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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, 1993
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 No.)
Suite 600, First Interstate Bank Bldg.,
1 East First Street, Reno, Nevada 89501 (702) 786-5527
(Address of principal executive offices) (Zip Code) (Telephone Number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT
Title of each class Name of each exchange on which registered
9.35% Subordinated Debentures Due 2003 New York Stock Exchange
6% Notes Due 1995 New York Stock Exchange
7.20% Notes Due 1997 New York Stock Exchange
9-5/8% Subordinated Notes Due 1998 New York Stock Exchange
8-5/8% Subordinated Debentures Due 2019 New York Stock Exchange
5% Notes Due 1995 New York Stock Exchange
4-5/8% Notes Due 1996 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___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. /X/
At January 1, 1994, 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 J(1)(a)
and (b) of Form 10-K and is therefore filing this Form with certain reduced
disclosures as permitted by Instruction J(2).
_____________________________________________________________________________
Page 1 of 322 pages.
Index to Exhibits Page 48.
PART I
ITEM 1. BUSINESS.
THE COMPANY
The principal business of John Deere Capital Corporation (Capital
Corporation) is the purchasing and financing of retail installment sales and
loan contracts (retail notes) from the equipment sales branches in the United
States operated by Deere & Company and its wholly-owned subsidiaries
(collectively called John Deere). These notes are acquired by the sales
branches through John Deere retail dealers in the United States and originate
in connection with retail sales by dealers of new John Deere agricultural
equipment, industrial equipment and lawn and grounds care equipment, as well
as used equipment. The Capital Corporation and its subsidiaries also purchase
and finance retail notes unrelated to John Deere equipment, representing
primarily recreational vehicle and recreational marine product notes acquired
from independent dealers of those products and from marine mortgage service
companies (recreational product retail notes). The Capital Corporation and
its subsidiaries also lease John Deere equipment to retail customers, finance
and service unsecured revolving charge accounts acquired from merchants in the
agricultural, lawn and grounds care and marine retail markets, and provide
wholesale financing for recreational vehicles and John Deere engine
inventories held by dealers of those products.
The Capital Corporation and its subsidiaries: Deere Credit, Inc., Farm
Plan Corporation, Deere Credit Services, Inc. and John Deere Receivables, Inc.
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.
Retail notes, revolving charge accounts, 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, 1994, the Company had 852 full-
and part-time employees.
BUSINESS OF JOHN DEERE
John Deere's operations are categorized into five business segments:
John Deere's worldwide AGRICULTURAL EQUIPMENT segment manufactures and
distributes a full range of equipment used in commercial farming --
including tractors; tillage, soil preparation, planting and harvesting
machinery; and crop handling equipment.
John Deere's 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
1
loaders; scrapers; motor graders; excavators; and log skidders. This
segment also includes the manufacture and distribution of engines and
drivetrain components for the original equipment manufacturer (OEM)
market.
John Deere's worldwide LAWN AND GROUNDS CARE EQUIPMENT segment
manufactures and distributes equipment for commercial and residential
uses - including small tractors for lawn, garden and utility purposes;
riding and walk-behind mowers; golf course equipment; utility transport
vehicles; snowblowers; and other outdoor power products.
The products produced by the equipment segments are marketed primarily
through independent retail dealer networks.
The CREDIT segment includes the operations of the Company (described
herein), the Company's parent, John Deere Credit Company, and John Deere
Finance Limited, which primarily purchases and finances retail notes
from John Deere's equipment sales branches in Canada.
The INSURANCE AND HEALTH CARE segment issues policies in the United
States and Canada primarily for: a general line of property and
casualty insurance to John Deere and non-Deere dealers and to the
general public; group life and group accident and health insurance for
employees of participating John Deere dealers; group life and group
accident and health insurance for employees of John Deere; life and
annuity products to the general public and credit physical damage
insurance in connection with certain retail sales of John Deere products
financed by the credit subsidiaries. This segment also provides health
management programs and related administrative services in the United
States to corporate customers and employees of John Deere.
John Deere's total worldwide net sales and revenues in 1993 and 1992,
which include net sales of agricultural equipment, industrial equipment and
lawn and grounds care equipment and revenues from credit, insurance and health
care operations, were as follows: total net sales and revenues, $7.8 billion
and $7.0 billion; total sales of equipment, $6.5 billion and $5.7 billion;
agricultural equipment sales, $4.1 billion and $3.8 billion; industrial
equipment sales, $1.3 billion and $1.0 billion; and lawn and grounds care
equipment sales, $1.1 billion and $.9 billion, respectively. John Deere
believes that its worldwide sales of agricultural equipment during recent
years have been greater than those of any other business enterprise. It also
believes that it is an important provider of most of the types of industrial
equipment that it markets and a leader in some size ranges. John Deere also
believes that it is the largest manufacturer of lawn and garden tractors and
provides the broadest line of grounds care equipment in North America.
John Deere's 1993 worldwide income before the effects of special items
(accounting changes, restructuring charges and the new United States tax law)
was $286 million compared with $37 million in 1992. Additional information
concerning the special items is presented in the Deere & Company Annual Report
on Form 10-K for the fiscal year ended October 31, 1993. John Deere's
improved 1993 results were mainly attributable to North American equipment
operations. Sales and production volumes in
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North America were higher this year in response to increased retail demand.
Price realization also improved in all of John Deere's North American
equipment businesses compared with 1992 as sales incentive cost levels were
significantly lower. Also, North American productivity continued to improve
during 1993. Additionally, income of John Deere's financial services
subsidiaries was significantly higher in 1993 compared with 1992. After the
effects of restructuring charges, the incremental expenses from the accounting
changes and the tax rate change, John Deere's worldwide income in 1993 was
$184 million. John Deere incurred a worldwide net loss in 1993 of $921
million after all of the special items, including the cumulative effect of the
accounting changes.
North American agricultural economic conditions were generally more
favorable in 1993 than in 1992. Although flooding and excessively wet
conditions in certain areas of the Midwest and drought conditions in parts of
the Southeast resulted in an estimated 31 percent decrease in corn production
and a 16 percent decline in soybean production in 1993, United States farm net
cash income is expected to achieve a record level in 1993. The lower
production caused grain prices to rise above 1992 levels. Livestock producers
enjoyed favorable prices and profit margins during 1993 and farmers boosted
their cash flow by selling inventories accumulated from record corn and
soybean yields in 1992. Additionally, direct government payments to farmers
are expected to increase in 1993, aiding farmers most heavily impacted by this
year's flooding. Uncertainties over the passage of a new investment tax
credit were resolved in 1993 as the anticipated tax credit was not included in
the final tax legislation. Consequently, many United States farmers who had
delayed making purchases in 1992 bought equipment this year. Sales in Canada
were boosted by a special 13-month investment tax credit in effect from
December 1992 to December 1993. As a result of these developments, North
American retail sales of John Deere agricultural equipment were considerably
higher in 1993 compared with last year.
The North American general economy continued its slow expansion in 1993.
In the United States, housing starts increased about five percent during the
year with second-half strength overcoming a very sluggish first half. Real
public construction was up slightly from the previous year's level while
nonresidential construction was flat. However, the cumulative effects of the
rebound in economic activity were felt in 1993, as housing starts were up more
than 25 percent from their 1991 level and real public construction was nine
percent larger. North American retail sales of industrial and construction
machinery for both the industry and John Deere rose significantly in 1993.
Consumer spending for durable goods rose briskly in 1993, and North
American retail sales of John Deere lawn and grounds care equipment increased
significantly. Sales were also supported by favorable moisture conditions
over most areas throughout the prime selling season. However, dry conditions
did emerge in portions of the Southeast and Northeast which impeded some late
season buying activity.
Industry retail sales of agricultural equipment in overseas markets in
general remained relatively weak during 1993. However, overseas retail sales
of John Deere agricultural equipment were higher in 1993 than in 1992,
reflecting good acceptance of John Deere's new tractors and combines. Despite
recessionary conditions prevailing in most European markets and in Japan,
overseas retail sales of John Deere lawn and
3
grounds care equipment continued to expand in 1993. Overseas industrial and
construction equipment markets were relatively flat in 1993 compared with
1992.
RELATIONSHIPS OF THE COMPANY WITH JOHN DEERE
The operations and results 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 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 Capital Corporation and John Deere
have joint access to all of the Capital Corporation's bank lines of credit.
The Company's acquisition 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 and other factors which influence demand for its products.
Since 1986, the Company has also been providing retail sales financing through
dealers of certain unrelated manufacturers of recreational vehicles and
recreational marine products. The net balance of recreational product retail
notes outstanding under these arrangements at October 31, 1993 totaled $804
million.
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 retail notes and leases on John Deere products or through John
Deere dealers. 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 the sales
branches, terminable by either the sales branches 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 the sales branches. Under
these agreements, the sales branches are not obligated to sell retail notes to
the Company, and the Company is obligated to purchase retail notes from the
sales branches only if the notes comply with the terms and conditions set by
the Company.
The terms of retail notes and the basis on which the sales branches
acquire retail notes from the dealers are governed by agreements with the
independent John Deere dealers, terminable at will by either the dealers or
the sales branches. In acquiring the retail 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 notes to be purchased from the sales branches. The dealers are not
obligated to send retail notes to the sales branches, and the sales branches
are not obligated to accept retail notes from the dealers. In practice,
retail notes are acquired from dealers only if the terms of the notes and the
creditworthiness of the customers are
4
acceptable to the Company for purchase of the notes from the sales branches.
The Company acts on behalf of both itself and the sales branches in
determining the acceptability of the notes and in acquiring acceptable notes
from dealers.
The terms of leases, and the basis on which the Company enters into such
leases with retail customers through John Deere dealers, are governed by
agreements between dealers and the Company. Leases are accepted based on the
lessees' creditworthiness, the anticipated residual values of the equipment
and the intended uses of the equipment.
Deere & Company has expressed an intention of conducting its business
with the Company on such terms that the Company's consolidated ratio of
earnings before fixed charges to fixed charges will not be less than 1.05 to 1
for any fiscal quarter. For 1993, the ratio was 1.99 to 1 (excluding the
effects of accounting changes) and for 1992, it was 1.74 to 1. For additional
information concerning these accounting changes, see note 1 to the
consolidated financial statements. This arrangement is not intended to make
Deere & Company responsible for the payment of obligations of the Company.
DESCRIPTION OF RECEIVABLES AND LEASES
Receivables and Leases arise mainly from the retail sale or lease
(including the sale to John Deere dealers for rental to users) 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. The great majority derive from retail sales
and leases of agricultural equipment, industrial equipment and lawn and
grounds care equipment sold by John Deere dealers. The Company also offers
financing to recreational product customers through the secured retail
financing of recreational vehicles and recreational marine products. The
Company also offers Farm Plan revolving charge accounts which are used
primarily by agri-businesses to finance customer purchases, as well as credit
cards which are used primarily by retail customers to finance purchases of
John Deere lawn and grounds care equipment and marine equipment. Retail notes
provide for retention by John Deere or the Company of security interests under
certain statutes, including the Uniform Commercial Code or comparable state
statutes, certain Federal statutes, and state motor vehicle laws. See notes 1
and 2 to the consolidated financial statements.
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 volumes, margins, and
collectibility of recreational product retail notes are affected by different
economic, marketing and competitive factors and cycles, such as fluctuations
in fuel prices and recreational spending patterns, than those affecting retail
notes arising from the sale of John Deere equipment. Recreational product
retail notes are acquired from more than 1,400 recreational vehicle dealers
throughout the United States, representing a variety of manufacturers, and
from approximately 900 marine product 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
5
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 John Deere lawn and
grounds care equipment. Additionally, through its Farm Plan credit product,
the Company finances revolving charge accounts offered by approximately 2,100
participating agri-businesses in the 48 contiguous states 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 revolving charge accounts are also used by customers
patronizing other agribusinesses, including farm supply, feed and seed, parts
supply, bulk fuel, building supply and veterinarians. John Deere Marine
Finance is used by the Company's marine customers to finance the purchase of
marine related products. See notes 1 and 2 to the consolidated financial
statements under "Revolving Charge Accounts Receivable."
The Company finances recreational vehicle inventories and John Deere
engines for approximately 300 dealers. A portion of the wholesale financing
provided by the Company is with dealers from whom it also purchases
recreational product retail notes. See notes 1 and 2 to the consolidated
financial statements under "Wholesale Receivables."
The Company requires that theft and physical damage insurance be carried
on all equipment leased or securing retail notes. The customer may, at his
own expense, have the Company purchase this insurance or obtain it from other
sources. Theft and physical damage insurance is also required on wholesale
notes and can be purchased through the Company or from other sources. If the
customer elects to purchase theft and physical damage insurance through the
Company, the Company purchases it from insurance subsidiaries of Deere &
Company. 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, 1993, approximately 57 percent of the net dollar value
of retail notes held by the Company bore a variable finance rate.
Recreational product retail notes are primarily fixed-rate notes.
A portion of the finance income earned by the Company arises from retail
sales of John Deere equipment sold in advance of the season of use or in other
sales promotions
6
by John Deere on which finance charges are waived by John Deere for a period
from the date of sale to a specified subsequent date. Some low-rate financing
programs are also offered by John Deere. The Company receives compensation
from John Deere approximately equal to the normal net finance charge on retail
notes for periods during which finance charges have been waived or reduced.
The portions of the Company's finance income earned that were received from
John Deere on retail notes containing waiver of finance charges or reduced
rates was 19 percent in 1993 and 17 percent in 1992.
RECEIVABLES AND LEASES ACQUIRED AND HELD
Receivable and Lease acquisitions during the fiscal years ended and
amounts held at October 31, 1993 and 1992 were as follows in millions of
dollars:
Fiscal Year Balance at
Acquisitions October 31
-------------- ---------------
1993 1992 1993 1992
---- ---- ---- ----
Retail Notes (1)
Agricultural equipment $1,526.8 $1,559.2 $1,546.8 $2,085.2
Industrial equipment 317.8 273.6 271.2 360.4
Lawn and grounds care equipment 89.7 123.8 169.5 193.2
Recreational products 201.8 250.8 804.2 870.3
------- ------- ------- -------
Total 2,136.1 2,207.4 2,791.7 3,509.1
Revolving charge accounts (1) 763.5 619.5 331.1 268.0
Financing and Operating Leases (2) 145.0 79.0 204.2 170.5
Wholesale Notes (1) 296.0 275.6 109.6 111.9
-------- -------- -------- --------
Total Receivables and Leases $3,340.6 $3,181.5 $3,436.6 $4,059.5
-------- -------- -------- --------
-------- -------- -------- --------
(1) "Amount" as used here means the approximate principal value financed.
(2) "Amount" as used here represents the cost of equipment financed on both
financing and operating leases.
John Deere equipment note acquisitions were slightly lower in the
current year due primarily to a larger volume of cash purchases by John Deere
customers and a more competitive agricultural financing environment. Lower
acquisitions of agricultural and lawn and grounds care equipment notes were
partially offset by higher acquisitions of industrial equipment notes.
Acquisitions of recreational product retail notes were 20 percent lower in the
current year due to a more competitive market for recreational product
financing.
7
The Company's business is somewhat seasonal, with overall acquisitions
of credit receivables traditionally higher in the second half of the fiscal
year than in the first half, and overall collections of credit receivables
traditionally somewhat higher in the first six months than in the last half of
the fiscal year.
From time to time, the Capital Corporation sells retail notes to other
financial institutions and in the public market. The Capital Corporation
received net proceeds from such sales of John Deere retail notes of $1.143
billion in 1993 and $683 million in 1992. The net unpaid balance of all
retail notes previously sold was $1.394 billion at October 31, 1993 and $688
million at October 31, 1992. For additional information on the terms,
conditions, recourse and accounting for such sales, see note 2 to the
consolidated financial statements.
AVERAGE ORIGINAL TERM AND AVERAGE LIFE OF RETAIL NOTES AND LEASES
The following table shows the estimated average original term in months
(based on dollar amounts) for retail notes and leases acquired by the Company
during 1993 and 1992:
Average Original Term
---------------------
1993 1992
---- ----
Retail Notes 67 68
New Equipment:
Agricultural 55 55
Industrial 43 40
Lawn and grounds care 44 43
Recreational products 152 151
Used Equipment:
Agricultural 52 51
Industrial 37 36
Lawn and grounds care 45 44
Recreational products 161 170
Leases 42 42
8
Because of prepayments, the average actual life of retail notes is
considerably shorter than the average original term. The following table
shows the estimated average life in months (based on dollar amounts) for John
Deere retail notes and leases liquidated in 1993 and 1992:
Average Life in Months
----------------------
1993 1992
---- ----
Retail Notes (1) 28 28
Agricultural 25 24
Industrial 29 28
Lawn and grounds care 31 31
Recreational products (2) 46 47
Leases (3) 47 48
(1) Includes new and used equipment.
(2) Estimated based on industry averages due to limited experience with the
recreational product portfolio.
(3) The average lives of leases liquidated in 1993 and 1992 were longer than
the average original terms of leases acquired during 1993 and 1992 due
to longer average original terms during prior years.
DEPOSITS WITHHELD ON RECEIVABLES AND LEASES
Generally, the Company has limited recourse against certain John Deere
dealers on retail notes and leases and against certain Farm Plan merchants on
revolving charge account balances acquired from or through those dealers and
merchants. For these John Deere dealers and Farm Plan merchants, separate
withholding accounts are maintained by the Company. The total amount of
deposits withheld from John Deere dealers and Farm Plan merchants totaled
$104.9 million and $100.7 million at October 31, 1993 and 1992, respectively.
Of this amount, deposits withheld from Farm Plan merchants totaled $.4 million
at October 31, 1993 and $ .8 million at October 31, 1992. Credit losses are
charged against these withheld deposits. To the extent that a loss cannot be
absorbed by the deposit withheld from the dealer or merchant from which the
retail note, lease or Farm Plan account was acquired, it is charged against
the Company's allowance for credit losses. Beginning in January 1992, all
industrial equipment retail notes have been accepted on a non-recourse basis,
and the withholding of dealer deposits on those notes ceased. See note 1 to
the consolidated financial statements.
The Company does not withhold deposits on recreational product retail
notes, credit card receivables, or wholesale notes acquired. However, an
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allowance for credit losses has been established by the Company in an amount
considered to be appropriate in relation to the Receivables and Leases
outstanding. In addition, for wholesale notes relating to recreational
vehicles, there are agreements with the recreational vehicle manufacturers for
the repurchase of new inventories held by dealers. For additional information
on credit losses and deposits withheld on Receivables and Leases, see note 3
to the consolidated financial statements.
DELINQUENCIES AND LOSSES
RETAIL NOTES. The following table shows unpaid installments 60 days
or more past due on retail notes held by the Company and the total unpaid
balances on the retail notes with such delinquencies, on the basis of retail
note terms in effect at the indicated dates, in millions of dollars and as a
percentage of retail notes at face value held by the Company at such dates:
Installments Past Due 60 Balances on Which Any Installment
Days or More is Past Due 60 Days or More
------------------------ ---------------------------------
Percent of Percent of
Face Value Face Value
of Retail of Retail
Notes Notes
October 31 Amount Outstanding Amount Outstanding
- ---------- ------ ----------- ------ -----------
1993 $ 6.8 0.19% $ 42.3 1.16%
1992 7.0 0.15 55.6 1.23
1991 17.5 0.35 108.0 2.15
The following table shows losses on retail notes in millions of dollars (after
charges to withheld dealer deposits) and as a percentage of retail notes
liquidated:
Percentage of Retail
Year Ended October 31 Amount Notes Liquidated
- --------------------- ------ --------------------
1993 $19.3 0.83%
1992 33.8 1.06
1991 41.3 1.52
The decrease in losses in 1993 and 1992 related mainly to lower
write-offs of recreational product retail notes, primarily as a result of the
development and use of more selective credit criteria over the past few years,
and lower write-offs of John Deere industrial equipment retail notes. The
losses incurred in 1991 related primarily to recreational product retail
notes, resulting from recessionary pressures and lower resale values of
repossessed equipment. Write-offs of recreational product retail notes
totaled $16.9 million in 1993 compared with $24.2 million in 1992 and $33.3
million in 1991.
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REVOLVING CHARGE ACCOUNTS. The following table shows revolving
charge account payments 60 days or more past due in millions of dollars and as
a percentage of total revolving charge accounts receivable:
Payments Past Due 60 Days or More
---------------------------------------
Percent of Total Revolving
October 31 Amount Charge Accounts Receivable
- ---------- ------ ---------------------------
1993 $5.3 1.6%
1992 6.4 2.4
1991 8.5 3.5
The following table shows losses on revolving charge accounts in
millions of dollars and as a percentage of revolving charge amounts
liquidated:
Percent of Revolving
Year Ended October 31 Amount Charge Amounts Liquidated
- --------------------- ------ -------------------------
1993 $3.3 0.5%
1992 6.0 1.0
1991 8.4 1.6
Losses declined in 1993 and 1992 for both Farm Plan and the John Deere
Credit Revolving Plan reflecting improvements in the Company's overall
collection procedures and improved economic conditions. The losses incurred
in 1991 were due primarily to general recessionary conditions in the economy.
LEASES. The following table shows finance and operating lease
payments 60 days or more past due in millions of dollars and as a percent of
the total lease payments receivable:
Payments Past Due 60 Days or More
--------------------------------------
Percent of Total Lease
October 31 Amount Payments Receivable
- --------------------- ------ -------------------------
1993 $ .5 0.3%
1992 1.2 0.8
1991 1.0 0.5
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The following table shows losses absorbed by the Company, in millions of
dollars and as a percent of total lease proceeds, on terminated financing and
operating leases (after charges to withheld dealer deposits). Total lease
proceeds include collections from regularly scheduled lease payments and
proceeds from the disposal of equipment.
Percent of Total
Year Ended October 31 Amount Lease Proceeds
- --------------------- ------ ----------------
1993 $1.2 1.1%
1992 2.7 2.3
1991 3.9 3.3
The decline in 1993 losses resulted from improvements in the Company's
overall collection procedures and improved economic conditions. The decline
in 1992 losses resulted from a more seasoned and smaller lease portfolio. The
losses incurred in 1991 related primarily to the overall recessionary
environment.
WHOLESALE NOTES. The following table shows wholesale note payments
60 days or more past due in millions of dollars and as a percentage of
wholesale notes receivable:
Payments Past Due 60 Days or More
------------------------------------
Percent of Wholesale
October 31 Amount Notes Receivable
- ---------- ------ ---------------------
1993 $0.1 0.1%
1992 0.0 0.0
1991 0.1 0.1
The following table shows wholesale note losses in millions of dollars
and as a percentage of wholesale note amounts liquidated:
Percent of Wholesale
Year Ended October 31 Amount Note Amounts Liquidated
- --------------------- ------- -------------------------
1993 $2.3 0.8%
1992 1.2 0.5
1991 2.9 1.5
The losses in 1993 and 1991 resulted primarily from relatively large
losses incurred with two recreational vehicle dealers, one in each of those
years.
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COMPETITION
The businesses in which the Company is engaged are highly competitive.
The Company competes for customers based upon customer service and finance
rates (or time-price differentials) charged. The proportion of John Deere
equipment retail sales and leases financed by the Company is influenced by
conditions prevailing in the agricultural equipment, industrial equipment and
lawn and grounds care equipment industries, in the financial markets, and in
business generally. A significant portion of such retail sales during 1993
were financed by the Company. A substantial part of the retail sales and
leases eligible for financing by the Company is financed by others, including
banks and other finance and leasing companies.
The Company attempts to emphasize convenient service to retail customers
and to offer terms desired in its specialized markets such as seasonal
installment schedules of repayment and rental. The Company's sales and loan
finance rates, time-price differentials and lease rental rates are believed to
be in the range of those of sales finance and leasing companies generally,
although not as low as those of some banks and other lenders and lessors.
REGULATION
In a number of states, the maximum finance rate or time-price
differential on retail notes is limited by state law. The present state
limitations have not, thus far, significantly limited the Company's
variable-rate finance charges, which are determined in relation to a base rate
quoted by a bank, nor the fixed-rate finance charges established by the
Company. However, if interest rate levels should increase, maximum state
rates or time-price differentials could affect the Company by preventing the
variable rates on outstanding variable-rate retail notes from increasing above
the maximum state rate or time-price differential, and/or by limiting the
fixed rates or time-price differentials on new notes. In some states, the
Company may be able to qualify new retail notes for a higher maximum 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 to Farm Plan and John
Deere revolving charge accounts receivable for such goods. To date, such laws
and regulations have not had a significant, adverse effect on the Company.
ITEM 2. PROPERTIES.
The Company's properties principally consist of office equipment and
leased office space in Reno, Nevada; West Des Moines, Iowa; Moline, Illinois;
Madison, Wisconsin; and Ft. Lauderdale, Florida.
13
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 such actions
relates to state and federal regulations concerning retail credit. There are
various claims and pending actions against the Company with respect to
commercial and consumer financing matters. These matters include lawsuits
pending in federal and state courts in Texas alleging that certain of the
Company's retail finance contracts for recreational vehicles and boats violate
certain technical provisions of Texas consumer credit statutes dealing with
maximum rates, licensing and disclosures. The plaintiffs in Texas claim they
are entitled to common law and statutory damages and penalties. On November
6, 1992, the federal District Court certified a federal class action under
Rule 23(b)(3) of the Federal Rules of Civil Procedure in an action brought by
Russell Durrett, individually and on behalf of others, against John Deere
Company (filed in state court on February 19, 1992 and removed on February 26,
1992 to the United States District Court for the Northern District of Texas,
Dallas Division). On October 12, 1993, in a case named DEERE CREDIT, INC. V.
SHIRLEY Y. MORGAN, ET AL., filed February 20, 1992, the 281st District Court
for Harris County, Texas, certified a class under Rules 42(b)(1)(A),
42(b)(1)(B) and 42(b)(2) of the Texas Rules of Civil Procedure, of all persons
who opt out of the federal class action. The Company believes that it has
substantial defenses and intends to defend the actions vigorously. Although
it is not possible to predict the outcome of these unresolved legal actions,
and the amounts of claimed damages and penalties are large, the Company
believes that these unresolved legal actions will not have a material adverse
effect on its consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted pursuant to instruction J(2).
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.
In 1993, the Capital Corporation paid a cash dividend to John Deere
Credit Company of $82 million, which in turn paid an $82 million cash dividend
to Deere & Company. Similarly during 1992, the Capital Corporation paid a $70
million dividend. During the first quarter of 1994, the Capital Corporation
declared and paid a dividend of $150 million to John Deere Credit Company,
which in turn declared and paid a dividend of $150 million to Deere & Company.
14
ITEM 6. SELECTED FINANCIAL DATA.
Omitted pursuant to instruction J(2).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1993 COMPARED WITH 1992
Total acquisitions of Receivables and Leases by the Company increased
five percent during 1993 compared with acquisitions in 1992. The higher
acquisitions this year resulted from an increased volume of John Deere leases,
revolving charge accounts and wholesale receivables, which more than offset
lower acquisitions of retail notes. Receivables and Leases held by the
Company at October 31, 1993 totaled $3.437 billion compared with $4.060
billion one year ago. This decrease resulted from sales of retail notes
during 1993. Receivables and Leases administered, which include retail notes
previously sold but still administered, amounted to $4.873 billion at the end
of 1993 compared with $4.796 billion at October 31, 1992.
During 1993, net retail notes (face value less unearned finance income)
acquired by the Company decreased three percent compared with 1992. Net
retail note acquisitions totaled $2.136 billion during 1993 compared with 1992
acquisitions of $2.207 billion. Acquisitions of recreational product retail
notes accounted for nine percent of total note acquisitions in 1993 and 11
percent in 1992.
Net retail note acquisitions from John Deere decreased by $22 million in
1993, due primarily to a larger volume of cash purchases by John Deere
customers and a more competitive agricultural financing environment. Lower
acquisitions of agricultural and lawn and grounds care equipment notes were
partially offset by higher acquisitions of industrial equipment notes. Note
acquisitions in 1993 from John Deere continued to represent a significant
proportion of the total United States retail sales of John Deere equipment.
Net acquisitions of recreational product retail notes, representing
primarily recreational vehicle and recreational marine product notes acquired
from independent dealers of several unrelated manufacturers, were $202 million
in 1993 compared with $251 million in 1992. This decline was due mainly to a
more competitive market for recreational product financing and more selective
acquisition criteria.
At October 31, 1993, the net amount of retail notes held by the Company
was $2.792 billion compared to $3.509 billion last year. Included in these
amounts were recreational product notes of $804 million in 1993 and $870
million in 1992. The net balance of John Deere retail notes decreased from
$2.639 billion at October 31, 1992 to $1.988 billion at the end of 1993, even
though net retail
15
notes acquired exceeded collections. This decrease resulted primarily from
the sale of retail notes during 1993. The Company periodically sells retail
notes as one of several funding techniques. In 1993 and in 1992, the Company
received net proceeds of $1.143 billion and $455 million, respectively, from
the sale of retail notes to limited-purpose business trusts which utilized the
notes as collateral for the issuance of asset backed securities to the public.
During 1992, the Company also sold retail notes to other financial
institutions receiving proceeds of $228 million. The net balance of retail
notes administered by the Company, which include retail notes previously sold,
amounted to $4.185 billion at 31 October 1993, compared with $4.197 billion at
31 October 1992. The net balance of retail notes previously sold was $1.394
billion at October 31, 1993 compared with $688 million at October 31, 1992.
Additional sales of retail notes are expected to be made in the future. On
October 31, 1993, the Company was contingently liable for recourse in the
maximum amount of $108 million on retail notes sold.
Retail notes bearing variable finance rates totaled 57 percent of the
total retail note portfolio at October 31, 1993 compared with 54 percent one
year earlier. The Company actively manages the increased interest rate risk
posed by fixed-rate retail notes through the issuance of fixed-rate borrowings
and the use of financial instruments such as interest rate swaps and interest
rate caps. See "Capital Resources and Liquidity" on pages 22 through 24.
At the end of fiscal 1993, revolving charge accounts receivable totaled
$331 million, an increase of 24 percent compared with $268 million at October
31, 1992. The balance at October 31, 1993 included $147 million of John Deere
Credit Revolving Plan receivables (including a small balance of marine finance
receivables) and $184 million of Farm Plan receivables compared with $114
million and $154 million, respectively, at October 31, 1992. The John Deere
Credit Revolving Plan, which was introduced in 1993, contains terms that
increase the maximum amount financed, offer more attractive financing
conditions and provide more flexible payment terms. Revolving charge account
acquisitions increased 23 percent in 1993 compared with last year.
The portfolio of net financing leases totaled $85 million at both
October 31, 1993 and October 31, 1992. The net investment in operating leases
was $119 million and $85 million at the end of 1993 and 1992, respectively.
Overall, lease acquisitions increased 84 percent in 1993 primarily due to a
new lease program applicable to some models of John Deere tractors. In
addition, $19 million of municipal leases were sold to Deere & Company during
1993 compared with $21 million sold last year. At October 31, 1993, the net
unpaid balance of leases sold to John Deere was $43 million compared with $48
million at October 31, 1992.
Wholesale notes on recreational vehicle and John Deere engine
inventories totaled $110 million at October 31, 1993 compared with $112
million at October 31, 1992.
Total Receivable and Lease amounts 60 days or more past due were $12.7
million at October 31, 1993 compared with $14.6 million at October 31, 1992.
16
These past-due amounts represented .30 percent of the face value of
Receivables and Leases held at October 31, 1993 and .29 percent at October 31,
1992. The total face amount of retail notes held with any installment 60 days
or more past due was $42.3 million at October 31, 1993 compared with $55.6
million one year earlier. The amount of retail note installments 60 days or
more past due was $7.0 million at both October 31, 1993 and October 31, 1992.
These past-due installments represented .19 percent of the unpaid face value
of retail notes at October 31, 1993 and .15 percent at October 31, 1992.
The total balance of revolving charge accounts receivable 60 days or
more past due was $5.3 million at October 31, 1993 compared with $6.4 million
at October 31, 1992. These past due amounts represented 1.6 and 2.4 percent
of the revolving charge accounts receivable held at each of those respective
dates. The total balance of financing and operating lease payments 60 days or
more past due was $0.5 million at October 31, 1993 compared with $1.2 million
at October 31, 1992. These past-due installments represented .3 percent of
the total lease payments receivable at October 31, 1993 and .8 percent at
October 31, 1992.
At October 31, 1993, the Company's allowance for credit losses, totaled
$77 million and represented 2.3 percent of the total net Receivables and
Leases financed compared with $83 million and 2.0 percent, respectively, one
year earlier. Deposits withheld from dealers and merchants, which are
available for potential credit losses, totaled $105 million at October 31,
1993 compared with $101 million one year earlier.
The Capital Corporation's consolidated income for the fiscal year ended
October 31, 1993, before the cumulative effect of adopting new accounting
standards related to postretirement and postemployment benefits, was $111.0
million compared with 1992 net income of $95.0 million. The ratio of earnings
before fixed charges to fixed charges was 1.99 to 1 (excluding the effects of
accounting changes) for 1993 compared with 1.74 to 1 last year. The
improvement in net income resulted primarily from higher securitization and
servicing fee income from retail notes previously sold, lower credit losses,
higher financing margins, and increased gains from the sale of retail notes,
which more than offset the effects of a lower balance of Receivables and
Leases financed. Net income totaled $107.2 million in 1993, including the
cumulative effect of adopting FASB Statement No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions, and FASB Statement No. 112,
Employers' Accounting for Postemployment Benefits.
Total revenues decreased one percent during 1993 to $466 million
compared with $471 million in 1992. The average balance of total net
Receivables and Leases financed was seven percent lower in 1993 compared with
last year due primarily to the sale of receivables during 1993. Revenues were
also affected by the lower level of interest rates and the corresponding lower
finance charges earned in 1993 compared with last year. These decreases in
revenues were partially offset by higher securitization and servicing fee
income from retail notes previously sold. However, borrowing rates were also
lower this year resulting in the slightly improved financing margins. The
lower borrowing rates and decrease
17
in average borrowings this year resulted in an 11 percent decrease in interest
expense, which totalled $168 million in 1993 compared with $189 million last
year. Average borrowings were $3.127 billion in 1993, a seven percent decline
from last year's average borrowings of $3.379 billion. The weighted average
annual interest rate incurred on all interest-bearing borrowings this year
declined to 5.1 percent from 5.4 percent in 1992.
Finance income earned on retail notes was $314 million this year
compared with $356 million in 1992, a decrease of 12 percent. The average
balance of the net retail note portfolio financed during 1993 was 10 percent
lower than during 1992.
Revenues earned on revolving charge accounts amounted to $54 million in
1993, a 14 percent increase over revenues of $47 million earned during 1992.
This increase was primarily due to a 20 percent increase in the average
balance of Farm Plan receivables financed and a 15 percent increase in the
average balance of John Deere Credit Revolving Plan receivables financed in
1993 compared with 1992.
The average net investment in financing and operating leases decreased
by two percent in 1993 compared with 1992. However, total lease revenues
increased eight percent to $39.6 million in 1993 compared with $36.8 million
in 1992. Lease revenues were favorably affected in 1993 by a significant
increase in rentals earned on operating leases.
The net gain on retail notes sold totaled $15.6 million during 1993
compared with $8.5 million for 1992. The Company received proceeds from the
sale of retail notes in the amount of $1.143 billion during 1993 and $683
million in 1992. Securitization and servicing fee income totaled $22.3 million
in 1993 compared with $1.1 million during 1992. Securitization and servicing
fee income relates to retail notes sold to limited-purpose business trusts and
includes the amortization of present value receivable amounts from the trusts
established at the time of sale and reimbursed administrative expenses
received from the trusts. The amount of securitization and servicing fee
income was small in 1992 because the first retail note sale to a trust
occurred near the end of that year.
Administrative and operating expenses increased 18 percent to $75
million in 1993 compared with $63 million in 1992. These expenses increased
primarily due to higher employment costs and legal expenses. The Company
incurred additional costs associated with efforts relating to future growth
and improving the quality of the portfolio.
The provision for credit losses declined to $28 million in 1993 from $48
million last year mainly as a result of improved credit experience resulting
in lower Receivable and Lease write-offs. The decline in write-offs related
particularly to recreational product retail notes and John Deere industrial
equipment retail notes.
18
ACCOUNTING CHANGES
In the fourth quarter of 1993, the Company adopted FASB Statement No.
106, Employers' Accounting for Postretirement Benefits Other Than Pensions,
effective November 1, 1992. Prior quarters of 1993 were restated as required
by this Statement. This Statement generally requires the accrual of retiree
health care and other postretirement benefits during employees' years of
active service. The Company elected to recognize the pretax transition
obligation of $5.4 million ($3.6 million net of deferred income taxes) as a
one-time charge to earnings in the current year. This obligation represents
the portion of future retiree benefit costs related to service already
rendered by both active and retired employees up to November 1, 1992. The
1993 postretirement benefits expense and related disclosures have been
determined according to the provisions of FASB Statement No. 106. For years
prior to 1993, postretirement benefits were generally included in costs as
covered expenses were actually incurred. The adoption of FASB Statement No.
106 resulted in an incremental pretax expense of $.2 million compared with the
expense determined under the previous accounting principle. This increase in
the current year expense is in addition to the previously mentioned one-time
charge relating to the transition obligation.
In the fourth quarter of 1993, the Company also adopted FASB Statement
No. 112, Employers' Accounting for Postemployment Benefits, effective November
1, 1992. This Statement requires the accrual of certain benefits provided to
former or inactive employees after employment but before retirement during
employees' years of active service. The Company previously accrued certain
disability related benefits when the disability occurred. Results for the
first quarter of 1993 were restated for the cumulative pretax charge resulting
from this change in accounting as of November 1, 1992 which totaled $.3
million ($.2 million net of deferred income taxes). The adoption of FASB
Statement No. 112 had an immaterial effect on 1993 expenses.
1992 COMPARED WITH 1991
Total acquisitions of Receivables and Leases by the Company decreased
three percent during 1992 compared with acquisitions in 1991. Receivables and
Leases held by the Company at October 31, 1992 totaled $4.060 billion compared
with $4.398 billion one year ago. This decrease resulted from sales of retail
notes during 1992. Receivables and Leases administered, which include retail
notes previously sold but still administered, amounted to $4.796 billion at
the end of 1992 compared with $4.693 billion at October 31, 1991.
During 1992, the volume of net retail notes acquired by the Company
decreased eight percent compared with 1991. Net retail note acquisitions
totaled $2.207 billion during 1992 compared with 1991 acquisitions of $2.400
billion. Acquisitions of recreational product retail notes accounted for 11
percent of total note acquisitions in 1992 and 13 percent in 1991.
19
Net retail note acquisitions from John Deere decreased by $142 million
in 1992, due primarily to a decrease in retail sales of John Deere
agricultural equipment. Acquisitions of industrial equipment retail notes
also were lower in 1992 while lawn and grounds care equipment note
acquisitions were significantly higher due mainly to finance waiver programs
on lawn and garden tractors. Note acquisitions in 1992 from John Deere
continued to represent a significant proportion of the total United States
retail sales of John Deere equipment.
Net acquisitions of recreational product retail notes were $251 million
in 1992 compared with $301 million in 1991. This decline was due mainly to a
more competitive financing environment and the development of more selective
retail note acquisition criteria by the Company over the past few years.
At October 31, 1992, 1991 and 1990, the net amount of retail notes held
by the Company was $3.509 billion, $3.854 billion and $3.074 billion,
respectively. Included in these amounts were non-Deere notes of $870 million,
$888 million and $773 million at those respective dates. The net balance of
John Deere retail notes decreased from $2.966 billion at October 31, 1991 to
$2.639 billion at the end of 1992. John Deere retail notes totaled $2.301
billion at the end of 1990. The decrease in 1992 resulted primarily from the
sale of retail notes. During 1992, the Company sold retail notes to other
financial institutions and the public, receiving net proceeds of $683 million.
Notes were not sold in 1991. At October 31, 1992, 1991 and 1990, the net
unpaid balance of retail notes sold was $688 million, $242 million and $521
million, respectively. Additional sales of retail notes are expected to be
made in the future.
Retail notes bearing variable finance rates totaled 54 percent of the
total retail note portfolio at October 31, 1992 compared with 56 percent one
year earlier.
Revolving charge accounts receivable totaled $268 million at October 31,
1992 compared with $240 million one year earlier. The increase in the
outstanding balance at October 31, 1992 was due mainly to an increase in Farm
Plan volume. The October 31, 1992 balance of revolving charge accounts
receivable includes $114 million of credit card receivables and $154 million
of Farm Plan receivables, compared with $112 million and $128 million,
respectively, at October 31, 1991.
At October 31, 1992, the net investment in financing and operating
leases on John Deere equipment was $170 million compared with $213 million at
October 31, 1991. Lease acquisitions declined 27 percent in 1992 compared
with 1991 due to a decrease in agricultural lease activity and competitive
pressures. Lease liquidations during 1992 exceeded acquisitions, as the high
lease acceptances of several years ago continued to mature. Also, $21 million
net value of municipal leases were sold to John Deere during 1992 compared
with $27 million sold in 1991. At October 31, 1992, the net unpaid balance of
leases sold to John Deere was $48 million compared with $53 million at October
31, 1991.
20
Wholesale notes receivable totaled $112 million at October 31, 1992
compared with $91 million at October 31, 1991, as wholesale note acquisitions
increased 37 percent in 1992.
Total Receivable and Lease amounts 60 days or more past due were $14.6
million at October 31, 1992 compared with $27.1 million at October 31, 1991.
These past due amounts represented .29 percent of the face value of
Receivables and Leases held at October 31, 1992 and .49 percent at October 31,
1991. The total face amount of retail notes held with any installment 60 days
or more past due was $55.6 million at October 31, 1992 compared with $108.0
million one year earlier. The amount of retail note installments 60 days or
more past due was $7.0 million at October 31, 1992, a decrease of 60 percent
compared with $17.5 million at October 31, 1991. These past-due installments
represented .15 percent of the unpaid face value of retail notes held at
October 31, 1992 and .35 percent at October 31, 1991.
The total balance of revolving charge accounts receivable 60 days or
more past due was $6.4 million at October 31, 1992 compared with $8.5 million
at October 31, 1991. These past due amounts represented 2.4 and 3.5 percent
of the revolving charge accounts receivable held at each of those respective
dates. The total balance of financing and operating lease payments 60 days or
more past due was $1.2 million at October 31, 1992 compared with $1.0 million
at October 31, 1991. These past-due installments represented .8 percent of
the total lease payments receivable at October 31, 1992 and .5 percent at
October 31, 1991.
At October 31, 1992, the Company's allowance for credit losses totaled
$83 million and represented 2.0 percent of the total net Receivables and
Leases financed compared with $78 million and 1.8 percent at October 31, 1991.
Deposits withheld from dealers and merchants amounted to $101 million at
October 31, 1992 compared with $99 million one year earlier.
Net income in 1992 totaled $95.0 million, an increase of 30 percent
compared with 1991 income of $73.0 million. The ratio of earnings before
fixed charges to fixed charges was 1.74 to 1 for 1992 compared with 1.48 to 1
in 1991. The improvement in net income in 1992 resulted primarily from a
higher average volume of Receivables and Leases financed and improved credit
loss experience. Results in 1992 also benefited from after-tax income of $5.6
million from sales of retail notes.
The average balance of total net Receivables and Leases financed was
seven percent higher in 1992 compared with 1991, although the year-end balance
was lower due to the sale of a substantial amount of retail notes in October
1992. However, total revenues decreased three percent to $471 million in 1992
compared with $487 million in 1991, as the average yield earned on the
portfolio was lower this year. While revenues were affected by the lower
level of interest rates and correspondingly lower finance charges earned in
1992 compared with last year, borrowing costs were also lower this year.
Interest expense totaled $189 million in 1992, a decrease of 17 percent
compared with $228 million in 1991. Total
21
average borrowings were $3.379 billion in 1992, an 11 percent increase over
fiscal year 1991 average borrowings of $3.053 billion. The weighted average
interest rate incurred on all interest-bearing borrowings during 1992 declined
to 5.4 percent from 7.2 percent in 1991.
Finance income earned on retail notes was $356 million this year
compared with $383 million in 1991, a decrease of seven percent. The average
balance of the net retail note portfolio financed during 1992 was seven
percent higher than during 1991.
Revenues earned on revolving charge accounts amounted to $47 million in
1992, an 11 percent increase over revenues of $43 million earned during 1991.
This increase was primarily due to a 17 percent increase in the average
balance of Farm Plan receivables financed and a 10 percent increase in the
average balance of credit card receivables financed in 1992 compared with
1991.
The average net investment in financing and operating leases decreased
by 13 percent in 1992 compared with 1991. In addition, total lease revenues
decreased slightly to $36.8 million in 1992 compared with $36.9 million in
1991. Lease revenues were favorably affected in 1992 by a significant
increase in rentals earned on operating leases.
Administrative and operating expenses for 1992 were $63 million, an
increase of eight percent compared with $59 million for 1991. These expenses
increased primarily due to the costs associated with the larger average
portfolio financed.
The provision for credit losses decreased to $48 million in 1992 from
$66 million in 1991 mainly as a result of improved credit experience resulting
in lower Receivable and Lease write-offs. The most significant decline in
write-offs related to recreational product notes, resulting primarily from
more selective note acquisition criteria used by the Company. Write-offs of
recreational product notes totaled $24.2 million in 1992 compared with $33.3
million in 1991.
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. The Company's ability to obtain funds is affected
by its debt ratings, which are closely 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 99.1.
The Company's ability to meet its debt obligations is supported in a
number of ways as described below. All commercial paper issued is backed by
bank credit lines. The assets of the Company are self-liquidating in nature.
A strong
22
equity position is available to absorb unusual losses on these assets.
Liquidity is also provided by the Company's ability to sell or "securitize"
these assets. Asset-liability risk is also actively managed to minimize
exposure to interest rate fluctuations.
The Company's business is somewhat seasonal, with overall acquisitions
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
half of the fiscal year.
The Company's cash flows from operating activities were $157 million in
1993. See "Statement of Consolidated Cash Flows" on page 34. Net cash
provided by investing activities totaled $477 million in 1993, primarily due
to net proceeds of $1.143 billion received from the securitization and sale of
receivables in the public market, which was partially offset by funds used for
Receivable and Lease acquisitions which exceeded collections by $698 million
in 1993. Collections of receivables in 1993 were slightly lower than last
year, due primarily to the lower retail note portfolio financed in 1993. The
aggregate cash provided by operating and investing activities was used for
financing activities and a $74 million increase in cash and cash equivalents.
Cash used for financing activities totaled $561 million in 1993, representing
a net decrease in outside borrowings of $853 million and the payment of an $82
million dividend to Deere & Company which were partially offset by a $374
million increase in payables to Deere & Company.
Over the past three years, operating activities have provided $453
million in cash. Proceeds from the sale of receivables and an increase in
payables to Deere & Company provided $1.893 and $423 million, respectively,
during the same period. These amounts were used mainly to fund Receivable and
Lease acquisitions which exceeded collections by $2.101 billion, a decrease of
$438 million in net outside borrowings, $202 million in dividends and an
increase in cash and cash equivalents of $67 million.
In common with other large finance and credit companies, the Company
actively 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 and currency fluctuations, while responding to favorable
competitive and 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. See notes 4 and 5 to the consolidated financial statements for
further details. The credit and market risks under these agreements are not
considered to be significant.
Total indebtedness amounted to $2.777 billion at October 31, 1993
compared with $3.256 billion at October 31, 1992. Total short-term
indebtedness amounted to $1.299 billion at October 31, 1993 compared with
$2.017 billion at October 31, 1992. See note 4 to the consolidated financial
statements. Total long-term indebtedness amounted to $1.478 billion at
October 31, 1993 and $1.239 billion at October 31, 1992. See note 5 to the
consolidated financial statements. The
23
decrease in total indebtedness at October 31, 1993 compared with October 31,
1992 was due primarily to the decline in Receivables and Leases financed. The
ratio of total interest-bearing debt to stockholder's equity was 3.8 to 1 and
4.6 to 1 at October 31, 1993 and October 31, 1992, respectively.
In 1993, the Company issued $150 million of 5% notes due in 1995 and
$200 million of 4-5/8% notes due in 1996. The Company also retired $150
million of 7.40% notes due in 1993, $125 million of 9.0% debentures due in
1993 and $47 million of 7-1/2% debentures due in 1998. In November 1993, the
Capital Corporation announced that on January 4, 1994 it will redeem the $40
million balance of outstanding 9.35% subordinated debentures due 2003.
Additional information on these borrowings is included in the discussion of
"Long-Term Borrowings" on page 41.
During 1993, the Capital Corporation issued $337 million and retired
$176 million of medium-term notes. At October 31, 1993, $737 million of
medium-term notes were outstanding having original maturity dates of between
one and seven years and interest rates that ranged from 3.4 percent to 9.5
percent.
At October 31, 1993, the Capital Corporation and Deere & Company,
jointly, had unsecured lines of credit with various banks in North America and
overseas totaling $3.025 billion. Included in the total credit lines were
three long-term credit agreement commitments totaling $3.016 billion. At
October 31, 1993, $2.265 billion of the lines of credit were unused. For the
purpose of computing unused credit lines, the aggregate of 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 Finance Limited (Canada) were considered to constitute utilization.
Annual facility fees on the credit agreements are paid by Deere & Company and
a portion is charged to the Capital Corporation based on utilization.
In 1993, the Capital Corporation paid a dividend of $82 million to John
Deere Credit Company, which, in turn, paid an $82 million dividend to Deere &
Company. During the first quarter of 1994, the Capital Corporation declared
and paid a dividend of $150 million to John Deere Credit Company, which in
turn declared and paid a dividend of $150 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.
24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Omitted pursuant to instruction J(2).
ITEM 11. EXECUTIVE COMPENSATION.
Omitted pursuant to instruction J(2).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Omitted pursuant to instruction J(2).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Omitted pursuant to instruction J(2).
25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements
(2) Financial Statement Schedules
See the table of contents to financial statements and schedules
immediately preceding the financial statements and schedules 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 24, 1993 (Items 5 and 7).
Current Report on Form 8-K dated August 4, 1993 (Items 5 and 7).
26
(THIS PAGE INTENTIONALLY LEFT BLANK)
27
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
By: /s/ Hans W. Becherer
----------------------
Hans W. Becherer,
Chairman
Date: 24 January 1994
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 )
-------------------- Executive Officer )
Hans W. Becherer )
)
/s/ J. Michael Dunn Director )
-------------------- )
J. Michael Dunn )
)
/s/ J. W. England Director, Vice President and )
------------------- Principal Accounting Officer )
J. W. England )
)
/s/ B. L. Hardiek Director )
------------------- )
B. L. Hardiek )
)
/s/ B. C. Harpole Director )
------------------- )
B. C. Harpole )
)
/s/ D. E. Hoffmann Director )
------------------- )
D. E. Hoffmann )
)
/s/ J. K. Lawson Director ) 24 January 1994
-------------------
J. K. Lawson
28
/s/ Pierre E. Leroy Director )
- -------------------- )
Pierre E. Leroy )
)
/s/ M. P. Orr Director and President )
- -------------------- )
M. P. Orr )
)
/s/ E. L. Schotanus Director, Vice President and ) 24 January 1994
- -------------------- Principal Financial Officer )
E. L. Schotanus )
)
/s/ D. H. Stowe, Jr. Director )
- -------------------- )
D. H. Stowe, Jr. )
)
/s/ S. E. Warren Director )
- -------------------- )
S. E. Warren )
29
[LOGO]
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, 1993 and 1992 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, 1993. Our audits also included the financial statement schedules
listed in the Table of Contents on page 31. These financial statements and
financial statement schedules are the responsibility of the company's
management. Our responsibility is to express an opinion on the financial
statements and financial statement schedules 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, 1993 and 1992 and the results of their
operations and their cash flows for each of the three years in the period
ended October 31, 1993 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as
a whole, present fairly in all material respects the information set forth
therein.
As discussed in Note 1 to the consolidated financial statements, effective
November 1, 1992 the company changed its method of accounting for
postretirement benefits other than pensions.
DELOITTE & TOUCHE
December 10, 1993
[LOGO]
30
TABLE OF CONTENTS
FINANCIAL STATEMENTS: Page
----
John Deere Capital Corporation and Subsidiaries
(consolidated):
Statement of Consolidated Income and Retained Earnings for
the Years Ended October 31, 1993, 1992 and 1991...............32
Consolidated Balance Sheet, October 31, 1993 and 1992...........33
Statement of Consolidated Cash Flows for the Years Ended
October 31, 1993, 1992 and 1991...............................34
Notes to Consolidated Financial Statements......................35
FINANCIAL STATEMENT SCHEDULES:
Schedule VIII - Valuation and Qualifying Accounts for the
Years Ended October 31, 1993, 1992 and 1991...................46
Schedule IX - Short-term Borrowings for the Years Ended
October 31, 1993, 1992 and 1991...............................47
SCHEDULES OMITTED
The following schedules are omitted because of the absence of the
conditions under which they are required:
I, II, III, IV, V, VI, VII, X, XI, XII, XIII and XIV.
31
STATEMENT OF CONSOLIDATED INCOME AND RETAINED EARNINGS
- --------------------------------------------------------------------------------
John Deere Capital Corporation and Subsidiaries For the Year Ended October 31
- --------------------------------------------------------------------------------
(In millions of dollars) 1993 1992 1991
- --------------------------------------------------------------------------------
REVENUES:
- --------------------------------------------------------------------------------
Finance income earned on retail notes $ 314.2 $ 356.3 $ 383.5
- --------------------------------------------------------------------------------
Revolving charge account income 53.8 47.3 42.8
- --------------------------------------------------------------------------------
Lease revenues 39.6 36.8 36.9
- --------------------------------------------------------------------------------
Finance income earned on wholesale notes 10.3 9.5 9.3
- --------------------------------------------------------------------------------
Net gain on retail notes sold 15.6 8.5 2.6
- --------------------------------------------------------------------------------
Interest income from short-term investments 6.2 7.2 7.7
- --------------------------------------------------------------------------------
Securitization and servicing fee income 22.3 1.1
- --------------------------------------------------------------------------------
Interest income from Deere & Company .9 1.0 .8
- --------------------------------------------------------------------------------
Other income 3.1 3.2 3.5
- --------------------------------------------------------------------------------
Total revenues 466.0 470.9 487.1
- --------------------------------------------------------------------------------
EXPENSES:
- --------------------------------------------------------------------------------
Interest Expense:
- --------------------------------------------------------------------------------
On obligations to others 165.8 189.2 228.0
- --------------------------------------------------------------------------------
On notes payable to Deere & Company 2.0 .1 .3
- --------------------------------------------------------------------------------
Total interest expense 167.8 189.3 228.3
- --------------------------------------------------------------------------------
OPERATING EXPENSES:
- --------------------------------------------------------------------------------
Administrative and operating expenses 74.5 63.2 58.7
- --------------------------------------------------------------------------------
Provision for credit losses 28.1 48.5 66.2
- --------------------------------------------------------------------------------
Insurance expense 2.7 1.5
- --------------------------------------------------------------------------------
Fees paid to Deere & Company 7.1 8.3 9.1
- --------------------------------------------------------------------------------
Depreciation of equipment on operating leases 19.2 16.0 12.5
- --------------------------------------------------------------------------------
Total operating expenses 128.9 138.7 148.0
- --------------------------------------------------------------------------------
Total expenses 296.7 328.0 376.3
- --------------------------------------------------------------------------------
Income before Income Taxes and Changes in Accounting 169.3 142.9 110.8
- --------------------------------------------------------------------------------
Provision for Income Taxes 58.3 47.9 37.8
- --------------------------------------------------------------------------------
Income before Changes in Accounting 111.0 95.0 73.0
- --------------------------------------------------------------------------------
Changes in Accounting (3.8)
- --------------------------------------------------------------------------------
Net Income $ 107.2 $ 95.0 $ 73.0
- --------------------------------------------------------------------------------
Cash Dividends Paid (82.0) (70.0) (50.0)
- --------------------------------------------------------------------------------
Retained Earnings at Beginning of the Year 601.1 576.1 553.1
- --------------------------------------------------------------------------------
Retained Earnings at End of the Year $ 626.3 $ 601.1 $ 576.1
- --------------------------------------------------------------------------------
Ratio of Earnings to Fixed Charges 1.99* 1.74 1.48
- --------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements on pages 35 to 45
are an integral part of this statement.
*Excludes effect of accounting changes.
- --------------------------------------------------------------------------------
32
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
John Deere Capital Corporation and Subsidiaries October 31
- --------------------------------------------------------------------------------
(In millions of dollars) 1993 1992
- --------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------
Cash and Cash Equivalents $ 165.2 $ 91.1
- --------------------------------------------------------------------------------
Receivables and Leases:
- --------------------------------------------------------------------------------
Retail notes 2,791.7 3,509.1
- --------------------------------------------------------------------------------
Revolving charge accounts 331.1 268.0
- --------------------------------------------------------------------------------
Financing leases 84.9 85.4
- --------------------------------------------------------------------------------
Wholesale notes 109.6 111.9
- --------------------------------------------------------------------------------
Total receivables 3,317.3 3,974.4
- --------------------------------------------------------------------------------
Equipment on operating leases 119.3 85.1
- --------------------------------------------------------------------------------
Total receivables and leases 3,436.6 4,059.5
- --------------------------------------------------------------------------------
Allowance for credit losses (77.5) (83.0)
- --------------------------------------------------------------------------------
Total receivables and leases-net 3,359.1 3,976.5
- --------------------------------------------------------------------------------
Other Receivables 182.8 87.5
- --------------------------------------------------------------------------------
Other Assets 46.4 49.6
- --------------------------------------------------------------------------------
TOTAL $3,753.5 $4,204.7
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
- --------------------------------------------------------------------------------
Short-Term Borrowings:
- --------------------------------------------------------------------------------
Commercial paper $ 454.0 $1,486.7
- --------------------------------------------------------------------------------
Deere & Company 439.5 65.7
- --------------------------------------------------------------------------------
Current maturities of long-term borrowings 405.2 464.4
- --------------------------------------------------------------------------------
Total short-term borrowings 1,298.7 2,016.8
- --------------------------------------------------------------------------------
Accounts Payable and Accrued Liabilities:
- --------------------------------------------------------------------------------
Accrued interest on notes and debentures 41.1 39.4
- --------------------------------------------------------------------------------
Other payables 79.4 91.3
- --------------------------------------------------------------------------------
Total accounts payable and accrued liabilities 120.5 130.7
- --------------------------------------------------------------------------------
Deposits Withheld from Dealers and Merchants 104.9 100.7
- --------------------------------------------------------------------------------
Long-Term Borrowings:
- --------------------------------------------------------------------------------
Notes and debentures 1,178.2 893.9
- --------------------------------------------------------------------------------
Subordinated debt 300.0 345.0
- --------------------------------------------------------------------------------
Total long-term borrowings 1,478.2 1,238.9
- --------------------------------------------------------------------------------
Retirement Benefit Accruals and Other Liabilities 12.1 3.7
- --------------------------------------------------------------------------------
Stockholder's Equity:
- --------------------------------------------------------------------------------
Common stock, without par value (authorized,
- --------------------------------------------------------------------------------
issued and outstanding-2,500 shares
- --------------------------------------------------------------------------------
owned by John Deere Credit Company) 112.8 112.8
- --------------------------------------------------------------------------------
Retained earnings 626.3 601.1
- --------------------------------------------------------------------------------
Total stockholder's equity 739.1 713.9
- --------------------------------------------------------------------------------
TOTAL $3,753.5 $4,204.7
- --------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements on pages 35 to 45
are an integral part of this statement.
- --------------------------------------------------------------------------------
33
STATEMENT OF CONSOLIDATED CASH FLOWS
- -------------------------------------------------------------------------------------------
John Deere Capital Corporation and Subsidiaries For the Year Ended October 31
- -------------------------------------------------------------------------------------------
(In millions of dollars) 1993 1992 1991
- -------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------------------------------------------------------------
Net income $ 107.2 $ 95.0 $ 73.0
- -------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash
- -------------------------------------------------------------------------------------------
provided by operator activities:
- -------------------------------------------------------------------------------------------
Changes in accounting, cumulative net adjustment 3.8
- -------------------------------------------------------------------------------------------
Provision for credit losses 28.1 48.5 66.2
- -------------------------------------------------------------------------------------------
Provision for depreciation 21.0 17.9 14.3
- -------------------------------------------------------------------------------------------
Deferred income taxes 3.8 (4.8) (14.5)
- -------------------------------------------------------------------------------------------
Other (6.6) (1.4) 1.5
- -------------------------------------------------------------------------------------------
Net cash provided by operating activities 157.3 155.2 140.5
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------------------------------------------------------------
Cost of receivables and leases acquired (3,340.6) (3,180.4) (3,248.7)
- -------------------------------------------------------------------------------------------
Collections of receivables 2,642.5 2,708.0 2,318.7
- -------------------------------------------------------------------------------------------
Proceeds from sales of receivables 1,161.7 703.6 27.4
- -------------------------------------------------------------------------------------------
Other 13.9 14.7 10.2
- -------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities 477.5 245.9 (892.4)
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------------------------------------------------------------
Increase (decrease) in notes payable to others (1,032.7) (615.1) 310.3
- -------------------------------------------------------------------------------------------
Change in receivable/payable with Deere & Company 373.9 (39.5) 88.5
- -------------------------------------------------------------------------------------------
Proceeds from issuance of long-term borrowings 687.0 522.7 426.2
- -------------------------------------------------------------------------------------------
Principal payments on long-term borrowings (506.9) (227.5) (1.9)
- -------------------------------------------------------------------------------------------
Dividends paid (82.0) (70.0) (50.0)
- -------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (560.7) (429.4) 773.1
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 74.1 (28.3) 21.2
- -------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 91.1 119.4 98.2
- -------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 165.2 $ 91.1 $ 119.4
- -------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements on pages 35 to 45 are an integral
part of this statement.
- -------------------------------------------------------------------------------------------
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. (DCS), Farm Plan Corporation (FPC), Deere Credit,
Inc. (DCI), and John Deere Receivables, Inc. (JDRI), are collectively called the
Company. Deere & Company with its other wholly-owned subsidiaries are
collectively called John Deere.
Retail notes, revolving charge accounts, 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. John Deere is compensated by the Company at a rate of 2.9 percent or
less of the finance income earned, depending on prevailing bank interest rate
levels, for originating retail notes on John Deere products. John Deere is
reimbursed by the Company for staff support and other administrative services at
estimated cost, and for credit lines provided by Deere & Company based on
utilization of the lines. John Deere is compensated for originating leases on
John Deere products and is reimbursed for staff support in a manner similar to
the procedures for retail notes.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of the
Capital Corporation and its subsidiaries, all of which are wholly-owned.
ACCOUNTING CHANGES
In the fourth quarter of 1993, the Company adopted FASB Statement No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions, effective
November 1, 1992. Prior quarters of 1993 were restated as required by this
Statement. This Statement generally requires the accrual of retiree health care
and other postretirement benefits during employees' years of active service. The
Company elected to recognize the pretax transition obligation of $5.4 million
($3.6 million net of deferred income taxes) as a one-time charge to earnings in
the current year. This obligation represents the portion of future retiree
benefit costs related to service already rendered by both active and retired
employees up to November 1, 1992. The 1993 postretirement benefits expense and
related disclosures have been determined according to the provisions of FASB
Statement No. 106. For years prior to 1993, postretirement benefits were
generally included in costs as covered expenses were actually incurred. The
adoption of FASB Statement No. 106 resulted in an incremental pretax expense of
$.2 million compared with the expense determined under the previous accounting
principle. This increase in the current year expense is in addition to the
previously mentioned one-time charge relating to the transition obligation.
In the fourth quarter of 1993, the Company adopted FASB Statement No. 112,
Employers' Accounting for Postemployment Benefits, effective November 1, 1992.
This Statement requires the accrual of certain benefits provided to former or
inactive employees after employment but before retirement during employees'
years of active service. The Company previously accrued certain disability
related benefits when the disability occurred. Results for the first quarter of
1993 were restated for the cumulative pretax charge resulting from this change
in accounting as of November 1, 1992 which totaled $.3 million ($.2 million net
of deferred income taxes). The adoption of FASB Statement No. 112 had an
immaterial effect on 1993 expenses.
In the fourth quarter of 1993, the Company adopted FASB Statement No. 107,
Disclosures about Fair Values of Financial Instruments. Disclosures of the fair
values of financial instruments which do not approximate the carrying values in
the financial statements are included in the appropriate financial statement
notes. Fair values of other financial instruments approximate the carrying
amounts because of the short maturities or current market interest rates of
those instruments.
In the second quarter of 1992, the Company adopted FASB Statement No. 109,
Accounting for Income Taxes. See note 10 for further information.
RETAIL NOTES RECEIVABLE
The Company purchases and finances retail notes from John Deere's agricultural
equipment, industrial equipment and lawn and grounds care equipment sales
branches in the United States. The notes are acquired by the sales branches
through John Deere retail dealers and principally originate in connection with
retail sales by dealers of new John Deere equipment and used equipment. The
Company also purchases and finances retail
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
notes unrelated to John Deere equipment, representing primarily recreational
vehicle and recreational marine product notes acquired from independent dealers
of those products and from marine mortgage service companies (recreational
product retail notes).
Finance income included in the face amount of retail notes is amortized
into income over the lives of the notes on the effective-yield basis. 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
amortized into income over the expected lives of the notes on the
effective-yield basis.
A portion of the finance income earned by the Company arises from retail
sales of John Deere equipment sold in advance of the season of use or in other
sales promotions by John Deere on which finance charges are waived by John Deere
for a period from the date of sale to a specified subsequent date. Some low-rate
financing programs are also offered by John Deere. The Company receives
compensation from John Deere approximately equal to the normal net finance
charge on retail notes for periods during which finance charges have been waived
or reduced. The portions of the Company's finance income earned that were
received from John Deere on retail notes containing waiver of finance charges or
reduced rates were 19 percent in 1993, 17 percent in 1992 and 20 percent in
1991.
A deposit equal to one percent of the face amount of John Deere
agricultural and lawn and grounds care equipment retail notes originating from
each dealer is withheld from that dealer and recorded by the Company. 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 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 balance outstanding on retail notes
originating with that dealer is remitted to the dealer, and any negative balance
in the dealer withholding account is written off and absorbed by the Company's
allowance for credit losses.
All John Deere industrial equipment retail notes are currently acquired on
a non-recourse basis and there is no withholding of dealer deposits on those
notes. This procedure originated in January 1992. Industrial notes acquired
prior to January 1992 remain subject to the agricultural and lawn and grounds
care equipment procedures, noted in the above paragraph, until the notes are
paid in full, or the withholding accounts are depleted. Because of this change,
the allowance for credit losses was increased to compensate for the additional
credit risk. The Company does not withhold deposits on recreational product
retail notes.
The Company requires that theft and physical damage insurance be carried on
all equipment leased or securing retail notes. The customer may, at his own
expense, have the Company purchase this insurance or obtain it from other
sources. Theft and physical damage insurance is also required on wholesale notes
and can be purchased through the Company or from other sources. Insurance is not
required on revolving charge accounts.
Generally, when an account becomes 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.
REVOLVING CHARGE ACCOUNTS RECEIVABLE
Revolving charge account income is generated primarily by two revolving credit
products: Farm Plan and the John Deere Credit Revolving Plan.
Farm Plan is primarily used by agri-businesses to finance customer
purchases, such as parts and service labor, which would otherwise be carried by
the merchants as accounts receivable. Farm Plan income includes a discount paid
by merchants for the purchase of customer accounts and finance charges paid by
customers on their outstanding revolving charge account balances. Merchant
recourse and a merchant reserve are established on some receivables purchased.
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.
Accrual of revolving charge account income is suspended generally when an
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 and 150 days for John Deere Credit Revolving Plan
accounts.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DIRECT FINANCING LEASES AND EQUIPMENT ON OPERATING LEASES
The Company leases John Deere agricultural equipment, industrial equipment and
lawn and grounds care equipment directly to retail customers.
At the time of accepting a lease that qualifies as a direct financing lease
under FASB Statement No. 13, the Company records the gross amount of lease
payments receivable, estimated residual value of the leased equipment for
non-purchase option leases 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.
Leases that do not meet the criteria for direct financing leases as
outlined by FASB Statement No. 13 are accounted for as operating leases. 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.
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 estimated wholesale market value of
the equipment.
Generally, when an account becomes 120 days delinquent, 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.
WHOLESALE RECEIVABLES
The Company finances recreational vehicle inventory and John Deere engines held
by dealers of those products. Wholesale finance income is 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 the recreational vehicle and engine inventories
financed. Although amounts are not withheld from dealers to cover uncollectible
receivables, there are repurchase agreements with manufacturers for new
inventories held by dealers. Generally, when an account becomes 60 days
delinquent, accrual of finance income is suspended, the collateral is
repossessed and the estimated uncollectible amount is written off to the
allowance for credit losses.
OTHER RECEIVABLES
During 1993 and 1992, the Company sold retail notes to limited-purpose business
trusts, which utilized the notes as collateral for the issuance of asset backed
securities to the public. At the time of the sales, "other receivables" from
the trusts were recorded at net present value. The receivables relate to
deposits made pursuant to recourse provisions and other payments to be received
under the sales agreements. The receivables will be amortized to their value at
maturity using the interest method. The Company is also compensated by the
trusts for certain expenses incurred in the administration of these receivables.
Securitization and servicing fee income includes both the amortization of the
above receivables and reimbursed administrative expenses.
CONCENTRATION OF CREDIT RISK
Receivables and leases have significant concentrations of credit risk in the
agricultural, industrial, lawn and grounds care, and recreational product
business sectors as shown in note 2, "Receivables and Leases." On a geographic
basis, there is not a disproportionate concentration of credit risk in any area
of the United States. The Company retains as collateral a security interest in
the equipment associated with receivables and leases other than revolving charge
accounts.
RECLASSIFICATIONS
Certain amounts for 1991 and 1992 have been reclassified to conform with 1993
financial statement presentations.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 RECEIVABLES AND LEASES
RETAIL NOTES RECEIVABLE
Retail notes receivable by product category at October 31 in millions
of dollars follow:
1993 1992
- ---------------------------------------------------------------------------
Agricultural equipment--new $ 993.1 $1,350.2
- ---------------------------------------------------------------------------
Agricultural equipment--used 840.0 1,092.4
- ---------------------------------------------------------------------------
Industrial equipment--new 233.1 319.7
- ---------------------------------------------------------------------------
Industrial equipment--used 71.8 85.3
- ---------------------------------------------------------------------------
Lawn and grounds care equipment--new 175.1 203.2
- ---------------------------------------------------------------------------
Lawn and grounds care equipment--used 22.2 23.8
- ---------------------------------------------------------------------------
Recreational Products 1,303.1 1,446.5
- ---------------------------------------------------------------------------
Total 3,638.4 4,521.1
- ---------------------------------------------------------------------------
Unearned finance income:
- ---------------------------------------------------------------------------
John Deere (347.7) (435.8)
- ---------------------------------------------------------------------------
Recreational Products (499.0) (576.2)
- ---------------------------------------------------------------------------
Total (846.7) (1,012.0)
- ---------------------------------------------------------------------------
Retail notes receivable--net $2,791.7 $3,509.1
- ---------------------------------------------------------------------------
Retail note installments at October 31 are scheduled as follows in millions of
dollars:
1993 1992
- ---------------------------------------------------------------------------
Due in:
- ---------------------------------------------------------------------------
0-12 months $ 871.5 $1,180.1
- ---------------------------------------------------------------------------
13-24 months 750.9 985.9
- ---------------------------------------------------------------------------
25-36 months 618.2 776.1
- ---------------------------------------------------------------------------
37-48 months 462.6 547.6
- ---------------------------------------------------------------------------
49-60 months 308.8 335.5
- ---------------------------------------------------------------------------
61-72 months 162.6 165.0
- ---------------------------------------------------------------------------
Over 72 months 463.8 530.9
- ---------------------------------------------------------------------------
Total $3,638.4 $4,521.1
- ---------------------------------------------------------------------------
Company guidelines relating to down payment requirements and maximum contract
terms on retail notes are generally as follows:
Down Contract
Payment Terms
- ---------------------------------------------------------------------------
Agricultural equipment, new and used:
- ---------------------------------------------------------------------------
Seasonal payments 30% 7 crop years
- ---------------------------------------------------------------------------
Monthly payments 20% 84 months
- ---------------------------------------------------------------------------
Industrial equipment:
- ---------------------------------------------------------------------------
New 20% 48-60 months
- ---------------------------------------------------------------------------
Used 20% 36 months
- ---------------------------------------------------------------------------
Lawn and grounds care equipment,
- ---------------------------------------------------------------------------
new and used:
- ---------------------------------------------------------------------------
Personal use 10% 72 months
- ---------------------------------------------------------------------------
Commercial use 20% 72 months
- ---------------------------------------------------------------------------
Recreational Products:
- ---------------------------------------------------------------------------
New 20% 180 months
- ---------------------------------------------------------------------------
Used 20% 144 months
- ---------------------------------------------------------------------------
During 1993, the average effective yield on retail notes held by the Company was
approximately 9.8 percent compared with 10.1 percent in 1992.
Retail notes acquired by the Company during the year ended October 31, 1993
had an estimated average original term (based on dollar amounts) of 67 months.
During 1992 and 1991, the estimated average original term was 68 and 66 months,
respectively. Historically, because of prepayments, the average actual life of
retail notes has been considerably shorter than the average original term.
During 1993, the Company received net proceeds of $1.143 billion from the
sale of retail notes to limited-purpose business trusts, which utilized the
notes as collateral for the issuance of asset backed securities to the public.
During 1992, the Company received net proceeds of $683 million from the sale of
retail notes.
At October 31, 1993 and 1992, the net balance of all retail notes
previously sold by the Company was $1.394 billion and $688 million,
respectively. Additional sales of retail notes are expected to be made in the
future.
The Company recognizes any gain or loss at the time of the sale of retail
notes. The sale price of retail notes sold to financial institutions is subject
to subsequent monthly adjustments to reflect changes in short-term interest
rates and variations in timing between actual and anticipated collections. The
Company acts as agent for the buyers in collection and administration of all the
notes it has sold and was contingently liable for recourse in the maximum amount
of $108 million and $67 million at October 31, 1993 and 1992, respectively. All
retail notes sold are collateralized by security agreements on the related
machinery sold to the customers. There is a minimal amount of market risk due to
monthly adjustments to the sale price of a small portion of the retail notes.
There is no anticipated credit risk related to the nonperformance by the
counterparties.
REVOLVING CHARGE ACCOUNTS RECEIVABLE
Revolving charge accounts receivable at October 31, 1993 totaled $331 million
compared with $268 million at October 31, 1992. 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.
FINANCING LEASES RECEIVABLE
Financing leases receivable by product category at October
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 are as follows in millions of dollars:
1993 1992
- ---------------------------------------------------------------------------
Agricultural equipment $ 68.5 $ 71.8
- ---------------------------------------------------------------------------
Industrial equipment 23.8 18.1
- ---------------------------------------------------------------------------
Lawn and grounds care equipment 4.9 5.8
- ---------------------------------------------------------------------------
Total 97.2 95.7
- ---------------------------------------------------------------------------
Estimated residual values 2.3 3.1
- ---------------------------------------------------------------------------
Unearned finance income (14.6) (13.4)
- ---------------------------------------------------------------------------
Financing leases receivable--net $ 84.9 $ 85.4
- ---------------------------------------------------------------------------
Residual values represent the amounts estimated to be recoverable at maturity
from disposition of the leased equipment under non-purchase option financing
leases.
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:
1993 1992
- ---------------------------------------------------------------------------
Due in:
- ---------------------------------------------------------------------------
0-12 months $ 35.4 $ 62.2
- ---------------------------------------------------------------------------
13-24 months 25.9 18.5
- ---------------------------------------------------------------------------
25-36 months 18.3 10.1
- ---------------------------------------------------------------------------
37-48 months 11.1 4.1
- ---------------------------------------------------------------------------
Over 48 months 6.5 .8
- ---------------------------------------------------------------------------
Total $ 97.2 $ 95.7
- ---------------------------------------------------------------------------
The Company sold $19 million of municipal leases to Deere & Company in 1993
compared with $21 million in 1992. At October 31, 1993, the net balance of
leases sold was $43 million compared with $48 million at October 31, 1992.
Additional sales of leases may be made in the future.
WHOLESALE RECEIVABLES
Wholesale receivables at October 31, 1993 totaled $110 million compared with
$112 million at October 31, 1992.
Maturities range from 12 to 24 months, with scheduled principal reductions from
invoice date to maturity.
EQUIPMENT ON OPERATING LEASES
The cost of equipment on operating leases by product category at October 31
follows in millions of dollars:
1993 1992
- ---------------------------------------------------------------------------
Agricultural equipment $ 102.4 $ 63.0
- ---------------------------------------------------------------------------
Industrial equipment 49.1 48.1
- ---------------------------------------------------------------------------
Lawn and grounds care equipment 1.6 1.6
- ---------------------------------------------------------------------------
Total 153.1 112.7
- ---------------------------------------------------------------------------
Accumulated depreciation (33.8) (27.6)
- ---------------------------------------------------------------------------
Equipment on operating leases--net $ 119.3 $ 85.1
- ---------------------------------------------------------------------------
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:
1993 1992
- ---------------------------------------------------------------------------
Due in:
- ---------------------------------------------------------------------------
0-12 months $ 27.0 $ 20.0
- ---------------------------------------------------------------------------
13-24 months 17.7 14.0
- ---------------------------------------------------------------------------
25-36 months 4.9 7.3
- ---------------------------------------------------------------------------
37-48 months 1.6 2.3
- ---------------------------------------------------------------------------
Over 48 months .2 .2
- ---------------------------------------------------------------------------
Total $ 51.4 $ 43.8
- ---------------------------------------------------------------------------
FAIR VALUE
At October 31, 1993, the estimated fair value of total net receivables and
leases was $3.516 billion compared with the carrying value of $3.436 billion.
The fair values of fixed-rate retail notes and financing leases were based on
the discounted values of their related cash flows at current market interest
rates. The fair values of variable-rate retail notes, revolving charge accounts
and wholesale notes approximate the carrying amounts.
NOTE 3 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
losses follows in millions of dollars:
1993 1992 1991
- ---------------------------------------------------------------------------
Balance, beginning
- ---------------------------------------------------------------------------
of the year $ 83.0 $ 78.2 $ 68.5
- ---------------------------------------------------------------------------
Provision charged to
- ---------------------------------------------------------------------------
operations 28.1 48.5 66.2
- ---------------------------------------------------------------------------
Amounts written off (26.1) (43.7) (56.5)
- ---------------------------------------------------------------------------
Transfers related to
- ---------------------------------------------------------------------------
retail note sales (7.5)
- ---------------------------------------------------------------------------
Balance, end of the year $ 77.5 $ 83.0 $ 78.2
- ---------------------------------------------------------------------------
The allowance for credit losses represented 2.3 percent, 2.0 percent and 1.8
percent of receivables and leases outstanding at October 31, 1993, 1992 and
1991, respectively. In addition, the Company had $105 million, $101 million and
$99 million at October 31, 1993, 1992 and 1991, respectively, of deposits
withheld from John Deere dealers and Farm Plan merchants available for certain
potential credit losses originating from those dealers and merchants. The lower
provisions in 1993 and 1992 resulted from a decrease in write-offs of
uncollectible receivables and leases, particularly recreational product retail
notes. The decrease in write-offs of recreational product notes resulted
primarily from the development of more selective recreational product retail
note acquisition criteria by the Company over the past few years and improved
collection effectiveness.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 SHORT-TERM BORROWINGS
On October 31, 1993, short-term borrowings were $1.299 billion, $454 million of
which was commercial paper. Short-term borrowings were $2.017 billion one year
ago, $1.487 billion of which was commercial paper. Original maturities of
commercial paper outstanding on October 31, 1993 ranged up to 244 days. The
weighted average remaining term of commercial paper outstanding on October 31,
1993 was approximately 71 days. The Capital Corporation's short-term debt also
includes amounts borrowed from Deere & Company, which totaled $439.5 million at
October 31, 1993. The Capital Corporation pays a market rate of interest to
Deere & Company based on the average outstanding borrowings each month. The
weighted average interest rates on all short-term borrowings, excluding current
maturities of long-term borrowings, for 1993, 1992 and 1991 were 4.0 percent,
5.0 percent and 6.9 percent, respectively.
At October 31, 1993, the Capital Corporation and Deere & Company, jointly,
had unsecured lines of credit with various banks in North America and overseas
totaling $3.025 billion. Included in the total credit lines are three long-term
credit agreements expiring on various dates through March 1996 for an aggregate
maximum amount of $3.016 billion. At October 31, 1993, $2.265 billion of the
lines of credit were unused. For the purpose of computing unused credit lines,
the aggregate of 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 Finance Limited (Canada) were considered to
constitute utilization. Annual facility fees on the credit agreements are paid
by Deere & Company and charged to the Capital Corporation based on utilization.
At October 31, 1993, the Capital Corporation had no borrowings outstanding
under the credit agreements. These agreements require the Capital Corporation to
maintain its consolidated ratio of earnings before fixed charges to fixed
charges at no less than 1.05 to 1 for each fiscal quarter. In addition, the
Capital Corporation'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 fiscal quarter.
For purposes of these calculations, "earnings" consist of income before income
taxes to which are added 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. "Senior debt"
consists of the Company's total interest-bearing obligations, excluding
subordinated debt, but including borrowings from Deere & Company. The Company's
ratio of earnings to fixed charges was 1.99 to 1 (excluding the effect of the
accounting changes), 1.74 to 1 and 1.48 to 1 in 1993, 1992 and 1991,
respectively. The Company's ratio of senior debt to total stockholder's equity
plus subordinated debt was 2.2 to 1 at October 31, 1993 compared with 2.7 to 1
at October 31, 1992.
In common with other large finance and credit companies, the Company
actively 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 and currency fluctuations, while responding to favorable
competitive and financing opportunities. Accordingly, from time to time, the
Company has entered into interest rate swap and interest rate cap agreements to
hedge its interest rate exposure in amounts corresponding to a portion of its
short-term borrowings. At October 31, 1993 and 1992, the total notional
principal amounts of interest rate swap agreements were $510 million and $150
million having rates of 3.6 to 9.6 percent terminating in up to 28 months and 14
months, respectively. The total notional principal amounts of interest rate cap
agreements at October 31, 1993 and 1992 were $44 million and $105 million having
capped rates of 8.0 percent to 9.0 percent terminating in up to 15 months and 28
months, respectively. 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. The credit and market risk under these agreements is
not considered to be significant. The estimated fair value and carrying value of
these interest rate swap and cap agreements were not significant at October 31,
1993.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 LONG-TERM BORROWINGS
Long-term borrowings of the Capital Corporation at October 31 consisted of the
following in millions of dollars:
1993 1992
- --------------------------------------------------------------------------------
Senior Debt:
- --------------------------------------------------------------------------------
Medium-term notes due 1994-2000:
- --------------------------------------------------------------------------------
Average interest rate of 5.9% as
- --------------------------------------------------------------------------------
of year end 1993 and 6.7% as of
- --------------------------------------------------------------------------------
year end 1992 $ 382.0 $ 400.1
- --------------------------------------------------------------------------------
5% Debenture due 1995 150.0
- --------------------------------------------------------------------------------
4-5/8% Debenture due 1996 200.0
- --------------------------------------------------------------------------------
6.0% Notes due 1995:
- --------------------------------------------------------------------------------
Swapped to variable interest rate
- --------------------------------------------------------------------------------
of 3.1% as of year end 1993
- --------------------------------------------------------------------------------
and 3.6% as of year end 1992 100.0 100.0
- --------------------------------------------------------------------------------
11-5/8% Notes due 1995:
- --------------------------------------------------------------------------------
Swapped to variable interest rate
- --------------------------------------------------------------------------------
of 3.2% as of year end 1993 and
- --------------------------------------------------------------------------------
3.3% as of year end 1992 150.0 150.0
- --------------------------------------------------------------------------------
7.2% Debenture due 1997 100.0 100.0
- --------------------------------------------------------------------------------
7.5% Debenture due 1998 47.5
- --------------------------------------------------------------------------------
5% Swiss Franc Bonds due 1999:
- --------------------------------------------------------------------------------
Swapped to variable interest rate
- --------------------------------------------------------------------------------
of 3.7% as of year end 1993 and
- --------------------------------------------------------------------------------
3.8% as of year end 1992 97.5 97.5
- --------------------------------------------------------------------------------
Total 1,179.5 895.1
- --------------------------------------------------------------------------------
Less unamortized debt discount 1.3 1.2
- --------------------------------------------------------------------------------
Net Senior Debt 1,178.2 893.9
- --------------------------------------------------------------------------------
Subordinated Debt:
- --------------------------------------------------------------------------------
9-5/8% Subordinated Notes due 1998:
- --------------------------------------------------------------------------------
Swapped to variable interest rate
- --------------------------------------------------------------------------------
of 3.8% as of year end 1993 and
- --------------------------------------------------------------------------------
3.9% as of year end 1992 150.0 150.0
- --------------------------------------------------------------------------------
9.35% Subordinated Debentures
- --------------------------------------------------------------------------------
due 2003 45.0
- --------------------------------------------------------------------------------
8-5/8% Subordinated Debentures
- --------------------------------------------------------------------------------
due 2019: Swapped to variable
- --------------------------------------------------------------------------------
interest rate of 3.2% as of
- --------------------------------------------------------------------------------
year end 1993 and 3.2% as of
- --------------------------------------------------------------------------------
year end 1992 150.0 150.0
- --------------------------------------------------------------------------------
Total Subordinated Debt 300.0 345.0
- --------------------------------------------------------------------------------
Total $1,478.2 $1,238.9
- --------------------------------------------------------------------------------
In 1993, the Capital Corporation issued $150 million of 5% notes due in 1995
and $200 million of 4-5/8% notes due in 1996. The Capital Corporation also
retired $150 million of 7.4% notes due in 1993, $125 million of 9.0% debentures
due in 1993 and $47 million of 7-1/2% debentures due in 1998. During 1993, the
Capital Corporation issued $337 million and retired $176 million of medium-term
notes. In November 1993, the Capital Corporation announced that on January 4,
1994 it will redeem the $40 million balance of outstanding 9.35% subordinated
debentures due 2003.
The Capital Corporation has entered into interest rate swap agreements
with independent parties that change the effective rate of interest on certain
long-term borrowings to a variable rate based on specified United States
commercial paper rate indices. The table 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. In addition, the
Capital Corporation has interest rate swap agreements corresponding to a portion
of its fixed rate long-term borrowings. At October 31, 1993, the total notional
principal amount of these interest rate swap agreements was $347 million, having
variable rates of 3.4 percent to 3.8 percent, terminating in up to 40 months.
The Capital Corporation also has interest rate swap and cap agreements
associated with medium-term notes. The table reflects the interest rates
relating to these swap and cap agreements. At October 31, 1993 and 1992, the
total notional principal amounts of these swap agreements were $138 million and
$110 million, terminating in up to 42 months and 54 months, respectively. At
October 31, 1993 and 1992, the total notional principal amounts of these cap
agreements were $25 million and $125 million, terminating in up to 22 months and
34 months, respectively. A Swiss franc to United States dollar currency swap
agreement is also associated with the Swiss franc bonds in the table. The credit
and market risk under these agreements is not considered to be significant.
At October 31, 1993, the total estimated fair value of the Company's total
long-term borrowings was $1.496 billion. The corresponding carrying amount of
total long-term borrowings was $1.478 billion. Fair values of long-term
borrowings with fixed rates were based on a discounted cash flow model. Fair
values of long-term borrowings, which have been swapped to current variable
interest rates, approximate their carrying amounts. The estimated fair value and
carrying value of the Company's interest rate swap and cap agreements associated
with medium-term notes were not significant at October 31, 1993.
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: 1994-$405, 1995-$633, 1996-$262, 1997-$309, 1998-$11.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 FIXED CHARGE COVERAGE
Deere & Company has expressed an intention of conducting its business with the
Company on such terms that the Company's consolidated ratio of earnings before
fixed charges to fixed charges will not be less than 1.05 to 1 for each fiscal
quarter. Financial support was not provided in 1993, 1992 or 1991, as the ratios
were 1.99 to 1 (excluding the effect of the accounting changes), 1.74 to 1, and
1.48 to 1, respectively. This arrangement is not intended to make Deere &
Company responsible for the payment of obligations of the Company.
NOTE 7 COMMON STOCK
All of the Company'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 reserved for officers or employees or for options,
warrants, conversions or other rights at October 31, 1993 or 1992.
NOTE 8 DIVIDENDS
In October 1993, the Capital Corporation paid a cash dividend to John Deere
Credit Company of $82 million, which in turn paid an $82 million cash dividend
to Deere & Company. Similarly, during 1992, the Capital Corporation paid a $70
million dividend. During the first quarter of 1994, the Capital Corporation
declared and paid a dividend of $150 million to John Deere Credit Company, which
in turn declared and paid a dividend of $150 million to Deere & Company.
NOTE 9 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 employees' compensation near retirement. 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 $1.5 million in 1993, $1.0 million in
1992 and was negligible in prior years. Further disclosure for the plan is
included in the Deere & Company 1993 annual report pension note.
During the fourth quarter of 1993, the Company adopted FASB Statement
No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions,
effective November 1, 1992. Additional information is presented in the "Summary
of Significant Accounting Policies" on page 35, and the "Quarterly Data
(unaudited)" on page 45.
The Company generally provides defined benefit health care and life
insurance plans for retired employees. Health care and life insurance benefits
expense is actuarially determined based on the Company's employees included in
the plans and amounted to $.6 million in 1993. The 1992 and 1991 expenses were
negligible as determined under the previous accounting principle.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 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.
DEFERRED INCOME TAXES
In 1992, the Company adopted FASB Statement No. 109, Accounting for Income
Taxes. There was no cumulative effect of adoption or current effect on
continuing operations mainly because the Company had previously adopted FASB
Statement No. 96, Accounting for Income Taxes, in 1988.
Deferred income taxes arise because there are certain items that are
treated differently for financial accounting than for income tax reporting
purposes. An analysis of deferred income tax assets and liabilities at October
31 in millions of dollars follows:
1993 1992
-----------------------------------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
- ----------------------------------------------------------------------------------------------------------
Allowance for credit losses $27.1 $28.2
- ----------------------------------------------------------------------------------------------------------
Deferred lease income $4.1 $2.6
- ----------------------------------------------------------------------------------------------------------
Deferred retail note
- ----------------------------------------------------------------------------------------------------------
finance income 1.5 .2
- ----------------------------------------------------------------------------------------------------------
Accrual for retirement and
- ----------------------------------------------------------------------------------------------------------
postemployment benefits 2.1
- ----------------------------------------------------------------------------------------------------------
Miscellaneous accruals and other .4 .1 .5
- ----------------------------------------------------------------------------------------------------------
Total deferred income tax
- ----------------------------------------------------------------------------------------------------------
assets and liabilities $29.2 $6.0 $28.3 $3.3
- ----------------------------------------------------------------------------------------------------------
The provision for income taxes consisted of the following in millions of
dollars:
1993 1992 1991
- -------------------------------------------------------------------------------------------
Current $ 54.5 $ 52.7 $ 52.3
- -------------------------------------------------------------------------------------------
Deferred 3.8 (4.8) (14.5)
- -------------------------------------------------------------------------------------------
Total provision for
- -------------------------------------------------------------------------------------------
income taxes $ 58.3 $ 47.9 $ 37.8
- -------------------------------------------------------------------------------------------
The Omnibus Budget Reconciliation Act of 1993, which enacted an increase in the
United States federal statutory income tax rate effective January 1, 1993, was
signed into law during the fourth quarter of 1993. In accordance with FASB
Statement No. 109, Accounting for Income Taxes, deferred tax assets and
liabilities as of the enactment date were revalued during the fourth quarter of
1993 using the new rate of 35 percent. This resulted in a credit of $.7 million
to the provision for income taxes.
EFFECTIVE INCOME TAX PROVISION
A comparison of the statutory and effective income tax provisions of the Company
and reasons for related differences follow in millions of dollars:
1993 1992 1991
- ------------------------------------------------------------------------------------------
United States federal income tax
- ------------------------------------------------------------------------------------------
provision at a statutory rate
- ------------------------------------------------------------------------------------------
of 34.83 percent in 1993
- ------------------------------------------------------------------------------------------
and 34 percent
- ------------------------------------------------------------------------------------------
in 1992 and 1991 $ 59.0 $ 48.6 $ 37.7
- ------------------------------------------------------------------------------------------
Municipal lease income
- ------------------------------------------------------------------------------------------
not taxable (.3) (.2) (.3)
- ------------------------------------------------------------------------------------------
Effect of statutory tax rate
- ------------------------------------------------------------------------------------------
change on deferred taxes (.7)
- ------------------------------------------------------------------------------------------
Other adjustments--net .3 (.5) .4
- ------------------------------------------------------------------------------------------
Total provision for
- ------------------------------------------------------------------------------------------
income taxes $ 58.3 $ 47.9 $ 37.8
- ------------------------------------------------------------------------------------------
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 CASH FLOW INFORMATION
For purposes of the statement 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 1993,
1992 and 1991 were $134.8 million, $172.6 million and $215.9 million,
respectively. Cash payments for income taxes during these same periods were
$54.9 million, $53.0 million and $53.3 million, respectively.
NOTE 12 LEGAL PROCEEDINGS
The Company is subject to various unresolved legal actions which arise in the
normal course of its business. The most prevalent of such actions relates to
state and federal regulations concerning retail credit. There are various claims
and pending actions against the Company with respect to commercial and consumer
financing matters. These matters include lawsuits pending in federal and state
courts in Texas alleging that certain of the Company's retail finance contracts
for recreational vehicles and boats violate certain technical provisions of
Texas consumer credit statutes dealing with maximum rates, licensing and
disclosures. The plaintiffs in Texas claim they are entitled to common law and
statutory damages and penalties. On November 6, 1992 the federal District Court
certified a federal class action under Rule 23 (b) (3) of the Federal Rules of
Civil Procedure in an action brought by Russell Durrett, individually and on
behalf of others, against John Deere Company (filed in state court on February
19, 1992 and removed on February 26, 1992 to the United States District Court
for the Northern District of Texas, Dallas Division). On October 12, 1993, in a
case named DEERE CREDIT, INC. V. SHIRLEY Y. MORGAN, ET AL., filed February 20,
1992, the 281st District Court for Harris County, Texas, certified a class under
Rules 42 (b) (1) (A), 42 (b) (1) (B) and 42 (b) (2) of the Texas Rules of Civil
Procedure, of all persons who opt out of the federal class action. The Company
believes that it has substantial defenses and intends to defend the actions
vigorously. Although it is not possible to predict the outcome of these
unresolved legal actions, and the amounts of claimed damages and penalties are
large, the Company believes that these unresolved legal actions will not have a
material adverse effect on its consolidated financial position.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 QUARTERLY DATA (UNAUDITED)
Supplemental consolidated quarterly information for the
Company follows in millions of dollars:
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
- --------------------------------------------------------------------------------
1993:
- --------------------------------------------------------------------------------
Revenues $115.1 $116.7 $114.4 $119.8 $466.0
- --------------------------------------------------------------------------------
Interest expense 43.6 42.8 40.7 40.7 167.8
- --------------------------------------------------------------------------------
Operating expenses (1) 30.1 33.3 30.4 35.1 128.9
- --------------------------------------------------------------------------------
Income taxes 14.0 13.8 14.7 15.8 58.3
- --------------------------------------------------------------------------------
Income before changes in accounting (1) 27.4 26.8 28.6 28.2 111.0
- --------------------------------------------------------------------------------
Changes in accounting (1) 3.8 3.8
- --------------------------------------------------------------------------------
Net income 23.6 26.8 28.6 28.2 107.2
- --------------------------------------------------------------------------------
1992:
- --------------------------------------------------------------------------------
Revenues $117.5 $116.8 $120.0 $116.6 $470.9
- --------------------------------------------------------------------------------
Interest expense 53.2 46.7 45.9 43.5 189.3
- --------------------------------------------------------------------------------
Operating expenses 33.1 34.7 31.4 39.5 138.7
- --------------------------------------------------------------------------------
Income taxes 10.6 11.6 14.9 10.8 47.9
- --------------------------------------------------------------------------------
Net income 20.6 23.8 27.8 22.8 95.0
- --------------------------------------------------------------------------------
(1) In the fourth quarter of 1993, the Company adopted FASB Statement Nos. 106
and 112 relating to postretirement and postemployment benefits, effective
November 1, 1992. Accordingly, results for the first quarter of 1993 were
restated for the cumulative after-tax effect of these changes in accounting as
of November 1, 1992, which totaled $3.8 million. Previously reported income
before changes in accounting for the first three quarters of 1993 were also
restated to reflect incremental pretax postretirement benefits expense of $.2
million ($.1 million after income taxes) compared with expense under the
previous accounting principles. The fourth quarter of 1993 also included an
incremental pretax increase in the postretirement and postemployment benefits
expense of $.1 million compared with expense under the previous accounting
principles. Additional information relating to the adoption of FASB Statement
Nos. 106 and 112 is presented in the "Summary of Significant Accounting
Policies" on page 35.
45
Schedule VIII
JOHN DEERE CAPITAL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED OCTOBER 31, 1993, 1992 AND 1991
(in thousands of dollars)
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
ADDITIONS DEDUCTIONS
------------------------- -------------------------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER ACCOUNTS BALANCE AT
DESCRIPTION OF YEAR EXPENSES -EXPLAIN DESCRIPTION AMOUNT END OF YEAR
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended October 31, 1993:
Reserve deducted from the asset
to which it applies-
Credit losses
Transfers related
to retail note sales $7,511
Uncollectible receivables $26,094 $77,486
--------- ---------
Total $83,002 $28,089 Total Deductions $33,605 $77,486
--------- --------- --------- ---------
--------- --------- --------- ---------
Year ended October 31, 1992:
Reserve deducted from the asset
to which it applies-
Credit losses
Total $78,159 $48,497 Uncollectible receivables $43,654 $83,002
--------- --------- --------- ---------
--------- --------- --------- ---------
Year ended October 31, 1991:
Reserve deducted from the asset
to which it applies-
Credit losses
Total $68,480 $66,210 $56,531 $78,159
--------- --------- Uncollectible receivables --------- ---------
--------- --------- --------- ---------
46
Schedule IX
SHORT-TERM BORROWINGS
FOR THE YEARS ENDED OCTOBER 31, 1993, 1992 AND 1991
(in thousands of dollars)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
-------- -------- -------- -------- -------- --------
MAXIMUM AMOUNT AVE AMOUNT WEIGHTED AVE
OUTSTANDING OUTSTANDING INTEREST RATE
BALANCE AT END WEIGHTED AVE DURING DURING DURING
CATEGORY OF AGGREGATE SHORT-TERM BORROWINGS OF PERIOD INTEREST RATE THE PERIOD THE PERIOD THE PERIOD
- --------------------------------------------------------------------------------------------------------------------------------
(1) (2) (3)
Year Ended October 31, 1993:
Demand notes payable to Deere & Company $439,540 3.2% $439,540 $58,821 3.5%
Payable to holders of commercial paper (4) 454,009 3.4% 1,477,078 1,119,574 3.4%
------------ ------------
Total short-term borrowings $893,549 3.3% $1,477,078 $1,178,395 3.4%
------------ ------------
------------ ------------
Year ended October 31, 1992:
Demand notes payable to Deere & Company $65,661 3.9% $65,661 $7,181 4.4%
Payable to holders of commercial paper (4) 1,486,673 3.4% 2,011,756 $1,850,245 4.3%
------------ ------------
Total short-term borrowings $1,552,334 3.4% $2,011,756 $1,857,426 4.3%
------------ ------------
------------ ------------
Year ended October 31, 1991:
Demand notes payable to Deere & Company $105,223 5.5% $105,223 $19,487 6.7%
Payable to holders of commercial paper (4) 2,101,804 5.9% 2,101,804 1,866,667 6.9%
------------ ------------
Total short-term borrowings $2,207,027 5.9% $2,207,027 $1,186,154 6.9%
------------ ------------
------------ ------------
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
(1) Maximum amount outstanding at end of any month during the fiscal year.
(2) Average amount outstanding during the period is computed by dividing the total of daily outstanding principal
balances by the number of days in the fiscal year.
(3) Weighted average interest rates were computed by dividing interest expense for the year (excluding commitment fees)
by the average daily principal balance outstanding. When commitment fees are included in the computation of the
weighted average interest rate the adjusted rates are 3.6 percent, 4.4 percent and 7.0 percent for 1993, 1992, and
1991 respectively.
(4) Commercial paper is issued with varying interest rates and with varying maturities up to a maximum of 270 days.
47
INDEX TO EXHIBITS
Page No.
-------
3.1 Certificate of Incorporation, as amended 50
3.2 By-laws, as amended 57
4.1 Credit agreements among registrant, Deere & Company, various
financial institutions, and Chemical Bank and Deutsche Bank,
as Managing Agents, dated as of December 15, 1993. 64
4.2 Revolving evergreen facility linked credit agreement among
registrant, Deere & Company and a number of banks dated as of
March 26, 1993 (Exhibit 4.2 to Form 10-Q of the registrant for
the quarter ended April 30, 1993*).
4.3 Form of certificate for common stock (Exhibit 4.3 to Form 10-Q
of the registrant for the quarter ended April 30, 1993*)
4.4 Indenture dated as of February 15, 1991 between registrant and
Citibank, N.A., as Trustee (Exhibit 4.5 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, are not
filed as exhibits herewith pursuant to Item 601(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 registrant and
Deere & Company concerning agricultural retail notes
(Exhibit 10.1 to Form 10-Q of registrant for the quarter
ended April 30, 1993*).
10.2 Agreement dated May 11, 1993 between registrant and Deere
& Company concerning lawn and grounds care retail notes
(Exhibit 10.2 to Form 10-Q of the registrant for the quarter
ended April 30, 1993*).
10.3 Agreement dated May 11, 1993 between registrant and
John Deere Industrial Equipment Company concerning
industrial retail notes (Exhibit 10.3 to Form 10-Q
of the registrant for the quarter ended April 30, 1993*).
48
10.4 Agreement dated January 26, 1983 between 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*).
10.5 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*).
11. Not applicable.
12. Statement of computation of the ratio of earnings before
fixed charges to fixed charges for each of the five years
in the period ended October 31, 1993. 321
13. Not applicable
16. Not applicable
18. Not applicable
21. Omitted pursuant to instruction J(2)
22. Not applicable
23. Consent of Deloitte & Touche 322
24. Not applicable
27. Not applicable
28. Not applicable
99.1 Parts I and II of the Deere & Company Form 10-K for the
fiscal year ended October 31, 1993.*
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* Incorporated by reference. Copies of these exhibits are available
from the Company upon request.
49