest
of consumers, especially in connection with consumer financing transactions. As
a result, significant changes have been made in the methods by which Ford Credit
and the financing industry conduct business, and many proposals have been made
which would require further changes. None of the changes to date has had a
substantial adverse effect on the operations of Ford Credit.
CERTAIN TRANSACTIONS WITH FORD AND AFFILIATES
For information concerning transactions between Ford Credit and Ford or
affiliates, see Note 12 of Notes to Financial Statements, "Business of Ford
Credit -- Other Financing Activities", "Business of Ford Credit -- Borrowings
and Other Sources of Funds" and Item 6 -- "Selected Financial Data -- Selected
Income Statement Data." The profit maintenance agreement referred to in the
first paragraph of Note 12 of Notes to Financial Statements, under which Ford
has agreed to maintain the income of Ford Credit at certain minimum levels,
expires at the end of 1998. In addition, Ford has agreed to maintain a minimum
ownership interest in Ford Credit Europe and has agreed to maintain or cause
Ford Credit to maintain Ford Credit Europe's net worth at a minimum level.
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BUSINESS OF FORD
Ford Motor Company was incorporated in Delaware in 1919 and acquired the
business of a Michigan company, also known as Ford Motor Company, incorporated
in 1903 to produce automobiles designed and engineered by Henry Ford. Ford is
the world's largest producer of trucks and the second largest producer of cars
and trucks combined. Ford and its subsidiaries also engage in automotive-related
businesses, such as, financing and renting vehicles and manufacturing automotive
components and systems.
GENERAL
The Company's two principal business segments are Automotive and Financial
Services. The activities of the Automotive segment consist of the design,
manufacture, assembly and sale of cars and trucks and related parts and
accessories. Substantially all of Ford's automotive products are marketed
through retail dealerships, most of which are privately owned and financed.
The primary activities of the Financial Services segment consist of
financing operations, vehicle and equipment leasing and rental operations, and
insurance operations. These activities are conducted primarily through the
Company's subsidiaries, Ford Motor Credit Company ("Ford Credit") and The Hertz
Corporation ("Hertz"). Ford also owns an 80.7% economic interest in Associates
First Capital Corporation ("The Associates"), which, as Ford has recently
announced, will be spun-off on April 7, 1998 to holders of Ford's Common and
Class B Stock.
AUTOMOTIVE OPERATIONS
The worldwide automotive industry is affected significantly by a number of
factors over which the industry has little control, including general economic
conditions.
In the United States, the automotive industry is a highly-competitive,
cyclical business characterized by a wide variety of product offerings. The
level of industry demand (retail deliveries of cars and trucks) can vary
substantially from year to year. In any year, demand is dependent to a large
extent on general economic conditions, the cost of purchasing and operating cars
and trucks and the availability and cost of credit and of fuel. Industry demand
also reflects the fact that cars and trucks are durable items, the replacement
of which can be postponed.
The automotive industry outside of the United States consists of many
producers, with no single dominant producer. Certain manufacturers, however,
account for the major percentage of total sales within particular countries,
especially their respective countries of origin. Most of the factors that affect
the U.S. automotive industry and its sales volumes and profitability are equally
relevant outside the United States.
The worldwide automotive industry also is affected significantly by a
substantial amount of costly government regulation. In the United States and
Europe, for example, government regulation has arisen primarily out of concern
for the environment, for greater vehicle safety and for improved fuel economy.
Many governments also regulate local content and/or impose import requirements
as a means of creating jobs, protecting domestic producers or influencing their
balance of payments.
Unit sales of Ford vehicles vary with the level of total industry demand
and as a result of Ford's share of industry sales. Ford's share is influenced by
the quality, price, design, driveability, safety, reliability, economy and
utility of its products compared with those offered by other manufacturers, as
well as by the timing of new model introductions and capacity limitations.
Ford's ability to satisfy changing consumer preferences with respect to type or
size of vehicle and its design and performance characteristics can affect Ford's
sales and earnings significantly.
The profitability of vehicle sales is affected by many factors, including
unit sales volume, the mix of vehicles and options sold, the level of
"incentives" (price discounts) and other marketing costs, the costs for customer
warranty claims and other customer satisfaction actions, the costs for
government-mandated safety, emission and fuel economy technology and equipment,
the ability to control costs and the ability to recover
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cost increases through higher prices. Further, because the automotive industry
is capital intensive, it operates with a relatively high percentage of fixed
costs which can result in large changes in earnings from relatively small
changes in unit volume.
UNITED STATES
Sales Data. The following table shows U.S. industry demand for the years
indicated:
U. S. INDUSTRY RETAIL DELIVERIES
(MILLIONS OF UNITS)
YEARS ENDED DECEMBER 31,
------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Cars........................................................ 8.3 8.6 8.6 9.0 8.5
Trucks...................................................... 7.2 6.9 6.5 6.4 5.7
---- ---- ---- ---- ----
Total....................................................... 15.5 15.5 15.1 15.4 14.2
==== ==== ==== ==== ====
Ford classifies cars by small, middle, large and luxury segments and trucks
by compact pickup, compact bus/van/utility, full-size pickup, full-size
bus/van/utility and medium/heavy segments. The large and luxury car segments and
the compact bus/van/utility, full-size pickup and full-size bus/van/utility
truck segments include the industry's most profitable vehicle lines. The term
"bus" as used herein refers to vans designed to
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carry passengers. The following tables show the proportion of retail car and
truck sales by segment for the industry (including Japanese and other
foreign-based manufacturers) and Ford for the years indicated:
U. S. INDUSTRY VEHICLE SALES BY SEGMENT
-----------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
CARS
Small.................................................... 18.1% 19.1% 19.6% 20.1% 19.8%
Middle................................................... 24.7 25.6 26.4 26.8 28.8
Large.................................................... 3.9 3.9 4.3 4.8 5.0
Luxury................................................... 6.7 6.7 6.8 6.6 6.4
----- ----- ----- ----- -----
Total U.S. Industry Car Sales............................ 53.4 55.3 57.1 58.3 60.0
----- ----- ----- ----- -----
TRUCKS
Compact Pickup........................................... 6.4 6.2 6.8 7.7 7.6
Compact Bus/Van/Utility.................................. 20.0 19.0 18.0 16.9 16.5
Full-Size Pickup......................................... 12.0 12.6 11.5 11.0 9.9
Full-Size Bus/Van/Utility................................ 6.1 5.0 4.4 4.1 4.2
Medium/Heavy............................................. 2.1 1.9 2.2 2.0 1.8
----- ----- ----- ----- -----
Total U.S. Industry Truck Sales.......................... 46.6 44.7 42.9 41.7 40.0
----- ----- ----- ----- -----
Total U.S. Industry Vehicle Sales........................ 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
FORD VEHICLE SALES BY SEGMENT IN U.S.
-----------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
CARS
Small.................................................... 12.7% 13.4% 15.1% 17.5% 15.1%
Middle................................................... 19.6 22.1 22.3 22.7 26.9
Large.................................................... 5.6 5.3 4.9 5.2 5.1
Luxury................................................... 4.1 4.1 4.4 4.7 4.9
----- ----- ----- ----- -----
Total Ford U.S. Car Sales................................ 42.0 44.9 46.7 50.1 52.0
----- ----- ----- ----- -----
TRUCKS
Compact Pickup........................................... 7.7 7.4 8.0 8.9 9.5
Compact Bus/Van/Utility.................................. 18.9 20.0 20.1 16.7 15.6
Full-Size Pickup......................................... 19.3 20.0 17.9 16.7 15.6
Full-Size Bus/Van/Utility................................ 11.0 6.6 5.9 6.2 6.0
Medium/Heavy*............................................ 1.1 1.1 1.4 1.4 1.3
----- ----- ----- ----- -----
Total Ford U.S. Truck Sales.............................. 58.0 55.1 53.3 49.9 48.0
----- ----- ----- ----- -----
Total Ford U.S. Vehicle Sales............................ 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
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* In May 1997, Ford and Freightliner Corporation ("Freightliner") entered into
an agreement for the sale to Freightliner of Ford's heavy truck business in
North America and Australia. Ford ceased production of heavy trucks in North
America in December 1997. The transfer of the North American heavy truck
business is expected to be completed by the end of the first quarter of 1998,
and the transfer of the Australian business is expect to be completed by
year-end 1998.
As shown in the tables above, since 1993 there has been a steady shift from
cars to trucks for both industry sales and Ford sales. Most of the shift
reflects fewer sales of cars in the middle and large segments for the industry
and in the small and middle segments for Ford, as well as increased sales of
trucks in all segments with the exception of compact pickups and medium/heavy
trucks.
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Market Share Data. The following tables show changes in car and truck
market shares of U.S. and foreign-based manufacturers for the years indicated:
U.S. CAR MARKET SHARES*
-------------------------------------------------
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
U.S. Manufacturers (Including Imports)
Ford...................................................... 19.7% 20.6% 20.9% 21.8% 22.3%
General Motors............................................ 32.2 32.3 33.9 34.0 34.1
Chrysler.................................................. 8.9 9.8 9.1 9.0 9.8
----- ----- ----- ----- -----
Total U.S. Manufacturers................................ 60.8 62.7 63.9 64.8 66.2
Foreign-Based Manufacturers**
Japanese.................................................. 30.9 30.0 29.7 29.6 29.1
All Other................................................. 8.3 7.3 6.4 5.6 4.7
----- ----- ----- ----- -----
Total Foreign-Based Manufacturers....................... 39.2 37.3 36.1 35.2 33.8
----- ----- ----- ----- -----
Total U.S. Car Retail Deliveries........................ 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
U.S. TRUCK MARKET SHARES*
-------------------------------------------------
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
U.S. Manufacturers (Including Imports)
Ford...................................................... 31.2% 31.1% 31.9% 30.1% 30.5%
General Motors............................................ 28.8 29.0 29.9 30.9 31.4
Chrysler.................................................. 21.7 23.4 21.3 21.7 21.4
Navistar International.................................... 1.3 1.3 1.4 1.3 1.3
All Other................................................. 1.8 1.8 2.0 1.8 1.6
----- ----- ----- ----- -----
Total U.S. Manufacturers................................ 84.8 86.6 86.5 85.8 86.2
Foreign-Based Manufacturers**
Japanese.................................................. 14.2 12.7 12.7 13.5 13.2
All Other................................................. 1.0 0.7 0.8 0.7 0.6
----- ----- ----- ----- -----
Total Foreign-Based Manufacturers....................... 15.2 13.4 13.5 14.2 13.8
----- ----- ----- ----- -----
Total U.S. Truck Retail Deliveries...................... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
U.S. COMBINED CAR AND TRUCK MARKET SHARES*
-------------------------------------------------
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
U.S. Manufacturers (Including Imports)
Ford...................................................... 25.0% 25.2% 25.6% 25.2% 25.5%
General Motors............................................ 30.6 30.8 32.2 32.7 33.1
Chrysler.................................................. 14.8 15.9 14.3 14.3 14.7
Navistar International.................................... 0.6 0.6 0.6 0.5 0.5
All Other................................................. 0.9 0.7 0.9 0.8 0.7
----- ----- ----- ----- -----
Total U.S. Manufacturers................................ 71.9 73.2 73.6 73.5 74.2
Foreign-Based Manufacturers**
Japanese.................................................. 23.2 22.4 22.6 22.9 22.8
All Other................................................. 4.9 4.4 3.8 3.6 3.0
----- ----- ----- ----- -----
Total Foreign-Based Manufacturers....................... 28.1 26.8 26.4 26.5 25.8
----- ----- ----- ----- -----
Total U.S. Car and Truck Retail Deliveries.............. 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
- -------------------------
* All U.S. retail sales data are based on publicly available information from
the American Automobile Manufacturers Association, the media and trade
publications.
** Share data include cars and trucks assembled and sold in the U.S. by
Japanese-based manufacturers selling through their own dealers as well as
vehicles imported by them into the U.S. "All Other" includes primarily
companies based in various European countries and in Korea.
Japanese Competition. The market share of Ford and other domestic
manufacturers in the United States is affected by sales from Japanese
manufacturers. As shown in the table above, the share of the U.S. combined car
and truck industry held by the Japanese manufacturers decreased from 22.8% in
1993 to 22.4% in 1996. This trend reflected in part the effects of a
strengthening Japanese yen, which put an upward pressure on the
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prices of vehicles produced by Japanese manufacturers, as well as the overall
market shift from cars to trucks and improvements in vehicles produced by U.S.
manufacturers. During 1997, however, the share of the U.S. combined car and
truck market held by Japanese manufacturers increased to 23.2% as the Japanese
yen weakened against the dollar. The recent disruption in Asian financial
markets and associated further weakening of the yen creates additional
competitive pressures in the United States by Japanese manufacturers.
In the 1980s and continuing in the 1990s, Japanese manufacturers added
assembly capacity in North America (frequently referred to as "transplants") in
response to a variety of factors, including export restraints, movements in the
exchange rate between the Japanese yen and the U.S. dollar, the significant
growth of Japanese car sales in the United States and international trade
considerations. Ford estimates that production in the United States by Japanese
transplants was approximately 2.3 million units in 1997.
Marketing Incentives and Fleet Sales. As a result of intense competition
from new product offerings (from both domestic and foreign manufacturers) and
the desire to maintain economic production levels, automotive manufacturers that
sell vehicles in the United States have provided marketing incentives (price
discounts) to retail and fleet customers (i.e., daily rental companies,
commercial fleets, leasing companies and governments). Marketing incentives are
particularly prevalent during periods of economic downturns, when excess
capacity in the industry tends to increase.
Ford's marketing costs in the United States as a percentage of gross sales
revenue for each of 1997, 1996, and 1995 were 8.7%, 8.0%, and 8.2%,
respectively. "Marketing costs" include (i) marketing incentives on vehicles
such as retail rebates and costs for special financing rates, (ii) reserves for
residual support on retail vehicle leases, (iii) reserves for costs and/or
losses associated with obligatory repurchases of certain vehicles sold to daily
rental companies and (iv) costs for advertising and sales promotions for
vehicles.
Sales by Ford to fleet customers were as follows for the years indicated:
FORD FLEET SALES
---------------------------------------------------
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Units sold..................................... 923,000 936,000 971,000 924,000 881,000
Percent of Ford's total U.S. car and truck
sales........................................ 24% 24% 25% 24% 25%
Fleet sales generally are less profitable than retail sales, and sales to
daily rental companies generally are less profitable than sales to other fleet
purchasers. The mix between sales to daily rental companies and other fleet
sales has been about evenly split in recent years.
Warranty Coverage. Ford presently provides warranty coverage for defects in
factory-supplied materials and workmanship on all vehicles (other than
medium/heavy trucks) sold by it in the United States that extends for at least
36 months or 36,000 miles (whichever occurs first) and covers all components of
the vehicle, other than tires which are warranted by the tire manufacturers. In
general, different warranty coverage is provided on medium/heavy trucks and on
vehicles sold outside the United States. In addition, as discussed below under
"Governmental Standards -- Mobile Source Emissions Control", the Federal Clean
Air Act requires a useful life of 10 years or 100,000 miles (whichever occurs
first) for emissions equipment on most light duty vehicles sold in the United
States. As a result of the coverage of these warranties and the increased
concern for customer satisfaction, costs for warranty repairs, emissions
equipment repairs and customer satisfaction actions ("warranty costs") can be
substantial. Estimated warranty costs for each vehicle sold by Ford are accrued
at the time of sale. Such accruals, however, are subject to adjustment from time
to time depending on actual experience.
EUROPE
Europe is the largest market for the sale of Ford cars and trucks outside
the United States. The automotive industry in Europe is intensely competitive;
for the past 12 years, the top six manufacturers have each achieved a car market
share in about the 10% to 17% range. (Manufacturers' shares, however, vary
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considerably by country.) This competitive environment is expected to intensify
further as Japanese manufacturers, which together had a European car market
share of 11% for 1997, increase their production capacity in Europe and import
restrictions on Japanese built-up vehicles gradually are removed in total by
December 31, 1999. Ford estimates that in 1997 the European automotive industry
had excess capacity of approximately 5.5 million units (based on a comparison of
European domestic demand and capacity).
In 1997, European car industry sales were 13.2 million units, up 5% from
1996 levels. Truck sales were 1.8 million units, up 6% from 1996 levels. Ford's
European car share for 1997 was 11.2%, down 3/10 of a point from 1996, and its
European truck share for 1997 was 12.2%, down 9/10 of a point from 1996.
For Ford, Great Britain and Germany are the most important markets within
Europe, although the Southern European countries are becoming increasingly
significant. Any adverse change in the British or German market has a
significant effect on total automotive profits. For 1997 compared with 1996,
total industry sales were up 7% in Great Britain and up 7% in Germany.
A single currency called the euro will be introduced in Europe on January
1, 1999. The increased price transparency resulting from the use of a single
currency may affect the ability of Ford and other companies to price their
products differently in the various European markets. A possible result of this
price harmonization is lower average prices for products sold in these markets.
OTHER FOREIGN MARKETS
Mexico and Canada. Mexico and Canada also are important markets for Ford.
In 1997, industry sales of cars and trucks in Canada were 1.4 million units, up
18% from 1996 levels. The increase reflected economic growth and low Canadian
interest rates. Mexico had been a growing market until late 1994. However,
substantial devaluation of the Mexican peso in late 1994 created a high level of
uncertainty regarding economic activity in Mexico. In 1996 and 1997, the Mexican
economy recovered. In 1997, industry volume was 496,000 units, up 50% from 1996
levels.
South America. Brazil and Argentina are the principal markets for Ford in
South America. The economic environment in those countries has been volatile in
recent years, leading to large variations in profitability. Results also have
been influenced by government actions to reduce inflation and public deficits,
and improve the balance of payments. Industry sales in 1997 were 1.9 million
units in Brazil, up 11% from 1996, and 426,000 units in Argentina, up 13% from
1996. Brazilian government austerity measures in late 1997 adversely impacted
industry vehicle sales in that country and are expected to continue to affect
industry sales in 1998.
Asia Pacific. In the Asia Pacific region, Australia, Taiwan and Japan are
the principal markets for Ford products. Industry volumes in 1997 in this region
were as follows: 722,000 units in Australia (up 11.1% from 1996), 482,000 units
in Taiwan (up 2.3% from 1996) and 6.7 million units in Japan (down 5% from
1996). In 1997, Ford was the market share leader in Australia with an 18%
combined car and truck market share. In Taiwan (where sales of built-up vehicles
manufactured in Japan are prohibited), Ford had a combined car and truck market
share in 1997 of 16.1%. Ford's combined car and truck market share in Japan has
never exceeded 1%. Ford's principal competition in the Asia Pacific region has
been the Japanese manufacturers. It is anticipated that the continuing
relaxation of import restrictions (including duty reductions) in Australia and
Taiwan will intensify competition in those markets.
The financial crisis that began in Thailand in mid-year 1997, and spread to
the neighboring Southeast Asian nations, particularly Indonesia, has resulted in
a significant reduction of vehicle sales for the region. These markets had been
expanding, but economic growth is now expected to remain subdued during a period
of restructuring. Ford is positioning itself to actively participate in these
markets in recognition of their long-term growth opportunities.
Africa. Ford operates in the South African market through South African
Motor Corporation (Pty.) Limited ("SAMCOR") in which Ford has a 45% equity
interest. SAMCOR is an assembler of Ford and other manufacturers' vehicles in
South Africa. In 1997, industry volume in South Africa was 367,000 units, down
7% from 1996 levels.
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FINANCIAL SERVICES OPERATIONS
FORD MOTOR CREDIT COMPANY
For information regarding the businesses of Ford Credit, see "Business of
Ford Credit."
THE HERTZ CORPORATION
Hertz and its affiliates and independent licensees operate what Hertz
believes is the largest car rental business in the world based upon revenues and
volume of rental transactions and the largest industrial and construction
equipment rental business in the United States based upon revenues. Hertz,
together with its affiliates and independent licensees, rents and leases cars,
rents industrial and construction equipment and operates its other businesses
from approximately 5,500 locations throughout the United States and in
approximately 140 foreign countries and jurisdictions. In April 1997, Hertz
completed an initial public offering of common stock representing a 19.1%
economic interest in Hertz.
ASSOCIATES FIRST CAPITAL CORPORATION
The Associates is a leading, diversified consumer and commercial finance
organization which provides finance, leasing and related services to individual
consumers and businesses in the United States and internationally. On March 2,
1998, Ford's Board of Directors approved the spin-off of The Associates by
declaring a dividend pursuant to which all of Ford's 279.5 million shares of The
Associates will be distributed to Ford Common and Class B stockholders in
proportion to their ownership of Common and Class B Stock. The distribution will
be made on April 7, 1998 to holders of record on March 12, 1998.
In 1996 and 1997, The Associates contributed 16.8% and 12%, respectively,
to Ford's consolidated earnings. Generally, the earnings of The Associates have
been retained by The Associates to fund its growth.
GOVERNMENTAL STANDARDS
A number of governmental standards and regulations relating to safety,
corporate average fuel economy ("CAFE"), emissions control, noise control,
damageability and theft prevention are applicable to new motor vehicles,
engines, and equipment manufactured for sale in the United States, Europe and
elsewhere. In addition, manufacturing and assembly facilities in the United
States, Europe and elsewhere are subject to stringent standards regulating air
emissions, water discharges and the handling and disposal of hazardous
substances. Such facilities in the United States also are subject to a
comprehensive federal-state permit program relating to air emissions.
Mobile Source Emissions Control -- U.S. Requirements. The Federal Clean Air
Act (the "Clean Air Act" or the "Act") imposes stringent limits on the amount of
regulated pollutants that lawfully may be emitted by new motor vehicles and
engines produced for sale in the United States. Concurrently, most light duty
vehicles sold in the United States must comply with these standards for 10 years
or 100,000 miles, whichever first occurs. More stringent emissions standards
will become effective as early as the 2004 model year, unless the U.S.
Environmental Protection Agency (the "EPA") decides otherwise.
Pursuant to the Act, California has received a waiver from the EPA to
establish unique emissions control standards. New vehicles and engines sold in
California must be certified by the California Air Resources Board (the "CARB").
The CARB's emissions requirements (the "California program") for model years
1994 through 2003 require manufacturers to meet a non-methane organic gasses
fleet average requirement and are significantly more stringent than those
prescribed by the Act for the corresponding periods of time. California
initially required that a specified percentage of each manufacturer's vehicles
produced for sale in California, beginning at 2% in 1998 and increasing to 10%
in 2003, must be zero-emission vehicles ("ZEVs"), which produce no emissions of
regulated pollutants. In 1996, however, the CARB eliminated the ZEV mandate
until the 2003 model year. Around the same time, vehicle manufacturers
voluntarily entered into an agreement with CARB to provide air quality benefits
for California equivalent to a 49 state program (i.e., equivalent to providing
vehicles certified to the California low emission vehicle standard nationwide
beginning with the 2001
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model year), to continue research and development of ZEV technology and to
provide specific numbers of advanced technology battery vehicles through
demonstration programs in California.
Electric vehicles are the only presently known type of zero-emission
vehicles. However, despite intensive research activities, technologies have not
been identified that would allow manufacturers to produce an electric vehicle
that either meets most customers' expectations or is commercially viable.
Compliance with the ZEV mandate may require manufacturers to curtail the sale of
non-electric vehicles or to offer substantial discounts on electric vehicles,
selling them well below cost, while increasing the price on non-electric
vehicles. The California program and ZEV mandates present significant
technological challenges to manufacturers and compliance may require costly
actions that would have a substantial adverse effect on Ford's sales volume and
profits.
The Act also permits other states which do not meet national ambient air
quality standards to adopt the California program no later than two years before
the affected model year. Under the Act, twelve northeastern states and the
District of Columbia formed a group known as the Ozone Transport Commission (the
"OTC"). Based on an OTC recommendation, the EPA required each OTC jurisdiction
to adopt the California program. The OTC jurisdictions also may adopt
California's ZEV mandates, if any, but were not required to do so by the EPA. In
March 1997, the Circuit Court of Appeals for the District of Columbia vacated
the EPA's rule requiring the OTC jurisdictions to adopt the California program.
That decision did not affect California programs, including ZEV mandates,
already adopted by individual states. There are major problems with transferring
California standards to the Northeast -- many dealers sell vehicles in
neighboring states and the driving range of present ZEVs is greatly diminished
(by more than 50 percent) in cold weather. Also, the Northeast states have
refused to adopt the California reformulated gasoline requirement, which makes
the task of meeting standards even more difficult.
The California program was adopted in New York and Massachusetts and is
currently in effect for model years 1996 and beyond. In addition, these two
states adopted ZEV mandates beginning with model year 1998. New York's mandate
retains the now rescinded California ZEV requirements. The automotive industry
is seeking to have New York's pre-2003 model year ZEV mandate declared invalid,
and the case is now pending before the U.S. Court of Appeals for the Second
Circuit. Massachusetts has attempted to adopt as a standard the ZEV obligations
relating to California to which the auto manufacturers voluntarily agreed with
CARB. A federal district court has invalidated these regulations, but
Massachusetts has appealed the decision to the U.S. Court of Appeals for the
First Circuit. Connecticut adopted the California program beginning with model
year 1998. Rhode Island and Vermont have adopted the California program
beginning in model year 1999 (with a ZEV mandate to be required in Vermont after
certain determinations with respect to the advancement of ZEV technology have
been made). Maine has adopted the California program beginning with the 2001
model year. Maryland and New Jersey have laws requiring adoption of the
California program and ZEV mandates after certain conditions, relating to
actions which may be taken by other OTC jurisdictions, have been met.
In response to OTC actions, the automotive industry proposed a National Low
Emissions Vehicle (NLEV) program, which the EPA promulgated as a rule and which
has been agreed to by all manufacturers and all OTC jurisdictions except Maine,
Massachusetts, New York and Vermont. This NLEV program will require
manufacturers to sell low emission vehicles in the participating OTC
jurisdictions beginning with the 1999 model year, and throughout the remainder
of the country beginning with the 2001 model year. The OTC jurisdictions which
have agreed to the NLEV program will for its duration substitute the NLEV
program for any of their other emissions programs for passenger cars and light
duty gasoline trucks. California and the non-participating OTC jurisdictions
will retain their California-based programs. A petition seeking judicial review
of the EPA's rule establishing NLEV has been filed by a coalition of
environmental groups. The petition alleges that the rule violates the Clean Air
Act.
Under the Act, the EPA and CARB can require manufacturers to recall and
repair non-conforming vehicles. The EPA, through its testing of production
vehicles, can also halt the shipment of non-conforming vehicles. Ford may be
required to recall, or may voluntarily recall, vehicles for such purposes in the
future. The costs of related repairs or inspections associated with such recalls
can be substantial.
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The Act generally prohibits the introduction of new fuel additives unless a
waiver is granted by the EPA. In 1995, the EPA was ordered by a federal court to
grant such a waiver to Ethyl Corporation for the additive MMT. Ford and other
manufacturers believe that the use of MMT will impair the performance of current
emissions systems and onboard diagnostics systems. Widespread use of MMT could
increase Ford's future warranty costs and necessitate changes in the Company's
warranties for emission control devices.
In January 1998, Ford announced that it would voluntarily re-engineer all
of its 1999 model year sports utility vehicles and its 1999 model year Windstar
minivan to emit 70% less pollutants than the level required by the Clean Air
Act. Ford is certifying those vehicles under the Act's Clean Fuel Fleet Program.
European Requirements. European Union directives and related legislation
limit the amount of regulated pollutants that may be emitted by new motor
vehicles and engines sold in the European Union. In June 1996, the European
Commission published a draft proposal for new more stringent European emissions
standards for 2000 (the "Stage III Directive"). That draft includes a new
framework for emission-related fiscal incentives for the early introduction of
vehicles capable of meeting Stage III standards before 2000 and vehicles capable
of meeting newly proposed and even more stringent standards before 2005. The
common position of the European Council of Environment Ministers (the
"Environment Council") published in November 1997 provides that the European
Commission should propose mandatory standards for 2005 by June 30, 1999 based on
a study that would address air quality needs, vehicle and engine technology
developments, the need for and availability of clean fuels, and other issues.
The European Parliament has proposed various amendments to the Environment
Council's common position that would make the proposed Stage III Directive even
more stringent. The Environment Council and the European Parliament are expected
to convene a conciliation committee to agree on the final form for the Stage III
Directive.
Certain European countries are conducting in-use emissions testing to
ascertain compliance of motor vehicles with applicable emissions standards.
These actions could lead to recalls of vehicles; the future costs of related
inspection or repairs could be substantial.
Motor Vehicle Safety -- The National Traffic and Motor Vehicle Safety Act
of 1966 (the "Safety Act") regulates motor vehicles and motor vehicle equipment
in two primary ways. First, the Safety Act prohibits the sale in the United
States of any new vehicle or equipment that does not conform to applicable motor
vehicle safety standards established by the National Highway Traffic Safety
Administration (the "Safety Administration"). Meeting or exceeding many safety
standards is costly because they tend to conflict with the need to reduce
vehicle weight in order to meet emissions and fuel economy standards. Second,
the Safety Act requires that defects related to motor vehicle safety be remedied
through safety recall campaigns. There currently are pending before the Safety
Administration a number of investigations relating to alleged safety defects in
Ford vehicles. A manufacturer is also obligated to recall vehicles if it
determines they contain a defect relating to motor vehicle safety or do not
comply with a safety standard. Should Ford or the Safety Administration
determine that either a safety defect or a noncompliance exists with respect to
certain of Ford's vehicles, the costs of such recall campaigns could be
substantial.
In 1997, the Safety Administration amended a standard to permit vehicle
manufacturers to reduce the inflation power in air bags in future models to
further reduce the risk of air bag deployment-related injuries. Ford will
incorporate lower output air bags in its 1998 and later model year vehicles. In
1997, the Safety Administration also adopted a rule permitting vehicle owners
meeting certain criteria to have their air bags deactivated or have "on-off"
switches installed in their vehicles. In June 1998, the Safety Administration is
expected to initiate rulemaking relating to advanced air bags.
The issue of truck-to-car compatibility in relation to collisions has
received significant media attention recently and has been the subject of a
Safety Administration report. Ford and its suppliers are continuing to work on
this complex issue, and Ford will participate with the Safety Administration in
a conference on this subject in early summer 1998. Government regulation to
address vehicle compatibility also is possible.
Canada, the European Union, individual member countries within the European
Union and other countries in Europe, South America and the Asia Pacific markets
also have safety standards applicable to motor vehicles and are likely to adopt
additional or more stringent standards in the future.
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Motor Vehicle Fuel Economy -- U.S. Requirements. Under the Motor Vehicle
Information and Cost Savings Act (the "Cost Savings Act") vehicles must meet
minimum CAFE standards set by the Safety Administration. A manufacturer is
subject to potentially substantial civil penalties if it fails to meet the CAFE
standard in any model year, after taking into account all available credits for
the preceding three model years and expected credits for the three succeeding
model years.
The Cost Savings Act established a passenger car CAFE standard of 27.5 mpg
for the 1985 and later model years, which the Safety Administration believes it
has the authority to amend to a level it determines to be the maximum feasible
level. The Safety Administration has established a 20.7 mpg CAFE standard
applicable to light trucks.
Ford expects to be able to comply with the foregoing CAFE standards, in
some cases using credits from prior or succeeding years. However, a continued
increase in demand for larger vehicles coupled with a decline in demand for
small and middle-size vehicles could jeopardize its ability to comply.
It is anticipated that efforts may be made to raise the CAFE standard
because of concerns for carbon dioxide ("CO2") emissions, energy security or
other reasons. President Clinton's Climate Change Action Plan ("CCAP") sets a
goal to improve new vehicle fuel efficiency in an amount equivalent to at least
2% per year over a 10 to 15 year period. In addition, international concerns
over global warming due to the emission of "greenhouse gasses" have given rise
to strong pressures to increase fuel economy. During the December 1997 meeting
of the parties to the United Nations Climate Change Convention in Kyoto, Japan,
the United States agreed to reduce greenhouse gas emissions by 7% below their
1990 levels during the 2008-2012 period (the "Kyoto Protocol"). The Kyoto
Protocol is not yet binding on the United States, pending signature by the
President and ratification by the Senate. If the CCAP or Kyoto Protocol goals
are partially or fully implemented through increases in the CAFE standard, or if
significant increases in car or light truck CAFE standards for subsequent model
years otherwise are imposed, Ford would find it necessary to take various costly
actions that would have substantial adverse effects on its sales volume and
profits. For example, Ford might have to curtail or eliminate production of
larger family-size and luxury cars and full-size light trucks, restrict
offerings of engines and popular options, and continue or increase market
support programs for its most fuel-efficient cars and light trucks.
Foreign Requirements. The European Union is also a party to the Kyoto
Protocol and has agreed to reduce greenhouse gas emissions by 8% below their
1990 levels during the 2008-2012 period. In December 1997, the Environment
Council reaffirmed its goal to reduce average CO2 emissions from new cars to 120
grams per kilometer by 2010 (at the latest) and invited European motor vehicle
manufacturers to negotiate further with the European Commission on a
satisfactory voluntary environmental agreement to help achieve this goal. In
addition, the Environment Council directed the European Commission to propose
legislation with binding CO2 limit values if such an agreement is determined to
be unachievable. On March 10, 1998, representatives of the European automotive
manufacturers association met with the European Environment Commissioner to
present an industry proposal that would (among other things) reduce the average
CO2 emissions of new cars sold in the European Union to 140 grams per kilometer
by 2008, review in 2002-2003 the feasibility of further reductions for 2012, and
offer for sale by 2000 vehicles that produce no more than 120 grams of CO2 per
kilometer. This proposal assumes (among other things) that no negative measures
will be implemented against diesel-fueled cars and the full availability of
improved fuels with low sulphur content by 2005. The European Environment
Commissioner will review the proposal with the member countries at a forthcoming
Environment Council meeting. The European Parliament has considered even more
stringent proposals for reducing CO2 emissions from new cars. If adopted,
certain of the proposals being considered could have substantial adverse effects
on Ford's sales volumes and profits in Europe.
In 1995, members of the German Automobile Manufacturers Association
(including Ford Werke AG) made a voluntary pledge to reduce by 2005 the average
fuel consumption of new cars sold in Germany by 25% from 1990 levels, to review
before the year 2000 the need for and feasibility of further reductions in
average fuel consumption, to make regular reports on fuel consumption, and to
increase industry research and development efforts toward this end.
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Other initiatives for reducing CO2 emissions from motor vehicles are being
considered by other European countries. Taken together such proposals could have
substantial adverse effects on Ford's sales volumes and profits in Europe.
Japan has adopted automobile fuel consumption goals that manufacturers must
attempt to achieve by the 2000 model year. The consumption levels apply only to
gasoline-powered vehicles, vary by vehicle weight, and range from 5.8 km/I to
19.2 km/l.
U.S. Stationary Source Air Pollution Control -- The Clean Air Act limits
various emissions into the atmosphere from stationary sources as well as mobile
sources, and allows states to adopt even more stringent standards. The Act
imposes comprehensive permit requirements for manufacturing facilities in
addition to those required by various states. Regulations continue to be
promulgated under the Act, and the costs to comply with the Act could be
substantial. In addition, the enormous complexity and time-consuming nature of
the comprehensive permit program provided for by the Act may reduce operational
flexibility and may interfere with future competitive upgrading of Ford's U.S.
production facilities.
U.S. Water Pollution Control -- Pursuant to the Federal Water Pollution
Control Act (the "Clean Water Act"), Ford is required to obtain permits for its
manufacturing facilities that regulate the facilities' discharge of wastewater
into public waters and municipal sewerage systems. The EPA also requires
management standards and, in some cases, permits for the discharge of storm
water. The standards under the Clean Water Act are established by the EPA and by
the state where a facility is located. Many states have requirements that go
beyond those established under the Clean Water Act.
The EPA also adopted regulations, pursuant to the Great Lakes Critical
Programs Act of 1990, that require more restrictive standards for discharges
into waters that impact the Great Lakes. These regulations may require the
addition of costly control equipment.
U.S. Hazardous Substance and Waste Control -- Pursuant to the Federal
Resource Conservation and Recovery Act ("RCRA"), the EPA has issued regulations
establishing certain procedures and standards for persons who generate,
transport, treat, store, or dispose of hazardous wastes and requiring corrective
action for prior releases. States may adopt even more extensive requirements.
The Federal Comprehensive Environmental Response, Compensation, and Liability
Act ("CERCLA") requires notification regarding certain releases into the
environment, and creates potential liability for remediation costs and for
damage to natural resources at sites where Ford waste was taken for treatment or
disposal. A number of states have enacted separate laws of this type. In
addition, under the Federal Toxic Substances Control Act ("TSCA"), the EPA
evaluates environmental and health effects of existing chemicals and new
substances. Pursuant to TSCA, the EPA regulates the use of polychlorinated
biphenyls in transformers, capacitors and other equipment that may be located at
Ford's U.S. facilities.
European Stationary Source Environmental Control -- The European Union and
individual member countries impose requirements on waste and hazardous wastes,
incineration, packaging, landfill, soil pollution, integrated pollution control,
air emissions standards, import/export and use of dangerous substances, air and
water quality standards, noise, environmental management systems, energy
efficiency, emissions reporting, and planning and permitting. Additional or more
stringent requirements (including tax measures and civil liability schemes for
cleaning polluted sites) are likely to be adopted in the future. The cost of
complying with these standards could be substantial.
The European Commission has published a draft proposal to introduce an
obligation for motor vehicle manufacturers to take back end-of-life vehicles on
a cost-free basis beginning in 2003, to impose requirements on the proportion of
the vehicle that may be disposed of in landfills and the proportion that must be
reused or recycled beginning in 2005, and to ban the use of certain substances
in vehicles beginning in 2003. Such proposals could, if adopted, impose a
substantial cost on manufacturers. The German Automobile Association (including
Ford Werke AG) and the German Automobile Importers Association made a voluntary
pledge to establish a nationwide infrastructure network to take back passenger
cars that are at least 12 years old (and meet certain other requirements) on a
cost-free basis to their owners.
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Pollution Control Costs -- During the period 1998 through 2002, Ford
expects that approximately $550 million will be spent on its North American and
European facilities to comply with air and water pollution and hazardous waste
control standards which now are in effect or are scheduled to come into effect.
Of this total, Ford estimates that approximately $100 million will be spent in
1998 and $120 million will be spent in 1999.
Worldwide Regulatory Compatibility -- Ford's efforts to develop new markets
and increase imports are impeded by incompatible automotive safety,
environmental and other product regulatory standards. At present, differing
standards either restrict the vehicles Ford can export to serve new markets or
increase the cost and complexity to do so.
LEGAL PROCEEDINGS
Various legal actions, governmental investigations and proceedings and
claims are pending or may be instituted or asserted in the future against the
Company and its subsidiaries, including those arising out of alleged defects in
the Company's products; governmental regulations relating to safety, emissions
and fuel economy; financial services; employment-related matters; intellectual
property rights; product warranties; and environmental matters. Certain of the
pending legal actions are, or purport to be, class actions. Some of the
foregoing matters involve or may involve compensatory, punitive or antitrust or
other treble damage claims in very large amounts, or demands for recall
campaigns, environmental remediation programs, sanctions or other relief which,
if granted, would require very large expenditures. Included among the foregoing
matters are the following:
PRODUCT LIABILITY MATTERS
Occupant Restraint Systems. Ford is a defendant in various actions for
damages arising out of automobile accidents where plaintiffs claim that the
injuries resulted from (or were aggravated by) alleged defects in the occupant
restraint systems in vehicle lines of various model years. The damages specified
by the plaintiffs in these actions, including both actual and punitive damages,
aggregated approximately $1 billion at December 31, 1997.
Bronco II. Ford is a defendant in various actions involving the alleged
propensity of Bronco II utility vehicles to roll over. The damages specified in
these actions, including both actual and punitive damages, aggregated
approximately $979 million at December 31, 1997.
In most of the actions described in the foregoing paragraphs no dollar
amount of damages is specified or the specific amount referred to is only the
jurisdictional minimum. It has been Ford's experience that in cases that allege
a specific amount of damages in excess of the jurisdictional minimum, such
amounts, on average, bear little relation to the actual amounts of damages paid
by Ford in such cases, which generally are, on average, substantially less than
the amounts originally claimed. In addition to the pending actions, accidents
have occurred and claims have arisen which also may result in lawsuits in which
such a defect may be alleged.
Asbestos. Ford is a defendant in various actions for injuries claimed to
have resulted from alleged contact with certain Ford parts and other products
containing asbestos. Damages specified by plaintiffs in complaints in these
actions, including both actual and punitive damages, aggregated approximately
$1.4 billion at December 31, 1997. (In some of these actions no dollar amount of
damages is specified or the specific amount referred to is only the
jurisdictional minimum.) As distinguished from most lawsuits against Ford, in
most of these asbestos-related cases, Ford is but one of many defendants, and
many of these co-defendants have substantial resources.
ENVIRONMENTAL MATTERS
General. Ford has received notices from government environmental
enforcement agencies concerning four matters which potentially involve monetary
sanctions exceeding $100,000. The agencies believe that Ford facilities may have
violated regulations relating to the management of certain materials or relating
to certain emissions from facility operations. In Ford's prior reports, Ford
included another environmental matter that
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related to certain emissions from one of its facilities. That matter was
resolved in February 1998, with Ford paying a civil penalty of $135,000.
Ford has received notices under RCRA, CERCLA and applicable state laws that
it (along with others) may be a potentially responsible party for the costs
associated with remediating numerous hazardous substance storage, recycling or
disposal sites in many states and, in some instances, for natural resource
damages. Ford also may have been a generator of hazardous substances at a number
of other sites. The amount of any such costs or damages for which Ford may be
held responsible could be substantial. Contingent losses expected to be incurred
by Ford in connection with many of these sites have been accrued and are
reflected in Ford's financial statements in accordance with generally accepted
accounting principles. However, for many sites the remediation costs and other
damages for which Ford ultimately may be responsible are not reasonably
estimable because of uncertainties with respect to factors such as Ford's
connection to the site or to materials there, the involvement of other
potentially responsible parties, the application of laws and other standards or
regulations, site conditions, and the nature and scope of investigations,
studies and remediation to be undertaken (including the technologies to be
required and the extent, duration and success of remediation). As a result, Ford
is unable to determine or reasonably estimate the amount of costs or other
damages for which it is potentially responsible in connection with these sites,
although it could be substantial.
CCA Lawsuit. The Corporation for Clean Air, Inc., a California non-profit
group ("CCA"), filed a lawsuit in California against Ford and numerous other
engine and vehicle manufacturers and owners of vehicle fleets, under
California's Safe Drinking Water and Toxic Enforcement Act ("Proposition 65").
Under Proposition 65 any business that knowingly and intentionally exposes any
person to certain carcinogens and reproductive toxins must provide that person
with an advance clear and reasonable warning, unless the business can prove that
the exposures are insignificant. CCA's complaint alleges that manufacturers and
fleet owners of diesel powered vehicles are exposing California's citizens to
diesel exhaust in violation of Proposition 65. Maximum penalties under
Proposition 65 are $2,500 per vehicle per day of violation.
Bridgend Plant. In November 1997, the Cardiff Crown Court imposed a fine of
10,000 Pounds Sterling on Ford's British subsidiary, Ford Motor Company, Limited
("Ford Britain"), for the discharge of certain pollutants into the River Ewenny
by Ford Britain's Bridgend plant in September 1995. Ford Britain was also
required to pay the United Kingdom Environmental Agency's costs of approximately
11,000 Pounds Sterling and to pay for the restocking of fish in the river.
CLASS ACTIONS
Described below are various class action lawsuits in which Ford has been
named a defendant. Class action lawsuits can involve very large classes of
plaintiffs, such as statewide or nationwide classes, if plaintiffs persuade the
court to grant class certification. Ford believes it has valid defenses in each
of these cases; however, if plaintiffs were to prevail in any of these lawsuits,
Ford could be required to pay substantial damages.
Paint. Pending against the Company are five purported class actions
alleging defects in the paint processes used on more than nine million vehicles
manufactured by the Company in model years 1984 through 1993. One case (Landry)
is nationwide in scope and is pending in the U.S. District Court for the Eastern
District of Louisiana. In January 1998, plaintiffs in Landry filed a motion for
class certification, which Ford opposed. Of the five cases that were
consolidated with Landry for pretrial proceedings, two were dismissed, and the
plaintiffs in the other three did not file motions for class certification
within the court-ordered deadline. In the remaining case (Sheldon), a Texas
state court certified two subclasses of Texas residents for trial. The Texas
Court of Appeals affirmed the class certification order. In its opinion, the
Court of Appeals approved of a bifurcated trial process that would require class
members to prove causation and damages in separate trials following a classwide
trial on the existence of a defect and the Company's knowledge thereof. Ford
will appeal the class certification to the Texas Supreme Court. In each pending
lawsuit, the plaintiffs seek unspecified compensatory damages, as well as
punitive damages, attorneys' fees and costs.
Bronco II. Currently pending against Ford are two state and one federal
purported class actions filed by Bronco II owners seeking recovery for economic
injury attributable to the alleged rollover propensity of these
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vehicles. Each lawsuit expressly excludes personal injury claimants, whose
claims are discussed above. Some of the lawsuits also seek recovery of
unspecified punitive damages and an order requiring the Company to recall and
retrofit these vehicles. Seven federal Bronco II cases had originally been
consolidated for pretrial purposes in a Louisiana federal court. After the court
denied plaintiffs' motion for class certification in these cases, six of the
cases were dismissed either by the court or voluntarily by the plaintiffs.
Plaintiffs in these cases have appealed the court's dismissal orders and denial
of class certification to the U.S. Court of Appeals for the Fifth Circuit.
Ford's motion for summary judgment is pending in the remaining federal case. The
two state court cases are pending in Alabama and Texas. The Texas case is
dormant. In October 1997, the Alabama court denied Ford's motion to dismiss
plaintiffs' fraud claims and certified a class consisting of Alabama residents
who owned a Bronco II vehicle any time between August 26, 1993 and May 31, 1997.
The Alabama Supreme Court agreed to hear Ford's interlocutory appeal of the
trial court's denial of Ford's motion to dismiss, but it has not yet ruled on
Ford's petition to appeal the trial court's class certification order. The trial
court proceedings are stayed pending the Supreme Court's decision on Ford's
interlocutory appeal.
A separate purported class action involving the Bronco II (Goff) is pending
against Ford in federal court in the Southern District of West Virginia. The
lawsuit purports to represent a class of former plaintiffs in Bronco II personal
injury cases that have been settled or tried. Plaintiffs allege that Ford and a
Ford expert on the design history of the Bronco II conspired to fraudulently
conceal documents that would establish (a) that Ford paid the expert to offer
false testimony in favor of Ford regarding the design of the Bronco II, and (b)
that Ford knew the design of the Bronco II rendered the vehicle unstable and
prone to rollover under normal driving conditions. Plaintiffs seek compensatory
and punitive damages, prejudgment interest, costs and attorneys' fees.
Plaintiffs also seek to prevent Ford from using as a defense in this case
releases obtained in settled Bronco II personal injury lawsuits and defense
verdicts in tried Bronco II personal injury lawsuits. Plaintiffs' motion for
class certification and Ford's motion to dismiss are pending.
Ignition Switch. In 1996, the Company was served with fourteen purported
class action lawsuits alleging that certain 1983 to 1993 model year vehicles
were equipped with defective ignition switches that could cause an electrical
short circuit, resulting in smoke and fire damage. Most of the suits were
brought on behalf of plaintiffs who have not experienced a problem, but who
claim that their vehicles have diminished value because of the allegedly
defective switches. Some of the lawsuits were purportedly brought on behalf of
plaintiffs who claim to have suffered fire or smoke damage to their vehicles.
Plaintiffs seek unspecified compensatory damages, punitive damages, attorneys'
fees and costs, as well as injunctive relief requiring, among other things, that
Ford replace the allegedly defective ignition switch in all affected vehicles.
All fourteen lawsuits were consolidated for pretrial proceedings in federal
court in New Jersey. In August 1997, the court denied plaintiffs' motion for
class certification. In September 1997, the court dismissed all of the claims
brought by the non-incident class members except the implied warranty claims
brought under Louisiana law and the breach of contract claims. In October 1997,
plaintiffs filed a motion with the court to remand all of the lawsuits to state
courts and to vacate the court's ruling denying nationwide class certification
and dismissing most of the underlying claims. The court deferred ruling on the
matter pending additional discovery in the case.
In a related matter, State Farm Mutual Automobile Insurance Company ("State
Farm") filed a lawsuit in federal court in California in January 1998 against
Ford and United Technologies Automotive, Inc. State Farm seeks damages for
insurance claims it paid to cover vehicle damage caused by allegedly defective
ignition switches, the deductible amounts paid by its insureds, other
compensatory damages, and attorney's fees and costs. Ford has moved to dismiss
State Farm's claims. Upon Ford's notice of the State Farm action, the Judicial
Panel on Multidistrict Litigation conditionally transferred the action to the
New Jersey federal court where the ignition switch class actions are pending.
State Farm opposed the transfer.
TFI Module. Six purported class actions are pending in state courts on
behalf of owners and lessees of 1983 through 1995 model year Ford vehicles
containing a distributor-mounted thick film ignition (TFI) module. The
plaintiffs allege that distributor-mounted TFI modules are defective because
they have a high propensity to fail due to exposure to engine heat, causing the
engine to stumble, stall, or not start. The plaintiffs in these cases seek pre-
and post-judgment interest, attorneys' fees, disgorgement of profits,
compensatory damages, punitive damages, notice to the public, and the recall and
retrofit of all vehicles with
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the allegedly defective TFI modules. The cases are pending in Alabama,
California, Illinois, Maryland, Tennessee and Washington. The Alabama and
Tennessee cases were conditionally certified as nationwide class actions
(excluding California). The cases in Illinois, Maryland and Washington purport
to be regional class actions, and the California case is statewide in scope. The
California case is the "lead" case and proceedings in the other cases are
stayed. The California court has certified a class of California residents who
currently own or lease the subject vehicles and California residents who
purchased such vehicles when they were new. The court also certified a sub-class
of consumers pursuing Consumer Legal Remedies Act claims. In February 1998, the
court ordered Ford to produce at its expense a mailing list for purposes of
class notification. The court reserved final decision on all other aspects of
class notice, but has indicated its intention to order the parties to share the
costs of notice. Ford estimates the costs of such notice to be approximately $1
million to $2 million. Ford appealed the California court's class certification
and class notice orders, but the appellate court has declined to hear Ford's
appeals. Ford has filed a motion for leave to appeal these orders to the
California Supreme Court. If leave to appeal is denied, Ford will have the right
to appeal those orders after entry of any final judgment in the case.
In related developments, Ford urged the Safety Administration to review
allegations by plaintiffs and the Safety Administration's former chief
investigator that Ford improperly withheld information and documents during
prior Safety Administration investigations into this matter. In September 1997,
the Safety Administration issued a Special Order requiring Ford to respond to
those allegations under oath, and Ford did so.
Air Bag. Three purported class action lawsuits were filed in Alabama,
Louisiana and Texas state courts alleging that air bags are defective because
they can cause injury, particularly to children and small adults. The Alabama
action appears to be nationwide in scope and purports to represent owners of
1993 through 1996 (and some 1997) model year cars and light trucks with
passenger air bags. The Louisiana and Texas actions purport to represent
residents who purchased vehicles with driver and/or passenger air bags, and
nonresidents who purchased such vehicles in those states. The Alabama action
names as defendants Ford, General Motors Corporation, Chrysler Corporation, and
an Alabama automobile dealership. The Louisiana action was brought against the
same manufacturers, as well as Volvo of North America, Inc., Nissan Motor
Corporation, Toyota Motor Corporation, Honda Motor Company, Ltd. and various
dealerships. The Texas action was brought against Ford, General Motors, Chrysler
and Volvo. However, in February 1998, plaintiffs in the Texas case filed an
amended complaint that did not name Ford as a defendant. The Louisiana and Texas
actions were removed to federal court and consolidated for pretrial proceedings.
Plaintiffs allege that their vehicles are unsuitable for transporting children
and small adults and, therefore, are not worth the purchase price they paid.
They seek compensatory damages, including the alleged diminution in value of
their vehicles and in the Alabama and Louisiana cases, the cost to disable the
air bags or "repair" the vehicles.
Ford/Citibank Visa. Following the June 1997 announcement of the termination
of the Ford/Citibank credit card rebate program, five purported nationwide class
actions and one purported statewide class action were filed against Ford;
Citibank is also a defendant in some of these actions. The actions allege
damages in an amount up to $3,500 for each cardholder who obtained a
Ford/Citibank credit card in reliance on the rebate program and who is precluded
from accumulating discounts toward the purchase or lease of new Ford vehicles
after December 1997 as a result of the termination of the rebate program.
Plaintiffs contend that defendants deceptively breached their contract by
unilaterally terminating the program, that defendants have been unjustly
enriched as a result of the interest charges and fees collected from
cardholders, and further, that defendants conspired to deprive plaintiffs of the
benefits of their credit card agreement. Plaintiffs seek compensatory damages,
or alternatively, reinstatement of the rebate program, and punitive damages,
costs, expenses and attorneys' fees. The five purported nationwide class actions
were filed in state courts in Alabama, Illinois, New York, Oregon and
Washington, and the purported statewide class action was filed in a California
state court. The Alabama court has conditionally certified a class consisting of
Alabama residents. Ford removed all of the cases to federal court and requested
that the Judicial Panel on Multidistrict Litigation consolidate and transfer the
cases to federal court in Washington for pretrial proceedings. Five of the cases
were consolidated and transferred to federal court in Washington. Ford's request
to consolidate and transfer the remaining case is pending. The plaintiff in the
Oregon case has moved to remand the case to state court.
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Flat Glass. The Company has been named as a defendant in thirteen purported
class actions brought on behalf of purchasers of flat glass alleging that Ford
and other manufacturers fixed prices and allocated markets in violation of
federal and state antitrust laws. Eleven of the class actions are nationwide in
scope and are pending in federal court and the other two class actions are
statewide in scope and are pending in state courts. The other defendants include
Pilkington plc; Libbey-Owens Ford Co., Inc.; AFG Industries; PPG Industries,
Inc.; Asahi Glass Co., Ltd.; and Guardian Industries Corp. There are nineteen
similar purported class actions pending in various courts in which the Company
is not currently named as a defendant. A total of 27 federal cases have been
consolidated in a single federal court in Pennsylvania for pretrial proceedings
under the multidistrict litigation rules. In the actions involving Ford, the
plaintiffs are seeking economic and treble damages.
Lease Residual. In January 1998 in connection with a case pending in
Illinois state court, Ford and Ford Credit were served with a summons and
intervention counterclaim complaint relating to Ford Credit's leasing practices
(Higginbotham v. Ford Credit). The counterclaim plaintiff, Carla Higginbotham,
is a member of a class that has been conditionally certified for settlement
purposes in Shore v. Ford Credit. In the Shore case, Ford Credit commenced an
action for deficiency against Virginia Shore, a Ford Credit lessee. Shore
counterclaimed for purported violations of the Truth-in-Leasing Act (alleging
that certain lease charges were excessive) and the Truth-in-Lending Act
(alleging that the lease lacked clarity). Shore purported to represent a class
of all similarly situated lessees. Ford was not a party to the Shore case.
Higginbotham objected to the proposed settlement of the Shore case, intervened
as a named defendant, filed separate counterclaims against Ford Credit, and
joined Ford as an additional counterclaim defendant. Higginbotham asserts claims
against Ford Credit for violations of the Consumer Leasing Act, declaratory
judgment concerning the enforceability of early termination provisions in Ford
Credit's leases, and fraud. She also asserts a claim against Ford Credit and
Ford for conspiracy to violate the Truth-in-Lending Act. The Higginbotham
counterclaims allege that Ford Credit inflates the residual values of its leased
vehicles, which results in lower monthly lease payments but higher termination
fees for lessees who exercise their right of early termination. Higginbotham
claims that the early termination fees were not adequately disclosed on the
lease form and that the fees are excessive and illegal because of the allegedly
inflated residual values. She also alleges that Ford dictated the residual
values to Ford Credit and thereby participated in an unlawful conspiracy.
OTHER MATTERS
Patents--General. A number of claims have been made or may be asserted in
the future against Ford alleging infringement of patents held by others. Ford
believes that it has valid defenses with respect to the claims that have been
asserted. If some of such claims should lead to litigation, however, and if the
claimant were to prevail, Ford could be required to pay substantial damages.
Lemelson Patent Case. In 1992, Ford was sued in federal court in Nevada by
an individual patent owner (Lemelson) seeking damages and an injunction for
alleged infringement of four U.S. patents characterized by Lemelson as covering
machine vision inspection technologies, including bar code reading. Ford filed a
declaratory judgment action in the same court to have these four patents as well
as others of Lemelson's patents directed to machine vision and laser uses
declared invalid, unenforceable and not infringed. Lemelson filed a counterclaim
alleging infringement of the patents added by Ford and several additional
patents. In 1995, Ford filed twelve summary judgment motions to dispose of large
portions of the case. One motion to have the case dismissed was granted in 1996
and reversed in 1997. The U.S. Court of Appeals refused to hear Ford's appeal of
the 1997 reversal until the case is tried. Ford and Lemelson then filed opposing
motions for further proceedings. Lemelson requested that the case be scheduled
for an immediate trial. Ford moved to have the case sent back to the magistrate
judge for consideration of Ford's eleven pending motions for summary judgment.
Mr. Lemelson died in October 1997. In January 1998 the court permitted the
Lemelson Medical, Education & Research Foundation, Limited Partnership to be
substituted as party to the lawsuit. The court also granted Ford's motion to
have the case remanded back to the magistrate judge for further proceedings to
recommend disposition of Ford's remaining summary judgment motions. If Lemelson
were to prevail in this lawsuit, Ford could be required to pay substantial
damages of an as yet indeterminate amount
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and could become subject to an injunction preventing future use of any process
or product found to be covered by a valid patent.
OFCCP Proceeding. In April 1997, Ford became the subject of a Department of
Labor administrative enforcement proceeding challenging Ford's compliance with
obligations imposed by Executive Order 11246, which prohibits employment
discrimination and requires affirmative action by government contractors and
subcontractors. The Office of Federal Contract Compliance Programs ("OFCCP")
claims that Ford's Kentucky Truck Plant used a hiring process in 1993 for
entry-level hourly laborer positions that discriminated against female
applicants. OFCCP further claims that Ford failed to make available required
records and otherwise cooperate with the agency during a 1993 compliance review.
OFCCP seeks to cancel Ford's government contracts and to bar Ford from obtaining
future government contracts and seeks an order awarding back pay to the
"affected class of women." If OFCCP prevails, Ford's results of operations could
be substantially adversely effected. Ford believes that, although the offer rate
for women at the Kentucky Truck Plant was less than the percentage of female
applicants in the 1993 interview process, there are sound gender-neutral
explanations for this difference. The Department of Labor has indicated it has
similar concerns about the hourly hiring practices at other Ford facilities and
would like to resolve those concerns as part of a resolution of the Kentucky
Truck proceeding.
FTC Investigation. The Federal Trade Commission and the Department of
Justice are continuing their investigation, commenced in 1995, of the retail
vehicle financing credit practices of Ford Credit for compliance with the Equal
Credit Opportunity Act and Regulation B.
EMPLOYMENT DATA
Substantially all hourly employees of Ford in the United States are
included in collective bargaining units represented by unions. Approximately 99%
of these unionized hourly employees are represented by the United Automobile
Workers (the "UAW"). Approximately 3% of salaried employees are represented by
unions. Most hourly employees and many nonmanagement salaried employees of
subsidiaries outside the United States also are represented by unions.
Affiliates of Ford also are parties to collective bargaining agreements in
Britain, France, Germany and Spain. Collective bargaining agreements between
Ford and the UAW and between Ford of Canada and the Canadian Automobile Workers
were entered into in 1996 and are scheduled to expire in September 1999.
Ford has not experienced significant work stoppages at its facilities in
recent years, but work stoppages have occurred in supplier facilities. Any
protracted work stoppages in the future, whether in Ford's facilities or those
of certain suppliers, could substantially adversely affect Ford's results of
operations.
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SELECTED FINANCIAL DATA AND OTHER DATA OF FORD MOTOR COMPANY
The following tables set forth selected financial data and other data
concerning Ford for each of the last eleven years (dollar amounts in millions
except per share amounts):
SUMMARY OF OPERATIONS 1997 1996 1995 1994 1993 1992
- --------------------- ---- ---- ---- ---- ---- ----
AUTOMOTIVE
Sales............................. $122,935 $118,023 $110,496 $107,137 $ 91,568 $ 84,407
Operating income/(loss)........... 6,946 2,516 3,281 5,826 1,432 (1,775)
Income/(loss) before income taxes
and cumulative effects of
changes in accounting
principles...................... 7,082 2,571 3,166 5,997 1,291 (1,952)
Income/(loss) before cumulative
effects of changes in accounting
principles(a)(c)................ 4,714 1,655 2,056 3,913 1,008 (1,534)
-------- -------- -------- -------- -------- --------
Net income/(loss)................. 4,714 1,655 2,056 3,913 1,008 (8,628)
-------- -------- -------- -------- -------- --------
FINANCIAL SERVICES
Revenues.......................... $ 30,692 $ 28,968 $ 26,641 $ 21,302 $ 16,953 $ 15,725
Income before income taxes and
cumulative effects of changes in
accounting principles........... 3,857 4,222 3,539 2,792 2,712 1,825
Income before cumulative effects
of changes in accounting
principles (b)(d)(e)............ 2,206 2,791 2,083 1,395 1,521 1,032
-------- -------- -------- -------- -------- --------
Net income........................ 2,206 2,791 2,083 1,395 1,521 1,243
-------- -------- -------- -------- -------- --------
TOTAL COMPANY
Income/(loss) before income taxes
and cumulative effects of
changes in accounting
principles...................... $ 10,939 $ 6,793 $ 6,705 $ 8,789 $ 4,003 $ (127)
Provision/(credit) for income
taxes........................... 3,741 2,166 2,379 3,329 1,350 295
Minority interests in net income
of subsidiaries................. 278 181 187 152 124 80
-------- -------- -------- -------- -------- --------
Income/(loss) before cumulative
effects of changes in accounting
principles(a)(b)(c)(d)(e)....... 6,920 4,446 4,139 5,308 2,529 (502)
Cumulative effects of changes in
accounting principles........... -- -- -- -- -- (6,883)
-------- -------- -------- -------- -------- --------
Net income/(loss)................. $ 6,920 $ 4,446 $ 4,139 $ 5,308 $ 2,529 $ (7,385)
======== ======== ======== ======== ======== ========
TOTAL COMPANY DATA PER SHARE OF
COMMON AND CLASS B STOCK(F)
Income/(loss) before cumulative
effects of changes in accounting
principles...................... $ 5.75 $ 3.73 $ 3.58 $ 4.97 $ 2.27 $ (0.73)
Income/(loss)
Basic........................... 5.75 3.73 3.58 4.97 2.27 (7.81)
Diluted......................... 5.62 3.64 3.33 4.44 2.10 (7.81)
Cash dividends.................... 1.645 1.47 1.23 0.91 0.80 0.80
Common stock price range (NYSE)
High............................ 50 1/4 37 1/4 32 7/8 35 33 1/16 24 7/16
Low............................. 30 27 1/4 24 3/4 25 5/8 21 1/2 13 7/8
Average number of shares of Common
and Class B stock outstanding
(in millions)................... 1,195 1,179 1,071 1,010 986 972
TOTAL COMPANY BALANCE SHEET DATA
AT YEAR-END
Assets
Automotive...................... $ 85,079 $ 79,658 $ 72,772 $ 68,639 $ 61,737 $ 57,170
Financial Services.............. 194,018 183,209 170,511 150,983 137,201 123,375
-------- -------- -------- -------- -------- --------
Total assets.................. $279,097 $262,867 $243,283 $219,622 $198,938 $180,545
Long-term debt
Automotive...................... $ 7,047 $ 6,495 $ 5,475 $ 7,103 $ 7,084 $ 7,068
Financial Services.............. 73,198 70,641 68,259 58,104 47,900 42,369
Stockholders' equity(g)........... 30,734 26,762 24,547 21,659 15,574 14,753
SUMMARY OF OPERATIONS 1991 1990 1989 1988 1987
- --------------------- ---- ---- ---- ---- ----
AUTOMOTIVE
Sales............................. $ 72,051 $ 81,844 $ 82,879 $ 82,193 $ 71,797
Operating income/(loss)........... (3,769) 316 4,252 6,612 6,256
Income/(loss) before income taxes
and cumulative effects of
changes in accounting
principles...................... (4,052) 275 5,156 7,312 6,499
Income/(loss) before cumulative
effects of changes in accounting
principles(a)(c)................ (3,186) 99 3,175 4,609 3,767
-------- -------- -------- -------- --------
Net income/(loss)................. (3,186) 99 3,175 4,609 3,767
-------- -------- -------- -------- --------
FINANCIAL SERVICES
Revenues.......................... $ 16,235 $ 15,806 $ 13,267 $ 10,253 $ 8,096
Income before income taxes and
cumulative effects of changes in
accounting principles........... 1,465 1,220 874 1,031 1,386
Income before cumulative effects
of changes in accounting
principles (b)(d)(e)............ 928 761 660 691 858
-------- -------- -------- -------- --------
Net income........................ 928 761 660 691 858
-------- -------- -------- -------- --------
TOTAL COMPANY
Income/(loss) before income taxes
and cumulative effects of
changes in accounting
principles...................... $ (2,587) $ 1,495 $ 6,030 $ 8,343 $ 7,885
Provision/(credit) for income
taxes........................... (395) 530 2,113 2,999 3,226
Minority interests in net income
of subsidiaries................. 66 105 82 44 34
-------- -------- -------- -------- --------
Income/(loss) before cumulative
effects of changes in accounting
principles(a)(b)(c)(d)(e)....... (2,258) 860 3,835 5,300 4,625
Cumulative effects of changes in
accounting principles........... -- -- -- -- --
-------- -------- -------- -------- --------
Net income/(loss)................. $ (2,258) $ 860 $ 3,835 $ 5,300 $ 4,625
======== ======== ======== =====