Ford Motor Company and Subsidiaries ----------------------------------- HIGHLIGHTS Fourth Quarter Full Year ----------------------- ------------------------- 1998 1997 1998 1997 ------- ------- -------- -------- (unaudited) Worldwide vehicle unit sales of cars and trucks (in thousands) - - North America 1,197 1,118 4,370 4,432 - - Outside North America 617 673 2,453 2,515 ----- ----- ----- ----- Total 1,814 1,791 6,823 6,947 ===== ===== ===== ===== Sales and revenues (in millions) - - Automotive $32,204 $31,897 $119,083 $122,935 - - Financial Services 5,699 8,055 25,333 30,692 ------- ------- -------- -------- Total $37,903 $39,952 $144,416 $153,627 ======= ======= ======== ======== Net income (in millions) - - Automotive $ 820 $ 1,341 $ 4,752 $ 4,714 - - Financial Services (excl. The Associates) 223 231 1,187 1,374 ------- ------- -------- -------- Subtotal 1,043 1,572 5,939 6,088 - - The Associates - 224 177 832 - - Gain on spin-off of The Associates - - 15,955 - ------- ------- -------- -------- Total $ 1,043 $ 1,796 $ 22,071 $ 6,920 ======= ======= ======== ======== Capital expenditures (in millions) - - Automotive $ 2,445 $ 2,389 $ 8,113 $ 8,142 - - Financial Services 106 162 504 575 ------- ------- -------- -------- Total $ 2,551 $ 2,551 $ 8,617 $ 8,717 ======= ======= ======== ======== Automotive capital expenditures as a percentage of sales 7.6% 7.5% 6.8% 6.6% Stockholders' equity at December 31 - - Total (in millions) $23,409 $30,734 $ 23,409 $ 30,734 - - After-tax return on Common and Class B stockholders' equity 17.8% 24.1% 25.4% 24.4% Automotive net cash at December 31 (in millions) - - Cash and marketable securities $23,805 $20,835 $ 23,805 $ 20,835 - - Debt 9,834 8,176 9,834 8,176 ------- ------- -------- -------- Automotive net cash $13,971 $12,659 $ 13,971 $ 12,659 ======= ======= ======== ======== After-tax return on sales - - North American Automotive 4.5% 5.9% 5.3% 5.1% - - Total Automotive 2.6% 4.2% 4.0% 3.9% Shares of Common and Class B Stock (in millions) - - Average number outstanding 1,210 1,201 1,211 1,195 - - Number outstanding at December 31 1,209 1,202 1,209 1,202 Common Stock price (per share) (adjusted to reflect The Associates spin-off) - - High $59-7/8 $33-9/16 $61-7/16 $33-9/16 - - Low 38-13/16 27-23/32 28-15/32 20-3/64 AMOUNTS PER SHARE OF COMMON AND CLASS B STOCK AFTER PREFERRED STOCK DIVIDENDS Income assuming dilution - - Automotive $ 0.66 $ 1.08 $ 3.76 $ 3.82 - - Financial Services (excl. The Associates) 0.18 0.19 0.96 1.12 ------- ------- ------- -------- Subtotal 0.84 1.27 4.72 4.94 - - The Associates - 0.18 0.14 0.68 - - Gain on spin-off of The Associates - - 12.90 - ------- -------- ------- -------- Total $ 0.84 $ 1.45 $ 17.76 $ 5.62 ======= ======= ======= ======== Cash dividends $ 0.46 $ 0.42 $ 1.72 $ 1.645 FS-1 Ford Motor Company and Subsidiaries VEHICLE UNIT SALES ------------------ For the Periods Ended December 31, 1998 and 1997 (in thousands) Fourth Quarter Full Year ---------------------- ---------------------- 1998 1997 1998 1997 ------ ------ ------ ------ (unaudited) (unaudited) North America United States Cars 428 409 1,563 1,614 Trucks 654 578 2,425 2,402 ----- ----- ----- ----- Total United States 1,082 987 3,988 4,016 Canada 87 91 279 319 Mexico 28 40 103 97 ----- ----- ----- ----- Total North America 1,197 1,118 4,370 4,432 Europe Britain 102 124 498 466 Germany 143 137 444 460 Italy 56 70 205 248 France 54 41 171 153 Spain 46 43 155 155 Other 95 91 377 318 ----- ----- ----- ----- Total Europe 496 506 1,850 1,800 Other international Brazil 34 49 178 214 Australia 35 31 133 132 Argentina 16 35 97 147 Taiwan 12 17 77 79 Japan 5 10 25 40 Other 19 25 93 103 ----- ----- ----- ----- Total other international 121 167 603 715 ----- ----- ----- ----- Total worldwide vehicle unit sales 1,814 1,791 6,823 6,947 ===== ===== ===== ===== Vehicle unit sales are reported worldwide on a "where sold" basis and include sales of all Ford-badged units, as well as units manufactured by Ford and sold to other manufacturers. Prior periods restated to correct reported unit sales. FS-2 Ford Motor Company and Subsidiaries CONSOLIDATED STATEMENT OF INCOME -------------------------------- For the Years Ended December 31, 1998, 1997 and 1996 (in millions, except amounts per share) 1998 1997 1996 --------- --------- --------- AUTOMOTIVE Sales (Note 1) $119,083 $122,935 $118,023 Costs and expenses (Note 1 and 15): Costs of sales 104,782 108,907 108,882 Selling, administrative and other expenses 7,616 7,082 6,625 -------- -------- -------- Total costs and expenses 112,398 115,989 115,507 Operating income 6,685 6,946 2,516 Interest income 1,331 1,116 841 Interest expense 829 788 695 -------- -------- -------- Net interest income 502 328 146 Equity in net loss of affiliated companies (Note 1) (38) (88) (6) Net expense from transactions with Financial Services (Note 1) (191) (104) (85) -------- -------- -------- Income before income taxes - Automotive 6,958 7,082 2,571 FINANCIAL SERVICES Revenues (Note 1) 25,333 30,692 28,968 Costs and expenses (Note 1): Interest expense 8,036 9,712 9,704 Depreciation 8,589 7,645 6,875 Operating and other expenses 4,618 6,621 6,217 Provision for credit and insurance losses 1,798 3,230 2,564 Asset write-downs and dispositions (Note 15) - - 121 -------- -------- -------- Total costs and expenses 23,041 27,208 25,481 Net revenue from transactions with Automotive (Note 1) 191 104 85 Gain on spin-off of The Associates (Note 15) 15,955 - - Gain on sale of Common Stock of a subsidiary (Note 15) - 269 650 -------- -------- -------- Income before income taxes - Financial Services 18,438 3,857 4,222 -------- -------- -------- TOTAL COMPANY Income before income taxes 25,396 10,939 6,793 Provision for income taxes (Note 6) 3,176 3,741 2,166 -------- -------- -------- Income before minority interests 22,220 7,198 4,627 Minority interests in net income of subsidiaries 149 278 181 -------- -------- -------- Net income $ 22,071 $ 6,920 $ 4,446 ======== ======== ======== Income attributable to Common and Class B Stock after preferred stock dividends (Note 1) $ 21,964 $ 6,866 $ 4,381 Average number of shares of Common and Class B Stock outstanding (Note 1) 1,211 1,195 1,179 AMOUNTS PER SHARE OF COMMON AND CLASS B STOCK (Note 1) Basic income $ 18.17 $ 5.75 $ 3.73 Diluted income $ 17.76 $ 5.62 $ 3.64 Cash dividends $ 1.72 $ 1.645 $ 1.47 The accompanying notes are part of the financial statements. FS-3 Ford Motor Company and Subsidiaries CONSOLIDATED BALANCE SHEET -------------------------- (in millions) December 31, December 31, 1998 1997 ------------ ------------ ASSETS Automotive Cash and cash equivalents $ 3,685 $ 6,316 Marketable securities (Note 2) 20,120 14,519 -------- -------- Total cash and marketable securities 23,805 20,835 Receivables 2,604 3,097 Inventories (Note 4) 5,656 5,468 Deferred income taxes 3,239 3,249 Other current assets (Note 1) 3,405 3,782 Net current receivable from Financial Services (Note 1) 0 416 -------- -------- Total current assets 38,709 36,847 Equity in net assets of affiliated companies (Note 1) 2,401 1,951 Net property (Note 5) 37,320 34,594 Deferred income taxes 3,175 3,712 Other assets (Notes 1 and 8) 7,139 7,975 -------- -------- Total Automotive assets 88,744 85,079 Financial Services Cash and cash equivalents 1,151 1,618 Investments in securities (Note 2) 968 2,207 Net receivables and lease investments (Note 3) 132,567 175,417 Other assets (Note 1) 13,227 14,776 Net receivable from Automotive (Note 1) 888 0 -------- -------- Total Financial Services assets 148,801 194,018 -------- -------- Total assets $237,545 $279,097 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Automotive Trade payables $ 13,368 $ 11,997 Other payables 2,755 2,557 Accrued liabilities (Note 7) 16,925 16,250 Income taxes payable 1,404 1,358 Debt payable within one year (Note 9) 1,121 1,129 Net current payable to Financial Services (Note 1) 70 0 -------- -------- Total current liabilities 35,643 33,291 Long-term debt (Note 9) 8,713 7,047 Other liabilities (Note 7) 30,133 28,899 Deferred income taxes 751 1,210 Net payable to Financial Services (Note 1) 818 0 -------- -------- Total Automotive liabilities 76,058 70,447 Financial Services Payables 3,555 4,539 Debt (Note 9) 122,324 160,071 Deferred income taxes 5,488 4,347 Other liabilities and deferred income 6,034 7,865 Net payable to Automotive (Note 1) 0 416 -------- -------- Total Financial Services liabilities 137,401 177,238 Company-obligated mandatorily redeemable preferred securities of a subsidiary trust holding solely junior subordinated debentures of the Company (Note 1) 677 678 Stockholders' equity Capital stock (Notes 10 and 11) Preferred Stock, par value $1.00 per share (aggregate liquidation preference of $177 million and $637 million) * * Common Stock, par value $1.00 per share (1,151 and 1,132 million shares issued) 1,151 1,132 Class B Stock, par value $1.00 per share (71 million shares issued) 71 71 Capital in excess of par value of stock 5,283 5,564 Accumulated other comprehensive income (1,670) (1,228) ESOP loan and treasury stock (1,085) (39) Earnings retained for use in business 19,659 25,234 -------- -------- Total stockholders' equity 23,409 30,734 -------- -------- Total liabilities and stockholders' equity $237,545 $279,097 ======== ======== - - - - - - *Less than $500,000 The accompanying notes are part of the financial statements. FS-4 Ford Motor Company and Subsidiaries CONSOLIDATED STATEMENT OF CASH FLOWS ------------------------------------ For the Years Ended December 31, 1998, 1997 and 1996 (in millions) 1998 1997 1996 ------------------------- --------------------------- ------------------------- Financial Financial Financial Automotive Services Automotive Services Automotive Services ------------ ----------- ------------ ---------- ------------ ---------- Cash and cash equivalents at January 1 $ 6,316 $ 1,618 $ 3,578 $ 3,689 $ 5,750 $ 2,690 Cash flows from operating activities (Note 16) 9,622 13,478 13,984 13,650 6,576 12,681 Cash flows from investing activities Capital expenditures (8,113) (504) (8,142) (575) (8,209) (442) Purchase of leased assets (110) - (332) - (195) - Acquisitions of other companies 0 (344) 0 (40) 0 (166) Acquisitions of receivables and lease investments - (78,863) - (117,895) - (109,087) Collections of receivables and lease investments - 49,303 - 86,842 - 82,398 Net acquisitions of daily rental vehicles - (1,790) - (958) - (1,759) Net proceeds from USL Capital asset sales - - - - - 1,157 Purchases of securities (Note 16) (758) (2,102) (43) (3,067) (6) (8,020) Sales and maturities of securities (Note 16) 590 2,271 13 3,520 7 9,863 Proceeds from sales of receivables and lease investments - 8,413 - 5,197 - 2,867 Net investing activity with Financial Services 642 - 258 - 416 - Other (468) (463) (285) (569) (586) (45) ------- -------- ------- -------- ------- -------- Net cash used in investing activities (8,217) (24,079) (8,531) (27,545) (8,573) (23,234) Cash flows from financing activities Cash dividends (5,348) - (2,020) - (1,800) - Issuance of Common Stock 157 - 310 - 192 - Issuance of Common Stock of a subsidiary (Note 15) - - - 453 - 1,897 Purchase of Ford Treasury Stock (669) - (15) - - - Preferred stock - Series B repurchase, Series A redemption (420) - - - - - Changes in short-term debt 497 7,475 (430) 6,210 151 3,474 Proceeds from issuance of other debt 2,403 21,776 1,100 22,923 1,688 22,342 Principal payments on other debt (1,434) (16,797) (668) (18,215) (1,031) (14,428) Net financing activity with Automotive - (642) - (258) - (416) Spin-off of The Associates cash - (508) - - - - Other (472) (12) 16 (206) 37 (528) ------- ------- ------- -------- ------- -------- Net cash (used in)/provided by financing activities (5,286) 11,292 (1,707) 10,907 (763) 12,341 Effect of exchange rate changes on cash (54) 146 (119) 28 (85) (116) Net transactions with Automotive/ Financial Services 1,304 (1,304) (889) 889 673 (673) ------- -------- - ------- -------- ------- -------- Net (decrease)/increase in cash and cash equivalents (2,631) (467) 2,738 (2,071) (2,172) 999 ------- -------- ------- -------- ------- -------- Cash and cash equivalents at December 31 $ 3,685 $ 1,151 $ 6,316 $ 1,618 $ 3,578 $ 3,689 ======= ======== ======= ======== ======= ======== The accompanying notes are part of the financial statements. FS-5 Ford Motor Company and Subsidiaries CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY ---------------------------------------------- For the Years Ended December 31, 1996, 1997 and 1998 (in millions) Capital Other Comprehensive Income in Excess ------------------------------------- of Par Foreign Minimum Unrealized Capital Value of Retained Currency Pension Holding Stock Stock Earnings Translation Liability Gain/Loss Other Total -------- -------- -------- ----------- --------- ---------- ------- ------ YEAR ENDED DECEMBER 31, 1996 - ---------------------------- Balance at beginning of year $1,160 $5,105 $17,688 $ 482 $ (108) $220 $ - $24,547 Comprehensive income Net income 4,446 4,446 Foreign currency translation (408) (408) Minimum pension liability (net of tax benefit of $74) (159) (159) Net unrealized holding loss, (net of tax benefit of $26) (56) (56) ------- Comprehensive income 3,823 Common stock issued for Series A Preferred Stock conversion, employee benefit plan and other 29 163 192 Cash dividends (1,800) (1,800) ------ ------ ------- ------- ------ ---- ------- ------- Balance at end of year $1,189 $5,268 $20,334 $ 74 $ (267) $164 $ - $26,762 ====== ====== ======= ======= ====== ==== ======= ======= YEAR ENDED DECEMBER 31, 1997 - ---------------------------- Balance at beginning of year $1,189 $5,268 $20,334 $ 74 $ (267) $164 $ - $26,762 Comprehensive income Net income 6,920 6,920 Foreign currency translation (1,038) (1,038) Minimum pension liability (net of tax benefit of $36) (70) (70) Net unrealized holding loss (net of tax benefit of $47) (91) (91) ------- Comprehensive income 5,721 Common stock issued for Series A Preferred Stock conversion, employee benefit plans and other 14 296 310 Treasury stock (39) (39) Cash dividends (2,020) (2,020) ------ ------ ------- ------- ------ ---- ------- ------- Balance at end of year $1,203 $5,564 $25,234 $ (964) $ (337) $ 73 $ (39) $30,734 ====== ====== ======= ======= ====== ==== ======= ======= YEAR ENDED DECEMBER 31, 1998 - ---------------------------- Balance at beginning of year $1,203 $5,564 $25,234 $ (964) $ (337) $ 73 $ (39) $30,734 Comprehensive income Net income (excluding gain on 5,073 spin-off of The Associates) 6,116 6,116 Gain on Associates spin-off 15,955 15,955 Foreign currency translation (53) (53) Minimum pension liability (net of tax benefit of $184) (361) (361) Net unrealized holding loss (net of tax benefit of $3) (6) (6) Reclassification adjustments for net gains realized in net income (net of tax of $11) (22) (22) ------ Comprehensive income 21,629 Common stock issued for Series A Preferred Stock conversion, employee benefit plans and other 19 139 158 Preferred stock-Series B repurchase and Series A redemption (420) (420) ESOP loan and treasury stock (1,046) (1,046) Associates spin-off to Ford Common stockholders (22,298) (22,298) Cash dividends (5,348) (5,348) ------ ------ ------- -------- ------ ---- ------- ------- Balance at end of year $1,222 $5,283 $19,659 $ (1,017) $ (698) $ 45 $(1,085) $23,409 ====== ====== ======= ======== ====== ==== ======= ======= The accompanying notes are part of the financial statements. FS-6 Ford Motor Company and Subsidiaries Notes to Financial Statements NOTE 1. Accounting Policies - ---------------------------- Principles of Consolidation - --------------------------- The consolidated financial statements include all significant majority-owned subsidiaries and reflect the operating results, assets, liabilities and cash flows for the company's two business sectors: Automotive and Financial Services. The assets and liabilities of the Automotive sector are classified as current or noncurrent, and those of the Financial Services sector are unclassified. Affiliates that are 20% to 50% owned, principally Mazda Motor Corporation and AutoAlliance International Inc., and subsidiaries where control is expected to be temporary, principally investments in certain dealerships, are accounted for on an equity basis. Use of estimates and assumptions as determined by management is required in the preparation of consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates and assumptions. For purposes of Notes to Financial Statements, "Ford" or "the company" means Ford Motor Company and its majority-owned consolidated subsidiaries unless the context requires otherwise. Certain amounts for prior periods are reclassified, if required, to conform with present period presentations. Structure of Operations - ----------------------- The company's sectors, Automotive and Financial Services, are managed as four primary operating segments. A segment is defined as a component with business activity resulting in revenue and expense that has separate financial information evaluated regularly by the company's chief operating decision maker in determining resource allocation and assessing performance (Note 17). The Automotive sector is comprised of Automotive and Visteon. The Automotive segment consists of the design, manufacture, assembly and sale of cars and trucks; the Visteon segment consists of the design, manufacture and sale of automotive components and systems. The Financial Services sector primarily includes two segments, Ford Motor Credit Company and its subsidiaries ("Ford Credit") and The Hertz Corporation and its subsidiaries ("Hertz"). The Financial Services sector also includes less significant financial services businesses (Note 17). Ford Credit leases and finances the purchase of cars and trucks made by Ford and other companies. It also provides inventory and capital financing to retail car and truck dealerships. Hertz rents cars and trucks and industrial and construction equipment. Both Ford Credit and Hertz also have insurance operations related to their businesses. Intersector transactions represent principally transactions occurring in the ordinary course of business, borrowings and related transactions between entities in the Financial Services and Automotive sectors, and interest and other support under special vehicle financing programs. These arrangements are reflected in the respective business sectors. Intersegment transactions are described in Note 17. Revenue Recognition - Automotive Sector - --------------------------------------- Sales are recorded by the company when products are shipped to dealers and other customers, except as described below. Estimated costs for approved sales incentive programs normally are recognized as sales reductions at the time of revenue recognition. Estimated costs for sales incentive programs approved subsequent to the time that related sales were recorded are recognized when the programs are approved. Sales through dealers to certain daily rental companies where the daily rental company has an option to require Ford to repurchase vehicles subject to certain conditions, are recognized over the period of daily rental service in a manner similar to lease accounting. The carrying value of these vehicles, included in other current assets, was $2.1 billion at December 31, 1998, and $2.2 billion at December 31, 1997. FS-7 NOTE 1. Accounting Policies (continued) - ---------------------------- Revenue Recognition - Financial Services Sector - ----------------------------------------------- Revenue from finance receivables is recognized over the term of the receivable using the interest method. Certain loan origination costs are deferred and amortized, using the interest method, over the term of the related receivable as a reduction in financing revenue. Revenue from operating leases is recognized as scheduled payments become due. Initial direct costs net of acquisition fees related to leases are deferred and amortized over the term of the lease. Agreements between the Automotive sector operations and certain Financial Services sector operations provide for interest supplements and other support costs to be paid by Automotive sector operations on certain financing and leasing transactions. The Financial Services sector recognizes this revenue in income over the period that the related receivables and leases are outstanding; the estimated costs of interest supplements and other support costs are recorded as sales incentives by Automotive sector operations in the same manner as sales incentives described above. The accrual of interest on loans is discontinued at the time a loan is determined to be impaired. Subsequent amounts of interest collected are recognized in income only if full recovery of the remaining principal is expected. Other amounts collected are generally recognized first as a reduction of principal. Any remaining amounts are treated as a recovery. The Financial Services sector periodically sells finance receivables through special purpose subsidiaries, retains the servicing rights and certain other beneficial interests, and receives a servicing fee which is recognized as collected over the remaining term of the related sold finance receivables. Estimated gains or losses from the sale of finance receivables are recognized in the period in which the sale occurs. In determining the gain or loss on each qualifying sale of finance receivables, the investment in the sold receivable pool is allocated between the portion sold and the portion retained based on their relative fair values at the date of sale. Other Costs - ----------- Advertising and sales promotion costs are expensed as incurred. Advertising costs were $2.2 billion in 1998, $2.3 billion in 1997 and $2.2 billion in 1996. Estimated costs related to product warranty are accrued at the time of sale. Research and development costs are expensed as incurred and were $6.3 billion in 1998, $6.3 billion in 1997 and $6.8 billion in 1996. Income Per Share of Common and Class B Stock - -------------------------------------------- Basic income per share of Common and Class B Stock is calculated by dividing the income attributable to Common and Class B Stock by the average number of shares of Common and Class B Stock outstanding during the applicable period, adjusted for shares issuable under employee savings and compensation plans. The calculation of diluted income per share of Common and Class B Stock takes into account the effect of obligations, such as stock options, considered to be potentially dilutive. FS-8 NOTE 1. Accounting Policies (continued) - ---------------------------- Income per share of Common and Class B Stock were as follows (in millions): 1998 1997 1996 ----------------- ---------------- ------------------ Income Shares* Income Shares* Income Shares* ------- ------ ------ ------ ------ ------ Net income $22,071 1,211 $6,920 1,195 $4,446 1,179 Preferred stock dividend requirements (22) - (54) - (65) - Premium on Series B Tender Offer** (85) - - - - - Issuable and uncommitted ESOP shares - (2) - (1) - (4) ------- ------ ------ ------ ------ ----- Basic income and shares $21,964 1,209 $6,866 1,194 $4,381 1,175 Basic Income Per Share $ 18.17 $ 5.75 $ 3.73 - ---------------------- Basic income and shares $21,964 1,209 $6,866 1,194 $4,381 1,175 Net dilutive effect of options - 28 - 20 - 16 Convertible preferred stock and other (1) - 8 10 24 19 ------- ------ ------ ------ ------ ----- Diluted income and shares $21,963 1,237 $6,874 1,224 $4,405 1,210 Diluted Income Per Share $ 17.76 $ 5.62 $ 3.64 - ------------------------ - - - - - - *Average shares outstanding **Represents a one-time reduction of $0.07 per share of Common and Class B Stock resulting from the premium paid to repurchase the company's Series B Cumulative Preferred Stock. Derivative Financial Instruments - -------------------------------- Ford has operations in over 30 countries and sells vehicles in over 200 markets, and is exposed to a variety of market risks, including the effects of changes in foreign currency exchange rates, interest rates and commodity prices. These financial exposures are monitored and managed by the company as an integral part of the company's overall risk management program, which recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effect on the company's results. The company uses derivative financial instruments to manage the exposures to fluctuations in exchange rates, interest rates and commodity prices. All derivative financial instruments are classified as "held for purposes other than trading"; company policy specifically prohibits the use of leveraged derivatives or use of any derivatives for speculative purposes. Ford's primary foreign currency exposures, in terms of net corporate exposure, are in the British Pound Sterling, Japanese Yen, euro, Mexican Peso and Brazilian Real. Agreements to manage foreign currency exposures include forward contracts, swaps and options. The company uses these derivative instruments to hedge assets and liabilities denominated in foreign currencies, firm commitments and certain investments in foreign subsidiaries. Gains and losses on hedges of firm commitments are deferred and recognized with the related transactions. In the case of hedges of net investments in foreign subsidiaries, gains and losses are recognized in other comprehensive income. All other gains and losses are recognized in cost of sales for the Automotive sector and interest expense for the Financial Services sector. These instruments usually mature in two years or less for Automotive sector exposures and longer for Financial Services sector exposures, consistent with the underlying transactions. The effect of changes in exchange rates may not be fully offset by gains or losses on currency derivatives, depending on the extent to which the exposures are hedged. Interest rate swap agreements are used to manage the effects of interest rate fluctuations by changing the interest rate characteristics of specific debt or pools of debt to match the interest rate characteristics of corresponding assets. These instruments mature consistent with underlying debt issues as identified in Note 9. The differential paid or received on interest rate swaps is recognized on an accrual basis as an adjustment to interest expense. Gains and losses on terminated interest rate swaps are amortized and reflected in interest expense over the remaining term of the underlying debt. FS-9 NOTE 1. Accounting Policies (continued) - ---------------------------- Ford has a commodity hedging program that uses primarily forward contracts and options to manage the effects of changes in commodity prices on the Automotive sector's results. The financial instruments used in this program mature in three years or less, consistent with the related purchase commitments. Gains and losses are recognized in cost of sales during the settlement period of the related transactions. Foreign Currency Translation - ---------------------------- Assets and liabilities of non-U.S. subsidiaries generally are translated to U.S. Dollars at end-of-period exchange rates. The effects of this translation for most non-U.S. subsidiaries are reported in other comprehensive income. Remeasurement of assets and liabilities of non-U.S. subsidiaries that use the U.S. Dollar as their functional currency are included in income as transaction gains and losses. Income statement elements of all non-U.S. subsidiaries are translated to U.S. Dollars at average-period exchange rates and are recognized as part of revenues, costs and expenses. Also included in income are gains and losses arising from transactions denominated in a currency other than the functional currency of the subsidiary involved. Net transaction gains and losses, as described above, increased net income by $97 million in 1998, and decreased net income by $164 million in 1997 and $156 million in 1996. Impairment of Long-Lived Assets and Certain Identifiable Intangibles - -------------------------------------------------------------------- The company evaluates the carrying value of goodwill for potential impairment on an ongoing basis. Such evaluations compare operating income before amortization of goodwill to the amortization recorded for the operations to which the goodwill relates. The company also periodically evaluates the carrying value of long-lived assets and long-lived assets to be disposed of for potential impairment. The company considers projected future operating results, cash flows, trends and other circumstances in making such estimates and evaluations. Goodwill - -------- Goodwill represents the excess of the purchase price over the fair value of the net assets of acquired companies and is amortized using the straight-line method principally over 40 years. Total goodwill included in the Automotive sector's other assets was $2.1 billion at December 31, 1998 and $2.1 billion at December 31, 1997. Total goodwill included in the Financial Services sector's other assets was $743 million at December 31, 1998 and $2.7 billion at December 31, 1997. The decrease is related to the spin-off of Associates First Capital Corporation ("The Associates", Note 15). Company-Obligated Mandatorily Redeemable Preferred Securities of a Subsidiary Trust - ----------------------------------------------------------------------------- During 1995, Ford Motor Company Capital Trust I (the "Trust") issued $632 million of its 9% Trust Originated Preferred Securities (the "Preferred Securities") in a one-for-one exchange for 25,273,537 shares of the company's outstanding Series B Depositary Shares (the "Depositary Shares"). Concurrent with the exchange and the related purchase by Ford of the Trust's common securities (the "Common Securities"), the company issued to the Trust $651 million aggregate principal amount of its 9% Junior Subordinated Debentures due December 2025 (the "Debentures"). The sole assets of the Trust are and will be the Debentures. The Debentures are redeemable, in whole or in part, at the company's option on or after December 1, 2002, at a redemption price of $25 per Debenture plus accrued and unpaid interest. If the company redeems the Debentures, or upon maturity of the Debentures, the Trust is required to redeem the Preferred Securities and Common Securities at $25 per share plus accrued and unpaid distributions. Ford guarantees to pay in full to the holders of the Preferred Securities all distributions and other payments on the Preferred Securities to the extent not paid by the Trust only if and to the extent that Ford has made a payment of interest or principal on the Debentures. This guarantee, when taken together with Ford's obligations under the Debentures and the Indenture relating thereto and its obligations under the Declaration of Trust of the Trust, including its obligation to pay certain costs and expenses of the Trust, constitutes a full and unconditional guarantee by Ford of the Trust's obligations under the Preferred Securities. FS-10 NOTE 2. Marketable and Other Securities - ---------------------------------------- Trading securities are recorded at fair value with unrealized gains and losses included in income. Available-for-sale securities are recorded at fair value with net unrealized gains and losses reported, net of tax, in other comprehensive income. Held-to-maturity securities are recorded at amortized cost. Equity securities which do not have readily determinable fair values are recorded at cost. The basis of cost used in determining realized gains and losses is specific identification. The fair value of substantially all securities is determined by quoted market prices. The estimated fair value of securities, for which there are no quoted market prices, is based on similar types of securities that are traded in the market. Expected maturities of debt securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty. Automotive Sector - ----------------- Investments in securities at December 31 were as follows (in millions): Memo: Amortized Unrealized Unrealized Fair Book Cost Gains Losses Value Value --------- ---------- ---------- ------- ------- 1998 - ----- Trading securities $19,534 $83 $40 $19,577 $19,577 Available-for-sale securities - Corporate securities 543 - - 543 543 ------- --- --- ------- ------- Total investments in securities $20,077 $83 $40 $20,120 $20,120 ======= === === ======= ======= 1997 - ---- Trading securities $14,114 $29 $ - $14,143 $14,143 Available-for-sale securities - Corporate securities 395 - 19 376 376 ------- --- --- ------- ------- Total investments in securities $14,509 $29 $19 $14,519 $14,519 ======= === === ======= ======= During 1997, $365 million of bonds issued by affiliates were reclassified from equity in net assets of affiliated companies to available-for-sale marketable securities; $202 million of the bonds matured in 1998. Proceeds from sales of available-for-sale securities were $586 million in 1998 and $8 million in 1997. In 1998, gross losses of $15 million were reported. Other comprehensive income included net unrealized losses of $5 million in 1998 and net unrealized gains of $28 million in 1997 on securities owned by certain unconsolidated affiliates. The available-for-sale securities at December 31, 1998 had contractual maturities between one and five years. Financial Services Sector - ------------------------- Investments in securities at December 31, 1998 were as follows (in millions): Memo: Amortized Unrealized Unrealized Fair Book Cost Gains Losses Value Value --------- ---------- ---------- ----- ----- Trading securities $231 $ 3 $4 $230 $230 Available-for-sale securities - ----------------------------- Debt securities issued by the U.S. government and agencies 153 3 - 156 156 Municipal securities 63 2 - 65 65 Debt securities issued by non-U.S. governments 25 - - 25 25 Corporate securities 192 3 2 193 193 Mortgage-backed securities 198 3 - 201 201 Equity securities 35 56 1 90 90 ---- --- -- ---- ---- Total available-for-sale securities 666 67 3 730 730 Held-to-maturity securities - --------------------------- Debt securities issued by the U.S. government and agencies 6 - - 6 6 Corporate securities 2 - - 2 2 ---- --- -- ---- ---- Total held-to-maturity securities 8 - - 8 8 Total investments in securities $905 $70 $7 $968 $968 ==== === == ==== ==== FS-11 NOTE 2. Marketable and Other Securities (continued) - ---------------------------------------- Investments in securities at December 31, 1997 were as follows (in millions): Memo: Amortized Unrealized Unrealized Fair Book Cost Gains Losses Value Value --------- ---------- ---------- ------ ------ Trading securities $ 267 $ 4 $1 $ 270 $ 270 Available-for-sale securities - ----------------------------- Debt securities issued by the U.S. government and agencies 385 4 1 388 388 Municipal securities 13 - - 13 13 Debt securities issued by non-U.S. governments 36 - - 36 36 Corporate securities 489 7 1 495 495 Mortgage-backed securities 837 8 1 844 844 Other debt securities 14 - - 14 14 Equity securities 53 65 2 116 116 ------ --- -- ------ ------ Total available-for-sale securities 1,827 84 5 1,906 1,906 Held-to-maturity securities - --------------------------- Debt securities issued by the U.S. government and agencies 7 - - 7 7 Corporate securities 15 - - 15 15 Other debt securities 3 - - 3 3 ------ --- -- ------ ------ Total held-to-maturity securities 25 - - 25 25 Total investments in securities with readily determinable fair value 2,119 $88 $6 $2,201 2,201 === == ====== Equity securities not practicable to fair value 6 6 ------ ------ Total investments in securities $2,125 $2,207 ====== ====== The amortized cost and fair value of investments in available-for-sale securities and held-to-maturity securities at December 31 by contractual maturity, were as follows (in millions): Available-for-sale Held-to-maturity ----------------------- ------------------------- Amortized Amortized 1998 Cost Fair Value Cost Fair Value ---- --------- ---------- --------- ---------- Due in one year or less $ 29 $ 29 $ 1 $ 1 Due after one year through five years 165 167 3 3 Due after five years through ten years 101 102 3 3 Due after ten years 138 141 1 1 Mortgage-backed securities 198 200 - - Equity securities 35 91 - - ------ ------ --- --- Total $ 666 $ 730 $ 8 $ 8 ====== ====== === === 1997 ---- Due in one year or less $ 100 $ 101 $14 $14 Due after one year through five years 443 446 10 10 Due after five years through ten years 273 276 - - Due after ten years 121 124 1 1 Mortgage-backed securities 837 843 - - Equity securities 53 116 - - ------ ------ --- --- Total $1,827 $1,906 $25 $25 ====== ====== === === Proceeds from sales of available-for-sale securities were $2.1 billion in 1998, $2.9 billion in 1997 and $8.4 billion in 1996. In 1998, gross gains of $48 million and gross losses of $3 million were realized on those sales; gross gains of $98 million and gross losses of $8 million were realized in 1997 and gross gains of $43 million and gross losses of $21 million were realized in 1996. FS-12 NOTE 3. Net Receivables and Lease Investments - Financial Services Sector - -------------------------------------------------------------------------- Receivables - ----------- Included in net receivables and lease investments at December 31 were net finance receivables, investments in direct financing leases and investments in operating leases. The investments in direct financing and operating leases relate to the leasing of vehicles, various types of transportation and other equipment, and facilities. Net finance receivables at December 31 were as follows (in millions): 1998 1997 ------- -------- Retail $60,653 $ 65,661 Wholesale 22,650 24,520 Real estate 2,507 21,065 Other finance receivables 5,533 19,482 ------- -------- Total finance receivables 91,343 130,728 Allowance for credit losses (1,229) (3,021) ------- -------- Total net finance receivables 90,114 127,707 Other 63 85 ------- -------- Net finance and other receivables $90,177 $127,792 ======= ======== Net finance receivables subject to fair value* $90,010 $127,595 Fair value $89,847 $130,978 - - - - - *Excludes certain diversified and other receivables of $167 million and $197 million at December 31, 1998 and 1997, respectively Included in finance receivables at December 31, 1998 and 1997 were a total of $1.5 billion and $1 billion, respectively, owed by three customers with the largest receivable balances. Other finance receivables consisted primarily of commercial and other collateralized loans and accrued interest. Also included in other finance receivables at December 31, 1998 and 1997 were $3.9 billion and $3.7 billion, respectively, of accounts receivable purchased by certain Financial Services sector operations from Automotive sector operations. Finance receivables that originated outside the United States are $35.6 billion and $28.3 billion at December 31, 1998 and 1997, respectively. Contractual maturities of total finance receivables are as follows (in millions): 1999 - $56,480; 2000 - $17,930; 2001 - $9,369; thereafter - $7,564. Experience indicates that a substantial portion of the portfolio generally is repaid before the contractual maturity dates. The fair value of most receivables was estimated by discounting future cash flows using an estimated discount rate that reflected the credit, interest rate and prepayment risks associated with similar types of instruments. For receivables with short maturities, the book value approximated fair value. The Financial Services sector has sold receivables through special purpose subsidiaries. The servicing portfolio related to these securitized assets amounted to $13.9 billion, $10.9 billion and $10.3 billion at December 31, 1998, 1997 and 1996, respectively. The company retains certain beneficial interests in the sold receivables which are subject to limited recourse provisions. These financial instruments of $1.3 billion at December 31, 1998 and $999 million at December 31, 1997 are included in other assets. FS-13 NOTE 3. Net Receivables and Lease Investments - Financial Services Sector - -------------------------------------------------------------------------- (continued) Lease Investments - ----------------- Investments in direct financing leases at December 31 were as follows (in millions): 1998 1997 ------ ------- Minimum lease rentals, net of unearned income $3,359 $ 7,874 Estimated residual values 3,720 2,923 Allowance for credit losses (80) (143) ------ ------- Net investments in direct financing leases $6,999 $10,654 ====== ======= Minimum direct financing lease rentals are contractually due as follows (in millions): 1999 - $1,506; 2000 - $1,019; 2001 - $599; 2002 - $202; 2003 - $33; thereafter - less than $1 million. Investments in operating leases, excluding daily rental, at December 31 were as follows (in millions): 1998 1997 ------- ------- Vehicles and other equipment, at cost $43,732 $44,705 Lease origination costs 63 65 Accumulated depreciation (8,136) (7,487) Allowance for credit losses (268) (312) ------- ------- Net investments in operating leases $35,391 $36,971 ======= ======= Minimum rentals on operating leases are contractually due as follows (in millions): 1999 - $7,150; 2000 - $3,712; 2001 - $1,629; 2002 - $224; 2003 - $76; thereafter - $121. Depreciation expense for assets subject to operating leases is provided primarily on the straight-line method over the term of the lease in amounts necessary to reduce the carrying amount of the asset to its estimated residual value. Depreciation rates and amounts are based on assumptions as to used car prices at lease termination and the number of vehicles that will be returned to the company. Estimated and actual residual values are reviewed on a regular basis to determine that depreciation amounts are appropriate. Gains and losses upon disposal of the assets also are included in depreciation expense. Depreciation expense was as follows: $8.4 billion in 1998, $7.4 billion in 1997 and $6.6 billion in 1996. Credit Losses - ------------- Allowances for credit losses are estimated and established as required based on historical experience and other factors that affect collectibility. The allowance for estimated credit losses includes a provision for certain non-homogeneous impaired loans. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate. Finance receivables and lease investments are charged to the allowances for credit losses when an account is deemed to be uncollectible, taking into consideration the financial condition of the borrower, the value of the collateral, recourse to guarantors and other factors. Recoveries on finance receivables and lease investments previously charged-off as uncollectible are credited to the allowances for credit losses. Changes in the allowances for credit losses were as follows (in millions): 1998 1997 1996 ------- ------- ------- Beginning balance $ 3,476 $ 2,799 $ 2,391 Provision for credit losses 1,489 2,759 2,092 Total charge-offs and recoveries: Charge-offs (1,640) (2,484) (2,058) Recoveries 262 238 338 ------- ------- ------- Net losses (1,378) (2,246) (1,720) Other changes (2,010)* 164 36 ------- ------- ------- Ending balance $ 1,577 $ 3,476 $ 2,799 ======= ======= ======= - - - - - *Other changes includes $1,892 million to reflect the spin-off of The Associates. FS-14 NOTE 4. Inventories - Automotive Sector - ---------------------------------------- Inventories at December 31 were as follows (in millions): 1998 1997 ------ ------ Raw materials, work-in-process and supplies $2,887 $2,875 Finished products 2,769 2,593 ------ ------ Total inventories $5,656 $5,468 ====== ====== U.S. inventories $1,832 $1,993 Inventories are stated at the lower of cost or market. The cost of most U.S. inventories is determined by the last-in, first-out ("LIFO") method. The cost of the remaining inventories is determined primarily by the first-in, first-out ("FIFO") method. If the FIFO method had been used instead of the LIFO method, inventories would have been higher by $1.2 billion and $1.4 billion at December 31, 1998 and 1997, respectively. NOTE 5. Net Property, Depreciation and Amortization - Automotive Sector - ------------------------------------------------------------------------ Net property at December 31 was as follows (in millions): 1998 1997 ------- ------- Land $ 409 $ 393 Buildings and land improvements 9,298 8,803 Machinery, equipment and other 43,562 41,510 Construction in progress 2,774 2,377 ------- ------- Total land, plant and equipment 56,043 53,083 Accumulated depreciation (26,840) (26,004) ------- ------- Net land, plant and equipment 29,203 27,079 Special tools, net of amortization 8,117 7,515 ------- ------- Net property $37,320 $34,594 ======= ======= Property, equipment and special tools are stated at cost, less accumulated depreciation and amortization. Property and equipment placed in service before January 1, 1993 are depreciated using an accelerated method that results in accumulated depreciation of approximately two-thirds of the asset cost during the first half of the estimated useful life of the asset. Property and equipment placed in service after December 31, 1992 are depreciated using the straight-line method of depreciation over the estimated useful life of the asset. On average, buildings and land improvements are depreciated based on a 30-year life; machinery and equipment are depreciated based on a 14-year life. Special tools are amortized using an accelerated method over periods of time representing the estimated productive life of those tools. Depreciation and amortization expenses were as follows (in millions): 1998 1997 1996 ------ ------ ------ Depreciation $2,804 $2,759 $2,644 Amortization 2,936 3,179 3,272 ------ ------ ------ Total $5,740 $5,938 $5,916 ====== ====== ====== When property and equipment are retired, the general policy is to charge the cost of those assets, reduced by net salvage proceeds, to accumulated depreciation. Maintenance, repairs and rearrangement costs are expensed as incurred and were $2.2 billion in 1998, $2.3 billion in 1997 and $2.3 billion in 1996. Expenditures that increase the value or productive capacity of assets are capitalized. Preproduction costs related to new facilities are expensed as incurred. FS-15 NOTE 6. Income Taxes - --------------------- Income before income taxes for U.S. and non-U.S. operations, excluding equity in net income/(loss) of affiliated companies and excluding non-taxable gains from The Associates spin-off (1998) and IPO (1996) and Hertz IPO (1997), was as follows (in millions): 1998 1997 1996 ------ ------- ------ U.S. $8,363 $ 8,353 $5,633 Non-U.S. 1,114 2,404 516 ------ ------- ------ Total income before income taxes $9,477 $10,757 $6,149 ====== ======= ====== The provision for income taxes was estimated as follows (in millions): 1998 1997 1996 ------ ------ ----- Currently payable U.S. federal $1,588 $2,130 $ 655 Non-U.S. 623 830 756 State and local 40 (25) 151 ------ ------ ------ Total currently payable 2,251 2,935 1,562 Deferred tax liability/(benefit) U.S. federal 883 536 642 Non-U.S. (109) 78 (117) State and local 151 192 79 ------ ------ ------ Total deferred 925 806 604 ------ ------ ------ Total provision $3,176 $3,741 $2,166 ====== ====== ====== Deferred taxes are provided for earnings of non-U.S. subsidiaries which are planned to be remitted. No provision for deferred taxes has been made on $2.1 billion of retained earnings (primarily prior to 1998) which are considered to be indefinitely invested in the non-U.S. subsidiaries. Deferred taxes for the undistributed earnings of non-U.S. subsidiaries are not practical to estimate. A reconciliation of the provision for income taxes compared with the amounts at the U.S. statutory tax rate, excluding the non-taxable gains from The Associates spin-off (1998) and IPO (1996) and Hertz IPO (1997), is shown below: 1998 1997 1996 ---- ---- ---- Tax provision at U.S. statutory rate of 35% 35% 35% 35% Effect of: Tax on non-U.S. income 0 Pts. 0 Pts. 2 Pts. State and local income taxes 1 1 2 Other (2) (1) (4) Provision for income taxes 34% 35% 35% === === === Deferred income taxes reflect the estimated tax effect of accumulated temporary differences between assets and liabilities for financial reporting purposes and those amounts as measured by tax laws and regulations. The components of deferred income tax assets and liabilities at December 31 were as follows (in millions): 1998 1997 ------- ------- Deferred tax assets ------------------- Employee benefit plans $ 6,591 $ 6,378 Dealer and customer allowances and claims 4,075 4,320 Net operating loss carryforwards 795 859 Allowance for credit losses 1,164 1,270 All other 1,717 1,697 Valuation allowances (256) (308) ------- ------- Total deferred tax assets 14,086 14,216 Deferred tax liabilities ------------------------ Leasing transactions 6,324 5,588 Depreciation and amortization (excluding leasing transactions) 4,221 4,011 Employee benefit plans 969 997 All other 2,682 2,490 ------- ------- Total deferred tax liabilities 14,196 13,086 ------- ------- Net deferred tax assets/(liabilities) $ (110) $ 1,130 ======= ======= FS-16 NOTE 6. Income Taxes (continued) - --------------------- Non-U.S. net operating loss carryforwards for tax purposes were $795 million at December 31, 1998. A substantial portion of these losses has an indefinite carryforward period; the remaining losses have expiration dates beginning in 2000. For financial statement purposes, the tax benefit of operating losses is recognized as a deferred tax asset, subject to appropriate valuation allowances. The company evaluates the tax benefits of operating loss carryforwards on an ongoing basis. Such evaluations include a review of historical and projected future operating results, the eligible carryforward period and other circumstances. NOTE 7. Liabilities - Automotive Sector - ---------------------------------------- Current Liabilities - ------------------- Included in accrued liabilities at December 31 were the following (in millions): 1998 1997 ------- ------- Dealer and customer allowances and claims $ 8,765 $ 8,059 Employee benefit plans 2,530 2,154 Deferred revenue 2,447 2,566 Salaries, wages and employer taxes 740 759 Postretirement benefits other than pensions 275 640 Other 2,168 2,072 ------- ------- Total accrued liabilities $16,925 $16,250 ======= ======= Noncurrent Liabilities - ---------------------- Included in other liabilities at December 31 were the following (in millions): 1998 1997 ------- ------- Postretirement benefits other than pensions $14,859 $15,407 Dealer and customer allowances and claims 7,401 7,049 Employee benefit plans 3,762 3,137 Unfunded pension obligation 1,528 1,009 Minority interests in net assets of subsidiaries 103 94 Other 2,480 2,203 ------- ------- Total other liabilities $30,133 $28,899 ======= ======= FS-17 NOTE 8. Employee Retirement Benefits - ------------------------------------- Employee Retirement Plans - ------------------------- The company has two principal retirement plans in the U.S. The Ford-UAW Retirement Plan covers hourly employees represented by the UAW, and the General Retirement Plan covers substantially all other Ford employees of the company in the U.S. The hourly plan provides noncontributory benefits related to employee service. The salaried plan provides similar noncontributory benefits and contributory benefits related to pay and service. Other U.S. and non-U.S. subsidiaries have separate plans that generally provide similar types of benefits for their employees. In general, the company's plans are funded with the main exceptions of the U.S. defined benefit plans for executives and certain plans in Germany; in such cases an unfunded liability is recorded. The company's policy for funded plans is to contribute annually, at a minimum, amounts required by applicable law, regulations and union agreements. Plan assets consist principally of investments in stocks, and government and other fixed income securities. Postretirement Health Care and Life Insurance Benefits - ------------------------------------------------------ The company and certain of its subsidiaries sponsor unfunded plans to provide selected health care and life insurance benefits for retired employees. The company's U.S. and Canadian employees may become eligible for those benefits if they retire while working for the company; however benefits and eligibility rules may be modified from time to time. The estimated cost for these benefits is accrued over periods of employee service on an actuarially determined basis. In June 1997, the company prepaid certain 1998 and 1999 hourly health benefits by contributing $1.6 billion to a Voluntary Employees' Beneficiary Association ("VEBA") trust. In 1998, a further $1.7 billion was contributed to the VEBA to pre-pay hourly retiree health benefits. At December 31, 1998, $2 billion of the remaining $2.4 billion VEBA assets applied to hourly retirees. Increasing the assumed health care cost trend rates by one percentage point is estimated to increase the aggregate service and interest cost components of net postretirement benefit expense for 1998 by about $200 million and the accumulated postretirement benefit obligation at December 31, 1998 by about $2.3 billion. A decrease of one percentage point would reduce service and interest costs by $160 million and decrease the December 31, 1998 obligation by $1.9 billion. FS-18 NOTE 8. Employee Retirement Benefits (continued) - ------------------------------------- Employee Retirement Benefit Expense - ----------------------------------- The company's expense for pensions, retirement health care and life insurance was as follows (in millions): Pension Benefits ------------------------------------------------- U.S. Plans Non-U.S. Plans Other Beneifts* ------------------------- ------------------- --------------------------- 1998 1997 1996 1998 1997 1996 1998 1997 1996 ------ ------ ------ ---- ---- ---- ---- ---- ---- Costs Recognized in Income - -------------------------- Service cost $ 596 $ 551 $ 532 $354 $331 $261 $ 265 $ 242 $ 268 Interest cost 1,999 1,993 1,838 867 857 819 1,183 1,161 1,195 Expected return on plan assets (2,747) (2,505) (2,310) (986) (931) (790) (45) - - Amortization of: Transition (asset)/obligation (22) (22) (21) 13 61 39 - - - Plan amendments 729 515 599 114 92 103 (42) (44) (48) (Gains)/losses and other 25 30 30 129 56 95 95 13 (21) ------- ------- ------- ----- ---- ---- ------- ------ ------ Net pension/postretirement expense $ 580 $ 562 $ 668 $491 $466 $527 $1,456 $1,372 $1,394 ======= ======= ======= ===== ===== ===== ======= ======= ====== Discount rate for expense 6.75% 7.25% 7.00% 6.50% 7.10% 7.60% 7.00% 7.50% 7.25% Assumed long-term rate of return on assets 9.00% 9.00% 9.00% 9.20% 9.20% 9.20% 6.20% - - Initial health care cost trend rate - - - - - - 6.60% 6.60% 9.50% Ultimate health care cost trend rate - - - - - - 5.00% 5.00% 5.50% Number of years to ultimate trend rate - - - - - - 10 10 10 - - - - - - *Postretirement health care and life insurance benefits Pension expense in 1998 increased for U.S. and non-U.S. plans primarily as a result of the year-to-year change in the cost of special employee separation programs and lower discount rates, partially offset by increased return on plan assets. FS-19 NOTE 8. Employee Retirement Benefits (continued) - ------------------------------------- The year-end status of these plans was as follows (in millions): Pension Benefits ------------------------------------------ U.S. Plans Non-U.S. Plans Other Benefits* ------------------ ------------------ -------------------- 1998 1997 1998 1997 1998 1997 -------- ------- ------- ------- -------- -------- Change in Benefit Obligation - ---------------------------- Benefit obligation at January 1 $30,923 $28,245 $13,311 $12,865 $ 17,522 $ 16,503 Service cost 596 551 354 331 265 242 Interest cost 1,999 1,993 867 857 1,183 1,161 Amendments 10 4 26 91 - - Special programs 278 79 114 37 63 - Net aquisitions/(sales) (493) 76 - - (130) - Plan participant contributions 45 43 91 - - - Benefits paid (1,869) (1,828) (660) (633) (846) (794) Foreign exchange translation - - 182 (1,029) (22) (15) Actuarial loss/(gain) 2,046 1,760 2,051 792 1,180 425 ------- ------- ------- ------- -------- -------- Benefit obligation at December 31 $33,535 $30,923 $16,336 $13,311 $ 19,215 $ 17,522 ======= ======= ======= ======= ======== ======== Change in Plan Assets - --------------------- Fair value of plan assets at January 1 $35,683 $30,933 $11,687 $10,898 $ 736 $ - Actual return on plan assets 5,746 5,933 1,470 1,533 45 - Company contributions 2 210 219 246 1,700 736 Special programs (95) (1) (27) - - - Net sales (473) - - - - - Plan participant contributions 45 43 91 - - - Benefits paid (1,869) (1,828) (660) (633) (480) - Foreign exchange translation - - 26 (652) - - Other 83 393 449 295 - - ------- ------- ------- ------- -------- -------- Fair value of plan assets at December 31 $39,122 $35,683 $13,255 $11,687 $ 2,001 $ 736 ======= ======= ======= ======= ======== ======== Funded Status of the Plan - ------------------------- Plan assets in excess of/(less than) $ 5,587 $ 4,760 $(3,081) $(1,624) $(17,214) $(16,786) benefit obligations Unamortized: Transition (asset)/obligation (68) (87) 744 212 - - Prior service cost 1,941 2,393 507 570 (119) (162) Net (gains)/losses (5,704) (4,801) 650 (63) 1,900 757 ------- ------- ------- ------- -------- -------- Net amount recognized $ 1,756 $ 2,265 $(1,180) $ (905) $(15,433) $(16,191) ======= ======= ======= ======= ======== ======== Amounts Recognized in the Balance Sheet Consists of Assets/(Liabilities) - ---------------------------------------------- Other non-current assets - Automotive** $ 2,314 $ 2,459 $ 1,558 $ 1,600 $ - $ - Accrued non-current liabilities - Automotive (611) (515) (3,601) (2,749) (14,859) (15,407) Deferred income taxes 34 39 376 120 - - Accumulated other comprehensive income 54 63 644 274 - - Other (35) 219 (157) (150) (574) (784) ------- ------- ------- ------- -------- -------- Net amount recognized $ 1,756 $ 2,265 $(1,180) $ (905) $(15,433) $(16,191) ======= ======= ======= ======= ======== ======== **Includes intangible asset 16 68 404 455 Pension Plans in Which Accumulated Benefit Obligation Exceeds Plan Assets at December 31 - --------------------------------------------- Projected benefit obligation $ 786 $ 795 $ 6,557 $ 5,358 Accumulated benefit obligation 689 688 6,141 5,024 Fair value of plan assets 14 76 2,820 2,631 Assumptions as of December 31 - ----------------------------- Discount rate 6.25% 6.75% 5.70% 6.50% 6.50% 7.00% Expected return on assets 9.00% 9.00% 9.30% 9.20% 6.00% 6.20% Average rate of increase in compensation 5.20% 5.50% 5.10% 5.10% - - Initial health care cost trend rate - - - - 7.00% 6.60% Ultimate health care cost trend rate - - - - 5.00% 5.00% Number of years to ultimate trend rate - - - - 9 10 - - - - - - *Postretirement health care and life insurance benefits FS-20 NOTE 9. Debt - ------------- The fair value of debt was estimated based on quoted market prices or current rates for similar debt with the same remaining maturities. Automotive Sector - ----------------- Debt at December 31 was as follows (in millions): Weighted Average Interest Rate* Book Value ---------------- ----------------- Maturity 1998 1997 1998 1997 -------- ---- ---- ----- ------ Debt payable within one year ---------------------------- Short-term debt 9.8% 7.9% $ 1,076 $ 592 Long-term debt payable within one year 45 537 ------- ------ Total debt payable within one year 1,121 1,129 Long-term debt 2000-2097 8.0% 8.5% 8,713 7,047 ------- ------ Total debt $ 9,834 $8,176 ======= ====== Fair value $10,809 $8,988 - - - - - *Excludes the effect of interest rate swap agreements; change in 1998 primarily reflects short-term debt in South America. Long-term debt at December 31, 1998 included maturities as follows (in millions): 1999 - $45 (included in current liabilities); 2000 - $705; 2001 - $222; 2002 - $595; 2003 - $69; thereafter - $7,122. Included in long-term debt at December 31, 1998 and 1997 were obligations of $7,944 million and $6,864 million, respectively, with fixed interest rates, and $769 million and $183 million, respectively, with variable interest rates (generally based on LIBOR or other short-term rates). Obligations payable in foreign currencies at December 31, 1998 and 1997 were $544 million and $372 million, respectively. Agreements to manage exposures to fluctuations in interest rates, which include primarily interest rate swap agreements and futures contracts, did not change the December 31, 1998 and December 31, 1997 overall weighted-average interest rates on long-term debt or the obligations subject to variable interest rates. Financial Services Sector - ------------------------- Debt at December 31 was as follows (in millions): Weighted Average Interest Rate* Book Value ------------------ ------------------- Maturity 1998 1997 1998 1997 -------- ------ ------ -------- -------- Debt payable within one year ---------------------------- Unsecured short-term debt $ 2,998 $ 3,684 Commercial paper 49,429 63,834 Other short-term debt 4,046 3,985 -------- -------- Total short-term debt 5.6% 6.0% 56,473 71,503 Long-term debt payable within one year 10,383 15,370 -------- -------- Total debt payable within one year 66,856 86,873 Long-term debt -------------- Secured indebtedness 2000-2005 10.2% 9.3% 17 64 Unsecured senior indebtedness Notes and bank debt 2000-2078 6.2% 6.6% 50,449 67,477 Debentures 2001-2006 4.0% 5.6% 1,661 2,313 Unamortized discount (30) (6) -------- -------- Total unsecured senior indebtedness 52,080 69,784 Unsecured subordinated indebtedness Notes 2000-2020 7.7% 8.5% 3,381 2,946 Debentures 7.3% 0 425 Unamortized discount (10) (21) -------- -------- Total unsecured subordinated indebtedness 3,371 3,350 -------- -------- Total long-term debt 55,468 73,198 -------- -------- Total debt $122,324 $160,071 ======== ======== Fair value $124,320 $161,872 - - - - - *Excludes the effect of interest rate swap agreements FS-21 NOTE 9. Debt (continued) - ------------- Financial Services Sector (continued) - ------------------------- Information concerning short-term borrowings (excluding long-term debt payable within one year) is as follows (in millions): 1998 1997 1996 ------- ------- ------- Average amount of short-term borrowings $49,099 $65,592 $62,529 Weighted-average short-term interest rates per annum (average year) 5.7% 5.3% 5.7% Average remaining term of commercial paper at December 31 31 days 30 days 33 days Long-term debt at December 31, 1998 included maturities as follows (in millions): 1999 - $10,383; 2000 - $11,307; 2001 - $12,363; 2002 - $8,577; 2003 - $9,958; thereafter - $13,263. Included in long-term debt at December 31, 1998 and 1997 were obligations of $38.1 billion and $56.7 billion, respectively, with fixed interest rates and $17.3 billion and $16.5 billion, respectively, with variable interest rates (generally based on LIBOR or other short-term rates). Obligations payable in foreign currencies at December 31, 1998 and 1997 were $30 billion and $27 billion, respectively. These obligations were issued primarily to fund non-U.S. business operations. Outstanding commercial paper at December 31, 1998 totaled $46.2 billion at Ford Credit and $2.3 billion at Hertz, with an average remaining maturity of 30 days and 52 days, respectively. Agreements to manage exposures to fluctuations in interest rates include primarily interest rate swap agreements. At December 31, 1998, these agreements decreased the weighted-average interest rate on long-term debt to 6%, compared with 6.2% excluding these agreements, and effectively decreased the obligations subject to variable interest rates to zero; the weighted-average interest rate on short-term debt excluding these agreements did not change materially. At December 31, 1997, these agreements decreased the weighted-average interest rate on long-term debt to 6.5%, compared with 6.6% excluding these agreements, and effectively decreased the obligations subject to variable rates to $11.8 billion; the weighted-average interest rate on short-term debt excluding these agreements did not change materially. Support Facilities - ------------------ At December 31, 1998, Ford had long-term contractually committed global credit agreements under which $8.6 billion is available from various banks; 94% are available through June 30, 2003. The entire $8.6 billion may be used, at Ford's option, by any affiliate of Ford; however, any borrowing by an affiliate will be guaranteed by Ford. Ford also has the ability to transfer on a nonguaranteed basis $8.3 billion of such credit lines in varying portions to Ford Credit and FCE Bank plc (formerly known as Ford Credit Europe plc). In addition, at December 31, 1998, $628 million of contractually committed credit facilities were available to various Automotive sector affiliates outside the U.S. Approximately $254 million of these facilities were in use at December 31, 1998. FS-22 NOTE 9. Debt (continued) - ------------- At December 31, 1998, the Financial Services sector had a total of $28.2 billion of contractually committed support facilities (excluding the $8.3 billion available under Ford's global credit agreements). Of these facilities, $23.9 billion are contractually committed global credit agreements under which $19.2 billion and $4.7 billion are available to Ford Credit and FCE Bank plc, respectively, from various banks; 58% and 76%, respectively, of such facilities are available through June 30, 2003. The entire $19.2 billion may be used, at Ford Credit's option, by any subsidiary of Ford Credit, and the entire $4.7 billion may be used, at FCE Bank plc's option, by any subsidiary of FCE Bank plc. Any borrowings by such subsidiaries will be guaranteed by Ford Credit or FCE Bank plc, as the case may be. At December 31, 1998, $131 million of the Ford Credit global facilities were in use and $826 million of the FCE Bank plc global facilities were in use. Other than the global credit agreements, the remaining portion of the Financial Services sector support facilities at December 31, 1998 consisted of $2 billion of contractually committed support facilities available to Hertz in the U.S. and $2.3 billion of contractually committed support facilities available to various affiliates outside the U.S.; at December 31, 1998 approximately $1.3 billion of these facilities were in use. Furthermore, banks provide $1.5 billion of liquidity facilities to support the asset-backed commercial paper program of a Ford Credit sponsored special purpose entity. NOTE 10. Capital Stock - ----------------------- At December 31, 1998, all general voting power was vested in the holders of Common Stock and the holders of Class B Stock, voting together without regard to class. At that date, the holders of Common Stock were entitled to one vote per share and, in the aggregate, had 60% of the general voting power; the holders of Class B Stock were entitled to such number of votes per share as would give them, in the aggregate, the remaining 40% of the general voting power, as provided in the company's Restated Certificate of Incorporation. The Restated Certificate of Incorporation provides that all shares of Common Stock and Class B Stock share equally in dividends (other than dividends declared with respect to any outstanding Preferred Stock), except that any stock dividends are payable in shares of Common Stock to holders of that class and in Class B Stock to holders of that class. Upon liquidation, all shares of Common Stock and Class B Stock are entitled to share equally in the assets of the company available for distribution to the holders of such shares. On January 9, 1998, all outstanding shares of Series A Depositary Shares, representing 1/1,000 of a share of Series A Cumulative Convertible Preferred Stock, were redeemed at a price of $51.68 per Depositary Share plus an amount equal to accrued and unpaid dividends. Series B Depositary Shares, representing 1/2,000 of a share of Series B Cumulative Preferred Stock, have a liquidation preference of $25 per Depositary Share. Shares outstanding at December 31, 1998 were valued at $177 million and numbered 7,096,688 Depositary Shares. Dividends are payable at a rate of $2.0625 per year per Depositary Share. Series B Cumulative Preferred Stock is not convertible into shares of Common Stock of the company. On and after December 1, 2002, and upon satisfaction of certain conditions, the stock is redeemable forcash at the option of Ford, in whole or in part, at a redemption price equivalent to $25 per Depositary Share, plus an amount equal to the sum of all accrued and unpaid dividends. On January 22, 1998, the company commenced an offer to purchase all Depositary Shares representing its Series B Cumulative Preferred Stock at a price of $31.40 per Depositary Share. The offer to purchase was in effect until February 26, 1998. Depositary Shares purchased totaled 13,229,775. The Series B Cumulative Preferred Stock ranks (and any other outstanding Preferred Stock of the company would rank) senior to the Common Stock and Class B Stock in respect of dividends and liquidation rights. FS-23 NOTE 10. Capital Stock (continued) - ----------------------- Changes to the number of shares of capital stock issued for the periods indicated were as follows (shares in millions): Series A Series B Common Class B Preferred Preferred Stock Stock Stock Stock ------- ------- --------- --------- Issued at December 31, 1995 1,089 71 0.011 0.010 Changes: 1996 - Conversion of Series A Preferred Stock 23 (0.007) - Employee benefit plans and other 6 1997 - Conversion of Series A Preferred Stock 4 (0.001) - Employee benefit plans and other 10 1998 - Conversion and Redemption of Series A 8 (0.003) Preferred Stock - Employee benefit plans and other 11 - Repurchase of Series B Preferred Stock (0.006) ----- -- ----- ----- Net change 62 0 (0.011) (0.006) ----- -- ----- ----- Issued at December 31, 1998 1,151 71 0.000 0.004 ===== == ===== ===== Authorized at December 31, 1998 3,000 265 -- Total Preferred: 30 -- NOTE 11. Stock Options - ----------------------- The company has stock options outstanding under the 1985 Stock Option Plan, the 1990 Long-Term Incentive Plan and 1998 Long-Term Incentive Plan. These Plans were approved by the stockholders. No further grants may be made under the 1985 Plan or 1990 Plan. Grants may be made under the 1998 Plan through April 2008. In general, options granted in 1997 under the 1990 Plan and subsequent years under the 1998 Plan become exercisable 33% after one year from the date of grant, 66% after two years and in full after three years. In general, options granted under the 1985 Plan and options granted prior to 1997 under the 1990 Plan become exercisable 25% after one year from the date of grant, 50% after two years, 75% after three years and in full after four years. Options under the Plans expire after 10 years from the date of grant. Certain participants were granted accompanying stock appreciation rights under the plans which may be exercised in lieu of the related options. Under the Plans, a stock appreciation right entitles the holder to receive, without payment, the excess of the fair market value of the Common Stock on the date of exercise over the option price, either in Common Stock or cash or a combination. In addition, grants of Performance/Contingent Stock Rights were made with respect to 1,354,627 shares in 1998, 936,300 shares in 1997, 865,100 shares in 1996. The number of shares ultimately awarded will depend on the extent to which the Performance Targets specified in each Right is achieved, individual performance of the recipients and other factors, as determined by the Compensation and Option Committee of the Board of Directors. Under the 1998 Plan, up to 2% of Common Stock issued as of December 31 of any year may be made available for stock options and other plan awards in the next succeeding calendar year. That limit may be increased up to 3% in any year, with a corresponding reduction in shares available for grants in future years. Any unused portion of the 2% limit for any calendar year may be carried forward and made available for Plan awards in succeeding calendar years. At December 31, 1998, the number of unused shares carried forward aggregated to 12,966,146 shares. FS-24 NOTE 11. Stock Options (continued) - ----------------------- Information concerning stock options is as follows (shares in millions): 1998 1997 1996 ------------------ ------------------ ------------------ Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares subject to option Shares Price Shares Price Shares Price ------------------------ ------ --------- ------ ---------- ------ --------- Outstanding at beginning of period 50.0 $28.44 50.3 $26.93 48.5 $25.22 New grants (based on fair value of Common Stock at dates of grant) 12.7 58.07 8.6 32.05 8.0 32.69 Associates adjustment* 24.8 - Exercised** (13.7) 19.97 (8.3) 23.19 (5.2) 20.32 Surrendered upon exercise of stock appreciation rights (2.5) 22.79 (0.4) 22.44 (0.7) 23.03 Terminated and expired (0.4) 33.58 (0.2) 30.86 (0.3) 31.14 ----- ----- ----- Outstanding at end of period 70.9*** 25.67 50.0 28.44 50.3 26.93 Outstanding but not exercisable (34.9) (21.6) (21.5) ----- ----- ----- Exercisable at end of period 36.0 19.53 28.4 25.84 28.8 23.61 ===== ===== ===== - - - - - *Outstanding stock options and related exercise prices were adjusted to preserve the intrinsic value of options as a result of The Associates spin-off in 1998. **Exercised at option prices ranging from $10.43 to $32.69 during 1998, $15.00 to $32.69 during 1997 and $13.42 to $29.06 during 1996. ***Included 0.7, 52.5 and 17.7 million shares under the 1985, 1990 and 1998 Plans, respectively, at option prices ranging from $10.43 to $58.63 per share. At December 31, 1998, the weighted-average remaining exercise period relating to the outstanding options was 7.1 years. The estimated fair value as of date of grant of options granted in 1998, 1997 and 1996, using the Black-Scholes option-pricing model, was as follows: 1998 1997 1996 ----- ----- ----- Estimated fair value per share of options granted during the year $9.25 $5.76 $6.93 Assumptions: Annualized dividend yield 4.1% 4.8% 4.3% Common Stock price volatility 28.1% 22.1% 25.2% Risk-free rate of return 5.7% 6.7% 6.2% Expected option term (in years) 5 5 5 The company measures compensation cost using the intrinsic value method. Accordingly, no compensation cost for stock options has been recognized. If compensation cost had been determined based on the estimated fair value of options granted since 1995, the company's net income and income per share would have been reduced to the pro forma amounts indicated below: 1998 1997 1996 --------------------- ------------------- ------------------- As Pro As Pro As Pro Reported Forma* Reported Forma* Reported Forma* -------- ------- -------- ------ -------- ------ Net income (in millions) $22,071 $22,014 $6,920 $6,892 $4,446 $4,428 Income per share ---------------- Basic $ 18.17 $ 18.12 $ 5.75 $ 5.73 $ 3.73 $ 3.71 Diluted $ 17.76 $ 17.71 $ 5.62 $ 5.60 $ 3.64 $ 3.63 - - - - - - *The pro forma disclosures may not be representative of the effects on reported net income and income per share for future periods because only stock options that were granted beginning in 1995 are included in the above table. The estimated fair value, before tax, of options granted in 1998, 1997 and 1996 was $162 million, $48 million and $54 million, respectively. FS-25 NOTE 12. Litigation and Claims - ------------------------------- Various legal actions, governmental investigations and proceedings and claims are pending or may be instituted or asserted in the future against the company and its subsidiaries, including those arising out of alleged defects in the company's products; governmental regulations relating to safety, emissions and fuel economy; financial services; employment-related matters; dealer, supplier and other contractual relationships; intellectual property rights; product warranties; and environmental matters. Certain of the pending legal actions are, or purport to be, class actions. Some of the foregoing matters involve or may involve compensatory, punitive, or antitrust or other treble damage claims in very large amounts, or demands for recall campaigns, environmental remediation programs, sanctions, or other relief which, if granted, would require very large expenditures. Litigation is subject to many uncertainties, and the outcome of individual litigated matters is not predictable with assurance. Reserves have been established by the company for certain of the matters discussed in the foregoing paragraph where losses are deemed probable. It is reasonably possible, however, that some of the matters discussed in the foregoing paragraph for which reserves have not been established could be decided unfavorably to the company or the subsidiary involved and could require the company or such subsidiary to pay damages or make other expenditures in amounts or a range of amounts that cannot be estimated at December 31, 1998. The company does not reasonably expect, based on its analysis, that any adverse outcome from such matters would have a material effect on future consolidated financial statements for a particular year, although such an outcome is possible. NOTE 13. Commitments and Contingencies - --------------------------------------- At December 31, 1998, the company had the following minimum rental commitments under non-cancelable operating leases (in millions): 1999 - $413; 2000 - $336; 2001 - $272; 2002 - $182; 2003 - $113; thereafter - $187. These amounts include rental commitments related to the sale and leaseback of certain Automotive sector machinery and equipment. Ford in the U.S. and Ford of Canada have entered into agreements with banks to provide credit card programs that offer rebates that can be applied against the purchase or lease of Ford vehicles. The maximum amount of rebates available to qualified cardholders at December 31, 1998 and 1997 was $1.6 billion and $1.8 billion, respectively. The company has provided for the estimated net cost of these programs as a sales incentive based on the estimated number of participants who ultimately will purchase vehicles. The U.S. program was discontinued December 31, 1997 and the Canadian program was discontinued May 31, 1998; rebates for the U.S. program earned prior to program discontinuance will be valid for up to five years following the calendar year in which earned, subject to certain restrictions. NOTE 14. Financial Instruments - ------------------------------- Estimated fair value amounts have been determined using available market information and various valuation methods depending on the type of instrument. In evaluating the fair value information, considerable judgment is required to interpret the market data used to develop the estimates. The use of different market assumptions and/or different valuation techniques may have a material effect on the estimated fair value amounts. Accordingly, the estimates of fair value presented herein may not be indicative of the amounts that could be realized in a current market exchange. FS-26 NOTE 14. Financial Instruments (continued) - ------------------------------- Balance Sheet Financial Instruments - ----------------------------------- Information about specific valuation techniques and estimated fair values is provided throughout the Notes to Financial Statements. Book value and estimated fair value amounts at December 31 were as follows (in millions): 1998 1997 ----------------------- ----------------------- Book Fair Book Fair Fair Value Value Value Value Value Reference -------- -------- -------- ------- ---------- Automotive Sector ----------------- Marketable securities $ 20,120 $ 20,120 $ 14,519 $ 14,519 Note 2 Debt 9,834 10,809 8,176 8,988 Note 9 Financial Services Sector ------------------------- Marketable securities $ 968 $ 968 $ 2,201 $ 2,201 Note 2 Receivables 90,010 89,847 127,595 130,978 Note 3 Debt 122,324 124,320 160,071 161,872 Note 9 Foreign Currency and Interest Rate Instruments - ---------------------------------------------- The fair value of foreign currency and interest rate instruments was estimated using current market prices provided by outside quotation services. The estimated fair value, notional amount and deferred loss at December 31 were as follows (in millions): Fair Value ------------------ 1998 1997 ------ ------ Foreign currency instruments Assets $631 $ 289 Liabilities 615 1,207 Interest rate instruments Assets 944 548 Liabilities 251 182 The notional amount represents the contract amount, not the amount at risk. The notional amount for foreign currency instruments was $33.1 billion at December 31, 1998, and $31 billion at December 31, 1997. The deferred loss for foreign currency instruments was $26 million at December 31, 1998 and $63 million at December 31, 1997. These deferred losses are offset by unrecognized gains on the underlying transactions or commitments. The notional amount for interest rate instruments was $97.5 billion at December 31, 1998, and $90.4 billion at December 31, 1997. Counterparty Credit Risk - ------------------------ Ford manages its foreign currency and interest rate counterparty credit risks by limiting exposure to and by monitoring the financial condition of each counterparty. The amount of exposure Ford may have to a single counterparty on a worldwide basis is limited by company policy. In the unlikely event that a counterparty fails to meet the terms of a foreign currency or an interest rate instrument, the company's risk is limited to the fair value of the instrument. Other Financial Agreements - -------------------------- At December 31, 1998, the notional amount of commodity hedging contracts outstanding totaled $853 million; the notional amount at December 31, 1997 was $496 million. The company also had guaranteed $826 million of debt of unconsolidated subsidiaries, affiliates and others at December 31, 1998. The risk of loss under these financial agreements is not material. FS-27 NOTE 15. Acquisitions, Dispositions and Restructuring - ------------------------------------------------------ Automotive Sector - ----------------- Restructurings - -------------- Ford recorded a pre-tax charge of $726 million ($472 million after taxes) in the fourth quarter of 1998 for retirement and separation programs. These special voluntary and involuntary programs reduce the workforce by 2,184 persons in North America (all salaried), 1,977 in Europe (1,304 hourly and 673 salaried) and 4,650 in South America (4,400 hourly and 250 salaried). The costs were charged to Automotive segment ($674 million) in cost of sales, Visteon segment ($38 million) in cost of sales, Ford Credit segment ($9 million) in operating and other expenses, and other Financial Services operations ($5 million) in operating and other expenses. Ford recorded a pre-tax charge of $272 million ($169 million after taxes) in the second quarter of 1997, reflecting actions that were completed during 1997 and 1998. These included primarily the discontinuation of passenger car production at the Lorain Assembly Plant resulting in a write-down of surplus assets. The charge also included employee termination costs related to the elimination of a shift at the Halewood (England) Plant, and a loss on the sale of the heavy truck business. Cost for special voluntary employee separation programs reduced the Automotive sector's net income for 1996 by $436 million. The programs affected about 3,500 salaried employees, primarily in the U.S. Write-Down of Kia Motors Corporation - ------------------------------------ During the fourth quarter of 1998, Ford recorded a pre-tax charge of $111 million ($86 million after taxes) to write-off its net exposure to Kia Motors Corporation ("Kia"). The write off of Ford's exposure was recorded in cost of sales. Ford's share of Mazda Motor Corporation's ("Mazda") exposure was recorded in equity in net income of affiliates. Batavia/ZF Friedrichshafen AG Joint Venture - ------------------------------------------- During the fourth quarter of 1998, Ford recorded in cost of sales a pre-tax charge of $112 million ($73 million after taxes) related to the fair value transfer of its Batavia (Ohio) Transmission Plant to a new joint venture company formed by Ford and ZF Friedrichshafen AG of Germany. The transaction is expected to be completed in the first quarter of 1999. The new joint venture will be reflected in Ford's consolidated financial statements on an equity basis. Investment in Mazda Motor Corporation - ------------------------------------- During May 1996, Ford increased its investment in Mazda from its existing 24.5% ownership interest to a 33.4% ownership interest by purchasing from Mazda newly-issued shares of common stock for an aggregate purchase price of $484 million. In connection with the purchase of shares, Mazda agreed to coordinate more closely with Ford its strategies and plans, particularly in the areas of product development, manufacturing and distribution of vehicles, so as to improve the competitiveness and economies of scale of both companies. Ford and Mazda remain separate public companies with separate identities. Ford is not responsible for any of Mazda's liabilities, debts or other obligations, and Mazda's operating results and financial position are not consolidated with those of Ford; Mazda continues to be reflected in Ford's consolidated financial statements on an equity basis. FS-28 NOTE 15. Acquisitions, Dispositions and Restructuring (continued) - ------------------------------------------------------ Financial Services Sector - ------------------------- Associates First Capital Corporation - ------------------------------------ During the second quarter of 1998, the company completed a spin-off of Ford's 80.7% (279.5 million shares) interest in The Associates. As a result of the spin-off of The Associates, Ford recorded a gain of $15,955 million in the first quarter of 1998 based on the fair value of The Associates as of the record date, March 12, 1998. The spin-off qualified as a tax-free transaction for U.S. federal income tax purposes. During the second quarter of 1996, The Associates completed an initial public offering ("IPO") of its common stock representing a 19.3% economic interest in The Associates. Ford recorded a second quarter 1996 gain of $650 million resulting from the IPO; the gain was not subject to income taxes. Hertz Corporation - ----------------- In the second quarter of 1997, Hertz, a subsidiary of Ford, completed an IPO of its common stock representing a 19.1% economic interest in Hertz. Ford recorded a second quarter 1997 gain of $269 million resulting from the IPO; the gain was not subject to income taxes. Ford Leasing - ------------ During the third quarter of 1996, Ford Leasing Corporation, then known as USL Capital Corporation ("USL Capital"), a subsidiary of Ford Holdings, Inc., concluded a series of transactions for the sale of substantially all of its assets, as well as certain assets owned by Ford Credit and managed by USL Capital. Proceeds from the sales were used to pay down related liabilities and debt. Ford recorded a pre-tax gain of $263 million from the sales ($95 million gain after taxes). Budget Rent a Car - ----------------- The company recorded a pre-tax charge in 1996 totaling $384 million ($233 million after taxes) to recognize the estimated value of its outstanding notes receivable from, and preferred stock investment in, Budget Rent a Car Corporation ("BRAC"). The initial provision taken in the second quarter of 1996 totaling $700 million ($437 million after taxes) resulted from conclusions reached in a study of Ford's rental car business strategy. In accordance with SFAS 114, the notes receivable provision reflected primarily the unsecured portion of financing provided to BRAC by Ford. The preferred stock write-down reflected recognition of the fair value of Ford's investment at the time. In the fourth quarter of 1996, the notes receivable provision was reduced by $316 million ($204 million after taxes), reflecting a strengthening of the rental car business, recent sales of rental car franchises, and increased investor interest that led to a reassessment of the value of the outstanding common stock of BRAC; Ford became the owner of approximately 22% of Team Rental as a result of the partial repayment in Team Rental stock of Ford's loans to BRAC. In the fourth quarter of 1997, Ford sold its shares of Budget Group (formerly "Team Rental") stock. The gain on sale was not material. FS-29 NOTE 16. Cash Flows - -------------------- The reconciliation of net income to cash flows from operating activities is as follows (in millions): 1998 1997 1996 -------------------- -------------------- --------------------- Financial Financial Financial Automotive Services Automotive Services Automotive Services ---------- --------- ---------- --------- ---------- --------- Net income $ 4,752 $17,319 $ 4,714 $ 2,206 $ 1,655 $ 2,791 Adjustments to reconcile net income to cash flows from operating activities: Depreciation and amortization 5,740 8,589 5,938 7,645 5,916 6,875 Losses/(earnings) of affiliated companies in excess of dividends remitted 82 (2) 127 (1) 44 (16) Provision for credit and insurance losses - 1,798 - 3,230 - 2,564 Foreign currency adjustments (208) - (27) - 156 - Net (purchases)/sales of trading securities (5,434) (205) (2,307) 67 (5,180) 62 Provision for deferred income taxes 421 504 908 (102) 74 530 Gain on spin-off of The Associates (Note 15) - (15,955) - - - - Gain on sale of common stock of a subsidiary (Note 15) - - - (269) - (650) Changes in assets and liabilities: Decrease/(increase) in accounts receivable and other current assets 1,027 (1,189) (179) 256 (2,183) (1,328) (Increase)/decrease in inventory (254) - 1,234 - 553 - Increase/(decrease) in accounts payable and accrued and other liabilities 3,019 1,728 3,854 (121) 5,447 1,303 Other 477 891 (278) 739 94 550 ------- ------- ------- ------- ------- ------- Cash flows from operating activities $ 9,622 $13,478 $13,984 $13,650 $ 6,576 $12,681 ======= ======= ======= ======= ======= ======= The company considers all highly liquid investments purchased with a maturity of three months or less, including short-term time deposits and government, agency and corporate obligations, to be cash equivalents. Automotive sector cash equivalents at December 31, 1998 and 1997 were $3.4 billion and $5.8 billion, respectively; Financial Services sector cash equivalents at December 31, 1998 and 1997 were $500 million and $800 million, respectively. Cash flows resulting from futures contracts, forward contracts and options that are accounted for as hedges of identifiable transactions are classified in the same category as the item being hedged. Purchases, sales and maturities of trading securities are included in cash flows from operating activities. Purchases, sales and maturities of available-for-sale and held-to-maturity securities are included in cash flows from investing activities. Cash paid for interest and income taxes was as follows (in millions): 1998 1997 1996 ------ ------- --------- c> Interest $9,120 $10,430 $10,250 Income taxes 2,027 1,301 1,285 FS-30 NOTE 17. Segment Information - ----------------------------- Ford adopted Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, effective with year-end 1998. This standard requires companies to disclose selected financial data by operating segment (defined in Note 1). Ford has identified four primary operating segments: Automotive, Visteon, Ford Credit, and Hertz. Segment selection was based upon internal organizational structure, the way in which these operations are managed and their performance evaluated by management and Ford's Board of Directors, the availability of separate financial results, and materiality considerations. Segment detail is summarized as follows (in millions): Automotive Sector Financial Services Sector ------------------ ----------------------------- Total Total Auto- Ford Other Elims/ Auto Fin Svcs motive Visteon Credit Hertz Fin Svcs Other Sector Sector --------- -------- -------- ------- -------- -------- -------- -------- 1998 - ---- Revenues External customer revenues $118,017 $ 1,412 a/ $ 19,095 $ 4,241 $ 1,997 $ (346) $119,083 $ 25,333 Intersegment revenues 3,839 16,350 208 9 272 (20,678) 0 0 -------- ------- -------- ------- -------- -------- -------- -------- Total Revenues $121,856 $17,762 $ 19,303 $ 4,250 $ 2,269 $(21,024) $119,083 $ 25,333 ======== ======= ======== ======= ======== ======== ======== ======== Income Income before taxes $ 5,829 $ 1,129 $ 1,812 $ 465 $ 16,161 b/ $ 0 $ 6,958 $ 18,438 Provision for income taxes 1,739 420 680 188 149 0 2,159 1,017 Net income 4,040 712 1,084 277 16,060 b/ (102) 4,752 17,319 Other Disclosures Depreciation/amortization $ 5,181 $ 559 $ 7,327 $ 1,186 $ 45 $ 31 $ 5,740 $ 8,589 Interest income 1,414 58 - - - (141) 1,331 - Interest expense 1,089 102 6,910 318 1,114 (668) 829 8,036 Capital expenditures 7,252 861 67 317 120 0 8,113 504 Unusual items 0 0 0 0 15,955 b/ 0 0 15,955 Unconsolidated affiliates Equity in net income (64) 26 2 0 0 0 (38) 2 Investments in 2,191 214 76 0 0 0 2,405 76 Total assets at year-end 83,214 9,565 137,248 8,873 6,181 (7,536) 88,744 148,801 - ------------------------------------------------------------------------------------------------------------------------- 1997 - ---- Revenues External customer revenues $121,976 $ 1,217 a/ $ 17,144 $ 3,895 $ 9,653 $ (258) $122,935 $ 30,692 Intersegment revenues 4,749 16,003 201 10 266 (21,229) 0 0 -------- ------- -------- ------- -------- -------- -------- -------- Total Revenues $126,725 $17,220 $ 17,345 $ 3,905 $ 9,919 $(21,487) $122,935 $ 30,692 ======== ======= ======== ======= ======== ======== ======== ======== Income Income before taxes $ 6,257 $ 825 $ 1,806 $ 343 $ 1,708 c/ $ 0 $ 7,082 $ 3,857 Provision for income taxes 2,014 308 727 142 550 0 2,322 1,419 Net income 4,196 518 1,031 202 1,205 c/ (232) 4,714 2,206 Other Disclosures Depreciation/amortization $ 5,346 $ 592 $ 6,188 $ 1,068 $ 364 $ 25 $ 5,938 $ 7,645 Interest income 1,228 17 - - - (129) 1,116 - Interest expense 904 82 6,268 316 3,523 (593) 788 9,712 Capital expenditures 7,225 917 49 211 315 0 8,142 575 Unusual items 0 0 0 0 269 c/ 0 0 269 Unconsolidated affiliates Equity in net income (117) 29 1 0 0 0 (88) 1 Investments in 1,782 195 84 0 0 0 1,977 84 Total assets at year-end 82,034 8,751 121,973 7,436 68,348 (9,445) 85,079 194,018 - ------------------------------------------------------------------------------------------------------------------------ 1996 - ---- Revenues External customer revenues $116,887 $ 1,368 a/ $ 16,476 $ 3,668 $ 8,913 $ (321) $118,023 $ 28,968 Intersegment revenues 5,001 15,111 229 11 985 (21,337) 0 0 -------- ------- -------- ------- -------- -------- -------- -------- Total Revenues $121,888 $16,479 $ 16,705 $ 3,679 $ 9,898 $(21,658) $118,023 $ 28,968 ======== ======= ======== ======= ======== ======== ======== ======== Income Income before taxes $ 1,973 $ 598 $ 2,240 $ 256 $ 1,726 d/ $ 0 $ 2,571 $ 4,222 Provision for income taxes 642 220 732 98 474 0 862 1,304 Net income 1,274 381 1,441 159 1,318 d/ (127) 1,655 2,791 Other Disclosures Depreciation/amortization $ 5,406 $ 510 $ 5,538 $ 975 $ 336 $ 26 $ 5,916 $ 6,875 Interest income 895 16 - - - (70) 841 - Interest expense 749 79 6,260 309 3,378 (376) 695 9,704 Capital expenditures 7,240 969 44 194 204 0 8,209 442 Unusual items 0 0 0 0 529 d/ 0 0 529 Unconsolidated affiliates Equity in net income (53) 47 0 0 1 (2) (6) (1) Investments in 2,245 206 76 0 0 0 2,451 76 Total assets at year-end 73,976 7,906 121,696 7,649 58,694 (7,054) 79,658 183,209 - - - - - - a/ Includes sales to outside fabricators for inclusion in components sold to Ford's Automotive segment. These sales are eliminated in total Automotive sector reporting. b/ Includes $15,955 non-cash gain (not taxed) on spin-off of The Associates in the first quarter of 1998 (Note 15). c/ Includes $269 gain (not taxed)on Hertz IPO in the second quarter of 1997 (Note 15). d/ Includes $650 gain (not taxed)on The Associates IPO in the second quarter of 1996, $263 gain on sale of USL Capital assets, $384 loss resulting from the write-down of Budget Rent A Car notes receivable in 1996 (Note 15). FS-31 NOTE 17. Segment Information (continued) - ----------------------------- "Other Financial Services" data is an aggregation of miscellaneous smaller Financial Services Sector business components, including Ford Motor Land Development Corporation, Ford Leasing Development Company, Ford Leasing Corporation, and Granite Management Corporation, and certain unusual transactions (footnoted). Also included is data for The Associates, which was spun-off from Ford in 1998. "Eliminations/Other" data includes intersegment eliminations and minority interest calculations. Data for "Depreciation/amortization" includes depreciation of fixed assets and assets subject to operating leases and amortization of special tools. Interest income for the operating segments in the Financial Services sector is reported as "Revenue". Information concerning principal geographic areas was as follows (in millions): Geographic Areas - ---------------- United All Total States Europe Other Company --------- -------- ------- --------- 1998 - ---- External revenues $100,597 $27,026 $16,793 $144,416 Net property 25,761 11,018 7,260 44,039 1997 - ---- External revenues $105,581 $27,618 $20,428 $153,627 Net property 23,948 9,596 7,090 40,634 1996 - ---- External revenues $ 98,887 $30,478 $17,626 $146,991 Net property 22,950 9,720 6,868 39,538 NOTE 18. Summary Quarterly Financial Data (Unaudited) - ------------------------------------------------------ (in millions, except amounts per share) 1998 1997 ---------------------------------------- ----------------------------------------- First Second Third Fourth First Second Third Fourth Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter -------- -------- ------- ------- ------- ------- ------- -------- Automotive Sales $29,076 $31,309 $26,494 $32,204 $30,037 $32,805 $28,196 $31,897 Operating income 1,806 2,922 777 1,180 1,704 2,444 846 1,952 Financial Services Revenues 7,508 5,980 6,146 5,699 7,277 7,460 7,900 8,055 Income before income taxes 16,813 590 645 390 830 1,199 912 916 Total Company Net income 17,646 2,381 1,001 1,043 $ 1,469 $ 2,530 $ 1,125 $ 1,796 Less: Preferred stock dividend requirements 95 4 4 4 14 14 13 13 ------- ------- ------- ------ ------- ------- ------- ------- Income attributable to Common and Class B Stock $17,551 $ 2,377 $ 997 $ 1,039 $ 1,455 $ 2,516 $ 1,112 $ 1,783 ======= ======= ======= ======= ======= ======= ======= ======= AMOUNTS PER SHARE OF COMMON AND CLASS B STOCK AFTER PREFERRED STOCK DIVIDENDS Basic income $ 14.48 $ 1.96 $ 0.82 $ 0.86 $ 1.23 $ 2.11 $ 0.93 $ 1.48 Diluted income 14.23 1.91 0.80 0.84 1.20 2.06 0.91 1.45 Cash dividends 0.42 0.42 0.42 0.46 0.385 0.42 0.42 0.42 FS-32 PricewaterhouseCoopers LLP Report of Independent Accountants --------------------------------- To the Board of Directors and Stockholders Ford Motor Company In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, stockholders' equity and cash flows present fairly, in all material respects, the financial position of Ford Motor Company and Subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP January 21, 1999