Item 1. Business
GENERAL
Ford Holdings, Inc. (the "Company" or "Ford Holdings") was incorporated on September 1, 1989 for the principal purpose of acquiring, owning and managing certain assets of Ford Motor Company ("Ford"). The Company's primary activities consist of consumer and commercial financing operations, insurance underwriting and equipment leasing. These activities are conducted through the Company's wholly owned subsidiaries, Associates First Capital Corporation and its subsidiaries ("The Associates"), USL Capital Corporation (formerly United States Leasing International, Inc.) and its subsidiaries ("USL Capital"), The American Road Insurance Company and its subsidiaries ("American Road"), Ford Motor Land Development Corporation and its subsidiaries ("Ford Land"), Ford Leasing Development Company and its subsidiaries ("Ford Leasing") and Ford Holdings Financing, Inc. ("Ford Financing").
The Associates' primary business activities are consumer finance, commercial finance and insurance underwriting. The Associates conducts its operations primarily through its principal operating subsidiary, Associates Corporation of North America ("ACONA").
The principal business of USL Capital is the leasing and financing of office and other business and commercial equipment, the leasing and management of rail cars and commercial auto fleets, the leasing and financing of commercial aircraft, industrial and energy facilities, and equipment financing for state and local governments.
American Road is principally engaged in underwriting insurance with respect to coverages for physical damage on vehicles financed through Ford Motor Credit Company ("Ford Credit"), a wholly owned subsidiary of Ford, credit life and credit disability insurance in connection with retail vehicle financing, and extended service plan products covering vehicle repairs on retail contracts. In addition, Ford Life Insurance Company ("Ford Life"), a wholly owned subsidiary of American Road, offers deferred annuities. American Road also has agreed to maintain Ford Life's surplus and capital at levels necessary to meet applicable insurance regulations.
Ford Land's principal business is real estate development. Ford Leasing's principal business is the leasing of dealership facilities to franchised Ford vehicle dealers.
Ford Financing's principal business is the leasing of certain commercial assets to Ford.
All the outstanding Common Stock of the Company, representing 75% of the combined voting power of all classes of capital stock of the Company, is owned, directly or indirectly, by Ford. The balance of the capital stock, consisting of shares of Flexible Rate Auction Preferred Stock (Exchange), Series A-K, Flexible Rate Auction Preferred Stock, Series L, M and N, Series A Cumulative Preferred Stock, Series B Cumulative Preferred Stock, Series C Cumulative Preferred Stock and Series D Cumulative Preferred Stock, accounts for the remaining 25% of the total voting power; none of the preferred stock is held, directly or indirectly, by Ford.
The principal executive offices of the Company are located at The American Road, Dearborn, Michigan 48121, and its telephone number is (313) 322-3000.
Item 1. Business (Continued)
BUSINESS OF THE COMPANY
As indicated above, the Company is a holding company and conducts its operations through its subsidiaries. The Company, through its subsidiaries, operates in three business segments: consumer finance, commercial finance and insurance underwriting. The consumer finance segment (which includes certain operations of The Associates) is principally engaged in making and investing in residential real estate-secured receivables, making secured and unsecured installment loans to individuals, purchasing consumer retail installment obligations, investing in credit card receivables, financing manufactured housing purchases and providing other consumer financial services. The commercial finance segment (which includes the operations of USL Capital, Ford Land, Ford Leasing, Ford Financing and certain operations of The Associates) is principally engaged in financing sales of transportation and industrial equipment, real estate development and leasing, and providing other financial services, including automobile club, mortgage banking and relocation services. The insurance segment (which includes the operations of American Road and certain operations of The Associates) is engaged in, among other things, underwriting property, casualty, credit life and disability insurance products, and offering deferred annuities.
The business of each of the Company's principal subsidiaries is presented separately below. Segment information for the Company is set forth in Note 17 of Notes to Financial Statements, included on page FH-20 of this Report.
THE ASSOCIATES
At December 31, 1994, The Associates had 1,473 branch offices in the United States and employed approximately 13,700 persons. The Associates' primary business activities are consumer finance, commercial finance and insurance underwriting. The Associates conducts its operations primarily through ACONA, its principal operating subsidiary.
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Item 1. Business (Continued)
Selected Financial Data. The following table sets forth selected financial information of The Associates (in millions):
- --------------- (a) Includes a net charge of $10 million representing the cumulative effects of changes in accounting principles.
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Item 1. Business (Continued)
Segment Data. The following table sets forth information by business segment of The Associates for the years ended December 31 (in millions):
- --------------- (a) Represents the gross profit of the insurance operation which is attributable to the business segment which produced the business. (b) Operating income is earnings before provision for income taxes and cumulative effects of changes in accounting principles. Operating income produced by the finance operations from the sale of the insurance operation's products is included in the respective finance operation. (c) Includes information pertaining to the financing of manufactured housing purchases which are managed by the commercial operation.
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Item 1. Business (Continued)
Consumer Finance. Consumer finance consists of making and investing in residential real estate-secured loans to individuals, making secured and unsecured installment loans to individuals, purchasing consumer retail installment obligations, investing in credit card receivables, financing manufactured housing purchases ("MHO") and providing other consumer financial services. In addition, The Associates offers insurance to its consumer finance customers.
Loans made to individuals are secured by mortgages on real property, by liens on personal property (the realizable value of which may be less than the amount of the loans secured) or are unsecured. At December 31, 1994, 77% of the gross outstanding balance of residential real estate-secured receivables was secured by first mortgages. At December 31, 1994, the gross consumer finance receivables included credit card receivables ($4.0 billion) owned or originated by Associates National Bank (Delaware), a subsidiary of The Associates.
The interest rates currently charged on all types of consumer finance receivables average approximately 17% simple interest per annum. At December 31, 1994, the interest rates charged on approximately 38% of the net consumer finance receivables outstanding varied during the term of the contract at specified intervals in relation to a base rate established at the time the loan was made. State laws establish maximum allowable finance charges for certain consumer loans; approximately 89% of the outstanding gross consumer finance receivables were either not subject to such state maximums, or if subject, such maximum finance charges did not, in most cases, materially restrict the interest rates charged. Original maturities of residential real estate-secured receivables average 149 months and original maturities of other consumer receivables, excluding credit card and MHO receivables, average 33 months. Original maturities of MHO receivables average 217 months.
Commercial Finance. Commercial finance consists of the purchase of time sales obligations and leases, direct leases and secured direct loans, and sales of other financial services, including automobile club, mortgage banking and relocation services. In addition, The Associates offers insurance to its commercial finance customers.
The types of equipment financed or leased are heavy-duty trucks, truck trailers, autos and other transportation equipment, construction equipment and machinery used in various manufacturing and distribution processes. Except for lease transactions in which The Associates owns the equipment, liens on the equipment financed secure the receivables. In many cases, The Associates obtains the endorsement or a full or limited repurchase agreement of the seller or the manufacturer of the goods, and in some cases, a portion of the purchase price of the installment obligations is withheld as a reserve.
At December 31, 1994, the interest rates charged on approximately 14% of the net commercial finance receivables were established to vary during the term of the contract in relation to a base rate. Commercial finance receivables are generally not subject to maximum finance charges established by state law, and where such restrictions apply, at the present time, they do not materially restrict the interest rates charged. The interest rates currently charged on all types of commercial finance receivables average approximately 9% simple interest per annum. Original maturities of the commercial receivables average 46 months.
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Item 1. Business (Continued)
Volume of Financing. The following tables set forth the gross volume of finance business by major categories and average size and number of accounts based on gross finance receivables volume (dollar amounts in millions):
- --------------- (a) Included in 1994 are $61 million of warehouse loan facilities purchased from First Collateral Services, Inc. and $416 million of credit card receivables purchased from Amoco Oil Company ("Amoco"). Included in 1993 are $182 million of gross residential real estate-secured and installment finance receivables attributable to the acquisition of Allied Finance Company and $216 million of credit card receivables purchased from Great Western Financial Corporation. Included in 1992 are $305 million of gross residential real estate-secured and installment finance receivables purchased from Signal Financial Corporation and $795 million of gross residential real estate-secured and installment finance receivables attributable to the acquisition of First Family Financial Services H.C., Inc. Included in 1991 are $2.7 billion of gross residential real estate-secured finance receivables and contracts for the purchase of manufactured housing purchased from Ford Credit and $337 million of gross installment finance receivables attributable to the acquisition of Kentucky Finance Co., Inc. Included in 1990 are $606 million in gross residential real estate-secured receivables and installment finance receivables attributable to the acquisition of Mellon Financial Services Corporation. (b) Included in 1993 are $597 million of gross heavy-duty truck and truck trailer finance receivables purchased from Mack Financial Corp. Included in 1992 are $57 million of gross industrial equipment finance receivables attributable to the acquisition of Trans-National Leasing, Inc. Included in 1991 are $931 million of gross industrial equipment finance receivables attributable to the acquisition of Chase Manhattan Leasing Company (Michigan), Inc. (renamed "Clark Credit").
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Item 1. Business (Continued)
- --------------- (a) Includes 5 million accounts pertaining to credit card receivables purchased from Amoco, which accounts had lower average balances than the remaining Associates receivables. (b) Excludes wholesale receivables.
During 1994, 25% of the total gross volume of consumer loans, excluding credit card receivables, was made to current creditworthy customers that requested additional funds. The average balance prior to making an additional advance was $10,150 and the average additional advance was $3,589.
Finance Receivables. The following tables set forth the amounts of gross finance receivables by major categories and average size and number of accounts (dollar amounts in millions):
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Item 1. Business (Continued)
- --------------- (a) Includes 3 million accounts pertaining to credit card receivables purchased from Amoco.
The ten largest customer accounts at December 31, 1994, other than accounts with affiliates, represented 9/10 of one percent of the total gross finance receivables outstanding. Of such ten accounts (all of which were current at December 31, 1994), four were secured by truck leasing arrangements, three were secured by construction equipment, one was secured by a manufacturer's endorsement and related to communications equipment, one was secured by manufactured housing and one was secured by auto leasing arrangements. At December 31, 1994, the largest gross balance outstanding in such accounts was $54 million and the average gross balance was $31 million.
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Item 1. Business (Continued)
Credit Loss and Delinquency Experience. The credit loss experience, net of recoveries, of the finance business is set forth in the following table (dollar amounts in millions):
An analysis of The Associates' allowance for losses on finance receivables is as follows (in millions):
The Associates maintains an allowance for losses on finance receivables at an amount which it believes is sufficient to provide adequate protection against future losses in the portfolios. The allowance is determined principally on the basis of historical loss experience, and reflects management's judgment of additional loss potential considering future economic conditions and the nature and characteristics of the finance receivables. Additions to the allowance are charged to the provision for losses on finance receivables. Collateral held for resale is not considered significant to total assets.
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Item 1. Business (Continued)
Finance receivables are charged to the allowance for losses when they are deemed to be uncollectible. Additionally, The Associates' policy generally provides for charge-off of various types of accounts on a contractual basis (described below). Consumer direct and other installment and credit card receivables are charged to the allowance for losses when they become 180 days delinquent. All other finance receivables are charged to the allowance for losses when any of the following conditions occur: (i) the related security has been converted or destroyed; (ii) the related security has been repossessed and sold or held for sale for one year; or (iii) the related security has not been repossessed and the receivable has become one year delinquent. A delinquent account is one on which the customer has not made a payment as contractually agreed. Extensions are granted on receivables from customers with satisfactory credit and with prior approval of management. Recoveries on losses previously charged to the allowance are credited to the allowance at the time the recovery is collected.
The following table shows total gross balances contractually delinquent 60 days and more by type of business at the dates indicated (dollar amounts in millions):
Insurance Underwriting. The Associates is engaged in the property and casualty and accidental death and dismemberment insurance business through Associates Insurance Company ("AIC") and in the credit life and credit accident and health insurance business through Associates Financial Life Insurance Company ("AFLIC"), principally for customers of the finance operations of The Associates. At December 31, 1994, AIC was licensed to do business in 50 states, the District of Columbia and Canada, and AFLIC was licensed to do business in 49 states and the District of Columbia. In addition, The Associates receives compensation for certain insurance programs underwritten by other companies.
The operating income produced by the finance operations' sale of insurance products is included in the respective finance operations' operating income.
The following table sets forth the net property and casualty insurance premiums written by major lines of business (in millions):
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Item 1. Business (Continued)
The following table sets forth the aggregate premium income relating to credit life, credit accident and health and accidental death and dismemberment insurance, and the life insurance in force, for the years indicated (in millions):
The following table summarizes the revenue of the insurance operation for all lines of business (in millions):
- --------------- (a) Includes compensation for insurance programs underwritten by other companies.
Competition and Regulation. The interest rates charged for the various classes of receivables of The Associates' finance business vary with the type of risk and maturity of the receivable and are generally affected by competition, current interest rates and, in some cases, governmental regulation. In addition to competition with finance companies, competition exists with, among others, commercial banks, thrift institutions, credit unions and retailers.
Consumer finance operations are subject to detailed supervision by state authorities under legislation and regulations which generally require finance companies to be licensed and which, in many states, govern interest rates and charges, maximum amounts and maturities of credit and other terms and conditions of consumer finance transactions, including disclosure to a debtor of certain terms of each transaction. Licenses may be subject to revocation for violations of such laws and regulations. In some states, the commercial finance operations are subject to similar laws and regulations. Customers may seek damages for violations of state and Federal statutes and regulations governing lending practices, interest rates and other charges. Federal legislation preempts state interest rate ceilings on first mortgage loans and state laws which restrict various types of alternative residential real estate-secured receivables, except in those states which have specifically opted out of such preemption. Certain Federal and state statutes and regulations, among other things, require disclosure of the finance charges in terms of an annual percentage rate, make credit discrimination unlawful on a number of bases, require disclosure of a maximum rate of interest on variable or adjustable rate mortgage loans, and limit the types of security that may be taken in connection with non-purchase money consumer loans. Federal and state legislation, in addition to that mentioned above, in the past has been, and from time to time may be, introduced which seeks to regulate the maximum interest rate and/or other charges on consumer finance receivables, including credit cards.
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Item 1. Business (Continued)
Associates National Bank (Delaware) ("ANB") is under the supervision of, and subject to examination by, the Office of the Comptroller of the Currency. In addition, ANB is subject to the rules and regulations of the Federal Reserve Board and the Federal Deposit Insurance Corporation ("FDIC"). Associates Investment Corporation, a Utah industrial loan company, is regulated by the FDIC and the Utah Department of Financial Institutions. Areas subject to regulation by these agencies include capital adequacy, loans, deposits, consumer protection, the payment of dividends and other aspects of operations.
The insurance business is subject to detailed regulation, and premiums charged on certain lines of insurance are subject to limitation by state authorities. Most states in which insurance subsidiaries of The Associates are authorized to conduct business have enacted insurance holding company legislation pertaining to insurance companies and their affiliates. Generally, such laws provide, among other things, limitations on the amount of dividends payable by any insurance company and guidelines and standards with respect to dealings between insurance companies and affiliates.
It is not possible to forecast the nature or the effect on future earnings or otherwise of present and future legislation, regulations and decisions with respect to the foregoing, or other related matters.
Other
In January 1995, Mr. Reece Overcash, Jr., Chairman of the Board of Directors of The Associates since 1979, passed away. Mr. Keith Hughes, formerly President of The Associates, was elected Chairman of the Board of Directors to replace Mr. Overcash.
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Item 1. Business (Continued)
USL CAPITAL
USL Capital, a diversified commercial leasing and financing organization, originally incorporated in 1956, was acquired by Ford in 1987 and was transferred to Ford Holdings in 1989. In November 1993, the corporation's name was changed from United States Leasing International, Inc. to USL Capital Corporation. USL Capital provides financing to commercial and governmental entities principally in the United States, including: (i) leasing and financing of office, manufacturing, and other general-purpose business equipment; (ii) leasing and management of commercial fleets of automobiles, vans, and trucks; (iii) leasing and financing of large-balance transportation equipment (principally commercial aircraft, rail and marine equipment); (iv) acting as owner-trustee for certain leveraged leases for other investors; (v) first-mortgage, intermediate-term financing of commercial properties; (vi) financing of essential-use equipment for state and local governments; and (vii) purchase of industrial development, private activity and housing bonds and investments in publicly traded and privately placed preferred stocks and senior and subordinated debt of public and private companies. Certain of these financing transactions are carried on the books of Ford affiliates. At December 31, 1994, USL Capital had 637 full-time employees.
Key Data. The following table sets forth certain data with respect to USL Capital's business for the periods ending on and as of the dates indicated (dollar amounts in millions):
- --------------- (a) Includes reduction of $3 million resulting from cumulative effect of adopting the new accounting standard on health care costs.
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Item 1. Business (Continued)
Credit Loss Experience. USL Capital reviews the credit of all prospective customers, and manages concentration exposure by customer, collateral type and geographic distribution. It establishes appropriate loss allowances based on the credit characteristics and the loss experience for each type of business, and also establishes additional reserves for specific transactions if it believes this action is warranted. Delinquent receivables are reviewed by management monthly, and are generally written down to expected realizable value when, in the opinion of management, they become uncollectible or when they become more than 180 days past due. Collection activities continue on accounts written off when management believes such action is warranted.
The table below summarizes certain information on USL Capital's allowance for doubtful accounts at December 31 of the years indicated (dollar amounts in millions):
Additions to the allowance for doubtful accounts for 1994 decreased by $17 million from 1993, primarily as a result of decreased write-offs as well as management's evaluation of the adequacy of the loss reserve. Deductions in 1994 decreased $5 million from 1993, primarily as a result of improved collection activities in the Business Equipment Financing business unit.
Total balances of accounts receivable over 90 days past due at year-end 1994 decreased $7 million over 1993 primarily because of the improved collections on aged accounts and the completion of foreclosure on an apartment complex, which was collateral for an $11 million note which was delinquent at December 31, 1993. These changes were offset in part by a $16 million note, collateralized by an aircraft, which became delinquent at the end of 1994. Substantial payment of the delinquent amount was received on this note in January 1995.
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Item 1. Business (Continued)
Residual Policy. The establishment and realization of residual values on finance, leveraged and operating leases are important elements of USL Capital's business. In general, finance and leveraged leases are non-cancelable leases in which the net lease payments over the term amortize the investment in the leased equipment down to the estimated value of equipment at lease expiration. Operating leases are usually of a shorter term and the lease payments by themselves are not sufficient to cover all costs and expenses. Full recovery of equipment cost is dependent upon selling or re-leasing the equipment.
Residual values are established upon acquisition of the equipment based upon the estimated value of the equipment at the time USL Capital expects to dispose of the equipment under finance and leveraged leases, and at the end of the equipment's expected useful life under operating leases. Periodically, USL Capital reviews its residual values, and if it determines there has been an other than temporary impairment in value, adjustments are made which result in an immediate charge to income and/or a reduction in earnings over the remaining term of the lease. Proceeds as a percentage of the adjusted residual values for finance and leveraged leases were 152% in 1994, 252% in 1993 and 129% in 1992. Proceeds as a percentage of the adjusted residual values for operating leases were 115% in 1994, 125% in 1993 and 115% in 1992.
Competition. In all of its financing programs, USL Capital competes with other leasing and finance companies, banks, lease brokers and investment banking firms who arrange for the financing and leasing of equipment, and manufacturers and vendors who sell, finance and lease their own products to customers.
AMERICAN ROAD
American Road was incorporated as a wholly owned subsidiary of Ford Credit in 1959 and was transferred to Ford Holdings in 1989. It is licensed in 50 states and the District of Columbia and in most provinces of Canada.
The operations of American Road consist primarily of underwriting floor plan insurance related to substantially all new vehicle inventories of dealers financed at wholesale by Ford Credit in the United States and Canada, credit life and disability insurance in connection with retail vehicle financing, and insurance related to retail contracts sold by automobile dealers to cover vehicle repairs. In addition, Ford Life, a wholly owned subsidiary of American Road, offers deferred annuities which are sold primarily through banks and brokerage firms. The obligations of Ford Life, including annuities, are guaranteed by American Road. American Road also has agreed to maintain Ford Life's surplus and capital at levels necessary to meet applicable insurance regulations.
The principal subsidiaries of American Road are Ford Life and Vista Life Insurance Company ("Vista Life"). Ford Life primarily offers annuities, credit life and disability insurance on vehicles and equipment financed at retail and Vista Life writes group credit life insurance and credit disability insurance on vehicles financed at retail.
Total premiums written by American Road and its subsidiaries during the last five years were as follows (in millions): 1994: $319; 1993: $309; 1992: $235; 1991: $379; and 1990: $437. The decrease in premiums written after 1990 resulted
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Item 1. Business (Continued)
primarily from (1) the conversion in October 1989 of a significant portion of the Extended Service Plan from an American Road insurance product to a Ford service contract and (2) the discontinuance in the second quarter of 1992 of Ford Credit's purchase of collateral protection insurance from American Road. The 1993 increase in premiums written resulted primarily from higher vehicle sales and higher premium rates for floor plan insurance products. The 1994 increase in premiums written reflected higher vehicle sales.
The following table summarizes the revenues and net income of American Road (in millions):
- --------------- (a) Includes an increase of $26 million for non-recurring recoveries of income taxes in 1994 from prior years. (b) Includes an increase of $16 million resulting from cumulative effect of adopting new accounting rules on income taxes.
The detail of premiums earned by American Road was as follows (in millions):
The insurance industry is highly regulated by the states with respect to premium rates, policy terms, dividends, investments and many other aspects of the insurance business. American Road competes with many insurance companies and is not a significant factor in car and truck insurance underwriting. The principal competitors of Ford Life and Vista Life are life insurance companies that specialize in credit life and credit disability insurance and insurance companies that offer deferred annuities.
FORD LAND
Ford Land was formed by Ford in 1970 to implement a master plan for the development of 2,360 acres of vacant land in Dearborn, Michigan. Since then, Ford Land has expanded its activities to include non-automotive real estate development and management and development of land and facilities related to Ford operations. See Item 2.
Item 2. Properties
The furniture, equipment and other physical property owned by the Company and its subsidiaries are not significant in relation to total assets. Ford Land and its wholly owned subsidiaries own or lease real property consisting of 3,692 acres of land and 7.0 million square feet of improvements having a net book value of $595 million. Of the real property owned or leased by Ford Land and its subsidiaries, 1,153 acres of land and 3.9 million square feet of improvements are located within the Fairlane Development, a commercial, residential and recreational community being developed by Ford Land in Dearborn and Allen Park, Michigan. The balance of the properties are located in California, Colorado, New Jersey, Massachusetts, Ohio and Virginia. The finance operations of the Company's subsidiaries generally are conducted on leased premises under short-term operating leases normally not exceeding five years.
Item 3.
Item 3. Legal Proceedings
Because the finance and insurance businesses involve the collection of numerous accounts, the validity and priority of liens, and loss or damage claims under many types of insurance policies, the finance and insurance subsidiaries of the Company are plaintiffs and defendants in numerous legal proceedings, including class action lawsuits. Neither the Company nor any of its subsidiaries is a party to, nor is the property thereof the subject of, any pending legal proceedings other than (i) ordinary routine litigation or (ii) litigation which should not have a material adverse impact on the consolidated financial position of the Company. There are no proceedings pending or, to the Company's knowledge, threatened by or on behalf of any administrative board or regulatory body which would materially affect or impair the right of the Company or any of its subsidiaries to carry on any of their respective businesses.
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8Item 4.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
All of the outstanding Common Stock of the Company is owned directly or indirectly by Ford as of March 1, 1995. There is no market for the Company's Common Stock.
Dividends on the Common Stock will be paid when declared by the Board of Directors. No dividends have been paid to date.
Item 6.
Item 6. Selected Financial Data
The following table sets forth selected consolidated financial information regarding the operating results and financial position of the Company and its subsidiaries. The amounts shown for the years ended December 31, 1990 through 1994 represent the consolidated operating results and financial position of the subsidiaries of the Company then owned, directly or indirectly, by Ford. The reorganizations of these subsidiaries, which occurred in October 1989, have been accounted for at historical cost in a manner similar to a pooling-of-interests combination. The information should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited consolidated financial statements and accompanying notes to financial statements included in this Report.
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Item 6. Selected Financial Data (Continued)
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Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
The Company's net income in 1994 was $609 million, up $98 million from the $511 million earned in 1993. The increase reflected primarily higher levels of earning assets and lower credit and insurance losses.
Consolidated results reflect the acquisition-related costs of purchasing The Associates, including interest expense, goodwill, and adjustments to record the fair value of net assets acquired. These adjustments will vary over time as the acquired assets and liabilities liquidate.
The consolidated financial statements on pages FH-1 through FH-20 should be read as an integral part of this review.
RESULTS OF OPERATIONS: 1994 COMPARED WITH 1993
The Associates earned a record $548 million in 1994, up $78 million from 1993. The increase reflected higher levels of earning assets and improved net interest margins. During 1994 and 1993, The Associates made acquisitions of finance businesses and finance receivables, as described in Note 4 of the consolidated financial statements.
USL Capital earned a record $109 million in 1994, up $32 million from 1993. The increase reflected higher earning assets, lower operating costs, and the non-recurrence of the one-time tax adjustment in 1993 for increased U.S. tax rates.
American Road earned $58 million in 1994, compared with $79 million in 1993. The decrease reflected primarily reduced investment income from capital gains, partially offset by improved underwriting experience in extended service plans and a one-time decrease to the 1994 income tax provision. Premiums written by American Road were $319 million in 1994, compared with $309 million a year ago.
Ford Land, Ford Leasing and Ford Financing, on a combined basis, earned $12 million in 1994, compared with $11 million in 1993.
HISTORICAL REFERENCE: 1993 COMPARED WITH 1992
The Company's net income in 1993 was $511 million, up $128 million from the $383 million earned in 1992. The increase reflected higher levels of earning assets and lower credit and insurance losses.
In 1992, the Company adopted new accounting standards for postretirement benefits (principally retiree health care) and income taxes that resulted in a one-time increase in net income in 1992 of $26 million. Excluding the accounting changes, the Company earned $357 million in 1992. The following discussion of the results of operations excludes the one-time effects associated with the accounting changes.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
The Associates earned $470 million in 1993, up $77 million from 1992. The increase resulted primarily from improved credit loss performance and higher levels of earning assets, partially offset by higher operating costs incurred to service higher receivables levels. During 1993 and 1992, The Associates made acquisitions of finance businesses and finance receivables, as described in Note 4 of the consolidated financial statements.
USL Capital earned $77 million in 1993, up $17 million from 1992. The improvement resulted primarily from higher earning assets and continued operating cost reductions.
American Road earned $79 million in 1993, compared with $47 million in 1992. The increase resulted primarily from improved underwriting experience in extended service plan and floor plan products, offset partially by lower investment income. Premiums written by American Road were $309 million in 1993, compared with $235 million in 1992. The increase in premiums written reflected higher vehicle sales and higher premium rates for floorplan insurance products.
Ford Land and Ford Leasing, on a combined basis, earned $11 million in 1993, compared with a loss of $3 million in 1992.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1994, Ford Holdings (excluding subsidiaries) had outstanding debt of $1.9 billion, all of which was long-term. All of Ford Holdings debt held by nonaffiliated persons is guaranteed by Ford. Ford Holdings had no contractually committed lines of credit at December 31, 1994. At December 31, 1994, Ford Holdings had outstanding shares of its Series A through N Flexible Rate Auction Preferred Stock and Series A through D Cumulative Preferred Stock with an aggregate liquidation preference of $1,875 million, as described in Note 12 of the consolidated financial statements.
The Associates' primary sources of funds include sales of commercial paper, issuance of unsecured intermediate-term debt in the public and private markets, and credit facilities with commercial banks. At December 31, 1994, The Associates had contractually committed lines of credit with banks of $3.8 billion, with various maturities ranging from January 4, 1995 to December 31, 1995, none of which was utilized at December 31, 1994. Also, at December 31, 1994, The Associates had $4.4 billion of contractually committed revolving credit facilities with banks, with maturity dates ranging from February 1, 1995 through January 1, 2000, and $1 billion of contractually committed receivables sale facilities, $500 million of which are available through April 30, 1995 and $500 million of which are available through April 15, 1997; none of these facilities was in use at December 31, 1994. Neither Ford nor Ford Holdings guarantees the debt of The Associates. Payment of dividends by ACONA, the primary operating subsidiary of The Associates, is restricted under the provisions of certain debt agreements. (See Note 13 of the consolidated financial statements for additional information regarding dividend restrictions applicable to The Associates.) Profitability of The Associates is not related to the business outlook for Ford, and this situation is not expected to change in the future.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
USL Capital's principal sources of funds include sales of commercial paper and issuance of unsecured medium-term debt. At December 31, 1994, USL Capital had $1.5 billion of contractually committed credit facilities, 69% of which are available through September 1999. These facilities included $120 million of contractually committed receivables sale facilities, of which 100% were in use at December 31, 1994. Neither Ford nor Ford Holdings guarantees the debt of USL Capital, although USL Capital's existing credit lines require that Ford maintain at least a 75% direct or indirect ownership interest in USL Capital. Profitability of USL Capital is not significantly related to the business outlook for Ford, and this situation is not expected to change in the future.
American Road's principal sources of funds are insurance premiums, annuity deposits, and investment income. American Road had no debt or credit lines at December 31, 1994. From an operating standpoint, American Road's profitability is closely related to the business conditions affecting Ford and Ford Credit and the level of insurance premiums generated by American Road depends, to a large extent, on the level of Ford vehicle sales and the extent to which Ford Credit finances these sales. (See Note 13 of the consolidated financial statements for additional information regarding dividend restrictions applicable to American Road.)
Ford Land is capitalized principally through a combination of unsecured long-term debt and mortgages. Ford Holdings has guaranteed substantially all of Ford Land's unsecured long-term debt. The mortgages are collateralized by land and buildings. A majority of Ford Land's completed real estate projects were unmortgaged as of December 31, 1994. Ford Land's primary business is real estate development, which is not directly related to the business of Ford, although Ford activities are among the tenants of Ford Land's developed properties.
Ford Leasing is capitalized principally through a combination of short-term notes payable to Ford and long-term debt. Either Ford or Ford Holdings has guaranteed substantially all of Ford Leasing's long-term debt. Ford Leasing's primary business is leasing dealership facilities to Ford dealers. Under an agreement with Ford, Ford Leasing is reimbursed for certain expenses and any loss incurred in dealership facility operations.
Ford Financing had no debt or credit lines at December 31, 1994.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Not required.
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PART III
Item 10.
Item 10. Directors and Executive Officers
The following table sets forth certain information as of March 1, 1995, regarding the directors and executive officers of the Company:
(a) Mr. Gilman was elected a director in February 1995 to replace W. F. Blood who had resigned. (b) Mr. Rintamaki has held the position of Secretary since July of 1993 and was elected Vice President - General Counsel in November 1994.
Except for Messrs. Toffey and Richardson, all of the above officers and directors have been employed by Ford or its subsidiaries in one or more executive capacities during the past five years. H. J. Toffey, Jr. was a Managing Director of First Boston, Inc. until his retirement in 1986. D. E. Richardson was the Chairman of the Board of Directors of Manufacturers National Corporation from October 1973 until his retirement in April 1990. Mr. Richardson serves as a director of The Detroit Edison Company, Tecumseh Products Company and the Automobile Club of Michigan.
Mr. Whipple serves as a director of CMS Energy Corporation; Consumers Power Company; Ford Credit; and USL Capital and is a Trustee of JPM Advisor Funds. Mr. Macdonald serves as a director of The Hertz Corporation. Mr. McCammon serves as a director of Ford Credit and The Hertz Corporation.
Based on Company records and other information, the Company believes that all SEC filing requirements applicable to its directors and officers with respect to the Company's fiscal year ended December 31, 1994 were complied with except that, due to an administrative error by the Company, the initial Form 3 report for Mr. Law (who does not own any stock of the Company) was not timely filed.
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Item 11.
Item 11. Executive Compensation
The directors and executive officers of the Company do not and will not receive any compensation from the Company except that directors of the Company who are not otherwise employed by Ford or another affiliate of the Company will be entitled to director fees in amounts established from time to time by the Board. Prior to January 1, 1995, each director who was not an employee of Ford or another affiliate of the Company was paid an annual fee of $15,000. Thus in 1994, Messrs. Richardson and Toffee each received annual fees of $15,000. None of the other directors received an annual fee in 1994. Effective January 1, 1995, each director who is not an employee of Ford or another affiliate of the Company will be paid an annual fee of $18,000. All directors and officers are reimbursed for expenses reasonably incurred in connection with their services on behalf of the Company. None of the directors and executive officers of the Company receives or will receive any additional compensation from Ford or any of its affiliates for services rendered on behalf of the Company. The Company compensates Ford for the time during which any salaried officer or employee of Ford performs services for the Company. See Item 13.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security ownership of certain beneficial owners (as of March 1, 1995).
(b) Security ownership of management (as of March 1, 1995).
None of the Company's or any of its parents or subsidiaries equity securities is beneficially owned by the Company's directors (and nominees) or officers, except as shown below:
- --------------- (*) Amount owned is less than 0.1% of class. (a) Mr. Richardson owns 4,000 Depositary Shares, each representing 1/4,000 of a share of Series A Cumulative Preferred Stock.
- 25 -
Item 12. Security Ownership of Certain Beneficial Owners and Management (continued)
- --------------- (*) Amount owned is less than 0.1% of class. (a) Of the number of shares listed, indicates those with respect to which such person(s) has the right to acquire beneficial ownership within 60 days. (b) Of the number of shares listed, Mr. Macdonald disclaims beneficial ownership of 596 shares. (c) Mr. Macdonald owns 1,000 Depositary Shares, each representing 1/1,000 of a share at Ford Motor Company Series A Cumulative Convertible Preferred Stock. Each Depositary Share is convertible into 3.2654 shares of Ford Motor Company Common Stock. In addition, Mr. Macdonald has disclaimed beneficial ownership of an additional 40 Depositary Shares.
- 26 -
Item 13.
Item 13. Certain Relationships and Related Transactions
Ford is the direct or indirect beneficial owner of all of the outstanding shares of Common Stock of the Company, which represent 75% of the total voting power of the outstanding capital stock of the Company. As majority stockholder, Ford is in a position to cause the election of a majority of the Board of Directors of the Company and to control the Company's affairs.
The Company, Ford and Ford Credit also maintain a number of financial and administrative arrangements and regularly engage in transactions with each other. These arrangements include management services agreements between the Company and Ford and the Company and Ford Credit ("Management Services Agreements") pursuant to which, upon the reasonable request of the Company, certain employees of Ford and Ford Credit work on the affairs of the Company and its subsidiaries, so as to enable the Company to continue to conduct and operate the business and affairs of the Company and to provide other services required by the Company. The services provided for under the Management Services Agreements include, but are not necessarily limited to, accounting, finance, treasury, systems, credit, personnel (including administration of pension and other benefit plans), purchasing, engineering, legal, tax, and other technical and professional support, including Ford employees who serve as executive officers of the Company and/or its subsidiaries.
Under the Management Services Agreements, the Company reimburses Ford or Ford Credit, as appropriate, for the costs of the services provided to the Company or its subsidiaries by Ford or Ford Credit, as the case may be. Presently, such costs include an allocation of the total compensation (including benefits) and overhead charges related to such employees, based on the time spent in rendering services under the Management Services Agreements, and in cases where the services are provided for purposes other than to enable the Company to provide, in turn, a service to Ford or Ford Credit, a reasonable markup on such costs. Out-of-pocket expenses incurred by Ford or Ford Credit under the Management Services Agreements also are reimbursed by the Company. The Associates also has similar services agreements with the various Ford subsidiaries that acquired The Associates' former foreign subsidiaries.
Certain of the arrangements and agreements between the Company (and/or its subsidiaries) and Ford (and its subsidiaries) were established by Ford prior to the Company's formation and thus were not the result of direct negotiations between Ford and the Company. The Company believes, however, that all such arrangements and agreements are fair and reasonable.
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PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
Ford Holdings, Inc. and Subsidiaries
Report of Independent Accountants.
Consolidated Statement of Income, for the years ended December 31, 1994, 1993 and 1992.
Consolidated Balance Sheet, December 31, 1994 and 1993.
Consolidated Statement of Cash Flows, for the years ended December 31, 1994, 1993 and 1992.
Consolidated Statement of Stockholders' Equity, for the years ended December 31, 1994, 1993 and 1992.
Notes to Financial Statements.
The Report of Independent Accountants, Financial Statements and Notes to Financial Statements listed above are filed as part of this Report and are as set forth on pages FH-1 through FH-20 immediately following the signature pages of this Report.
(a) 2. Financial Statement Schedules
The Financial Statement Schedule listed above is filed as part of this Report and is as set forth on pages FSS-1 and FSS-2 immediately following page FH-20. The schedules not filed are omitted because the information required to be contained therein is disclosed elsewhere in the financial statements or the amounts involved are not sufficient to require submission.
- 28 -
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (Continued)
(a) 3. Exhibits
- 29 -
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (Continued)
- 30 -
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (Continued)
- --------------- * Incorporated by reference as an exhibit hereto.
(b) Reports on Form 8-K
The Registrant did not file any Current Reports on Form 8-K during the quarter ended December 31, 1994.
- 31 -
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
FORD HOLDINGS, INC.
By: /s/Eric A. Law ----------------------------- Eric A. Law Vice President-Controller (principal accounting officer)
Date: March 20, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
- 32 -
- 33 -
[COOPERS & LYBRAND LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders Ford Holdings, Inc.
We have audited the consolidated balance sheet of Ford Holdings, Inc. and Subsidiaries at December 31, 1994 and 1993, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1994, and the financial statement schedule listed in Item 14(a) of this Form 10-K. These financial statements and financial statement schedule are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ford Holdings, Inc. and Subsidiaries at December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
As discussed in Notes 9 and 11 to the consolidated financial statements, the Company changed its method of accounting for income taxes and postretirement benefits other than pensions in 1992.
/s/ Coopers & Lybrand L.L.P.
400 Renaissance Center Detroit, Michigan 313-446-7100 January 27, 1995
FH-1
The accompanying notes are part of the financial statements.
FH-2
- --------------- *Less than $50,000
The accompanying notes are part of the financial statements.
FH-3
The accompanying notes are part of the financial statements.
FH-4
- --------------- *Less than $50,000
The accompanying notes are part of the financial statements.
FH-5
Ford Holdings, Inc. and Subsidiaries
Notes to Financial Statements
NOTE 1. Accounting Policies
Principles of Consolidation
The consolidated financial statements include Ford Holdings and all majority-owned subsidiaries (the "company"). Ford Holdings, Inc. ("Ford Holdings") is a wholly-owned subsidiary of Ford Motor Company ("Ford"). The company's wholly-owned subsidiaries include Associates First Capital Corporation and its subsidiaries ("The Associates"), The American Road Insurance Company and its subsidiaries ("American Road"), USL Capital Corporation (formerly United States Leasing International, Inc.) and its subsidiaries ("USL Capital"), Ford Motor Land Development Corporation and its subsidiaries ("Ford Land"), Ford Leasing Development Company and its subsidiaries ("Ford Leasing"), and Ford Holdings Financing, Inc. ("Ford Financing"). Investments in certain partnerships and affiliates that are 50% or less owned are included in the consolidated financial statements on an equity basis.
Revenue Recognition
Revenue from finance receivables and direct financing leases is recognized over the term of the contract using the interest method. Revenue from operating leases is recognized ratably over the term of the lease. Insurance premiums are recorded as unearned premiums when written and are subsequently recognized in income over the term of the related insurance contracts. The methods of recognizing premium revenue are related to amounts at risk and include historical loss experience, pro rata, and sum-of-the-digits bases.
Derivative Financial Instruments
The company and many of its subsidiaries have entered into agreements to manage exposures to fluctuations in foreign exchange and interest rates. All derivative financial instruments are classified as "held for purposes other than trading"; company policy specifically prohibits the use of derivatives for speculative purposes.
Certain subsidiaries of the company issue debt denominated in foreign currencies. Foreign currency swap agreements are used to manage foreign exchange exposure. Gains and losses on the foreign currency swap agreements are recognized during the period of the related transactions.
Certain subsidiaries of the company issue debt and other payables for which the maturity and interest rate structure differs from the invested assets to ensure continued access to capital markets and to minimize overall borrowing costs. Agreements to manage interest rate fluctuations include interest-rate swap agreements and, to a lesser extent, interest rate cap agreements. The differential paid or received on interest-rate agreements is recognized as an adjustment to interest expense in the period.
Cash Equivalents
The company considers all highly-liquid investments purchased with a maturity of three months or less to be cash equivalents. The book value of these investments approximates fair value because of the short maturity.
Goodwill
Goodwill, representing the excess of the purchase price over the fair value of the net assets primarily from the acquisitions of The Associates by Ford Holdings and of USL Capital by Ford, is being amortized using the straight-line method over 40 years. 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 considers projected future operating results, trends and other circumstances in making such evaluations.
FH-6
NOTE 1. Accounting Policies (Cont'd)
Insurance Claims
A liability is provided for reported claims and for claims that have been incurred but not reported. The estimate of the liability for claims that have been incurred but not reported is based on prior experience and insurance in-force.
Annuity Contracts
The liability for annuity contracts reflected deposits received and interest credited, less related withdrawals. The weighted-average interest rate on annuity contracts outstanding at December 31, 1994 and 1993 was 6.3% and 6.2%, respectively. Interest rates offered are initially guaranteed for periods of either one or five years. Interest credited to annuity account balances is recognized as expense; surrender charges are recognized as a reduction of interest credited to annuitants. The fair value of annuity contracts at December 31, 1994 and 1993 approximated book value because the contractual interest rate due holders is reset annually for more than 97% of contracts outstanding.
NOTE 2. Reinsurance Activity
A portion of the physical damage and credit life and disability insurance business of the company relates to reinsurance agreements with unaffiliated insurance companies. Amounts added to or deducted from accounts in connection with insurance assumed or ceded were as follows (in millions):
The company remains contingently liable with respect to insurance ceded should the reinsurer be unable to meet the obligation assumed under the reinsurance agreement. Amounts recoverable from reinsurers in 1994 and 1993 were $7 million each year.
NOTE 3. Investments in Securities
The company adopted Statement of Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments in Debt and Equity Securities," as of January 1, 1994. The effect of this change in accounting principle on the company's financial statements was not material.
Trading securities are recorded at fair value, with unrealized gains and losses included in income. Available-for-sale securities are recorded at fair value, with unrealized gains and losses excluded from income and reported in a separate component of stockholders' equity, net of taxes. Held-to-maturity securities are recorded at amortized cost. The first-in, first-out basis of cost is generally used in determining realized gains and losses; realized gains and losses are included in investment income. The purchases, sales and maturities of trading securities are included in cash flows from operating activities. The purchases, sales and maturities of available-for-sale and the purchases and maturities of held-to-maturity securities are included in cash flows from investing activities.
FH-7
NOTE 3. Investments in Securities (Cont'd)
The fair value of most securities was estimated based on quoted market prices. For those securities for which there were no quoted market prices, the estimate of fair value was based on similar types of securities that are traded in the market.
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.
Investments in securities at December 31, 1994 were as follows (in millions):
The amortized cost and fair value of investments in available-for-sale securities and held-to-maturity securities at December 31, 1994, by contractual maturity, were as follows (in millions):
For trading securities, the net unrealized loss included in income during 1994 was $4 million.
Proceeds from sales of available-for-sale securities were $8.9 billion in 1994; gross gains of $37 million and gross losses of $57 million were realized on those sales. The net unrealized loss, net of taxes, included in stockholders' equity was $155 million at December 31, 1994.
Other securities classified as cash equivalents were $927 million and $740 million at December 31, 1994 and 1993, respectively, and consisted primarily of short-term time deposits, corporate securities, and debt securities issued by the U.S. government and agencies.
At December 31, 1993, investments in debt securities were recorded at amortized cost because of the ability to hold such securities until maturity and the intent to hold them for the foreseeable future. Marketable equity securities were recorded at fair value, with the net unrealized gain net of tax recorded directly to stockholders' equity.
FH-8
NOTE 3. Investments in Securities (Cont'd)
Investments in debt securities at December 31, 1993 were as follows (in millions):
The book value and fair value of investments in debt securities at December 31, 1993, by contractual maturity, were as follows (in millions):
Proceeds from sales of investments in debt securities were $11.1 billion in 1993 and $9.9 billion in 1992. In 1993, gross gains of $112 million and gross losses of $20 million were realized on those sales; gross gains of $90 million and gross losses of $28 million were realized in 1992.
The cost of marketable equity securities at December 31, 1993 was $160 million. In 1993, gross unrealized gains totaled $66 million and gross unrealized losses totaled $5 million.
NOTE 4. Finance Receivables
Finance receivables at December 31 were as follows (in millions):
The estimated contractual maturities of finance receivables outstanding at December 31, 1994 were as follows (in millions):
FH-9
NOTE 4. Finance Receivables (Cont'd)
Estimated maturities were based on contractual terms and do not give effect to possible prepayments or renewals.
The fair value of most receivables was estimated by discounting future cash flows using an estimated discount rate which 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.
Acquisitions
During 1994, 1993 and 1992, the company made acquisitions of finance businesses and finance receivables, the most significant of which were as follows:
In December 1994, The Associates acquired the assets of First Collateral Services, Inc., principally consisting of warehouse loan facilities extended to mortgage brokers secured by mortgage contracts. The fair value of assets acquired and liabilities assumed was $62 million and $3 million, respectively. The transaction was accounted for as a purchase.
In September 1994, The Associates acquired the credit card portfolio and certain other assets of Amoco Oil Company. The fair value of assets acquired totaled $426 million. The transaction was accounted for as a purchase.
In September 1993, The Associates acquired the credit card portfolio of Great Western Financial Corporation. The outstanding balances totaled $216 million.
In September 1993, The Associates purchased the assets of Mack Financial Corporation, the financing division of Mack Trucks, Inc., consisting of $552 million of net commercial finance receivables, principally secured by heavy-duty trucks and truck trailers. The fair value of assets acquired and liabilities assumed was $587 million and $380 million, respectively. The transaction was accounted for as a purchase.
In April 1993, The Associates purchased the stock of Allied Finance Company, with assets primarily consisting of $146 million of net consumer finance receivables, principally comprised of residential real estate-secured, direct installment and indirect installment receivables. The fair value of assets acquired and liabilities assumed was $197 million and $112 million, respectively. The transaction was accounted for as a purchase.
In December 1992, The Associates purchased the stock of Trans-National Leasing, Inc. Approximately $48 million of net commercial finance receivables relating to the financing of fleet vehicles was acquired in the transaction. The fair value of assets acquired and liabilities assumed was $52 million and $45 million, respectively. The transaction was accounted for as a purchase.
In November 1992, The Associates purchased substantially all of the assets of First Family Financial Services H. C., Inc., including $546 million of net consumer finance receivables, principally residential real estate-secured and direct installment receivables. The fair value of assets acquired and liabilities assumed was $697 million and $543 million, respectively. The transaction was accounted for as a purchase.
In April 1992, The Associates purchased from Signal Financial Corporation $290 million of net consumer finance receivables, consisting primarily of direct installment and residential real estate-secured receivables. The fair value of assets acquired and liabilities assumed was $303 million and $2 million, respectively. The transaction was accounted for as a purchase.
FH-10
NOTE 5. Investments in Direct Financing Leases
Investments in direct financing leases at December 31 were as follows (in millions):
Minimum direct financing lease rentals are contractually due as follows (in millions): 1995 - $1,509; 1996 - $1,207; 1997 - $782; 1998 - $540; thereafter - - $1,530.
The estimated residual values represent proceeds expected to be received from the sale of equipment leased under direct financing leases.
NOTE 6. Investments in Operating Leases
Investments in equipment operating leases at December 31 were as follows (in millions):
Future minimum equipment operating lease rentals are contractually due as follows (in millions): 1995 - $154; 1996 - $98; 1997 - $54; 1998 - $26; thereafter - $28. Revenues from equipment operating leases, included in financing revenues, were as follows (in millions): 1994 - $218; 1993 - $189; 1992 - $168. The cost of equipment under operating leases is capitalized and depreciated over the lease term, or useful life, primarily on a straight-line basis. Depreciation expense on these operating leases was as follows (in millions): 1994 - $122; 1993 - $131; 1992 - $159.
Investments in real estate operating leases at December 31 were as follows (in millions):
Future minimum real estate operating lease rentals are contractually due as follows (in millions): 1995 - $35; 1996 - $30; 1997 - $28; 1998 - $26; thereafter - $80. Revenues from real estate operating leases are included in real estate rental income. The cost of real estate operating leases is capitalized and depreciated on a straight-line basis over the useful life of the real estate asset. Depreciation expense on these operating leases was as follows (in millions): 1994 - $26; 1993 - $23; 1992 - $23.
FH-11
NOTE 6. Investments in Operating Leases (Cont'd)
The company, as lessee, leases certain office facilities, equipment, land, and dealership facilities under operating leases for subsequent sublease. Rental expense and sublease income, respectively, for all operating leases were as follows (in millions): 1994 - $64 and $61; 1993 - $58 and $56; 1992- $57 and $54.
NOTE 7. Allowances for Credit Losses
Allowances for credit losses are established as required based on historical experience. Other factors that affect collectibility also are evaluated, and additional amounts may be provided.
Finance receivables and lease investments are charged to the allowances for credit losses when an account is deemed to be uncollectible, taking into consideration the financial condition of the borrower, the value of the collateral, recourse to guarantors and other factors. In addition, company policy generally provides for charge-off of various types of accounts on a contractual basis as follows: consumer direct and other installment and credit card receivables, are charged to the allowance for losses when the receivable becomes six months delinquent. All other finance receivables and lease investments are charged to the allowances for losses when any of the following conditions occur: (i) the related security has been converted or destroyed; (ii) the related security has been repossessed and sold or held for sale for one year; or (iii) the related security has not been repossessed and the receivable has become contractually one year delinquent. Recoveries on losses previously charged to the allowances are credited to the allowance at the time the recovery is collected.
Changes in the allowances for credit losses were as follows (in millions):
NOTE 8. Deferred Policy Acquisition Costs
Certain costs of acquiring insurance contracts are deferred and amortized over the terms of the related contracts on the same bases on which the premiums are earned. Changes in deferred policy acquisition costs were as follows (in millions):
FH-12
NOTE 9. Income Taxes
The provision for income taxes was as follows (in millions):
--------------- *Excludes cumulative effects of changes in accounting principles
A reconciliation of the provision for income taxes compared with the amounts at the U.S. statutory tax rate is shown below (in millions):
--------------- *Excludes cumulative effects of changes in accounting principles
The company adopted Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes," as of January 1, 1992. The adoption of SFAS 109 changed the method of accounting for income taxes from the deferred method using Accounting Principles Board Opinion No. 11 to an asset and liability approach. The cumulative effect of this change in accounting principle increased 1992 net income by $51 million.
Under SFAS 109, deferred income taxes reflect the estimated tax effect of temporary differences between assets and liabilities for financial reporting purposes and those amounts as measured by tax laws and regulations. The components of deferred income tax assets and liabilities at December 31 were as follows (in millions):
FH-13
NOTE 10. Debt
Debt at December 31 was as follows (in millions):
--------------- *Excludes the effect of interest-rate swap agreements
The fair value of debt was estimated based on quoted market prices or current rates for similar debt with the same remaining maturities.
The average remaining term of commercial paper was 17 days and 24 days at December 31, 1994 and 1993, respectively.
Long-term debt at December 31, 1994, including amounts payable within one year, matures as follows (in millions): 1995 - $2,505; 1996 - $3,591; 1997 - $4,247; 1998 - $2,014; 1999 - $2,372; thereafter - $5,541. The interest portion of capital lease obligations was $1 million at December 31, 1994.
Secured indebtedness is collateralized by mortgages on land and buildings of approximately $99 million and by rentals receivable and rental equipment of approximately $10 million, which are included in investments in leases. At December 31, 1994, warrants were outstanding to purchase $155 million aggregate principal amount of senior notes at specified dates between 1995 and 1999.
Included in long-term debt at December 31, 1994 and December 31, 1993 were obligations of $17,325 million and $15,325 million, respectively, with fixed interest rates and $440 million and $443 million, respectively, with variable interest rates (generally based on LIBOR or other short-term rates).
Agreements to manage exposures to fluctuations in interest rates, which include primarily interest-rate swap agreements, did not materially change the overall weighted-average rate on long-term debt and effectively decreased the obligations subject to variable interest rates to $305 million at December 31, 1994. In addition, the weighted-average interest rate on short-term debt did not materially change as a result of these agreements.
At December 31, 1994, Ford guaranteed all of Ford Holdings' debt held by nonaffiliated persons, totaling $1,867 million, and $4 million of Ford Leasing's debt.
At December 31, 1994, the company had contractually committed revolving credit facilities with banks of $5.8 billion, none of which were utilized. Maturity dates for these facilities ranged from February 1995 through January 2000. Also, at December 31, 1994, the company had contractually committed lines of credit with banks of $3.8 billion, none of which were utilized. Maturity dates for these facilities ranged from January 1995 through December 1996. In addition, the company had $1.1 billion of contractually committed receivables sale facilities, of which about 11% were in use at December 31, 1994. Some of these agreements contain certain provisions related to the continuation of Ford's direct or indirect ownership in the company.
FH-14
NOTE 11. Employee Retirement Benefits
Employee Retirement Plans
The Associates sponsors various defined benefit pension plans, which together cover substantially all permanent employees who meet certain eligibility requirements.
The Associates' pension expense was as follows (in millions):
The status of these plans for The Associates at December 31 was as follows (in millions):
USL Capital sponsors a defined contribution retirement plan which covers substantially all of its employees. The combined contribution for profit sharing and deferred compensation is limited to 10% of a participant's qualified earnings. Under the profit sharing p contributions are determined as 6.9% of each covered participant's qualified earnings, plus an additional 5.7% of earnings above the social security maximum taxable amount. Profit sharing cost represents contributions minus forfeited amounts of terminated participants. Under the deferred compensation part, contributions (cost) are determined as 75 cents per dollar for the first 3% and 25 cents per dollar on the next 3% of deferred compensation up to a maximum of 6% of a participant's compensation. The amount charged to operating expenses related to USL Capital's retirement plan was as follows (in millions): 1994 - $3; 1993 - $4; 1992 - $4.
Other subsidiaries of the company do not have employees but purchase technical and administrative services from Ford, the cost of which includes retirement benefits. Retirement costs included in such service fee billings from Ford were not significant.
Postretirement Health Care and Life Insurance Benefits
The Associates sponsors unfunded plans that provide selected health care and life insurance benefits to substantially all retired employees who have met certain eligibility requirements; however, the benefits of the plan may be modified or terminated at the discretion of The Associates.
FH-15
NOTE 11. Employee Retirement Benefits (Cont'd)
USL Capital sponsors unfunded plans that provide selected health care and life insurance benefits to retired employees, the cost of which is shared between USL Capital and the retiree. The accounting for the health care plan anticipates future cost-sharing changes that are consistent with USL Capital's past practice. USL Capital defines a maximum amount (or "cap") that it will contribute toward the health benefits of each retiree. This cap is determined annually and is based on the individual retiree's number of dependents. Over the last seven years the aggregate increase in the cap approximates the average increase in the underlying premium costs of the program. This valuation assumed that in future years USL Capital will continue to increase the cap at the average rate of increase of the underlying cost of the retiree benefit program. Benefits and eligibility rules, however, may be modified by USL Capital from time to time.
The estimated cost for postretirement health care benefits is accrued over periods of employee service on an actuarially determined basis, in accordance with the requirements of Statement of Financial Accounting Standards No. 106 ("SFAS 106"), "Employers' Accounting for Postretirement Benefits Other Than Pensions". In adopting SFAS 106, the company elected to recognize immediately the prior-year unaccrued accumulated postretirement benefit obligation, resulting in an adverse effect on income of $25 million in the first quarter of 1992. The charge reflected an unaccrued retiree benefit obligation of $70 million, offset partially by projected tax benefits of $27 million and reversal of the unamortized postretirement benefit liability of $18 million relating to the acquisition of The Associates by Ford Holdings.
The combined amount paid by The Associates and USL Capital for postretirement benefits in 1994, 1993 and 1992 was $2 million each year.
The combined net postretirement benefit expense for The Associates and USL Capital included the following (in millions):
The combined accrued postretirement benefit cost for The Associates and USL Capital at December 31 included the following (in millions):
--------------- a/ The prior service effect of the plan amendments deferred for recognition over remaining service to retirement eligibility. b/ The deferred gain or loss resulting from experience and changes in assumptions deferred for recognition over remaining service to retirement.
For measurement purposes, The Associates assumed 12.1% and 12.5% weighted average annual rates of increase in per capita cost of covered health care benefits for 1994 and 1993, respectively, decreasing gradually to 5.5% by 2009.
FH-16
NOTE 11. Employee Retirement Benefits (Cont'd)
For measurement purposes, USL Capital assumed 9% and 7.5% annual rates of increase in per capita cost of postretirement medical benefits for 1994 for the under age 65 indemnity and HMO and over age 65 indemnity plans, respectively; the rates were assumed to decrease gradually to 5.5% by 2006 and remain at that level thereafter. The comparable rates assumed for 1993 were 12% and 8% for the under age 65 indemnity and HMO and over age 65 indemnity plans, respectively.
Changing the assumed health care cost trend rates by one percentage point would change the aggregate service and interest cost components of net postretirement benefit expense of The Associates and USL Capital, on a combined basis, for 1994 by $1 million and the accumulated postretirement benefit obligation at December 31, 1994 by $7 million.
NOTE 12. Capital Stock
The authorized capital stock of Ford Holdings consists of Common Stock and Preferred Stock. Holders of Preferred Stock generally are entitled to elect not less than 25 percent of the directors of the company. On all matters other than the election of directors as to which stockholders generally have a vote, holders of Common Stock, as a class, are entitled to 75%, and holders of Preferred Stock, as a class, are entitled to 25%, of the total number of votes of all the capital stock of Ford Holdings. At December 31, 1994, the Preferred Stock consisted of $1,015 million of Cumulative Flexible Rate Auction Preferred Stock ("Flex-APS"); $287 million of fixed-rate Series A Cumulative Preferred Stock; $173 million of fixed-rate Series B Cumulative Preferred Stock; $200 million of fixed-rate Series C Cumulative Preferred Stock; and $200 million of fixed-rate Series D Cumulative Preferred Stock.
Dividends on the Flex-APS generally are determined through auction procedures. The maximum applicable dividend rate is a function of the 60- day "AA" Composite Commercial Paper rate or the applicable reference rate. The average dividend rate in effect on the Flex-APS in 1994 was 4.82%; the weighted average dividend rate was 5.56% on December 31, 1994. Accumulated and unpaid dividends on the Flex-APS amounted to $6 million at December 31, 1994.
The fixed-rate Series A Cumulative Preferred Stock dividend rate is 8% ($2.00 per depository share) per year; accumulated and unpaid dividends were $2 million at December 31, 1994. The fixed-rate Series B Cumulative Preferred Stock dividend rate is 8% ($2.00 per depository share) per year; accumulated and unpaid dividends were $1 million at December 31, 1994. The fixed-rate Series C Cumulative Preferred Stock dividend rate is 7.12% ($1.78 per depository share) per year; accumulated and unpaid dividends were $1 million at December 31, 1994. The fixed-rate Series D Cumulative Preferred Stock dividend rate is 8.1% ($2.025 per depository share) per year, accumulated and unpaid dividends were $1 million at December 31, 1994.
NOTE 13. Dividend Restrictions
Payment of dividends by American Road to a company within its holding company system is regulated by the State of Michigan. Under Michigan regulations, all dividend payments must be reported to and reviewed by the Michigan Insurance Commission.
Payment of dividends by certain subsidiaries of The Associates is restricted under the provisions of certain debt and revolving credit agreements. At December 31, 1994, $454 million was available for the payment of dividends.
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NOTE 14. Litigation and Claims
Various legal actions, governmental investigations and proceedings and claims are pending or may be instituted or asserted in the future against Ford Holdings and its subsidiaries. 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, sanctions, or other relief which, if granted, would require very large expenditures.
Litigation is subject to many uncertainties, the outcome of individual litigated matters is not predictable with assurance. It is reasonably possible that some of the matters discussed in the foregoing paragraph could be decided unfavorably to Ford Holdings or the subsidiary involved and could require Ford Holdings or such subsidiary to pay damages or make other expenditures in amounts or a range of amounts that at December 31, 1994 cannot reasonably be estimated. Although the final resolution of any such matters could have a material effect on the company's consolidated financial results for a particular reporting period, the company believes that, based on its analysis, any resulting liability should not materially affect the consolidated financial position at December 31, 1994.
NOTE 15. Transactions With Affiliated Companies
The company receives technical and administrative advice and services from Ford and utilizes data processing facilities maintained by Ford. The cost of these services is allocated to the company based on actual costs incurred by Ford in performing these services. The company believes this allocation is a reasonable approximation of the costs it would have incurred on a stand-alone basis. Payments to Ford for such services were as follows (in millions): 1994 - - $36; 1993 - $31; 1992 - $41.
The company provides insurance and other services to Ford and other affiliated companies. Amounts included in revenues for these services were as follows (in millions):
Net interest income under various financing arrangements between the company and Ford was as follows (in millions): 1994 - $9; 1993 - $16; 1992 - $33.
NOTE 16. Financial Instruments
The company adopted Statement of Financial Accounting Standards No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments" as of December 31, 1994. 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 judgement 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.
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NOTE 16. Financial Instruments (Cont'd)
Balance Sheet Financial Instruments
Information about specific valuation techniques and related fair value detail is provided throughout the footnotes. The table below provides book value and fair value amounts (in millions) and a cross reference to the applicable Note.
Foreign Currency Instruments
The fair value of foreign currency swap agreements generally was estimated using current market prices provided by outside quotation services. At December 31, 1994, the fair value of net receivable contracts was $47 million. At December 31, 1993, the fair value for all agreements was a net receivable of $12 million. At December 31, 1994, foreign currency swaps had a deferred loss of $1 million. In the unlikely event that a counterparty fails to meet the terms of a foreign currency swap agreement, the company's risk is the fair value of the agreement. At December 31, 1994 and 1993, the total notional amount of the company's foreign currency swaps outstanding was $173 million and $281 million, respectively, maturing primarily through 1997.
Interest-Rate Instruments
The fair value of interest-rate swap and cap agreements is the estimated amount the company would receive or pay to terminate the agreement. Fair value is calculated using information provided by outside quotation services, taking into account current interest rates and the current credit-worthiness of the swap and cap parties. At December 31, 1994, the fair value of net receivable contracts was $10 million, and the fair value of net payable contracts was $5 million. At December 31, 1993, the fair value for all agreements was a net receivable of $7 million. In the unlikely event that a counterparty fails to meet the terms of an interest-rate swap or cap agreement, the company's risk is the fair value of the agreement. At December 31, 1994 and 1993, the underlying notional principal amounts on which the company has interest-rate swap and cap agreements outstanding aggregated $4.5 billion and $2.1 billion, respectively, maturing primarily through 1999.
Other Instruments
Certain subsidiaries of the company make credit lines available to holders of their credit cards and to certain commercial and consumer customers. At December 31, 1994 and 1993, the unused portion of available credit was approximately $10.3 billion and $9.6 billion, respectively, and is revocable under specified conditions. The fair value of unused credit lines and the potential risk of loss was not considered to be material.
In addition, the company has entered into a variety of other financial agreements which contain potential risk of loss. These agreements include financial guarantees and warrants. Neither the amounts of these agreements nor the potential risk of loss was considered to be material at December 31, 1994.
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NOTE 17. Segment Information
The company operates in three business segments: consumer finance, commercial finance, and insurance. The consumer finance segment is engaged primarily in making and investing in direct installment and revolving credit receivables, including credit card receivables, purchasing consumer-related installment obligations, and providing other consumer financial services. The commercial finance segment is engaged primarily in financing sales of transportation and industrial equipment, leasing of equipment either through equipment vendors or directly to end users, and the construction and operation of commercial real estate developments. The insurance segment is engaged primarily in the issuance of deferred annuities, property and casualty insurance relating to extended service plan contracts, credit life and credit disability insurance, and physical damage insurance. These insurance products are provided primarily to purchasers of vehicles financed by Ford subsidiaries and to customers of the finance operations of The Associates.
Corporate expenses consist primarily of interest on acquisition-related debt. Acquisition-related goodwill has been allocated to the operating segments.
Financial information segregated by business segment is as follows (in millions):
NOTE 18. Summary Quarterly Financial Data (Unaudited) (in millions)
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FSS-1
FSS-2
EXHIBIT INDEX
Designation Description Method of Filing - ----------- ----------- ---------------- Exhibit 4-A-5 Certificate of Designations Filed as Exhibit 4-A-5 to of Series A Cumulative the Registrant's Annual Preferred Stock. Report on Form 10-K for the year ended December 31, 1992. File No. 0-18263.*
Exhibit 4-A-6 Certificate of Designations Filed as Exhibit 4-A-6 to of Series B Cumulative the Registrant's Annual Preferred Stock. Report on Form 10-K for the year ended December 31, 1992. File No. 0-18263.*
Exhibit 4-A-7 Form of Certificate of Filed as Exhibit 2.7 to Designations of Series C the Registrant's Regis- Cumulative Preferred tration Statement on Stock. Form 8-A dated August 24, 1993. File No. 0-18263.*
Exhibit 4-A-8 Certificate of Designations Filed as Exhibit 4.1 of the of the Series D Cumulative Registrant's Current Report Preferred Stock. on Form 8-K dated August 11, 1994. File No. 1-11146 or 0-18263.
Exhibit 4-A-9 Certificate of Designations Filed as Exhibit 4.1 of the of the Flexible Rate Auction Registrant's Current Report Preferred Stock, Series L, M on Form 8-K dated December and N. 12, 1994. File No. 1-11146 or 0-18263.*
Exhibit 4-B Indenture dated as of February Filed as Exhibit 4-A to 1, 1990 among the Registrant, the Registrant's Regis- Ford and Manufacturers Hanover tration Statement No. Trust Company. 33-32641.*
Exhibit 4-C-1 Deposit Agreement dated as of Filed as Exhibit 4-C-1 to June 4, 1992, among Registrant, the Registrant's Annual Chemical Bank, as depositary, Report on Form 10-K for and the holders from time to the year ended December time of Depositary Shares, each 31, 1992. File No. representing 1/4,000 of a share 0-18263.* of Series A Cumulative Preferred Stock.
Exhibit 4-C-2 Deposit Agreement dated as of Filed as Exhibit 1-B January 26, 1993, among to Registrant's Report on Registrant, Chemical Bank, Form 8-K dated January 19, as depositary and the holders 1993. File No. 0-18263.* from time to time of Depositary Shares, each representing 1/4,000 of a share of Series B Cumulative Preferred Stock.
Designation Description Method of Filing - ----------- ----------- ---------------- Exhibit 4-C-3 Deposit Agreement dated as of Filed as Exhibit 2.8 to August 30, 1993, among Reg- the Registrant's Regis- istrant, Chemical Bank, as tration Statement on depositary and the holders Form 8-A dated August from time to time of Depositary 24, 1993. File No. Shares, each representing 1/4000 0-18263.* of a share of Series C Cumulative Preferred Stock.
Exhibit 4-C-4 Deposit Agreement dated as of Filed as Exhibit 4.3 of August 10, 1994, among the Registrant's Registrant, Chemical Bank, as Current Report on Form depositary and the holders from 8-K dated August 11, time to time of Depositary 1994. File No. 1-11146 Shares, each representing or 0-18263.* 1/4,000 of a share of Series D Cumulative Preferred Stock.
Exhibit 10-A Agreement dated as of Filed as Exhibit 10-A to October 27, 1989 between the Registrant's Annual the Registrant and Ford. Report on Form 10-K for the year ended December 31, 1989. File No. 0-18263.*
Exhibit 10-B Agreement dated as of Filed as Exhibit 10-B to October 27, 1989 between the Registrant's Annual the Registrant and Ford Report on Form 10-K for Credit. the year ended December 31, 1989. File No. 0-18263.*
Exhibit 12 Computation of Ratio of Filed with this Report. Earnings to Fixed Charges.
Exhibit 21 Subsidiaries of the Registrant Filed with this Report. as of December 31, 1994.
Exhibit 23 Consent of Independent Filed with this Report. Certified Public Accountants.
Exhibit 24 Powers of Attorney. Filed with this Report.
- --------------- * Incorporated by reference as an exhibit hereto.