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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997
Commission file number 1-6458
JOHN DEERE CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-2386361
(State of incorporation) (IRS employer identification number)
1 East First Street, Suite 600
Reno, Nevada 89501 (702) 786-5527
(Address of principal (Zip Code) (Telephone number)
executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange
- ------------------- on which registered
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9-5/8% Subordinated Notes Due 1998 New York Stock Exchange
8-5/8% Subordinated Debentures Due 2019 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
At January 1, 1998, 2,500 shares of common stock, without par
value, of the registrant were outstanding, all of which were owned
by John Deere Credit Company.
The registrant meets the conditions set forth in General
Instruction I(1)(a) and (b) of Form 10-K and is therefore filing
this Form with certain reduced disclosures as permitted by
Instruction I(2).
=================================================================
Page 1 of 47
The Index to Exhibits appears at Pages 46 and 47.
PART I
Item 1. Business.
The Company
John Deere Capital Corporation (Capital Corporation) and its
subsidiaries: Deere Credit, Inc., Deere Credit Services, Inc.,
Farm Plan Corporation, John Deere Receivables, Inc., John Deere
Funding Corporation, Arrendadora John Deere, S.A. de C.V. and John
Deere Credit Limited (Australia), are collectively called the
Company. John Deere Credit Company, a wholly-owned finance holding
subsidiary of Deere & Company, is the parent of the Capital
Corporation.
The principal business of the Company is providing and
administering financing for retail purchases of new and used
equipment manufactured by Deere & Company's agricultural,
construction and commercial and consumer equipment divisions. The
Company purchases retail installment sales and loan contracts
(retail notes) from Deere & Company and its wholly-owned
subsidiaries (collectively called John Deere). These retail notes
are acquired by John Deere through independent John Deere retail
dealers. The Company also purchases and finances certain
agricultural, construction and lawn and grounds care retail notes
unrelated to John Deere. In addition, the Company purchases and
finances recreational product retail notes acquired from
independent dealers and marine product mortgage service companies
(recreational product retail notes). The Company also leases
equipment to retail customers, finances and services revolving
charge accounts acquired from and offered through merchants in the
agricultural and lawn and grounds care retail markets (revolving
charge accounts), and provides wholesale financing for inventories
of recreational vehicles, manufactured housing units, yachts, John
Deere engines, and John Deere agricultural and John Deere
construction equipment owned by dealers of those products
(wholesale notes). Retail notes, revolving charge accounts, direct
financing leases and wholesale notes receivable are collectively
called "Receivables." Receivables and operating leases are
collectively called "Receivables and Leases."
The Capital Corporation was incorporated under the laws of
Delaware and commenced operations in 1958. At January 1, 1998, the
Company had 1,044 full- and part-time employees.
Business of the Company
The Company's operations are categorized into four primary
divisions:
The Agricultural Division provides agricultural market
financing through products such as agricultural equipment
retail notes and leases, Farm PlanTM (a revolving charge
product) and producer operating loans. In addition, the
division provides wholesale financing to dealers for equipment
to be used as rental equipment.
Page 2
The Commercial Division provides construction equipment
financing through products such as retail notes and leases.
The division also provides wholesale financing of construction
equipment, recreational vehicles, manufactured housing units
and other commercial equipment.
The Consumer Division provides consumer and recreational
product equipment financing through products such as retail
notes, John Deere Credit Revolving Plan (a revolving charge
product), Preferred ResourceTM (an unsecured lending product),
YachtLineTM (a revolving charge product marketed to yacht
customers) and leases on lawn and grounds care equipment. In
addition, the Consumer Division provides wholesale financing
for yachts.
The International Division provides certain financing products
to the Company's international markets, such as Mexico, United
Kingdom, Germany and Australia.
Business of John Deere
John Deere's operations are categorized into six business
segments:
John Deere's worldwide agricultural equipment segment
manufactures and distributes a full line of farm equipment -
including tractors; combine and cotton harvesters; tillage,
seeding and soil preparation machinery; sprayers; hay and
forage equipment; materials handling equipment; and
integrated precision farming technology.
John Deere's worldwide construction equipment segment,
formerly the worldwide industrial equipment segment,
manufactures and distributes a broad range of machines used in
construction, earthmoving and forestry -- including backhoe
loaders; crawler dozers and loaders; four-wheel-drive loaders;
excavators; scrapers; motor graders; log skidders; and
forestry harvesters. This segment also includes the
manufacture and distribution of engines and drivetrain
components for the original equipment manufacturer (OEM)
market.
John Deere's worldwide commercial and consumer equipment
segment manufactures and distributes equipment for commercial
and residential uses -- including small tractors for lawn,
garden, commercial and utility purposes; riding and walk-
behind mowers; golf course equipment; snowblowers; hand-held
products such as chain saws, string trimmers and leaf blowers;
skid-steer loaders; utility vehicles; and other outdoor power
products.
The products produced by the equipment segments are marketed
primarily through independent retail dealer networks and major
retail outlets.
Page 3
The credit segment includes the operations of the Company
(described herein), John Deere Credit Company and John Deere
Credit Inc., which primarily purchases and finances retail
notes from John Deere's equipment sales branches in Canada, as
well as recreational products and construction and
transportation equipment notes from independent dealers.
The insurance segment issues policies in the United States
primarily for: general and specialized lines of commercial
property and casualty insurance; group accident and health
insurance for employees of participating John Deere dealers
and disability insurance for employees of John Deere.
The health care segment provides health management programs
and related administrative services in the United States to
employees of John Deere and commercial clients.
John Deere achieved record worldwide net income for 1997, totaling
$960 million, or $3.78 per share, compared with last year's income
of $817 million, or $3.14 per share. The higher profit resulted
from strong worldwide demand for John Deere products. Operating
margins remained at strong levels as a result of John Deere's
continuous improvement and quality initiatives.
John Deere's worldwide net sales and revenues increased 14 percent
to $12,791 million in 1997 compared with $11,229 million in 1996.
Net sales of John Deere's equipment operations increased 15
percent in 1997 to $11,082 million from $9,640 million last year.
International demand remained at strong levels, with export sales
from the United States totaling $2,013 million for 1997 compared
with $1,584 million last year. Overseas sales for the year also
increased, rising by 11 percent compared with a year ago. Overall,
John Deere's worldwide physical volume of sales (excluding the
sales of the newly consolidated Mexican subsidiaries) increased 15
percent for the year, reflecting the strong worldwide demand for
John Deere products.
Worldwide demand for John Deere agricultural equipment remained at
strong levels this year as a result of favorable fundamentals in
the farm economy. Increased acres planted and favorable weather
conditions in major producing areas of North America resulted in
historically high levels of production. However, strong domestic
and export demand for grains and oilseeds are expected to hold
carryover stocks relatively low. As a result, soybean prices have
remained at favorable levels. Overseas demand for John Deere
agricultural equipment also remained at strong levels, reflecting
good demand from the republics of the former Soviet Union and
favorable market conditions in Latin America. Despite recent
economic instability in the world's financial markets, current
overall fundamentals are expected to remain favorable for farm
equipment sales in 1998.
Construction equipment demand rose in 1997 due to low interest
rates, moderate economic growth and low inflation, all of which
should continue in 1998. These factors promoted high levels of
consumer confidence and housing activity this past year. Housing
Page 4
starts for next year are expected to approximate this year's level
and expenditures on highways and streets are anticipated to grow
in 1998 when a new federal highway bill is passed. These favorable
economic conditions should promote good construction equipment
demand next year.
Sales of John Deere commercial and consumer equipment increased
this year from the weather depressed levels of last year. With low
unemployment rates, growing incomes, low interest rates, moderate
economic growth and new product introductions, demand is
anticipated to remain at favorable levels in 1998.
Results for John Deere's credit operations are expected to improve
as a result of the strong demand for John Deere products and
favorable economic conditions. The insurance operations are
expected to maintain reasonable operating returns despite the
continued competitive environment in commercial lines. Although
the health care operations should continue to face margin
pressures and a very competitive environment, substantially
improved results are expected for next year.
Based on these market conditions, John Deere's worldwide physical
volume of sales is currently projected to increase by
approximately 6 percent in 1998 compared to 1997. First quarter
physical volumes are projected to be 15 percent higher than
comparable levels in the first quarter of 1997.
Overall, the fundamentals of John Deere's businesses remain
favorable. Industry demand for John Deere products remains strong
and operating margins are benefiting from continuous improvement
initiatives. John Deere's investment in the development of new
products and markets should further its worldwide leadership
position. Based on these factors and John Deere's exceptional
employees and dealer organization, another strong operating
performance is expected next year.
Relationships of the Company with John Deere
The results of operations of the Company are affected by its
relationships with John Deere, including among other things, the
terms on which the Company acquires Receivables and Leases and
borrows funds from John Deere, the reimbursement for interest
waiver and low-rate finance programs from John Deere and the
payment to John Deere for various expenses applicable to the
Company's operations. In addition, the Company and John Deere have
joint access to all of the Company's lines of credit.
The Company's acquisition volume of Receivables and Leases is
largely dependent upon the level of retail sales and leases of
John Deere products. The level of John Deere retail sales and
leases is responsive to a variety of economic, financial,
climatic, legislative and other factors which influence demand for
its products. All of the Company's businesses are affected by
changes in interest rates, demand for credit and competition.
Page 5
The Company bears all of the credit risk (net of recovery from
withholdings from certain John Deere dealers and Farm Plan
merchants) associated with its holding of Receivables and Leases,
and performs all servicing and collection functions. The Company
compensates John Deere for originating certain retail notes and
leases on John Deere products. John Deere is also reimbursed for
staff and other administrative services at estimated cost, and for
credit lines provided to the Company based on utilization of those
lines.
The terms of retail notes and the basis on which the Company
acquires retail notes from John Deere are governed by agreements
with John Deere, terminable by either John Deere or the Company on
30 days notice. As provided in these agreements, the Company sets
its terms and conditions for purchasing the retail notes from John
Deere. Under these agreements, John Deere is not obligated to sell
retail notes to the Company, and the Company is obligated to
purchase retail notes from John Deere only if the notes comply
with the terms and conditions set by the Company.
The basis on which John Deere acquires retail and certain
wholesale notes from the dealers are governed by agreements with
the independent John Deere dealers, terminable at will by either
the dealers or John Deere. In acquiring these notes from dealers,
the terms and conditions, as set forth in agreements with the
dealers, conform with the terms and conditions adopted by the
Company in determining the acceptability of retail and certain
wholesale notes to be purchased from John Deere. The dealers are
not obligated to send these notes to John Deere and John Deere is
not obligated to accept these notes from the dealers. In practice,
retail and certain wholesale notes are acquired from dealers only
if the terms of these notes and the creditworthiness of the
customers are acceptable to the Company for purchase of these
notes from John Deere. The Company acts on behalf of both itself
and John Deere in determining the acceptability of the notes and
in acquiring acceptable notes from dealers.
The basis on which the Company enters into leases with retail
customers through John Deere dealers is governed by agreements
between dealers and the Company. Leases are accepted based on the
terms and conditions, the lessees' creditworthiness, the
anticipated residual values of the equipment and the intended uses
of the equipment.
Deere & Company has an agreement with the Company to make income
maintenance payments to the Company such that its consolidated
ratio of earnings before fixed charges to fixed charges is not
less than 1.05 to 1 for each fiscal quarter. For 1997 and 1996,
the Company's ratios were 1.64 to 1 and 1.75 to 1, respectively,
and never less than 1.60 to 1 for any fiscal quarter. Deere &
Company also has committed to own at least 51 percent of the
voting shares of capital stock of the Company and to maintain the
Company's consolidated tangible net worth at not less than $50
million. These arrangements are not intended to make Deere &
Company responsible for the payment of any indebtedness,
obligation or liability of the Company.
Page 6
Description of Receivables and Leases
Receivables and Leases arise mainly from retail sales and leases
of John Deere products, used equipment accepted in trade for them,
and equipment of unrelated manufacturers, and also include
revolving charge accounts receivable and wholesale notes
receivable (including the sale to John Deere dealers for rental to
users). The great majority of these Receivables and Leases are
derived from retail sales and leases of agricultural equipment,
construction equipment and commercial and consumer equipment sold
by John Deere dealers. Receivables and Leases relating to
equipment manufactured by John Deere's Commercial and Consumer
segment may be financed by the Company's Commercial Division
(construction product line) or the Consumer Division (lawn and
grounds care product line), depending on how the equipment is
used.
The Company offers secured financing of recreational products and
yachts. The Company also offers Farm Plan revolving charge
accounts which are used primarily by agri-businesses to finance
purchases, which would otherwise be carried by the merchant as
accounts receivable, as well as credit cards which are used
primarily by retail customers to finance purchases of certain
commercial and residential lawn and grounds care equipment.
Retail notes provide for retention by John Deere or the Company of
security interests in the goods financed under certain statutes,
including the Uniform Commercial Code, certain Federal statutes
and state motor vehicle laws. Security interest filings are also
made for leases. However, filings for operating leases are made
for informational purposes only. See notes 1 and 2 to the
consolidated financial statements.
The Company also provides retail sales financing through dealers
of certain unrelated manufacturers of recreational vehicles and
yachts. Recreational product retail notes conform to industry
standards different from those for John Deere retail notes and
often have smaller down payments and longer repayment terms. In
addition, the acquisition volumes, margins and collectibility of
recreational product retail notes are affected by economic,
marketing and competitive factors and cycles, such as fluctuations
in fuel prices and recreational spending patterns, that are
different from those affecting retail notes arising from the sale
of John Deere equipment. Recreational product retail notes are
acquired from more than 650 recreational vehicle and yacht
dealers.
Receivables and Leases are eligible for acceptance if they conform
to prescribed finance and lease plan terms. Guidelines relating to
down-payments and contract terms on retail notes and leases are
described in note 2 to the consolidated financial statements.
The John Deere Credit Revolving Plan is used primarily by retail
customers of John Deere dealers to finance purchases of lawn and
grounds care equipment. Through its Farm Plan product, the Company
finances revolving charge accounts offered by approximately 4,500
Page 7
participating agri-businesses to their retail customers for the
purchase of goods and services. Farm Plan account holders consist
mainly of farmers purchasing equipment parts and service at
implement dealerships. Farm Plan is also used by customers
patronizing other agri-businesses, including farm supply, feed and
seed, parts supply, bulk fuel, building supply merchants and
veterinarians. Preferred Resource, marketed primarily to
executives and professionals, offers customers convenience and
security by providing a substantial, readily-available source of
funding for a variety of personal expenses. Additionally,
YachtLine, introduced in 1997, is a revolving credit account which
allows retail customers to access the equity in their vessels and
thereby better manage their investments. See note 2 to the
consolidated financial statements under "Revolving Charge Accounts
Receivable."
The Company finances wholesale inventories owned by approximately
1,200 dealers of recreational vehicles, manufactured housing
units, yachts, John Deere engines, and John Deere agricultural and
John Deere construction equipment. A large portion of the
wholesale financing provided by the Company is with dealers from
whom it also purchases agricultural, construction, recreational
product and yacht retail notes. See note 2 to the consolidated
financial statements under "Wholesale Notes Receivable."
The Company requires theft and physical damage insurance be
carried on all goods leased or securing retail notes. In most
cases, the customer may, at his expense, have the Company or the
seller of the goods purchase this insurance or obtain it from
other sources. Theft and physical damage insurance is also
required on goods securing wholesale notes and can be purchased
through the Company or from other sources. Insurance is not
required for revolving charge accounts.
In some circumstances, Receivables and Leases may be accepted and
acquired even though they do not conform in all respects to the
established guidelines. Acceptability and servicing of retail
notes, wholesale notes and leases, according to the finance plans
and retail terms, including any waiver of conformity with such
plans and terms, is determined by Company personnel. Officers of
the Company are responsible for reviewing the performance of the
Company in accepting and collecting retail notes, wholesale notes
and leases. The Company normally makes all routine collections,
compromises, settlements and repossessions on Receivables and
Leases.
Finance Rates on Retail Notes
As of October 31, 1997, approximately 50 percent of the retail
notes held by the Company bore a variable finance rate. With the
exception of agricultural and certain yacht retail notes, retail
notes are fixed rate notes. A portion of the finance income earned
by the Company arises from financing the retail sales of John
Deere equipment sold on which finance charges are waived or
reduced by John Deere for a period from the date of sale to a
specified subsequent date. Some low-rate financing programs are
Page 8
also offered by John Deere. See note 2 to the financial statements
for additional information.
Average Original Term and Average Actual Life of Retail Notes and
Leases
Due to prepayments (often from trade-ins), the average actual life
of retail notes is considerably shorter than the average original
term. The following table shows the average original term for
retail notes and leases acquired and the estimated average life in
months for retail notes and leases liquidated (in months-based on
dollar amounts):
Average Average
Original Actual
Term Life
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1997 1996 1997 1996
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Retail notes 66 67 25 31
New equipment:
Agricultural equipment 56 56 25 25
Construction equipment 44 45 18 21
Lawn and grounds care equipment 43 45 29 32
Recreational products (excluding yachts) 174 159 47 44
Yachts 217 218 32 31
Used equipment:
Agricultural equipment 57 55 25 26
Construction equipment 41 41 23 23
Lawn and grounds care equipment 50 49 31 34
Recreational products (excluding yachts) 157 148 33 33
Yachts 212 219 33 32
Leases 45 43 38 36
The average original term for recreational products and yachts is
longer than for John Deere equipment notes because of customer
preferences and industry convention.
Competition
The businesses in which the Company is engaged are highly
competitive. The Company competes for customers with commercial
banks and finance and leasing companies based upon its service and
finance rates charged. The proportion of John Deere equipment
retail sales and leases financed by the Company is influenced by
conditions prevailing in the agricultural equipment, construction
equipment and lawn and grounds care equipment industries, in the
financial markets, and in business generally. A significant
portion of John Deere equipment retail sales and leases during
1997 was financed by the Company.
The Company emphasizes convenient service to customers and
endeavors to offer terms desired in its specialized markets such
Page 9
as seasonal schedules of repayment and rentals. The Company's
retail note finance rates and lease rental rates are generally
believed to be in the range offered by other sales finance and
leasing companies, although not as low as those of some banks and
other lenders and lessors.
Regulation
In a number of states, the maximum finance rate on receivables is
limited by state law. The present state limitations have not, thus
far, significantly limited the Company's variable-rate finance
charges nor the fixed-rate finance charges established by the
Company. However, if interest rate levels should increase
significantly, maximum state rates could affect the Company by
preventing the variable rates on outstanding variable-rate retail
notes from increasing above the maximum state rate, and by
limiting the fixed rates on new notes. In some states, the Company
may be able to qualify new retail notes for a higher maximum rate
limit by using retail installment sales contracts (rather than
loan contracts) or by using fixed-rate rather than variable-rate
contracts.
In addition to rate regulation, various state and federal laws and
regulations apply to some Receivables and Leases, principally
retail notes for goods sold for personal, family or household use
and Farm Plan and John Deere Credit Revolving Plan accounts
receivable for such goods. To date, such laws and regulations have
not had a significant adverse effect on the Company's financial
position or results of operations.
Item 2. Properties.
The Company's properties principally consist of office equipment
and leased office space in Reno, Nevada; West Des Moines, Iowa;
Madison, Wisconsin; Alameda, California; Newport Beach,
California; Shelton, Connecticut; St. Petersburg, Florida; Ft.
Lauderdale, Florida; Manasquan, New Jersey; and Monterrey, Mexico.
Item 3. Legal Proceedings.
The Company is subject to various unresolved legal actions which
arise in the normal course of its business, the most prevalent of
which relate to state and federal laws and regulations concerning
retail credit. Although it is not possible to predict with
certainty the outcome of these unresolved legal actions or the
range of possible loss, the Company believes these unresolved
legal actions will not have a material effect on its financial
position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
Omitted pursuant to instruction I(2).
Page 10
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
All of the Capital Corporation's common stock is owned by John
Deere Credit Company, a finance holding company that is wholly-
owned by Deere & Company. The Capital Corporation paid cash
dividends to John Deere Credit Company of $75 million in 1997 and
$70 million in 1996. In each case, John Deere Credit Company paid
a comparable dividend to Deere & Company. During the first quarter
of 1998, the Capital Corporation declared and paid a dividend of
$12.5 million to John Deere Credit Company which, in turn, paid a
dividend of $12.5 million to Deere & Company.
Item 6. Selected Financial Data.
Omitted pursuant to instruction I(2).
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Results of Operations
1997 Compared with 1996
Consolidated net income for the fiscal year ended October 31, 1997
was $136 million compared with $134 million in 1996. 1997 results
reflect higher income from a larger average Receivable and Lease
portfolio financed and higher gains from the sales of retail
notes, partially offset by lower securitization and servicing fee
income, narrower financing spreads and higher expenditures
associated with several growth initiatives. The ratio of earnings
to fixed charges was 1.64 to 1 for 1997 compared with 1.75 to 1 in
1996.
Revenues totaled $754 million in 1997 compared to $657 million a
year ago. Revenues increased due to a 19 percent increase in the
average balance of Receivables and Leases financed, particularly
related to growth in retail notes, operating leases and wholesale
notes. Finance income earned on retail notes totaled $417 million
in 1997 compared to $372 million in 1996. Lease revenues
increased $50 million, to $118 million in 1997, from $68 million
in 1996, largely due to low-rate leasing initiatives related to
John Deere agricultural equipment. Finance income earned on
wholesale notes increased $11 million to $49 million in 1997 from
$38 million earned in 1996. Increases in finance income earned on
wholesale notes was primarily a result of the continued growth in
the financing for inventories of construction, yacht and
manufactured housing.
Revenues earned on revolving charge accounts amounted to $103
million in 1997, an 8 percent increase over revenues of $95
million earned during 1996. This increase was primarily due to a 9
Page 11
percent increase in the average balance of Farm Plan receivables
financed in 1997 compared with 1996.
Securitization and servicing fee income totaled $30 million in
1997 compared with $46 million during 1996, a decrease of $16
million. The decrease in securitization and servicing fee income
was partially the result of a 6 percent decrease in the average
balance of retail notes previously sold. Securitization and
servicing fee income relates to retail notes sold to other
financial institutions or limited-purpose business trusts and
primarily includes the interest from present value receivable
amounts established at the time of sale, adjustments related to
those sales and reimbursed administrative expenses received. The
net gain on retail notes sold totaled $19 million during 1997
compared with $14 million for 1996. Additional sales of retail
notes are expected to be made in the future.
Total interest expense increased $53 million from $274 million in
1996 to $327 million in 1997. The increase in interest expense was
primarily the result of increased borrowings required to finance
the higher average portfolio of Receivables and Leases. Average
borrowings were $5.380 billion in 1997 compared with $4.498
billion in 1996, an increase of 20 percent. The weighted average
annual interest rate incurred on all interest-bearing borrowings
increased in 1997 to 6.1 percent from 5.9 percent in 1996.
Administrative and operating expenses increased 12 percent from
$95 million in 1996 to $107 million in 1997. These increases were
the result of higher employment costs associated with
administering a larger Receivable and Lease portfolio and certain
expenses relating to the Company's growth initiatives. These
growth initiatives include expansion of international retail
financing, the introduction of golf and turf financing products,
and continued efforts related to new agricultural business
finance opportunities, such as producer operating loans.
Operating expenses were also affected by higher depreciation of
equipment on operating leases, which totaled $68 million in 1997
compared to $37 million in 1996, a result of the significant
growth in operating leases financed.
The provision for credit losses was $33 million in 1997 and $38
million in 1996. Total write-offs of Receivables and Leases
financed were $30 million during 1997 compared with $29 million in
1996. The increase in write-offs during 1997 primarily related to
a $4 million increase in lease and revolving credit write-offs and
a $1 million increase in wholesale write-offs, offset by a $4
million decrease in retail note write-offs. See note 2 to the
consolidated financial statements for additional information.
Page 12
Receivables and Leases Acquired and Held
Acquisition volumes of Receivables and Leases by the Company
during 1997 totaled $6.462 billion, an increase of 17 percent
compared with volumes of $5.517 billion during 1996. The higher
volumes resulted mainly from an increased volume of John Deere
equipment retail notes, revolving charge accounts, wholesale notes
and operating leases. Receivables and Leases held by the Company
at October 31, 1997 totaled $6.303 billion compared with $5.624
billion one year ago. For the 1997 and 1996 fiscal years,
Receivable and Lease acquisition volumes and balances held were as
follows (in millions of dollars):
Fiscal Year Volumes Balance at October 31
---------------------- ----------------------
% %
1997 1996 Chng 1997 1996 Chng
Retail notes: ---------------------- ----------------------
Agricultural
equipment $2,455.2 $2,154.5 14% $2,556.2 $2,417.3 6%
Construction
equipment 412.4 462.8 (11) 660.5 628.9 5
Lawn and grounds
care equipment 153.9 123.9 24 215.6 182.6 18
Recreational
products 340.9 233.9 46 917.1 840.8 9
----------------- -----------------
Total 3,362.4 2,975.1 13 4,349.4 4,069.6 7
Revolving charge
accounts 1,450.4 1,232.5 18 618.5 571.1 8
Wholesale notes 1,158.5 982.3 18 593.4 524.5 13
Financing leases 121.9 103.9 17 214.6 181.5 18
Equipment on
operating leases 368.4 222.8 65 527.2 276.8 90
----------------- -----------------
Total $6,461.6 $5,516.6 17 $6,303.1 $5,623.5 12
================= =================
John Deere equipment retail note volumes increased by $314 million
in 1997 compared with last year, primarily due to an increase in
the volumes of agricultural equipment retail notes. Volumes of
recreational product retail notes increased 46 percent in 1997 due
to the Company's aggressive marketing programs initiated within
the recreational vehicle markets and a $17 million purchase of
yacht installment notes from an unrelated third party. Revolving
charge accounts, wholesale note and lease volumes increased
significantly in 1997, due to the higher demand for these
products.
The Company also securitized and sold retail notes, receiving
proceeds of $837 million during 1997 compared to $814 million
during 1996. Retail notes administered by the Company, which
includes retail notes previously sold, amounted to $5.663 billion
Page 13
at October 31, 1997, compared with $5.247 billion at October 31,
1996. The balance of retail notes previously sold was $1.314
billion at October 31, 1997 compared with $1.177 billion at
October 31, 1996. The Company's maximum exposure under all retail
note recourse provisions at October 31, 1997 and 1996 was $168
million and $186 million, respectively. See notes 1 and 2 to the
consolidated financial statements.
Retail notes bearing variable finance rates totaled 50 percent of
the total retail note portfolio at October 31, 1997 compared with
43 percent one year earlier. The Company manages interest rate
risk through the issuance of fixed-rate and variable-rate
borrowings and the use of financial instruments such as interest
rate swaps and interest rate caps. See "Capital Resources and
Liquidity" and note 12 to the consolidated financial statements.
Total Receivable and Lease amounts 60 days or more past due were
$22 million at October 31, 1997 compared with $19 million at
October 31, 1996. These past-due amounts represented .35 percent
of the total Receivables and Leases held on each of those
respective dates. The balance of retail notes held (principal plus
accrued interest) with any installment 60 days or more past due
was $44 million at October 31, 1997 compared to $47 million at
October 31, 1996. The balances of retail notes held on which any
installment is 60 days or more past due as a percentage of ending
retail notes receivable was 1.02% at October 31, 1997 and 1.16% at
October 31, 1996. See note 3 to the consolidated financial
statements for additional information on past dues.
Deposits withheld from dealers and merchants, representing mainly
the aggregate dealer retail note and lease withholding accounts
from individual John Deere dealers to which losses from retail
notes and leases originating from the respective dealers can be
charged, amounted to $144 million at October 31, 1997 compared to
$135 million at October 31, 1996. The Company's allowance for
credit losses on all Receivables and Leases financed at October
31, 1997 totaled $86 million and represented 1.4 percent of the
total Receivables and Leases financed compared with $87 million
and 1.6 percent, respectively, one year earlier. The Company's
allowance for credit losses, as a percentage of total Receivables
and Leases, declined in 1997 due to an ongoing evaluation of loss
experience and related estimates to insure that the allowance for
credit losses is maintained at an adequate level.
1996 Compared with 1995
The Company's consolidated net income for the fiscal year ended
October 31, 1996 was $134 million compared with $114 million in
1995. Total revenues of $657 million in 1996 were up 19 percent
from $551 million in 1995. Revenues were affected by the higher
average portfolio owned and increases from the securitization and
sale of retail notes. The ratio of earnings to fixed charges was
1.75 to 1 for 1996 compared with 1.73 to 1 in 1995.
Page 14
Finance income earned on retail notes was $372 million in 1996
compared with $333 million in 1995, an increase of 12 percent. The
average balance of the retail note portfolio financed during 1996
was 15 percent higher than the comparable 1995 average balance.
Revenues earned on revolving charge accounts amounted to $95
million in 1996, a 13 percent increase over revenues of $84
million earned during 1995. The increase was primarily due to a 20
percent increase in the average balance of Farm Plan receivables
financed and a 4 percent increase in the average balance of John
Deere Credit Revolving Plan receivables financed in 1996 compared
with 1995.
Finance income earned on wholesale notes was $38 million in 1996,
an increase of $15 million, compared with $23 million in 1995.
Increases in finance income earned on wholesale notes were
attributable to the continued growth in the manufactured housing,
construction and yacht markets.
The average net investment in financing and operating leases
increased by 36 percent in 1996 compared with 1995.
Correspondingly, total lease revenues increased to $68 million in
1996 compared with $48 million in 1995.
The net gain on retail notes sold totaled $14 million during 1996
compared with $11 million for 1995. Securitization and servicing
fee income totaled $46 million in 1996 compared with $36 million
during 1995. Securitization and servicing fee income relates to
retail notes sold to other financial institutions or limited-
purpose business trusts and, prior to 1997, primarily included the
interest earned on present value receivable amounts established at
the time of sale, adjustments related to those sales and
reimbursed administrative expenses received.
Gains of $6 million on the sale of leased equipment contributed to
an increase in other income, from $4 million in 1995 to $12
million in 1996.
Higher average borrowings in 1996 resulted in higher interest
expense, which totaled $274 million in 1996 compared with $238
million in 1995. Average borrowings were $4.498 billion in 1996
compared with $3.726 billion in 1995, an increase of 21 percent.
The weighted average annual interest rate incurred on all
interest-bearing borrowings during 1996 decreased to 5.9 percent
from 6.3 percent in 1995.
Administrative and operating expenses increased 22 percent from
$78 million in 1995 to $95 million in 1996. These increases were
attributable to the costs associated with administering a larger
Receivable and Lease portfolio as well as higher employment costs
relating to the increasing level of new acquisition volumes.
The provision for credit losses was $38 million in 1996 and $32
million in 1995. Total write-offs of Receivables and Leases
financed were $29 million during 1996 compared with $24 million in
1995. The increase in write-offs from 1995 primarily related to a
Page 15
$4.9 million increase in equipment retail note write-offs and a
$2.0 million increase in revolving charge account write-offs,
offset by a $1.9 million decrease in recreational product retail
notes write-offs.
Receivables and Leases Acquired and Held
Acquisition volumes of Receivables and Leases by the Company
during 1996 totaled $5.517 billion, an increase of 18 percent
compared with volumes of $4.667 billion during 1995. The higher
volumes in 1996 resulted mainly from an increased volume of John
Deere equipment retail notes, leases, revolving charge accounts
and wholesale receivables. Receivables and Leases held by the
Company at October 31, 1996 totaled $5.624 billion compared with
$4.922 billion at October 31, 1995. Receivables and Leases
administered, which include retail notes and leases previously
sold but still administered, amounted to $6.812 billion at the end
of 1996 compared with $6.105 billion at October 31, 1995.
Receivable and Lease acquisition volumes during the fiscal years
ended and balances held were as follows (in millions of dollars):
Fiscal Year Volumes Balance at October 31
---------------------- ----------------------
% %
1996 1995 Chng 1996 1995 Chng
Retail notes: ---------------------- ----------------------
Agricultural
equipment $2,154.5 $2,083.5 3% $2,417.3 $2,286.2 6%
Construction
equipment 462.8 391.2 18 628.9 511.0 23
Lawn and grounds
care equipment 123.9 100.1 24 182.6 162.3 13
Recreational
products 233.9 288.7 (19) 840.8 865.4 (3)
----------------- -----------------
Total 2,975.1 2,863.5 4 4,069.6 3,824.9 6
Revolving charge
accounts 1,232.5 1,050.1 17 571.1 510.2 12
Wholesale notes 982.3 607.0 62 524.5 298.1 76
Financing leases 103.9 88.5 17 181.5 149.3 22
Equipment on
operating leases 222.8 58.3 282 276.8 139.5 98
----------------- -----------------
Total $5,516.6 $4,667.4 18 $5,623.5 $4,922.0 14
================= =================
John Deere equipment retail note volumes increased by
approximately $153 million in 1996 compared with 1995, primarily
due to an increase in the volumes of agricultural equipment and
construction equipment retail notes. Volumes of recreational
product retail notes decreased 19 percent in 1996 due to the
aggressive pricing environment that existed in these credit
markets. Additionally, in 1996 the Company shifted its emphasis
relating to marine products towards the yacht market. Revolving
Page 16
charge accounts, leases and wholesale note volumes increased
significantly in 1996, due to the higher demand for these
products.
Retail notes receivable increased primarily from retail note
acquisition volumes exceeding collections during 1996. However,
the Company also securitized and sold retail notes, receiving
proceeds of $814 million during 1996 compared to $726 million
during 1995. Additional information is presented in note 2 to the
consolidated financial statements. Retail notes administered by
the Company, which includes retail notes previously sold, amounted
to $5.247 billion at October 31, 1996, compared with $4.987
billion at October 31, 1995. The balance of retail notes
previously sold was $1.177 billion at October 31, 1996 compared
with $1.162 billion at October 31, 1995. The Company's maximum
exposure under all retail note recourse provisions at October 31,
1996 and 1995 was $186 million and $180 million, respectively.
Retail notes bearing variable finance rates totaled 43 percent of
the total retail note portfolio at October 31, 1996 compared with
52 percent at October 31, 1995.
Total Receivable and Lease amounts 60 days or more past due were
$19 million at October 31, 1996 compared with $14 million at
October 31, 1995. These past-due amounts represented .35 percent
and .29 percent of the total Receivables and Leases held at those
respective dates. While past due amounts, as a percentage of total
Receivables and Leases held, increased in 1996, these amounts
compare favorably with historical levels. See note 3 to the
consolidated financial statements for additional information on
past dues.
Deposits withheld from dealers and merchants, representing mainly
the aggregate dealer retail note and lease withholding accounts
from individual John Deere dealers to which losses from retail
notes and leases originating from the respective dealers can be
charged, amounted to $135 million at October 31, 1996 compared to
$127 million at October 31, 1995. The Company's allowance for
credit losses on all Receivables and Leases financed at October
31, 1996 totaled $87 million and represented 1.6 percent of the
total Receivables and Leases financed compared with $84 million
and 1.7 percent, respectively, one year earlier. The Company's
allowance for credit losses, as a percentage of total Receivables
and Leases, declined in 1996 due to an ongoing evaluation of loss
experience and related estimates to insure that the allowance for
credit losses is maintained at an adequate level.
Capital Resources and Liquidity
The Company relies on its ability to raise substantial amounts of
funds to finance its Receivable and Lease portfolios. The
Company's primary sources of funds for this purpose are a
combination of borrowings and equity capital. Additionally, the
Company periodically sells substantial amounts of retail notes in
the public market and in private sales. The Company's ability to
obtain funds is affected by its debt ratings, which are closely
Page 17
related to the outlook for and the financial condition of Deere &
Company, and the nature and availability of support facilities,
such as its lines of credit. For information regarding Deere &
Company and its business, see Exhibit 99.
The Company's ability to meet its debt obligations is supported in
a number of ways. All commercial paper issued is backed by bank
credit lines. The assets of the Company are self-liquidating in
nature. A strong equity position is available to absorb unusual
losses on these assets. Liquidity is also provided by the
Company's ability to sell these assets. Asset-liability risk is
managed to minimize exposure to interest rate fluctuations.
The Company's business is somewhat seasonal, with overall
acquisition volumes of Receivables and Leases traditionally higher
in the second half of the fiscal year than in the first half, and
overall collections of Receivables and Leases traditionally
somewhat higher in the first six months than in the last six
months of the fiscal year.
The aggregate net cash provided by operating and financing
activities was primarily used to increase Receivables and Leases.
Net cash provided by operating activities was $262 million in
1997. Financing activities provided $507 million during the same
period, resulting from a $582 million net increase in total
borrowings which was partially offset by dividend payments
totaling $75 million to John Deere Credit Company. Net cash used
for investing activities totaled $736 million in 1997, primarily
due to Receivable and Lease acquisitions exceeding collections by
$1.621 billion, which was partially offset by the $837 million of
proceeds from the sale of receivables. Cash and cash equivalents
increased $33 million during 1997. See "Statements of
Consolidated Cash Flows."
Over the past three years, operating activities have provided $646
million in net cash. In addition, the sale of receivables provided
$2.377 billion and an increase in total net borrowings provided
$2.129 billion. These amounts were used mainly to fund Receivable
and Lease acquisitions, which exceeded collections by $4.878
billion, and to pay $200 million in dividends.
The Company is naturally exposed to various interest rate and
foreign currency risks. As a result, the Company enters into
derivative transactions to hedge certain of these exposures that
arise in the normal course of business, and not for the purpose of
creating speculative positions or trading. Similar to other large
credit companies, the Company manages the relationship of the
types and amounts of its funding sources to its Receivable and
Lease portfolios in an effort to diminish risk due to interest
rate fluctuations, while responding to favorable financing
opportunities. Accordingly, from time to time, the Company enters
into interest rate swap and interest rate cap agreements to hedge
its interest rate exposure in amounts corresponding to a portion
of its borrowings. The Company also has a foreign exchange swap
related to a long-term borrowing. The credit and market risks
under these interest rate and foreign currency agreements are not
Page 18
considered to be significant. See note 12 to the consolidated
financial statements for further details.
Total interest-bearing indebtedness amounted to $5.470 billion at
October 31, 1997, compared with $4.898 billion at October 31,
1996, generally corresponding with the level of Receivables and
Leases financed and the level of cash and cash equivalents. Total
short-term indebtedness amounted to $3.387 billion at October 31,
1997 compared with $3.098 billion at October 31, 1996. Total long-
term indebtedness amounted to $2.083 billion at October 31, 1997
and $1.800 billion at October 31, 1996. The ratio of total
interest-bearing debt to stockholder's equity was 6.7 to 1 and 6.5
to 1 at October 31, 1997 and 1996, respectively.
The Company maintained unsecured lines of credit with various
banks in North America and overseas. See note 4 to the
consolidated financial statements.
During 1997, the Capital Corporation issued $200 million of 6%
notes and $200 million of 6.30% notes, both due in 1999, and
retired $100 million of 7.20% notes due in 1997. In 1997, the
Capital Corporation also issued $750 million and retired $589
million of medium-term notes.
The Company has developed plans for the completion of systems
changes related to year 2000. The cost is not expected to have a
material effect on the Company's financial position or results of
operations.
The Capital Corporation paid cash dividends to John Deere Credit
Company of $75 million in 1997 and $70 million in 1996. In each
case, John Deere Credit Company paid a comparable dividend to
Deere & Company. During the first quarter of 1998, the Capital
Corporation declared and paid a dividend of $12.5 million to John
Deere Credit Company which, in turn, paid a dividend of $12.5
million to Deere & Company.
Item 8. Financial Statements and Supplementary Data.
See accompanying table of contents of financial statements.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Omitted pursuant to instruction I(2).
Item 11. Executive Compensation.
Omitted pursuant to instruction I(2).
Page 19
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
Omitted pursuant to instruction I(2).
Item 13. Certain Relationships and Related Transactions.
Omitted pursuant to instruction I(2).
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on
Form 8-K.
(a) (1) Financial Statements
(2) Financial Statement Schedule
See the table of contents to financial statements and
schedule immediately preceding the financial
statements and schedule to consolidated financial
statements.
(3) Exhibits
See the index to exhibits immediately preceding the
exhibits filed with this report.
(b) Reports on Form 8-K
Current Report on Form 8-K dated August 12, 1997
(Items 5 and 7).
Page 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
JOHN DEERE CAPITAL CORPORATION
/s/ Hans W. Becherer
--------------------------------
By: Hans W. Becherer
Chairman
Date: 22 January 1998
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the date
indicated.
Signature Title Date
--------- ----- ----
/s/ Hans W. Becherer Director, Chairman )
- ---------------------- and Principal )
Hans W. Becherer Executive Officer )
)
/s/ J. W. England Director )22 January 1998
- ---------------------- )
J. W. England )
)
/s/ Bernard L. Hardiek Director )
- ---------------------- )
Bernard L. Hardiek )
)
/s/ James R. Heseman Director )
- ---------------------- )
James R. Heseman )
)
/s/ James A. Israel )
- ---------------------- Director )
James A. Israel )
)
/s/ F. F. Korndorf Director )
- ---------------------- )
F. F. Korndorf )
)
/s/ Robert W. Lane Director, Vice President)
- ---------------------- and Principal Financial )
Robert W. Lane Officer )
)
Page 21
/s/ Pierre E. Leroy Director )
- ---------------------- )
Pierre E. Leroy )
)
/s/ Michael P. Orr Director and President )22 January 1998
- ---------------------- )
Michael P. Orr )
)
/s/ Jon D. Volkert Director )
- ---------------------- )
Jon D. Volkert )
)
/s/ Steven E. Warren Director, Vice President)
- ---------------------- and Principal Accounting)
Steven E. Warren Officer )
Page 22
[Deloitte & Touche Letterhead]
INDEPENDENT AUDITORS' REPORT
John Deere Capital Corporation:
We have audited the accompanying consolidated balance sheets of
John Deere Capital Corporation and subsidiaries as of October 31,
1997 and 1996 and the related statements of consolidated income
and retained earnings and of consolidated cash flows for each of
the three years in the period ended October 31, 1997. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of John
Deere Capital Corporation and subsidiaries at October 31, 1997
and 1996 and the results of their operations and their cash flows
for each of the three years in the period ended October 31, 1997
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Chicago, Illinois
November 25, 1997
Page 23
Table of Contents
Page
Financial Statements:
John Deere Capital Corporation and Subsidiaries:
Statements of Consolidated Income and Retained Earnings
for the Years Ended October 31, 1997, 1996 and 1995........25
Consolidated Balance Sheets, October 31, 1997 and 1996.......26
Statements of Consolidated Cash Flows for the Years Ended
October 31, 1997, 1996 and 1995............................27
Notes to Consolidated Financial Statements...................28
SCHEDULES OMITTED
The following schedules are omitted because of the absence of
conditions under which they are required or because the required
information is included in the Notes to the Consolidated Financial
Statements:
I, II, III, IV, and V.
Page 24
John Deere Capital Corporation and Subsidiaries
Statements of Consolidated Income and Retained Earnings
(dollars in millions)
For the Year Ended
October 31
-----------------------------
Revenues 1997 1996 1995
Finance income earned
on retail notes $ 417.4 $ 372.4 $ 333.5
Lease revenues 118.0 67.7 48.0
Revolving charge account income 102.6 95.1 84.3
Finance income earned on
wholesale notes 48.9 37.7 23.1
Securitization and servicing
fee income 29.7 46.0 35.5
Net gain on retail notes sold 18.8 14.4 11.4
Interest income from short-term
investments 10.2 11.4 11.3
Other income 8.7 12.0 3.8
- ----------------------------------------------------------------
Total revenues 754.3 656.7 550.9
- ----------------------------------------------------------------
Expenses
Interest expense:
On obligations to others 325.3 271.2 234.6
On notes payable to
Deere & Company 1.6 2.5 3.8
- ----------------------------------------------------------------
Total interest expense 326.9 273.7 238.4
- ----------------------------------------------------------------
Operating expenses:
Administrative and
operating expenses 106.5 95.0 77.6
Provision for credit losses 33.2 38.2 32.3
Fees paid to Deere & Company 8.3 6.1 5.3
Depreciation of equipment on
operating leases 68.2 37.1 21.9
- ----------------------------------------------------------------
Total operating expenses 216.2 176.4 137.1
- ----------------------------------------------------------------
Total expenses 543.1 450.1 375.5
- ----------------------------------------------------------------
Income of consolidated group
before income taxes 211.2 206.6 175.4
Provision for income taxes 74.0 72.5 61.3
- ----------------------------------------------------------------
Income of consolidated group 137.2 134.1 114.1
Equity in losses of
unconsolidated affiliates (1.4) -- --
- ----------------------------------------------------------------
Net income 135.8 134.1 114.1
Cash dividends declared (75.0) (70.0) (55.0)
Retained earnings at
beginning of the year 644.4 580.3 521.2
- ----------------------------------------------------------------
Retained earnings at end of year $ 705.2 $ 644.4 $ 580.3
================================================================
Ratio of earnings to fixed charges 1.64 1.75 1.73
================================================================
The accompanying Notes to Consolidated Financial
Statements are an integral part of this statement.
Page 25
John Deere Capital Corporation and Subsidiaries
Consolidated Balance Sheets
(dollars in millions)
October 31
------------------------
1997 1996
Assets ------------------------
Cash and cash equivalents $ 204.4 $ 171.0
Receivables and leases:
Retail notes 4,349.4 4,069.6
Revolving charge accounts 618.5 571.1
Wholesale notes 593.4 524.5
Financing leases 214.6 181.5
Total receivables....................5,775.9 5,346.7
Equipment on operating leases - net 527.2 276.8
Total receivables and leases.........6,303.1 5,623.5
Allowance for credit losses (85.9) (87.4)
Total receivables and leases - net...6,217.2 5,536.1
Other receivables 157.9 189.9
Investments in unconsolidated
affiliates 12.8 6.3
Other assets 66.8 67.8
- ----------------------------------------------------------------
Total Assets $ 6,659.1 $ 5,971.1
=================================================================
Liabilities and Stockholder's Equity
Short-term borrowings:
Commercial paper $ 1,991.9 $ 1,689.9
Deere & Company 349.9 544.8
Current maturities of
long-term borrowings 1,042.5 863.7
Other notes payable 2.4 --
Total short-term borrowings..........3,386.7 3,098.4
Accounts payable & accrued liabilities:
Accrued interest on senior debt 39.2 35.9
Other payables 188.3 144.8
Total accounts payable and
accrued liabilities..................227.5 180.7
Deposits withheld from dealers
and merchants 144.2 135.4
Long-term borrowings:
Senior debt 1,782.9 1,649.5
Subordinated debt 300.0 150.0
Total long-term borrowings...........2,082.9 1,799.5
Total liabilities....................5,841.3 5,214.0
Stockholder's equity
Common stock, without par value (issued
and outstanding - 2,500 shares owned
by John Deere Credit Company) 112.8 112.8
Retained earnings 705.2 644.4
Cumulative translation adjustment (.2) (.1)
Total stockholder's equity.............817.8 757.1
- ----------------------------------------------------------------
Total Liabilities & Stockholder's
Equity $ 6,659.1 $ 5,971.1
=================================================================
The accompanying Notes to Consolidated Financial
Statements are an integral part of this statement.
Page 26
John Deere Capital Corporation and Subsidiaries
Statements of Consolidated Cash Flows
(in millions)
For the Year Ended October 31
----------------------------------
1997 1996 1995
Cash Flows from Operating ----------------------------------
Activities:
Net income $ 135.8 $ 134.1 $ 114.1
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Provision for credit losses 33.2 38.2 32.3
Provision for depreciation 71.2 39.5 23.8
Provision (credit) for
deferred income taxes .8 1.7 (2.0)
Equity in losses of
unconsolidated affiliates 1.4 --- ---
Other 19.6 8.9 (7.0)
Net cash provided by
operating activities......262.0 222.4 161.2
- ----------------------------------------------------------------
Cash Flows from Investing
Activities:
Cost of receivables
and leases acquired (6,461.6) (5,516.6) (4,667.4)
Collections of receivables 4,840.3 3,888.8 3,038.5
Proceeds from sales of
receivables 836.5 814.0 726.3
Acquisitions of businesses (8.1) (7.4) ---
Other 57.1 41.6 5.2
Net cash used for
investing activities......(735.8) (779.6) (897.4)
- ----------------------------------------------------------------
Cash Flows from Financing
Activities:
Increase (decrease) in
commercial paper 302.0 (296.8) 405.9
Change in receivable/payable
with Deere & Company (183.4) 84.7 357.5
Increase in other notes payable 2.4 --- ---
Proceeds from issuance of
long-term borrowings 1,150.0 1,190.0 775.0
Principal payments on
long-term borrowings (688.8) (344.0) (625.8)
Dividends paid (75.0) (70.0) (55.0)
Net cash provided by
financing activities........507.2 563.9 857.6
- ----------------------------------------------------------------
Net increase in cash and
cash equivalents 33.4 6.7 121.4
Cash and cash equivalents
at the beginning of year........171.0 164.3 42.9
Cash and cash equivalents
at the end of year $ 204.4 $ 171.0 $ 164.3
================================================================
The accompanying Notes to Consolidated Financial
Statements are an integral part of this statement.
Page 27
John Deere Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
The following are significant accounting policies in addition to
those included in other notes to the consolidated financial
statements.
Corporate Organization
John Deere Capital Corporation (Capital Corporation) is a wholly-
owned subsidiary of John Deere Credit Company, a finance holding
company which is wholly-owned by Deere & Company. The Capital
Corporation and its subsidiaries, Deere Credit Services, Inc.,
Farm Plan Corporation, Deere Credit, Inc., John Deere
Receivables, Inc., John Deere Funding Corporation, Arrendadora
John Deere, S.A. de C.V. and John Deere Credit Limited
(Australia) are collectively called the Company. Deere & Company,
together with its subsidiaries and affiliates, are collectively
called John Deere.
Retail notes, revolving charge accounts, direct financing leases,
and wholesale notes receivable are collectively called
"Receivables." Receivables and operating leases are collectively
called "Receivables and Leases."
The risk of credit losses applicable to John Deere retail notes
and leases, net of recovery from withholdings from John Deere
dealers, is borne by the Company. During 1997, John Deere was
compensated by the Company for originating certain retail notes
and leases on John Deere products. John Deere is also reimbursed
by the Company for staff support and other administrative
services at estimated cost, and for credit lines provided by John
Deere based on utilization of the lines.
In 1997, the Company's subsidiary, Farm Plan Corporation, entered
into a partnership to offer certain financing products in Germany
under the trademark John Deere Credit. Along with the Company's
existing joint venture in the United Kingdom, these operations
support John Deere and independent John Deere retail dealers by
offering financing products specific to the European markets.
Both investments are accounted for under the equity method of
accounting.
Principles of Consolidation
The consolidated financial statements include the financial
statements of the Capital Corporation and its subsidiaries.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
and related disclosures. Actual results could differ from those
estimates.
Page 28
Accounting Changes
In 1997, the Company adopted the Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of. This Statement had no material
effect on the Company's financial position or results of
operations. In 1997, the Company adopted FASB Statement No. 125,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. This Statement had no material
effect on the Company's financial position or results of
operations.
In 1997, the FASB issued Statements No. 130, Reporting
Comprehensive Income, and No. 131, Disclosures about Segments of
an Enterprise and Related Information, which must be adopted by
fiscal year 1999. These Statements will have no effect on the
Company's financial position or results of operations.
In 1997, the Securities and Exchange Commission amended its rules
to require certain disclosure concerning derivatives and other
financial instruments. This information is included in Note 12 -
Financial Instruments and Supplemental Information (Unaudited) on
page 44.
Reclassifications
Certain amounts for prior years have been reclassified to conform
with 1997 financial statement presentations.
Note 2. Receivables and Leases
Retail Notes Receivable
The principal business of the Company is providing and
administering financing for retail purchases of new and used
equipment manufactured by John Deere's agricultural, construction
and commercial and consumer equipment divisions. The Company
purchases retail installment sales and loan contracts (retail
notes) from John Deere. These retail notes are acquired by John
Deere through independent John Deere retail dealers. The Company
also purchases and finances certain agricultural, construction and
lawn and grounds care retail notes unrelated to John Deere. In
addition, the Company purchases and finances recreational product
retail notes acquired from independent dealers and marine product
mortgage service companies (recreational product retail notes).
Page 29
Retail notes receivable by product category at October 31 are as
follows (in millions of dollars):
1997 1996
-----------------------
Agricultural equipment - new $ 1,607.1 $ 1,581.9
Agricultural equipment - used 1,464.5 1,318.4
Construction equipment - new 626.4 587.9
Construction equipment - used 128.7 134.6
Lawn and grounds care equipment - new 226.8 193.4
Lawn and grounds care equipment - used 22.6 20.5
Recreational products 1,507.0 1,351.3
- -------------------------------------------------------------
Total 5,583.1 5,188.0
- -------------------------------------------------------------
Unearned finance income:
Equipment (643.8) (608.0)
Recreational products (589.9) (510.4)
- -------------------------------------------------------------
Total (1,233.7) (1,118.4)
- -------------------------------------------------------------
Retail notes receivable $ 4,349.4 $ 4,069.6
==============================================================
Retail notes acquired by the Company during the year ended
October 31, 1997 had an estimated average original term (based on
dollar amounts) of 66 months. During 1996 and 1995, the estimated
average original term was 67 and 71 months, respectively.
Historically, because of prepayments, the average actual life of
retail notes has been considerably shorter than the average
original term. Average actual life for retail notes in 1997, 1996
and 1995 were 25, 31 and 29 months, respectively.
Retail note installments at October 31 are scheduled as follows
(in millions of dollars):
1997 1996
Due in: ______________________
0-12 months $ 1,379.1 $ 1,278.7
13-24 months 1,207.6 1,117.9
25-36 months 978.6 932.0
37-48 months 691.2 690.9
49-60 months 438.9 435.9
61-72 months 211.9 177.5
Over 72 months 675.8 555.1
-----------------------------------------------
Total $ 5,583.1 $ 5,188.0
===============================================
Page 30
Company guidelines relating to down payment requirements and
contract terms on retail notes are generally as follows:
Down Contract
Payment Terms
-----------------------
Agricultural equipment
(new and used):
Seasonal payments 30% 4-8 crop years
Monthly payments 20% 48-96 months
Construction equipment:
New 20% 48-60 months
Used 20% 36 months
Lawn and grounds care equipment
(new and used):
Seasonal payments 10% 3-6 years
Monthly payments 10% 36-72 months
Recreational products
(excluding yachts):
New 10% 180 months
Used 10% 144 months
Yachts (new and used): 20% 240 months
During 1997, 1996 and 1995, the Company received proceeds of $837
million, $814 million and $726 million, respectively, from the
sale and securitization of retail notes. The Company acts as
agent for the buyers in collection and administration of all the
notes it has sold. All retail notes sold are collateralized by
security agreements on the related equipment sold to the
customers. The Company's estimated maximum exposure under all
retail note recourse provisions at October 31, 1997 and 1996 was
$168 million and $186 million, respectively. At October 31, 1997,
1996 and 1995, the balance of all retail notes previously sold by
the Company was $1.314 billion, $1.177 billion and $1.162
billion, respectively. Additional sales of retail notes are
expected to be made in the future.
Finance income is recognized over the lives of the notes on the
effective-yield basis. During 1997, the average effective yield
on retail notes held by the Company was approximately 9.5
percent, compared with 9.7 percent in 1996. Unearned finance
income on variable-rate notes is adjusted monthly based on
fluctuations in the base rate of a specified bank. Costs incurred
in the acquisition of retail notes are deferred and recognized
over the expected lives of the notes on the effective-yield
basis.
A portion of the finance income earned by the Company arises from
financing of retail sales of John Deere equipment on which
finance charges are waived or reduced by John Deere for a period
from the date of sale to a specified subsequent date. The Company
generally receives compensation from John Deere equal to a
competitive interest rate for periods during which finance
charges have been waived or reduced on retail notes and leases.
The portions of the Company's finance income earned that were
Page 31
received from John Deere on retail notes containing waiver of
finance charges or reduced rates were 19 percent in 1997, 20
percent in 1996 and 19 percent in 1995.
A deposit equal to one percent of the face amount of certain John
Deere agricultural and commercial and consumer equipment retail
notes originating from each dealer is withheld by the Company
from that dealer. Any subsequent retail note losses are charged
against the withheld deposits. To the extent that a loss on a
retail note cannot be absorbed by these deposits withheld from
the dealer from which the retail note was acquired, it is charged
against the Company's allowance for credit losses. At the end of
each calendar year, the balance of each dealer's withholding
account in excess of a specified percent (currently 3 percent) of
the total dealer's balance is remitted to the dealer. At the end
of the Company's fiscal year, any negative balance in the dealer
withholding account is written off and absorbed by the Company's
allowance for credit losses. There is no withholding of dealer
deposits on John Deere construction equipment retail notes or
recreational product retail notes.
The Company requires that theft and physical damage insurance be
carried on all goods leased or securing retail notes and
wholesale notes. In most cases, the customer may, at his own
expense, have the Company or the seller of the goods purchase
this insurance or obtain it from other sources.
Revolving Charge Accounts Receivable
Revolving charge account income is generated primarily by three
revolving credit products: Farm Plan, the John Deere Credit
Revolving Plan and Preferred Resource. Farm Plan is primarily
used by farmers and ranchers to finance day-to-day operating
expenses, such as parts and service labor. Merchants offer Farm
Plan as an alternative to carrying in-house accounts receivable,
and can initially sell existing balances to the Company under a
recourse arrangement. Farm Plan income includes a discount paid
by merchants for transaction processing and support and finance
charges paid by customers on their existing account balances. The
John Deere Credit Revolving Plan is used primarily by retail
customers of John Deere dealers to finance lawn and grounds care
equipment. Income includes a discount paid by dealers on most
transactions and finance charges paid by customers on their
outstanding account balances. Preferred Resource (an unsecured
lending product) is used primarily by executives and
professionals, and offers customers convenience and security by
providing a substantial, readily-available source of funding for
a variety of personal expenses. In 1997, the Company introduced
YachtLine, a secured line of credit, which allows customers
access to the equity of their vessel.
Revolving charge accounts receivable at October 31, 1997 totaled
$619 million compared with $571 million at October 31, 1996.
Account holders may pay the account balance in full at any time,
or make payments over a number of months according to a payment
schedule. A minimum amount is due each month from customers
selecting the revolving payment option.
Page 32
Direct Financing Leases and Equipment on Operating Leases
The Company leases agricultural, construction, lawn and grounds
care and certain other equipment directly to retail customers. At
the time of accepting a lease that qualifies as a direct
financing lease under FASB Statement No. 13, Accounting for
Leases, the Company records the gross amount of lease payments
receivable, estimated residual value of the leased equipment and
unearned lease income. The unearned lease income is equal to the
excess of the gross lease receivable plus the estimated residual
value over the cost of the equipment. The unearned lease income
is recognized as revenue over the lease term on the effective-
yield method. Rental payments applicable to equipment on
operating leases are recorded as income on a straight-line method
over the lease terms. Operating lease assets are recorded at cost
and depreciated on a straight-line method over the terms of the
leases. Lease acquisition costs are accounted for in a manner
similar to the procedures for retail notes. Residual values
represent estimates of the value of the leased assets at the end
of the contract terms and are initially recorded based upon
appraisals and estimates. Residual values are continually
reviewed to determine that recorded amounts are appropriate.
Financing leases receivable by product category at October 31 are
as follows (in millions of dollars):
1997 1996
-------------------
Agricultural equipment $ 62.2 $ 65.0
Construction equipment 100.0 73.1
Lawn and grounds care equipment 37.7 10.6
Other equipment 23.7 31.0
-----------------------------------------------------------
Total 223.6 179.7
Estimated residual values 26.2 31.7
Unearned finance income (35.2) (29.9)
-----------------------------------------------------------
Financing leases receivable $ 214.6 $ 181.5
===========================================================
Residual values represent the amounts estimated to be recoverable
at maturity from disposition of the leased equipment.
Initial lease terms for financing leases range from 12 months to
72 months. Payments on financing leases receivable at October 31
are scheduled as follows (in millions of dollars):
1997 1996
------------------
Due in:
0-12 months $ 84.4 $ 64.8
13-24 months 65.6 51.1
25-36 months 43.2 36.1
37-48 months 22.2 19.8
Over 48 months 8.2 7.9
--------------------------------------
Total $ 223.6 $ 179.7
======================================
Page 33
Deposits withheld from John Deere dealers and related losses on
leases are handled in a manner similar to the procedures for
retail notes. In addition, a lease payment discount program,
allowing reduced payments over the term of the lease, is
administered in a manner similar to finance waiver on retail
notes.
Equipment returned to the Company upon termination of leases and
held for subsequent sale or lease is recorded at the lower of net
book value or estimated market value of the equipment.
The cost of equipment on operating leases by product category at
October 31 is as follows (in millions of dollars):
1997 1996
-------------------
Agricultural equipment $ 403.9 $ 221.3
Construction equipment 181.9 96.4
Lawn and grounds care equipment 25.1 7.5
Other equipment 16.2 6.9
----------------------------------------------------------
Total 627.1 332.1
Accumulated depreciation (99.9) (55.3)
----------------------------------------------------------
Equipment on operating leases - net $ 527.2 $ 276.8
==========================================================
Initial lease terms for equipment on operating leases range from
12 months to 72 months. Rental payments for equipment on
operating leases at October 31 are scheduled as follows (in
millions of dollars):
1997 1996
------------------
Due in:
0-12 months $ 113.1 $ 54.7
13-24 months 85.6 47.8
25-36 months 41.4 21.6
37-48 months 19.3 12.0
Over 48 months 5.1 3.1
----------------------------------------
Total $ 264.5 $ 139.2
========================================
Wholesale Notes Receivable
The Company finances wholesale inventories of recreational
vehicles, manufactured housing units, yachts, John Deere engines,
John Deere agricultural and John Deere construction equipment
owned by dealers of those products. Wholesale finance income is
generally recognized monthly based on the daily balance of
wholesale receivables outstanding and the applicable effective
interest rate. Interest rates vary with a prevailing bank base
rate, the type of equipment financed and the balance outstanding.
Wholesale receivables are secured by equipment financed.
Page 34
Wholesale notes receivable on John Deere equipment owned by the
dealers, recreational vehicles, manufactured housing units and
yachts totaled $593 million at October 31, 1997 compared with
$524 million at October 31, 1996. Generally, the maximum maturity
for wholesale notes is 12 months.
Other Receivables
The Company has sold retail notes to limited-purpose business
trusts and to private third parties, which utilized the notes as
collateral for the issuance of asset-backed securities. Other
receivables related to securitizations are recorded at net
present value and relate to payments to be received for retained
interests and deposits made pursuant to recourse provisions under
asset-backed securities sales agreements. These receivables are
subsequently carried at estimated fair value with unrealized
gains or losses, if any, recorded directly in equity similar to
available-for-sale marketable securities. Securitization and
servicing fee income includes the interest earned on and realized
adjustments related to these receivables and reimbursed
administrative expenses.
Concentration of Credit Risk
Receivables and Leases have significant concentrations of credit
risk in the agricultural, construction, lawn and grounds care and
recreational product business sectors as shown in the previous
tables. On a geographic basis, there is not a disproportionate
concentration of credit risk in any area in which the Company
operates. The Company retains as collateral a security interest
in the goods associated with Receivables and Leases other than
certain revolving charge accounts.
Note 3. Allowance for Credit Losses, Delinquencies and Write-offs
Allowance for Credit Losses
Allowances for credit losses on Receivables and Leases are
maintained in amounts considered to be appropriate in relation to
the Receivables and Leases outstanding based on estimated
collectibility and collection experience.
An analysis of the allowance for credit losses on total
Receivables and Leases follows (in millions of dollars):
1997 1996 1995
-----------------------
Balance, beginning of the year $ 87.4 $ 84.2 $ 80.1
Provision charged to operations 33.2 38.2 32.3
Amounts written off (29.7) (29.0) (23.7)
Transfers related to retail note sales (5.0) (6.0) (4.5)
- ----------------------------------------------------------------
Balance, end of the year $ 85.9 $ 87.4 $ 84.2
================================================================
Page 35
The allowance for credit losses represented 1.4 percent, 1.6
percent and 1.7 percent of Receivables and Leases financed at
October 31, 1997, 1996 and 1995, respectively. In addition, the
Company had $144 million, $135 million and $127 million at
October 31, 1997, 1996 and 1995, respectively, of deposits
withheld from John Deere dealers and Farm Plan merchants
available for certain potential credit losses originating from
those dealers and merchants.
Delinquencies
Generally, when retail notes become 120 days delinquent, accrual
of finance income is suspended, the collateral is repossessed or
the account is designated for litigation and the estimated
uncollectible amount, after charging the dealer's withholding
account, if any, is written off to the allowance for credit
losses. Accrual of revolving charge account income is suspended
generally when the account becomes 120 days delinquent. Accounts
are deemed to be uncollectible and written off to the allowance
for credit losses when delinquency reaches 180 days for a Farm
Plan account, 150 days for a John Deere Credit Revolving Plan
account and 120 days for both Preferred Resource and YachtLine
accounts. When a lease account becomes 120 days delinquent, the
accrual of lease revenue is suspended, the equipment is
repossessed or the account is designated for litigation, and the
estimated uncollectible amount, after charging the dealer's
withholding account, if any, is written off to the allowance for
credit losses. When a wholesale account becomes 60 days
delinquent, accrual of finance income is suspended, the
collateral is repossessed or the amount is designated for
litigation, and the estimated uncollectible amount is written off
to the allowance for credit losses. Although amounts are not
withheld from dealers to cover uncollectible wholesale
receivables, there are usually repurchase agreements with
manufacturers for new inventories held by dealers.
Total Receivable and Lease amounts 60 days or more past due, by
product and as a percentage of total balances held were as
follows (dollars in millions):
Oct 31, 1997 Oct 31, 1996 Oct 31, 1995
------------ ------------ ------------
Dollars % Dollars % Dollars %
Retail notes: ------------ ------------ ------------
Agricultural equipment $ 6.8 .27% $ 4.4 .18% $ 4.1 .18%
Construction equipment 2.0 .31 2.5 .39 1.2 .23
Lawn and grounds care
equipment .6 .28 .7 .38 .6 .38
Recreational products .3 .03 .3 .03 .2 .1
----- ----- -----
Total retail notes 9.7 .22 7.9 .19 6.1 .16
Revolving charge accounts 8.3 1.34 8.9 1.57 7.1 1.40
Wholesale notes 2.0 .33 1.0 .17 .1 .02
Leases 2.0 .27 1.7 .38 .8 .28
----- ----- -----
Total Receivables
and Leases $22.0 .35 $19.5 .35 $14.1 .29
===== ===== =====
Page 36
Write-offs
Total Receivable and Lease write-off amounts, by product and as a
percentage of total balances held were as follows (dollars in
millions):
1997 1996 1995
------------ ------------ ------------
Dollars % Dollars % Dollars %
Retail notes: ------------ ------------ ------------
Agricultural equipment $ 1.5 .05% $ 2.4 .10% $ .3 .02%
Construction equipment 3.7 .58 5.3 .93 2.2 1.36
Lawn and grounds care
equipment .2 .12 .3 .17 .6 .38
Recreational products 8.0 .90 9.6 1.11 11.5 1.33
----- ----- -----
Total retail notes 13.4 .30 17.6 .45 14.6 .38
Revolving charge accounts 11.3 2.08 9.7 1.93 7.6 1.49
Wholesale notes 2.0 .39 1.0 .25 .4 .14
Leases 3.0 .51 .7 .20 1.1 .36
----- ----- -----
Total Receivables
and Leases $29.7 .49 $29.0 .56 $23.7 .48
===== ===== =====
Note 4. Short-Term Borrowings
On October 31, 1997, short-term borrowings were $3.387 billion,
$1.992 billion of which was commercial paper. Short-term
borrowings were $3.098 billion on October 31, 1996, $1.690
billion of which was commercial paper. The Capital Corporation's
short-term debt also includes amounts borrowed from Deere &
Company, which totaled $350 million and $545 million at October
31, 1997 and 1996, respectively. The Capital Corporation pays a
market rate of interest to Deere & Company based on the average
outstanding borrowings each month. The weighted average interest
rate on total short-term borrowings, excluding current maturities
of long-term borrowings, was 5.5 percent during both 1997 and
1996.
At October 31, 1997, the Capital Corporation, Deere & Company,
John Deere Limited (Canada) and John Deere Credit Inc. (Canada),
jointly, maintained $4.007 billion of unsecured lines of credit
with various banks in North America and overseas, $1.329 billion
of which was unused. For the purpose of computing unused credit
lines, total short-term borrowings, excluding the current portion
of long-term borrowings, of the Capital Corporation, Deere &
Company, John Deere Limited (Canada) and John Deere Credit Inc.
(Canada), were considered to constitute utilization. Included in
the total credit lines is a long-term commitment credit
agreement, expiring February 25, 2002, for $3.500 billion. The
credit agreement has various requirements of the Company,
including the maintenance of its consolidated ratio of earnings
before fixed charges to fixed charges at not less than 1.05 to 1
for each fiscal quarter (as described below) and the Company's
ratio of senior debt to total stockholder's equity plus
subordinated debt may not be more than 8 to 1 at the end of any
Page 37
fiscal quarter. "Senior debt" consists of the Company's total
interest-bearing obligations, excluding subordinated debt, but
including borrowings from John Deere. The Company's ratio of
senior debt to total stockholder's equity plus subordinated debt
was 4.6 to 1 at October 31, 1997 compared to 4.4 to 1 at October
31, 1996. An annual facility fee on the credit agreement is
charged to the Capital Corporation based on utilization.
Deere & Company has an agreement with the Capital Corporation to
make income maintenance payments to the Capital Corporation such
that its consolidated ratio of earnings before fixed charges to
fixed charges is not less than 1.05 to 1 for each fiscal quarter.
For purposes of these calculations, "earnings" consist of income
before income taxes, the cumulative effect of changes in
accounting and fixed charges. "Fixed charges" consist of interest
on indebtedness, amortization of debt discount and expense, an
estimated amount of rental expense under capitalized leases which
is deemed to be representative of the interest factor and rental
expense under operating leases. The Company's ratio of earnings
to fixed charges was 1.64 to 1, 1.75 to 1, and 1.73 to 1 in 1997,
1996 and 1995, respectively. Deere & Company also agreed to
maintain the Capital Corporation's tangible net worth at not less
than $50 million and to own at least 51 percent of Capital
Corporation's voting capital stock. This arrangement is not
intended to make Deere & Company responsible for the payment of
any indebtedness, obligation or liability of the Company or any
of its direct or indirect subsidiaries.
Page 38
Note 5. Long-Term Borrowings
Long-term borrowings of Capital Corporation at October 31
consisted of the following (in millions of dollars):
1997 1996
Senior Debt: ----------------------
Medium-term notes due 1998-2007:
Average interest rate of 6.7%
as of year end 1997 and 1996 $ 1,284.5 $ 1,402.0
Floating rate notes due 1998
(federal funds rate):
Swapped to an alternative
variable interest rate of
5.6% as of 1996 --- 150.0
5% Swiss franc bonds due 1999:
Swapped to U.S. dollars and a
variable interest rate of 6.1%
as of year end 1997 and 6.0%
as of year end 1996 97.5 97.5
6.30% Notes due 1999 200.0 ---
6% Notes due 1999 200.0 ---
- ----------------------------------------------------------------
Total senior debt 1,782.0 1,649.5
Unamortized debt premium .9 ---
- ----------------------------------------------------------------
Net senior debt 1,782.9 1,649.5
- ----------------------------------------------------------------
Subordinated Debt:
9-5/8% Subordinated Notes due 1998:
Swapped to variable interest rate
of 6.1% as of year end 1997
and 6.0% as of year end 1996 150.0 150.0
8-5/8% Subordinated Debentures
due 2019* 150.0 ---
- ----------------------------------------------------------------
Total subordinated debt 300.0 150.0
- ----------------------------------------------------------------
Total $ 2,082.9 $ 1,799.5
================================================================
* Reclassified to short-term borrowings in 1996 because the
obligation was callable by the creditors in 1997. Swapped to
variable interest rate of 5.3% as of year end 1996.
The approximate amounts of long-term borrowings maturing and
sinking fund payments required in each of the next five years, in
millions of dollars, are as follows: 1998 - $1,043, 1999 -
$1,048, 2000 - $365, 2001 - $140 and 2002 - $280.
Note 6. Common Stock
All of Capital Corporation's common stock is owned by John Deere
Credit Company, a wholly-owned finance holding subsidiary of
Deere & Company. No shares of common stock of the Company were
Page 39
reserved for officers or employees or for options, warrants,
conversions or other rights at October 31, 1997 or 1996. At
October 31, 1997, the Company had authorized, but not issued,
10,000 shares of $1 par value preferred stock.
Note 7. Dividends
The Capital Corporation paid cash dividends to John Deere Credit
Company of $75 million in 1997 and $70 million in 1996. In each
case, John Deere Credit Company paid an identical dividend to
Deere & Company.
Note 8. Pension and Other Retirement Benefits
The Company participates in the Deere & Company salaried pension
plan, which is a defined benefit plan in which benefits are based
primarily on years of service and employee compensation. This
plan is funded according to the 1974 Employee Retirement Income
Security Act (ERISA) and income tax regulations. Plan assets
consist primarily of common stocks, common trust funds,
government securities and corporate debt securities. Pension
expense is actuarially determined based on the Company's
employees included in the plan. The Company's pension expense
amounted to $1.6 million in 1997, $1.7 million in 1996 and $1.4
million in 1995. The Company generally provides defined benefit
health care and life insurance plans for retired employees
through participation in the Deere & Company's plans. Health care
and life insurance benefits expense is actuarially determined
based on the Company's employees included in the plans and
amounted to $.8 million in both 1997 and 1996 and $.9 million in
1995. Further disclosure for these plans is included in the notes
to the Deere & Company 1997 annual report.
Note 9. Income Taxes
Taxes on Income and Income Tax Credits
The taxable income of the Company is included in the consolidated
United States income tax return of Deere & Company. Provisions
for income taxes are made generally as if the Capital Corporation
and each of its subsidiaries filed separate income tax returns.
Page 40
Deferred Income Taxes
Deferred income taxes arise because certain items are treated
differently for financial accounting than for income tax
reporting purposes. An analysis of deferred income tax assets and
liabilities at October 31 are as follows (in millions of
dollars):
1997 1996
-------------------- --------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
-------------------- -------------------
Allowance for
credit losses $ 35.1 $ 34.3
Deferred lease
income $ 6.8 $ 4.6
Deferred retail note
finance income 9.3 8.9
Accrual for retirement
and other benefits 4.2 2.5
Securitization income 2.7 3.6
Miscellaneous accruals
and other .2 .3
- ------------------------------------------- -------------------
Total deferred income
tax assets and
liabilities $ 42.0 $ 16.3 $ 40.4 $ 13.8
=========================================== ===================
The provision for income taxes consisted of the following (in
millions of dollars):
1997 1996 1995
------- ------- -------
Current $ 73.1 $ 70.8 $ 63.3
Deferred .9 1.7 (2.0)
- -----------------------------------------------------------------
Total provision for income taxes $ 74.0 $ 72.5 $ 61.3
=================================================================
Effective Income Tax Provision
A comparison of the statutory and effective income tax provisions
and reasons for related differences follows (in millions of
dollars):
1997 1996 1995
---------------------------
United States federal income
tax provision at a statutory
rate of 35 percent $ 73.8 $ 72.3 $ 61.4
Municipal lease income not taxable (1.1) (.5) (.3)
Other adjustments - net 1.3 .7 .2
- ----------------------------------------------------------------
Total provision for income taxes $ 74.0 $ 72.5 $ 61.3
================================================================
Page 41
Note 10. Cash Flow Information
For purposes of the statements of consolidated cash flows, the
Company considers investments with original maturities of three
months or less to be cash equivalents. Substantially all of the
Company's short-term borrowings mature within three months or
less.
Cash payments by the Company for interest incurred on borrowings
in 1997, 1996 and 1995 were $346 million, $271 million and $225
million, respectively. Cash payments for income taxes during
these same periods were $68 million, $77 million and $64 million,
respectively.
Note 11. Legal Proceedings
The Company is subject to various unresolved legal actions which
arise in the normal course of its business, the most prevalent of
which relate to state and federal laws and regulations concerning
retail credit. Although it is not possible to predict with
certainty the outcome of these unresolved legal actions or the
range of possible loss, the Company believes these unresolved
legal actions will not have a material effect on its financial
position or results of operations.
Note 12. Financial Instruments
The fair values of financial instruments which do not approximate
the carrying values in the financial statements at October 31 are
as follows (in millions of dollars):
1997 1996
------------------ -----------------
Carrying Fair Carrying Fair
Value Value Value Value
------------------ ------------------
Receivables financed $ 5,776 $ 5,750 $ 5,347 $ 5,329
============================================= ==================
Long-term borrowings
and related swaps:
Long-term borrowings $ 2,089 $ 2,127 $ 1,816 $ 1,844
Interest rate and
foreign currency swaps (6) (19) (17) (30)
- --------------------------------------------- ------------------
Total $ 2,083 $ 2,108 $ 1,799 $ 1,814
============================================= ==================
Fair Value Estimates
Fair values of the long-term financing receivables with fixed
rates were based on the discounted values of their related cash
flows at current market interest rates. The fair values of the
remaining financing receivables approximated the carrying
amounts.
Fair values of long-term borrowings with fixed rates were based
on discounted values of their related cash flows at current
market interest rates. Certain long-term borrowings of the
Page 42
Company have been swapped to current variable interest rates and
United States dollars. Fair values of these swaps were based on
quotes from dealers.
Fair values and carrying values of the Company's other interest
rate swaps and caps associated with short-term borrowings and
foreign exchange forward contracts were not material.
Derivatives
The Company enters into derivative transactions only to hedge
exposures arising in the normal course of business, and not for
the purpose of creating speculative positions or trading. The
following notional or contract amounts do not represent amounts
exchanged by the parties and, therefore, are not representative
of the Company's risk. The net amounts exchanged are calculated
on the basis of the notional amounts and other terms of the
derivatives such as interest rates and exchange rates, and
represent only a small portion of the notional amounts. The
credit and market risks under these agreements are not considered
to be significant since the counterparties have high credit
ratings and the fair values and carrying values are not material.
Interest Rate Swaps and Caps
The Company enters into interest rate swap and interest rate cap
agreements related to its borrowings in order to more closely
match the type of interest rates of the borrowings to those of
the assets being funded. The differential to be paid or received
on all swap and cap agreements is accrued as interest rates
change and is recognized over the lives of the agreements in
interest expense. Premiums are amortized to interest expense over
the lives of the agreements.
At October 31, 1997 and 1996, the total notional principal
amounts of interest rate swap agreements related to short-term
borrowings were $490 million and $346 million, having rates of
5.6 to 6.3 percent and 5.2 to 7.4 percent, terminating in up to
12 months and 12 months, respectively. There were no interest
rate cap agreements at October 31, 1997 or 1996.
The Company has entered into interest rate swap agreements with
independent parties that change the effective rate of interest on
certain long-term borrowings. See the table in Note 5 - Long-Term
Borrowings, which reflects the effective year-end variable
interest rates relating to these swap agreements. The notional
principal amounts and maturity dates of these swap agreements are
the same as the principal amounts and maturities of the related
borrowings. The Company also has interest rate swap agreements
associated with medium-term notes. Note 5 - Long-Term Borrowings
also includes a table which reflects the interest rates relating
to these swap agreements. At October 31, 1997 and 1996, the total
notional principal amounts of these swap agreements were $380
million and $520 million, terminating in up to 116 months and 113
months, respectively.
Page 43
Foreign Exchange Swaps
At October 31, 1997 and 1996, the Company had a foreign exchange
swap agreement maturing in 15 months and 27 months, respectively,
for $97 million to hedge the currency exposure of the 5% Swiss
Franc Bonds due in 1999. The foreign exchange swap gains and
losses are accrued as foreign exchange rates change and offset
the equal and opposite gains and losses on the related bonds.
Supplemental Information (Unaudited)
Quarterly Information
Supplemental quarterly information for the Company follows (in
millions of dollars):
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
------------------------------------------
1997:
Revenues $163.5 $179.1 $200.3 $211.4 $754.3
Interest expense 71.5 78.6 86.6 90.2 326.9
Operating expenses 45.7 55.4 55.4 59.7 216.2
Provision for
income taxes 16.1 15.8 20.2 21.9 74.0
Equity in losses of
unconsolidated
affiliates .5 .3 .3 .3 1.4
- ----------------------------------------------------------------
Net income $ 29.7 $ 29.0 $ 37.8 $ 39.3 $135.8
================================================================
1996:
Revenues $150.7 $167.6 $158.7 $179.7 $656.7
Interest expense 66.3 67.6 66.8 73.0 273.7
Operating expenses 34.7 41.8 42.2 57.7 176.4
Provision for
income taxes 17.4 20.3 17.4 17.4 72.5
- ----------------------------------------------------------------
Net income $ 32.3 $ 37.9 $ 32.3 $ 31.6 $134.1
================================================================
Sensitivity Analysis
The following is a sensitivity analysis for the Company's
derivatives and other financial instruments which have interest
rate risk. The gains or losses in the table below represent the
changes in the financial instrument's fair values which would be
caused by increasing the interest rates by 10 percent of the
current market rates at October 31, 1997. The fair values were
determined based on the discounted values of their related cash
flows. The gains or losses in fair values at October 31, 1997
would have been (in millions of dollars):
Page 44
Fair Value
Gains (Losses)
--------------
Financing receivables $ (36)
Long-term borrowings
and related swaps:
Long-term borrowings 27
Interest rate and
foreign currency swaps (7)
-------------------------------------------
Total $ (16)
===========================================
Dividend
On December 5, 1997, the Capital Corporation declared a $12.5
million dividend, to be paid to John Deere Credit Company on
December 16, 1997. John Deere Credit Company, in turn, declared a
$12.5 million dividend to Deere & Company, also payable on
December 16, 1997.
Page 45
Index to Exhibits
2. Not applicable.
3.1 Certificate of Incorporation, as amended (Exhibit
3.1 to Form 10-K of the registrant for the year
ended October 31, 1994*).
3.2 Bylaws, as amended (Exhibit 3.2 to Form 10-K of the
registrant for the year ended October 31, 1994*).
4.1 Credit agreements among registrant, Deere & Company,
various financial institutions, and Chemical Bank,
The Chase Manhattan Bank (National Association),
Bank of America National Trust and Savings
Association, Deutsche Bank AG, and the Toronto-
Dominion Bank as Managing Agents, dated as of April
5, 1995 (Exhibit 4.1 to Form 10-Q of Deere & Company
for the quarter ended April 30, 1995, Securities and
Exchange Commission file number 1-4121*).
4.2 Senior Indenture dated as of June 15, 1995 between
the registrant and The Chase Manhattan Bank
(National Association), as Trustee (Exhibit 4.1 to
Form 10-Q of the registrant for the quarter ended
July 31, 1995*).
4.3 Subordinated Indenture dated as of June 15, 1995
between the registrant and First National Bank of
Chicago, as Trustee (Exhibit 4.2 to Form 10-Q of the
registrant for the quarter ended July 31, 1995*).
4.4 Form of certificate for common stock (Exhibit 4.3 to
Form 10-Q of the registrant for the quarter ended
April 30, 1993*).
Certain instruments relating to long-term debt
constituting less than 10% of the registrant's
total assets may not be filed as exhibits herewith
pursuant to Item 604(b)(4)(iii)(A) of Regulation
S-K. The registrant will file copies of such
instruments upon request of the Commission.
9. Not applicable.
10.1 Agreement dated May 11, 1993 between the registrant
and Deere & Company concerning agricultural retail
notes (Exhibit 10.1 to Form 10-Q of the registrant
for the quarter ended April 30, 1993*).
10.2 Amendment dated November 4, 1994 between the
registrant and Deere & Company concerning
agricultural retail notes. (Exhibit 10.2 to Form
10-K of the registrant for the year ended October
31, 1995*).
10.3 Agreement dated May 11, 1994 between the registrant
and Deere & Company concerning lawn and grounds care
retail notes (Exhibit 10.2 to the Form 10-Q of the
registrant for the quarter ended April 30, 1993*).
Page 46
10.4 Amendment dated November 4, 1994 between the
registrant and Deere & Company concerning lawn and
grounds care retail notes. (Exhibit 10.4 to Form
10-K of the registrant for the year ended October
31, 1995*).
10.5 Agreement dated January 26, 1983 between the
registrant and Deere & Company relating to
agreements with United States sales branches
on retail notes (Exhibit 10.4 to Form 10-Q of the
registrant for the quarter ended April 30, 1993*).
10.6 Insurance policy no. CL-001 of Sierra General Life
Insurance Company providing insurance on lives of
purchasers of certain equipment financed with
receivables (Exhibit 10.5 to Form 10-Q of the
registrant for the quarter ended April 30, 1993*).
10.7 Agreement dated October 15, 1996 between the
registrant and John Deere Construction Equipment
Company relating to fixed charges ratio, ownership
and minimum net worth (Exhibit 10.7 to Form 10-K of
the registrant for the year ended October 31, 1996*).
10.8 Agreement dated July 14, 1997 between the registrant
and John Deere Construction Equipment Company
concerning construction retail notes.
11. Not applicable.
12. Computation of Ratio of Earnings to Fixed Charges
for each of the five years in the period ended
October 31, 1997.
13. Not applicable.
16. Not applicable.
18. Not applicable.
21. Omitted pursuant to instruction I(2).
22. Not applicable.
23. Consent of Deloitte & Touche LLP.
24. Not applicable.
27. Financial Data Schedule.
99. Parts I and II of the Deere & Company Form 10-K
for the fiscal year ended October 31, 1997
(Securities and Exchange Commission file number
1-4121*).
- ----------------
* Incorporated by reference. Copies of these exhibits are
available from the Company upon request.
Page 47