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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998
Commission file number 1-6458
JOHN DEERE CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-2386361
(State of incorporation) (IRS employer identification
number)
1 EAST FIRST STREET, SUITE 600
RENO, NEVADA 89501 (702) 786-5527
(Address of principal 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
8-5/8% Subordinated Debentures Due 2019 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
At January 1, 1999, 2,500 shares of common stock, without par value, of the
registrant were outstanding, all of which were owned by John Deere Credit
Company.
The registrant meets the conditions set forth in General Instruction I(1)(a)
and (b) of Form 10-K and is therefore filing this Form with certain reduced
disclosures as permitted by Instruction I(2).
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PART I
ITEM 1. BUSINESS.
THE COMPANY
John Deere Capital Corporation (Capital Corporation) and its
subsidiaries: Deere Credit, Inc., Deere Credit Services, Inc., Farm Plan
Corporation, John Deere Receivables, Inc., John Deere Funding Corporation,
Arrendadora John Deere, S.A. de C.V. (Mexico), and John Deere Credit Limited
(Australia), are collectively called the Company. John Deere Credit Limited
(United Kingdom), a joint venture, and John Deere Credit - Germany, a
partnership, offer equipment financing products within the United Kingdom
and Germany, and are considered unconsolidated affiliates of the Company.
John Deere Credit Company, a wholly-owned finance holding subsidiary of Deere
& Company, is the parent of the Capital Corporation.
The principal business of the Company is providing and administering
financing for retail purchases of new and used equipment manufactured by
Deere & Company's agricultural, construction, and commercial and consumer
equipment divisions. The Company purchases retail installment sales and loan
contracts (retail notes) from Deere & Company and its wholly-owned
subsidiaries (collectively called John Deere). John Deere acquires these
retail notes through independent John Deere retail dealers. The Company also
purchases and finances certain agricultural, construction, and lawn and
grounds care retail notes unrelated to John Deere. In addition, the Company
purchases and finances recreational product retail notes acquired from
independent dealers and marine product mortgage service companies
(recreational product retail notes). The Company also leases equipment to
retail customers, finances and services revolving charge accounts acquired
from and offered through merchants or leading farm input providers in the
agricultural, construction, lawn and grounds care, and yacht markets
(revolving charge accounts), and provides wholesale financing for inventories
of recreational vehicles, manufactured housing units, yachts, John Deere
engines, and John Deere agricultural and John Deere construction equipment
owned by dealers of those products (wholesale notes). Retail notes, revolving
charge accounts, 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, 1999, the Company had 1,151
full-time and part-time employees.
BUSINESS OF JOHN DEERE
John Deere's operations are categorized into six business segments:
John Deere's worldwide AGRICULTURAL EQUIPMENT segment manufactures
and distributes a full line of farm equipment -- including tractors;
combine, cotton, and sugarcane harvesters; tillage, seeding and soil
preparation machinery; sprayers; hay and forage equipment; materials
handling equipment; and integrated precision farming technology.
John Deere's worldwide CONSTRUCTION EQUIPMENT segment manufactures
and distributes a broad range of machines used in construction,
earthmoving and forestry -- including backhoe loaders; crawler
dozers and loaders; four-wheel-drive loaders; excavators; scrapers;
motor graders; log skidders; and forestry harvesters. This segment
also includes the manufacture and distribution of engines and
drivetrain components for the original equipment manufacturer (OEM)
market.
John Deere's worldwide COMMERCIAL AND CONSUMER EQUIPMENT segment
manufactures and distributes equipment for commercial and
residential uses -- including small tractors for lawn, garden,
commercial and utility purposes; riding and walk-behind mowers; golf
course equipment; snowblowers; handheld products such as chain saws,
string trimmers and leaf blowers; skid-steer loaders; utility
vehicles; and other outdoor power products.
1
The products produced by the equipment segments are marketed
primarily through independent retail dealer networks and major
retail outlets.
The CREDIT segment includes the operations of the Company (described
herein), John Deere Credit Company and John Deere Credit Inc., which
primarily purchases and finances retail notes from John Deere's
equipment sales branches in Canada, as well as recreational products
and construction and transportation equipment notes from independent
dealers.
The INSURANCE segment issues policies in the United States primarily
for: general and specialized lines of commercial property and
casualty insurance; group accident and health insurance for
employees of participating John Deere dealers; and disability
insurance for employees of John Deere.
The HEALTH CARE segment provides health management programs and
related administrative services in the United States to employees of
John Deere and commercial clients.
John Deere achieved record worldwide net income in 1998, totaling
$1,021 million, or $4.20 per share ($4.16 diluted), compared with last year's
income of $960 million, or $3.78 per share ($3.74 diluted). The Equipment
Operations and Financial Services operations both contributed to the higher
level of earnings.
John Deere's worldwide net sales and revenues increased 8 percent to
a record $13,822 million in 1998, compared with $12,791 million in 1997. Net
sales of John Deere's equipment operations increased 8 percent in 1998 to
$11,926 million from $11,082 million last year. Export sales from the United
States totaled $1,970 million for 1998, compared with $2,013 million last
year. Overseas sales, which were affected by weaker economic conditions and
adverse currency fluctuations, were slightly lower in 1998. Overall, John
Deere's worldwide physical volume of sales increased 8 percent for the year.
OUTLOOK FOR JOHN DEERE
Grain and oilseed prices declined significantly during the fourth
quarter on prospects for record or near-record crop production and the
effects of weakening demand from Asia. Pork prices moved substantially lower
as well. As a result, United States farm income is expected to continue to
decline in 1999, despite a recently enacted emergency government aid package.
At the same time, farm income declines are expected in other parts of the
world, and unsettled financial conditions should continue to have an
unfavorable impact on credit availability in emerging markets. Accordingly,
retail demand for agricultural equipment in 1999 is now projected to decline
by 20 percent in North America, by 10 percent in Europe and by 15 percent in
Latin America and Australia. John Deere's financial results for the first
quarter will be significantly affected by the reduced production schedules
for large tractors and combines associated with this lower level of demand.
North American construction equipment industry sales and housing
starts are expected to decline slightly next year, but remain at favorable
levels. In addition, John Deere is implementing an initiative aimed at better
matching production schedules to customer orders, leading to lower field
inventories and improved product availability. Initial stages of
implementation will result in lower shipments to dealers.
Sales of commercial and consumer equipment should continue to
increase in 1999 following strong gains in 1998. New product introductions
are expected to expand John Deere's position in many growing markets served
by this division.
Credit operations are expected to improve in 1999 because of a
larger portfolio, primarily due to recent growth in leasing. Insurance and
health care operations also are well positioned for improved results. At the
same time, John Deere's Financial Services subsidiaries are expected to see
continued margin pressure, resulting from their highly competitive markets.
2
Based on these conditions, John Deere's worldwide physical volume of
sales is currently projected to decline by approximately 13 to 15 percent in
1999, compared to 1998. In this environment, the previously stated goal of
reporting flat earnings per share in 1999 is not achievable. Physical volume
in the first quarter of 1999 is projected to be 23 to 25 percent below the
comparable level of the first quarter of 1998.
The present economic situation is challenging John Deere to balance
its response to current conditions with its ongoing need for investment in
the future. In this regard, John Deere has reduced capital spending and is
aggressively managing costs and assets, while pursuing further efficiency
gains through various quality and supply management initiatives. At the same
time, John Deere fully intends to maintain its commitment to the key projects
that underlie its plan for global growth and long-term market share
improvement.
RELATIONSHIPS OF THE COMPANY WITH JOHN DEERE
The results of operations of the Company are affected by its
relationships with John Deere, including among other things, the terms on
which the Company acquires Receivables and Leases and borrows funds from John
Deere, the reimbursement for interest waiver and low-rate finance programs
from John Deere and the payment to John Deere for various expenses applicable
to the Company's operations. In addition, the Company and John Deere have
joint access to all of the Company's lines of credit.
The Company's acquisition volume of Receivables and Leases is
largely dependent upon the level of retail sales and leases of John Deere
products. The level of John Deere retail sales and leases is responsive to a
variety of economic, financial, climatic, legislative and other factors that
influence demand for its products. All of the Company's businesses are
affected by changes in interest rates, demand for credit and competition.
The Company bears all of the credit risk (net of recovery from
withholdings from certain John Deere dealers and Farm Plan merchants)
associated with its holding of Receivables and Leases, and performs all
servicing and collection functions. The Company compensates John Deere for
originating certain retail notes and leases on John Deere products. John
Deere is also reimbursed for staff and other administrative services at
estimated cost, and for credit lines provided to the Company based on
utilization of those lines.
The terms and the basis on which the Company acquires retail and
certain wholesale notes from John Deere are governed by agreements with John
Deere, terminable by either John Deere or the Company on 30 days notice. As
provided in these agreements, the Company sets its terms and conditions for
purchasing the notes from John Deere. Under these agreements, John Deere is
not obligated to sell notes to the Company, and the Company is obligated to
purchase notes from John Deere only if the notes comply with the terms and
conditions set by the Company.
The basis on which John Deere acquires retail and certain wholesale
notes from the dealers is governed by agreements with the independent John
Deere dealers, terminable at will by either the dealers or John Deere. In
acquiring these notes from dealers, the terms and conditions, as set forth in
agreements with the dealers, conform with the terms and conditions adopted by
the Company in determining the acceptability of retail and certain wholesale
notes to be purchased from John Deere. The dealers are not obligated to send
these notes to John Deere and John Deere is not obligated to accept these
notes from the dealers. In practice, retail and certain wholesale notes are
acquired from dealers only if the terms of these notes and the
creditworthiness of the customers are acceptable to the Company for purchase
of these notes from John Deere. The Company acts on behalf of both itself and
John Deere in determining the acceptability of the notes and in acquiring
acceptable notes from dealers.
The basis on which the Company enters into leases with retail
customers through John Deere dealers is governed by agreements between
dealers and the Company. Leases are accepted based on the terms and
conditions, the lessees' creditworthiness, the anticipated residual values of
the equipment and the intended uses of the equipment.
3
Deere & Company has an agreement with the Company to make income
maintenance payments to the Company such that its consolidated ratio of
earnings before fixed charges to fixed charges is not less than 1.05 to 1 for
each fiscal quarter. For 1998 and 1997, the Company's ratios were 1.63 to 1
and 1.64 to 1, respectively, and never less than 1.05 to 1 for any fiscal
quarter. Deere & Company also has committed to own at least 51 percent of the
voting shares of capital stock of the Company and to maintain the Company's
consolidated tangible net worth at not less than $50 million. These
arrangements are not intended to make Deere & Company responsible for the
payment of any indebtedness, obligation or liability of the Company.
DESCRIPTION OF RECEIVABLES AND LEASES
Receivables and Leases arise mainly from retail sales and leases of
John Deere products, used equipment accepted in trade for them, and equipment
of unrelated manufacturers, and also include revolving charge accounts
receivable and wholesale notes receivable (including the sale to John Deere
dealers for rental to users). The great majority of these Receivables and
Leases are derived from retail sales and leases of agricultural equipment,
construction equipment and commercial and consumer equipment sold by John
Deere dealers.
The Company offers secured financing of recreational products and
yachts. The Company also offers Farm Plan-TM- revolving charge accounts,
which are used primarily by agri-businesses to finance purchases that would
otherwise be carried by the merchant as accounts receivable, PowerPlan-R-
revolving charge accounts, which are used by commercial customers to finance
the purchase of parts and service work performed at John Deere construction
dealers, as well as John Deere Credit Revolving Plan revolving charge
accounts, which are used primarily by retail customers to finance purchases
of certain commercial and residential lawn and grounds care equipment.
Retail notes provide for retention by John Deere or the Company of
security interests in the goods financed under certain statutes, including
the Uniform Commercial Code, certain Federal statutes and state motor vehicle
laws. Security interest filings are also made for leases. However, filings
for operating leases are made for informational purposes only. See notes 1
and 2 to the consolidated financial statements.
The Company also provides retail sales financing through dealers of
certain unrelated manufacturers of recreational vehicles and yachts.
Recreational product retail notes conform to industry standards different
from those for John Deere retail notes and often have smaller down payments
and longer repayment terms. In addition, the acquisition volumes, margins and
collectibility of recreational product retail notes are affected by economic,
marketing and competitive factors and cycles, such as fluctuations in fuel
prices and recreational spending patterns, that are different from those
affecting retail notes arising from the sale of John Deere equipment.
Recreational product retail notes are acquired from more than 630
recreational vehicle and yacht dealers.
Receivables and Leases are eligible for acceptance if they conform
to prescribed finance and lease plan terms. Guidelines relating to down
payments and contract terms on retail notes and leases are described in note
2 to the consolidated financial statements.
The John Deere Credit Revolving Plan is used primarily by retail
customers of John Deere dealers to finance purchases of lawn and grounds care
equipment. Through its Farm Plan product, the Company finances revolving
charge accounts offered by approximately 5,600 participating agri-businesses
to their retail customers for the purchase of goods and services. Farm Plan
account holders consist mainly of farmers purchasing equipment parts and
service at implement dealerships. Farm Plan is also used by customers
patronizing other agri-businesses, including farm supply, feed and seed,
parts supply, bulk fuel, building supply merchants and veterinarians. The
Company also works with several leading farm input providers to offer
production loans for materials such as seeds and fertilizer. The amount
loaned is secured by the year's expected production crops or livestock. The
PowerPlan revolving charge account is used by commercial customers to finance
the purchase of parts and service work performed at John Deere construction
dealers. Preferred Resource-R-, an unsecured lending product marketed
primarily to executives and professionals, offers customers convenience and
security by providing a substantial, readily available source of funding for
a variety of personal expenses. The YachtLine-TM- product is a revolving
credit account that allows retail customers to access the equity in their
vessels and thereby better manage their investments. See note 2 to the
consolidated financial statements under "Revolving Charge Accounts
Receivable."
4
The Company finances wholesale inventories owned by approximately
400 dealers of recreational vehicles, manufactured housing units, yachts,
John Deere engines, and John Deere agricultural and John Deere construction
equipment. A large portion of the wholesale financing provided by the Company
is with dealers from whom it also purchases agricultural, construction,
recreational product and yacht retail notes. See note 2 to the consolidated
financial statements under "Wholesale Notes Receivable."
The Company requires theft and physical damage insurance be carried
on all goods leased or securing retail notes. In most cases, the customer
may, at his expense, have the Company or the seller of the goods purchase
this insurance or obtain it from other sources. Theft and physical damage
insurance is also required on goods securing wholesale notes and can be
purchased through the Company or from other sources. Insurance is not
required for revolving charge accounts.
In some circumstances, Receivables and Leases may be accepted and
acquired even though they do not conform in all respects to the established
guidelines. Acceptability and servicing of retail notes, wholesale notes and
leases, according to the finance plans and retail terms, including any waiver
of conformity with such plans and terms, is determined by Company personnel.
Officers of the Company are responsible for reviewing the performance of the
Company in accepting and collecting retail notes, wholesale notes, revolving
charge accounts 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, 1998 and 1997, approximately 45 percent and 50
percent of the retail notes held by the Company bore a variable finance rate,
respectively. With the exception of agricultural and certain yacht retail
notes, a majority of retail notes are fixed rate notes. A portion of the
finance income earned by the Company arises from reimbursements from John
Deere in connection with financing the retail sales of John Deere equipment
on which finance charges are waived or reduced by John Deere for a period
from the date of sale to a specified subsequent date. See note 2 to the
financial statements for additional information.
5
AVERAGE ORIGINAL TERM AND AVERAGE ACTUAL LIFE OF RETAIL NOTES AND LEASES
Due to prepayments (often from trade-ins and refinancings), the
average actual life of retail notes is considerably shorter than the average
original term. The following table shows the average original term for retail
notes and leases acquired and the average actual life for retail notes and
leases liquidated (in months):
AVERAGE ORIGINAL TERM AVERAGE ACTUAL LIFE
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1998 1997 1998 1997
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Retail notes 54 66 25 25
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New equipment:
Agricultural equipment 56 56 23 25
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Construction equipment 46 44 30 18
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Lawn and grounds care equipment 47 43 26 29
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Recreational products (excluding yachts) 178 174 49 47
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Yachts 212 217 35 32
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Used equipment:
Agricultural equipment 55 57 23 25
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Construction equipment 43 41 26 23
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Lawn and grounds care equipment 53 50 29 31
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Recreational products (excluding yachts) 162 157 34 33
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Yachts 219 212 37 33
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Leases 44 45 31 38
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The average original term for recreational products and yachts is longer than
for other equipment notes because of customer preferences and industry
convention.
COMPETITION
The businesses in which the Company is engaged are highly
competitive. The Company competes for customers with commercial banks and
finance and leasing companies based upon its service and finance rates
charged. The proportion of John Deere equipment retail sales and leases
financed by the Company is influenced by conditions prevailing in the
agricultural equipment, construction equipment, and commercial and consumer
equipment industries, in the financial markets, and in business generally.
The Company financed a significant portion of John Deere equipment retail
sales and leases during 1998.
The Company emphasizes convenient service to customers and endeavors
to offer terms desired in its specialized markets such as seasonal schedules
of repayment and rentals. The Company's retail note finance rates and lease
rental rates are generally believed to be in the range offered by other sales
finance and leasing companies, although not as low as those of some banks and
other lenders and lessors.
REGULATION
In a number of states, state law limits the maximum finance rate on
receivables. The present state limitations have not, thus far, significantly
limited the Company's variable-rate finance charges or the fixed-rate finance
charges established by the Company. However, if interest rate levels should
increase significantly, maximum state rates could affect the Company by
preventing the variable rates on outstanding variable-rate retail notes from
increasing above the maximum state rate, and by limiting the fixed rates on
new notes. In some states, the Company may be able to qualify new retail
notes for a higher maximum rate limit by using retail installment sales
contracts (rather than loan contracts) or by using fixed-rate rather than
variable-rate contracts.
6
In addition to rate regulation, various state and federal laws and
regulations apply to some Receivables and Leases, principally retail notes
for goods sold for personal, family or household use and Farm Plan and John
Deere Credit Revolving Plan accounts receivable for such goods. To date, such
laws and regulations have not had a significant adverse effect on the
Company's financial position or results of operations.
Retail sales financing outside the United States is affected by a
diversity of customs and regulations.
ITEM 2. PROPERTIES.
The Company's properties principally consist of office equipment, an
owned office building in Madison, Wisconsin, and leased office space in Reno,
Nevada; West Des Moines, Iowa; Alameda, California; Newport Beach,
California; Shelton, Connecticut; Annapolis, Maryland; Ft. Lauderdale,
Florida; Manasquan, New Jersey; Bloomington, Illinois; Brisbane, Australia;
and Monterrey, Mexico.
ITEM 3. LEGAL PROCEEDINGS.
The Company is subject to various unresolved legal actions which
arise in the normal course of its business, the most prevalent of which
relate to state and federal laws and regulations concerning retail credit.
Although it is not possible to predict with certainty the outcome of these
unresolved legal actions or the range of possible loss, the Company believes
these unresolved legal actions will not have a material effect on its
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted pursuant to instruction I(2).
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
All of the Capital Corporation's common stock is owned by John Deere
Credit Company, a finance holding company that is wholly-owned by Deere &
Company. The Capital Corporation declared and paid cash dividends to John
Deere Credit Company of $50 million in 1998 and $75 million in 1997. In each
case, John Deere Credit Company paid a comparable dividend to Deere &
Company. During the first quarter of 1999, the Capital Corporation declared
and paid a dividend of $5 million to John Deere Credit Company which, in
turn, paid a dividend of $5 million to Deere & Company.
ITEM 6. SELECTED FINANCIAL DATA.
Omitted pursuant to instruction I(2).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
1998 COMPARED WITH 1997
Consolidated net income for the fiscal year ended October 31, 1998
was $151 million compared with $136 million in 1997. Results for 1998 reflect
higher income from a larger average Receivable and Lease portfolio financed
and higher gains from the sales of retail notes, partially offset by higher
operating expenses and narrower financing spreads. The ratio of earnings to
fixed charges was 1.63 to 1 for 1998 compared with 1.64 to 1 for 1997.
Revenues totaled $887 million in 1998 compared to $754 million a
year ago. Revenues increased primarily due to an 11 percent increase in the
average balance of Receivables and Leases financed. Finance income earned on
retail notes totaled $431 million in 1998 compared to $417 million in 1997.
Lease revenues increased $74 million, to $192 million in 1998, from $118
million in 1997. Finance income earned on wholesale notes increased $12
million, to $61 million in 1998, from $49 million earned in 1997. Increases
in finance income earned on wholesale notes were primarily the result of the
continued growth in the financing for inventories of construction, yacht and
recreational vehicles.
Revenues earned on revolving charge accounts amounted to $113
million in 1998, a 10 percent increase over revenues of $103 million earned
during 1997. The increase was primarily due to growth of agricultural
production loans in 1998 compared with 1997.
The net gain on retail notes sold totaled $39 million during 1998
compared with $19 million for 1997. Securitization and servicing fee income
totaled $28 million in 1998 compared with $30 million during 1997.
Securitization and servicing fee income relates to retail notes sold to other
financial institutions or limited-purpose business trusts and primarily
included the interest earned on retained interests and reimbursed
administrative expenses received. Additional sales of retail notes are
expected to be made in the future.
Higher average borrowings in 1998 resulted in higher interest
expense, which totaled $368 million in 1998 compared with $327 million in
1997. Average borrowings were $5.875 billion in 1998 compared with $5.380
billion in 1997, an increase of 9 percent. The weighted average annual
interest rate incurred on all interest-bearing borrowings during 1998
remained the same as 1997 at 6.1 percent.
Administrative and operating expenses increased 9 percent from $107
million in 1997 to $117 million in 1998. These increases were attributable to
the costs associated with administering a larger Receivable and Lease
8
portfolio as well as higher employment costs relating to the increasing level
of new acquisition volumes.
The provision for credit losses was $46 million in 1998 and $33
million in 1997. Total write-offs of Receivables and Leases financed were $32
million during 1998 compared with $30 million in 1997. The increase in
write-offs from 1997 primarily related to a $3.8 million increase in
equipment retail note write-offs and a $1.1 million increase in unsecured
lending write-offs, partially offset by a $1.3 million decrease in revolving
charge account write-offs and a $1.7 million decrease in recreational product
retail note write-offs.
RECEIVABLES AND LEASES ACQUIRED AND HELD
Acquisition volumes of Receivables and Leases by the Company during
1998 totaled $7.349 billion, an increase of 14 percent compared with volumes
of $6.462 billion during 1997. The higher volumes in 1998 resulted mainly
from increased volumes of leases, wholesale receivables, revolving charge
accounts, and John Deere equipment retail notes. Receivables and Leases held
by the Company at October 31, 1998 totaled $6.528 billion compared with
$6.303 billion at October 31, 1997. For the 1998 and 1997 fiscal years,
Receivable and Lease acquisition volumes and balances held were as follows
(in millions of dollars):
FISCAL YEAR VOLUMES BALANCE AT OCTOBER 31,
-------------------------------------- ----------------------------------------
1998 1997 % CHANGE 1998 1997 % CHANGE
---------- ---------- -------- ---------- ---------- --------
Retail notes:
Agricultural equipment $ 2,482.0 $ 2,455.2 1% $ 2,284.8 $ 2,556.2 (11%)
Construction equipment 461.8 412.4 12 703.5 660.5 7
Lawn and grounds care equipment 188.8 153.9 23 269.7 215.6 25
Recreational products 354.4 340.9 4 581.4 917.1 (37)
---------- ---------- ---------- ----------
Total 3,487.0 3,362.4 4 3,839.4 4,349.4 (12)
Revolving charge accounts 1,685.9 1,450.4 16 751.1 618.5 21
Wholesale notes 1,483.1 1,158.5 28 803.9 593.4 35
Financing leases 136.4 121.9 12 241.8 214.6 13
Equipment on operating leases 556.6 368.4 51 891.5 527.2 69
---------- ---------- ---------- ----------
Total $ 7,349.0 $ 6,461.6 14 $ 6,527.7 $ 6,303.1 4
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Retail note volumes increased by approximately $125 million in 1998
compared with 1997, primarily due to an increase in the volumes of lawn and
grounds care equipment and construction equipment retail notes. Revolving
charge accounts, leases and wholesale note volumes increased significantly in
1998, due to the higher demand for these products.
Retail notes receivable decreased primarily due to the Company
selling retail notes, receiving proceeds of $1.738 billion during 1998
compared to $837 million during 1997. This decrease was partially offset by
retail note acquisition volumes exceeding collections during 1998. Additional
information is presented in note 2 to the consolidated financial statements.
Receivables and Leases administered by the Company, which include
retail notes sold, were as follows (in millions):
October 31, October 31,
1998 1997
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Receivables and Leases administered:
Receivables and Leases owned by the Company $ 6,527.7 $ 6,303.1
Retail notes sold and securitized (with limited recourse)* 1,812.1 1,313.8
Retail notes sold (without recourse) 376.4
--------- ---------
Total Receivables and Leases administered $ 8,716.2 $ 7,616.9
--------- ---------
--------- ---------
9
* The Company's maximum exposure under all retail note recourse
provisions at October 31, 1998 and 1997 was $181 million and $168
million, respectively.
Retail notes bearing variable finance rates totaled 45 percent of
the total retail note portfolio at October 31, 1998, compared with 50 percent
at October 31, 1997.
Total Receivable and Lease amounts 60 days or more past due were $25
million at October 31, 1998, compared with $22 million at October 31, 1997.
These past-due amounts represented .39 percent and .35 percent of the total
Receivables and Leases held at those respective dates. The balance of retail
notes held (principal plus accrued interest) with any installment 60 days or
more past due was $54 million at October 31, 1998 compared to $44 million at
October 31, 1997. The balances of retail notes held on which any installment
60 days or more past due as a percentage of ending retail notes receivable
was 1.42 percent at October 31, 1998 and 1.02 percent at October 31, 1997.
While past due amounts, as a percentage of total Receivables and Leases held,
increased in 1998, these amounts compare favorably with historical levels.
See note 3 to the consolidated financial statements for additional
information on past dues.
Deposits withheld from dealers and merchants, representing mainly
the aggregate dealer retail note and lease withholding accounts from
individual John Deere dealers to which losses from retail notes and leases
originating from the respective dealers can be charged, amounted to $156
million at October 31, 1998, compared to $144 million at October 31, 1997.
The Company's allowance for credit losses on all Receivables and Leases
financed at October 31, 1998 totaled $81 million and represented 1.2 percent
of the total Receivables and Leases financed, compared with $86 million and
1.4 percent, respectively, one year earlier. The Company's allowance for
credit losses, as a percentage of total Receivables and Leases, declined in
1998 due to an ongoing evaluation of loss experience and related estimates to
ensure the allowance for credit losses is maintained at an adequate level.
1997 COMPARED WITH 1996
Consolidated net income for the fiscal year ended October 31, 1997
was $136 million compared with $134 million in 1996. Results for 1997 reflect
higher income from a larger average Receivable and Lease portfolio financed
and higher gains from the sales of retail notes, partially offset by lower
securitization and servicing fee income, narrower financing spreads and
higher expenditures associated with several growth initiatives. The ratio of
earnings to fixed charges was 1.64 to 1 for 1997 compared with 1.75 to 1 in
1996.
Revenues totaled $754 million in 1997 compared to $657 million in
1996. Revenues increased primarily due to a 19 percent increase in the
average balance of Receivables and Leases financed, particularly related to
growth in retail notes, operating leases and wholesale notes. Finance income
earned on retail notes totaled $417 million in 1997 compared to $372 million
in 1996. Lease revenues increased $50 million, to $118 million in 1997, from
$68 million in 1996, largely due to low-rate leasing initiatives related to
John Deere agricultural equipment. Finance income earned on wholesale notes
increased $11 million to $49 million in 1997 from $38 million earned in 1996.
Increases in finance income earned on wholesale notes were primarily the
result of the growth in the financing for inventories of construction, yacht
and manufactured housing.
Revenues earned on revolving charge accounts amounted to $103
million in 1997, an 8 percent increase over revenues of $95 million earned
during 1996. This increase was primarily due to a 9 percent increase in the
average balance of Farm Plan receivables financed in 1997 compared with 1996.
Securitization and servicing fee income totaled $30 million in 1997,
compared with $46 million during 1996, a decrease of $16 million. The
decrease in securitization and servicing fee income was partially the result
of a 6 percent decrease in the average balance of retail notes previously
sold. Securitization and servicing fee income relates to retail notes sold to
other financial institutions or limited-purpose business trusts and primarily
includes the interest earned on retained interests, adjustments related to
those sales and reimbursed administrative expenses received. The net gain on
retail notes sold totaled $19 million during 1997, compared with $14 million
for 1996.
10
Total interest expense increased $53 million from $274 million in
1996 to $327 million in 1997. The increase in interest expense was primarily
the result of increased borrowings required to finance the higher average
portfolio of Receivables and Leases. Average borrowings were $5.380 billion
in 1997 compared with $4.498 billion in 1996, an increase of 20 percent. The
weighted average annual interest rate incurred on all interest-bearing
borrowings increased to 6.1 percent in 1997 from 5.9 percent in 1996.
Administrative and operating expenses increased 12 percent from $95
million in 1996 to $107 million in 1997. These increases were the result of
higher employment costs associated with administering a larger Receivable and
Lease portfolio and certain expenses related to the Company's growth
initiatives. These growth initiatives included expansion of international
retail financing, the introduction of golf and turf financing products, and
efforts related to agricultural production financing. Operating expenses were
also affected by higher depreciation of equipment on operating leases, which
totaled $68 million in 1997 compared to $37 million in 1996, a result of the
significant growth in operating leases financed.
The provision for credit losses was $33 million in 1997 and $38
million in 1996. Total write-offs of Receivables and Leases financed were $30
million during 1997 compared with $29 million in 1996. The increase in
write-offs during 1997 primarily related to a $4 million increase in lease
and revolving credit write-offs and a $1 million increase in wholesale
write-offs, offset by a $4 million decrease in retail note write-offs. See
note 2 to the consolidated financial statements for additional information.
RECEIVABLES AND LEASES ACQUIRED AND HELD
Acquisition volumes of Receivables and Leases by the Company during
1997 totaled $6.462 billion, an increase of 17 percent compared with volumes
of $5.517 billion during 1996. The higher volumes resulted mainly from an
increased volume of John Deere equipment retail notes, revolving charge
accounts, wholesale notes and operating leases. Receivables and Leases held
by the Company at October 31, 1997 and 1996, totaled $6.303 billion and
$5.624 billion, respectively. For the 1997 and 1996 fiscal years, Receivable
and Lease acquisition volumes and balances held were as follows (in millions
of dollars):
FISCAL YEAR VOLUMES BALANCE AT OCTOBER 31
------------------------------------ -------------------------------------
1997 1996 % CHANGE 1997 1996 % CHANGE
---------- ---------- -------- ---------- ---------- --------
Retail notes:
Agricultural equipment $ 2,455.2 $ 2,154.5 14% $ 2,556.2 $ 2,417.3 6%
Construction equipment 412.4 462.8 (11) 660.5 628.9 5
Lawn and grounds care equipment 153.9 123.9 24 215.6 182.6 18
Recreational products 340.9 233.9 46 917.1 840.8 9
---------- ---------- ---------- ----------
Total 3,362.4 2,975.1 13 4,349.4 4,069.6 7
Revolving charge accounts 1,450.4 1,232.5 18 618.5 571.1 8
Wholesale notes 1,158.5 982.3 18 593.4 524.5 13
Financing leases 121.9 103.9 17 214.6 181.5 18
Equipment on operating leases 368.4 222.8 65 527.2 276.8 90
---------- ---------- ---------- ----------
Total $ 6,461.6 $ 5,516.6 17 $ 6,303.1 $ 5,623.5 12
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
John Deere equipment retail note volumes increased by $314 million
in 1997 compared with 1996, primarily due to an increase in the volumes of
agricultural equipment retail notes. Volumes of recreational product retail
notes increased 46 percent in 1997 due to the Company's aggressive marketing
programs initiated within the recreational vehicle markets and a $17 million
purchase of yacht installment notes from an unrelated third party. Revolving
charge accounts, wholesale note and lease volumes increased significantly in
1997 due to the higher demand for those products.
The Company also securitized and sold retail notes, receiving
proceeds of $837 million during 1997 compared to $814 million during 1996.
Retail notes administered by the Company, which included retail notes
11
previously sold, amounted to $5.663 billion at October 31, 1997, compared
with $5.247 billion at October 31, 1996. The balance of retail notes
previously sold was $1.314 billion at October 31, 1997 compared with $1.177
billion at October 31, 1996. The Company's maximum exposure under all retail
note recourse provisions at October 31, 1997 and 1996 was $168 million and
$186 million, respectively. See notes 1 and 2 to the consolidated financial
statements.
Retail notes bearing variable finance rates totaled 50 percent of
the total retail note portfolio at October 31, 1997 compared with 43 percent
at October 31, 1996. The Company manages interest rate risk through the
issuance of fixed-rate and variable-rate borrowings and the use of financial
instruments such as interest rate swaps and interest rate caps. See "Capital
Resources and Liquidity" and note 12 to the consolidated financial statements.
Total Receivable and Lease amounts 60 days or more past due were $22
million at October 31, 1997 compared with $19 million at October 31, 1996.
These past-due amounts represented .35 percent of the total Receivables and
Leases held on each of those respective dates. The balance of retail notes
held (principal plus accrued interest) with any installment 60 days or more
past due was $44 million at October 31, 1997 compared to $47 million at
October 31, 1996. The balances of retail notes held on which any installment
is 60 days or more past due as a percentage of ending retail notes receivable
was 1.02 percent at October 31, 1997 and 1.16 percent at October 31, 1996.
See note 3 to the consolidated financial statements for additional
information on past dues.
Deposits withheld from dealers and merchants, representing mainly
the aggregate dealer retail note and lease withholding accounts from
individual John Deere dealers to which losses from retail notes and leases
originating from the respective dealers can be charged, amounted to $144
million at October 31, 1997 compared to $135 million at October 31, 1996. The
Company's allowance for credit losses on all Receivables and Leases financed
at October 31, 1997 totaled $86 million and represented 1.4 percent of the
total Receivables and Leases financed compared with $87 million and 1.6
percent, respectively, at October 31, 1996. The Company's allowance for
credit losses, as a percentage of total Receivables and Leases, declined in
1997 due to an ongoing evaluation of loss experience and related estimates to
ensure that the allowance for credit losses is maintained at an adequate
level.
CAPITAL RESOURCES AND LIQUIDITY
The Company relies on its ability to raise substantial amounts of
funds to finance its Receivable and Lease portfolios. The Company's primary
sources of funds for this purpose are a combination of borrowings and equity
capital. Additionally, the Company periodically sells substantial amounts of
retail notes in the public market and in private sales. The Company's ability
to obtain funds is affected by its debt ratings, which are closely related to
the outlook for and the financial condition of Deere & Company, and the
nature and availability of support facilities, such as its lines of credit.
For information regarding Deere & Company and its business, see Exhibit 99.
The Company's ability to meet its debt obligations is supported in a
number of ways. All commercial paper issued is backed by bank credit lines.
The assets of the Company are self-liquidating in nature. A strong equity
position is available to absorb unusual losses on these assets. Liquidity is
also provided by the Company's ability to sell these assets.
The Company's business is somewhat seasonal, with overall
acquisition volumes of Receivables and Leases traditionally higher in the
second half of the fiscal year than in the first half, and overall
collections of Receivables and Leases traditionally somewhat higher in the
first six months than in the last six months of the fiscal year.
The aggregate net cash provided by operating and financing
activities was primarily used to increase Receivables and Leases. Net cash
provided by operating activities was $308 million in 1998. Financing
activities provided $2 million during the same period, resulting from a $52
million net increase in total borrowings which was partially offset by
dividend payments totaling $50 million to John Deere Credit Company. Net cash
used for investing activities totaled $323 million in 1998, primarily due to
Receivable and
12
Lease acquisitions exceeding collections by $2.137 billion, which was
partially offset by the $1.738 billion of proceeds from the sale of
receivables. Cash and cash equivalents decreased $13 million during 1998. See
"Statements of Consolidated Cash Flows."
Over the past three years, operating activities have provided $792
million in cash. In addition, the sale of receivables provided $3.388 billion
and an increase in total net borrowings provided $1.268 billion. These
amounts were used mainly to fund Receivable and Lease acquisitions, which
exceeded collections by $5.386 billion, and to pay $195 million in dividends.
The Company is naturally exposed to various interest rate and
foreign currency risks. As a result, the Company enters into derivative
transactions to hedge certain of these exposures that arise in the normal
course of business, and not for the purpose of creating speculative positions
or trading. Similar to other large credit companies, the Company manages the
relationship of the types and amounts of its funding sources to its
Receivable and Lease portfolios in an effort to diminish risk due to interest
rate fluctuations, while responding to favorable financing opportunities.
Accordingly, from time to time, the Company enters into interest rate swap
agreements to hedge its interest rate exposure in amounts corresponding to a
portion of its borrowings. The Company also has a foreign exchange swap
related to a current maturity of a long-term borrowing. The credit and market
risks under these interest rate and foreign currency agreements are not
considered to be significant. See note 12 to the consolidated financial
statements for further details.
Total interest-bearing indebtedness amounted to $5.516 billion at
October 31, 1998, compared with $5.470 billion at October 31, 1997, generally
corresponding with the level of Receivables and Leases financed and the level
of cash and cash equivalents. Total short-term indebtedness amounted to
$3.417 billion at October 31, 1998 compared with $3.387 billion at October
31, 1997. Total long-term indebtedness amounted to $2.099 billion at October
31, 1998 and $2.083 billion at October 31, 1997. The ratio of total
interest-bearing debt to stockholder's equity was 6.0 to 1 and 6.7 to 1 at
October 31, 1998 and 1997, respectively.
The Company maintained unsecured lines of credit with various banks
in North America and overseas. See note 4 to the consolidated financial
statements.
During 1998, the Capital Corporation issued $200 million of 5.35%
notes and $200 million of 5.85% notes, both due in 2001, and retired $150
million of 9.625% notes due in 1998. In 1998, the Capital Corporation also
issued $1.321 billion and retired $918 million of medium-term notes.
The Capital Corporation paid cash dividends to John Deere Credit
Company of $50 million in 1998 and $75 million in 1997. In each case, John
Deere Credit Company paid a comparable dividend to Deere & Company. During
the first quarter of 1999, the Capital Corporation declared and paid a
dividend of $5 million to John Deere Credit Company which, in turn, paid a
dividend of $5 million to Deere & Company.
YEAR 2000
The Company has established a global program (the "Year 2000
Program") to address the inability of certain computer and infrastructure
systems to process dates in the Year 2000 and later. The major assessment
areas include information systems, mainframe computers, personal computers,
the distributed network, facilities systems, the Company's products, and the
readiness of the Company's suppliers and distribution network. The program
includes the following phases: identification and assessment, business
criticality analysis, project work prioritization, compliance plan
development, remediation and testing, production implementation, and
contingency plan development for mission critical systems.
The Company is on schedule to become Year 2000 compliant with its
mission critical activities and systems, allowing substantial time for
further testing, verification and the final conversion of less important
systems. Over 90 percent of the Company's systems identified as being mission
critical have been tested and verified as being Year 2000 compliant. The
Company's goal has been to have all remaining mission critical and
13
non-mission critical systems compliant by October 31, 1999, and the progress
to date makes this goal realistic. The Company has initiated information and
infrastructure systems modifications to ensure that both information
technology (IT) and non-IT systems are compliant.
The Company is assessing the Year 2000 readiness of its critical
suppliers and merchants. The Company is surveying its major suppliers and
will be surveying the largest volume generating merchants; following up as
appropriate with prioritization based on mission criticality. The Company is
requiring suppliers of new software or equipment and third parties who
develop or modify software to provide a written warranty that their product
is Year 2000 compliant and has been tested accordingly. In some instances,
the Company is independently testing the software.
The total cost of the modifications and upgrades to date has not
been material and the future costs to become Year 2000 compliant are not
expected to be material. These costs are expensed as incurred and do not
include the cost of scheduled replacement software. Other major systems
projects have not been deferred due to the Year 2000 compliance projects.
Although no assurances can be given as to the Company's compliance,
particularly as it relates to third-parties, based upon the progress to date,
the Company does not expect consequences of any of the Company's
unanticipated or unsuccessful modifications to have a material adverse effect
on the Company's financial position or results of operations. However, the
failure to correct a material Year 2000 problem could result in the
interruption of certain normal business activities and operations. The
Company's most reasonably likely worst case scenario is that the Year 2000
noncompliance of a critical third-party, such as an energy supplier, could
result in lost revenues or profits. The Company is developing contingency
plans, which should be complete by early 1999, should any Year 2000 failures
occur in any of the assessment areas noted above.
SAFE HARBOR STATEMENT
Statements under the "Outlook for John Deere" and "Year 2000"
headings and other statements herein that relate to future operating periods
are subject to important risks and uncertainties that could cause actual
results to differ materially. Further information, including factors that
potentially could materially affect the Company's and John Deere's financial
results, is included in the Deere & Company Form 10-K for the fiscal year
ended October 31, 1998 filed with the Securities and Exchange Commission and
filed with this report as Exhibit 99.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See the information under "Management's Discussion and Analysis" on
page 13, the "Financial Instruments" note on page 33, and the supplementary
data under "Sensitivity Analysis" on page 35.
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.
14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Omitted pursuant to instruction I(2).
ITEM 11. EXECUTIVE COMPENSATION.
Omitted pursuant to instruction I(2).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Omitted pursuant to instruction I(2).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Omitted pursuant to instruction I(2).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT 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 18, 1998 (Items 5
and 7).
Current Report on Form 8-K dated August 28, 1998 (Item 5).
15
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: 22 January 1999
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 )
- ------------------------
Hans W. Becherer Principal Executive Officer )
)
)
/s/ J. W. England Director ) 22 January 1999
- ------------------------
J. W. England )
)
)
/s/ Bernard L. Hardiek Director )
- ------------------------
Bernard L. Hardiek )
)
)
/s/ James R. Heseman Director )
- ------------------------
James R. Heseman )
)
)
/s/ James A. Israel Director )
- ------------------------
James A. Israel )
)
16
Signature Title Date
--------- ----- ----
/s/ N. J. Jones Director, Senior Vice President )
- ------------------------
N. J. Jones and Principal Financial Officer )
)
)
/s/ F. F. Korndorf Director ) 22 January 1999
- ------------------------
F. F. Korndorf )
)
)
/s/ Robert W. Lane Director )
- ------------------------
Robert W. Lane )
)
)
/s/ Pierre E. Leroy Director )
- ------------------------
Pierre E. Leroy )
)
)
/s/ Michael P. Orr Director )
- ------------------------
Michael P. Orr )
)
)
/s/ Jon D. Volkert Director and President )
- ------------------------
Jon D. Volkert )
)
)
/s/ Steven E. Warren Director, Senior Vice President )
- ------------------------
Steven E. Warren and Principal Accounting Officer)
)
17
[DELOITTE & TOUCHE LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
John Deere Capital Corporation:
We have audited the accompanying consolidated balance sheets of John Deere
Capital Corporation and subsidiaries as of October 31, 1998 and 1997 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, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of John Deere Capital Corporation
and subsidiaries at October 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period
ended October 31, 1998 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Chicago, Illinois
November 24, 1998
18
TABLE OF CONTENTS
PAGE
FINANCIAL STATEMENTS:
John Deere Capital Corporation and Subsidiaries:
Statements of Consolidated Income and Retained Earnings
For the Years Ended October 31, 1998, 1997 and 1996....................20
Consolidated Balance Sheets, October 31, 1998 and 1997 ...................21
Statements of Consolidated Cash Flows For the Years Ended
October 31, 1998, 1997 and 1996 .......................................22
Notes to Consolidated Financial Statements ...............................23
SCHEDULES OMITTED
The following schedules are omitted because of the absence of
conditions under which they are required or because the required information
is included in the Notes to the Consolidated Financial Statements:
I, II, III, IV, and V.
19
JOHN DEERE CAPITAL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME AND RETAINED EARNINGS
(in millions)
FOR THE YEAR ENDED OCTOBER 31,
---------------------------------------------
1998 1997 1996
--------- --------- ---------
REVENUES
Finance income earned on retail notes $ 430.8 $ 417.4 $ 372.4
Lease revenues 191.9 118.0 67.7
Revolving charge account income 112.8 102.6 95.1
Finance income earned on wholesale notes 61.4 48.9 37.7
Securitization and servicing fee income 28.5 29.7 46.0
Net gain on retail notes sold 38.8 18.8 14.4
Interest income from short-term investments 8.9 10.2 11.4
Other income 14.0 8.7 12.0
- -----------------------------------------------------------------------------------------------------------
Total revenues 887.1 754.3 656.7
- -----------------------------------------------------------------------------------------------------------
EXPENSES
Interest expense 368.4 326.9 273.7
Operating expenses:
Administrative and operating expenses 116.7 106.5 95.0
Provision for credit losses 46.1 33.2 38.2
Fees paid to John Deere 10.2 8.3 6.1
Depreciation of equipment on operating leases 112.2 68.2 37.1
- -----------------------------------------------------------------------------------------------------------
Total operating expenses 285.2 216.2 176.4
- -----------------------------------------------------------------------------------------------------------
Total expenses 653.6 543.1 450.1
- -----------------------------------------------------------------------------------------------------------
INCOME OF CONSOLIDATED GROUP BEFORE INCOME TAXES 233.5 211.2 206.6
PROVISION FOR INCOME TAXES 82.4 74.0 72.5
- -----------------------------------------------------------------------------------------------------------
INCOME OF CONSOLIDATED GROUP 151.1 137.2 134.1
EQUITY IN INCOME (LOSS) OF UNCONSOLIDATED AFFILIATES .1 (1.4)
- -----------------------------------------------------------------------------------------------------------
NET INCOME 151.2 135.8 134.1
CASH DIVIDENDS DECLARED (50.0) (75.0) (70.0)
RETAINED EARNINGS AT BEGINNING OF THE YEAR 705.2 644.4 580.3
- -----------------------------------------------------------------------------------------------------------
RETAINED EARNINGS AT END OF THE YEAR $ 806.4 $ 705.2 $ 644.4
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges 1.63 1.64 1.75
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an
integral part of this statement.
20
JOHN DEERE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions)
OCTOBER 31,
---------------------------
1998 1997
---------- ---------
ASSETS
Cash and cash equivalents $ 191.1 $ 204.4
Receivables and leases:
Retail notes 3,839.4 4,349.4
Revolving charge accounts 751.1 618.5
Wholesale notes 803.9 593.4
Financing leases 241.8 214.6
- -----------------------------------------------------------------------------------------------
Total receivables 5,636.2 5,775.9
Equipment on operating leases - net 891.5 527.2
- -----------------------------------------------------------------------------------------------
Total receivables and leases 6,527.7 6,303.1
Allowance for credit losses (81.3) (85.9)
- -----------------------------------------------------------------------------------------------
Total receivables and leases - net 6,446.4 6,217.2
- -----------------------------------------------------------------------------------------------
Other receivables 154.8 157.9
Investments in unconsolidated affiliates 20.0 12.8
Other assets 54.1 66.8
- -----------------------------------------------------------------------------------------------
TOTAL ASSETS $ 6,866.4 $ 6,659.1
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Short-term borrowings:
Commercial paper $ 1,672.0 $ 1,991.9
John Deere 59.9 349.9
Current maturities of long-term borrowings 1,678.5 1,042.5
Other notes payable 6.8 2.4
- -----------------------------------------------------------------------------------------------
Total short-term borrowings 3,417.2 3,386.7
- -----------------------------------------------------------------------------------------------
Accounts payable and accrued liabilities:
Accrued interest on debt 45.5 39.2
Other payables 229.7 188.3
- -----------------------------------------------------------------------------------------------
Total accounts payable and accrued liabilities 275.2 227.5
- -----------------------------------------------------------------------------------------------
Deposits withheld from dealers and merchants 156.4 144.2
- -----------------------------------------------------------------------------------------------
Long-term borrowings:
Senior debt 1,949.2 1,782.9
Subordinated debt 150.0 300.0
- -----------------------------------------------------------------------------------------------
Total long-term borrowings 2,099.2 2,082.9
- -----------------------------------------------------------------------------------------------
Total liabilities 5,948.0 5,841.3
- -----------------------------------------------------------------------------------------------
Stockholder's equity
Common stock, without par value (issued and outstanding -
2,500 shares owned by John Deere Credit Company) 112.8 112.8
Retained earnings 806.4 705.2
Cumulative translation adjustment (.8) (.2)
- -----------------------------------------------------------------------------------------------
Total stockholder's equity 918.4 817.8
- -----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 6,866.4 $ 6,659.1
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an
integral part of this statement.
21
JOHN DEERE CAPITAL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(in millions)
FOR THE YEAR ENDED OCTOBER 31,
------------------------------------------------
1998 1997 1996
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 151.2 $ 135.8 $ 134.1
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 46.1 33.2 38.2
Provision for depreciation 115.4 71.2 39.5
Provision for deferred income taxes 23.0 .8 1.7
Equity in loss (income) of unconsolidated affiliates (.1) 1.4
Other (28.1) 19.6 8.9
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 307.5 262.0 222.4
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of receivables and leases acquired (7,349.0) (6,461.6) (5,516.6)
Collections of receivables 5,211.7 4,840.3 3,888.8
Proceeds from sales of receivables 1,737.6 836.5 814.0
Acquisitions of businesses (7.2) (8.1) (7.4)
Other 83.8 57.1 41.6
- ---------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (323.1) (735.8) (779.6)
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in commercial paper (319.9) 302.0 (296.8)
Change in receivable/payable with John Deere (285.7) (183.4) 84.7
Increase in other notes payable 4.4 2.4
Proceeds from issuance of long-term borrowings 1,721.0 1,150.0 1,190.0
Principal payments on long-term borrowings (1,067.5) (688.8) (344.0)
Dividends paid (50.0) (75.0) (70.0)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2.3 507.2 563.9
- ---------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (13.3) 33.4 6.7
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR 204.4 171.0 164.3
- ---------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT THE END OF YEAR $ 191.1 $ 204.4 $ 171.0
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an
integral part of this statement.
22
JOHN DEERE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following are significant accounting policies in addition to
those included in other notes to the consolidated financial statements.
CORPORATE ORGANIZATION
John Deere Capital Corporation (Capital Corporation) is a
wholly-owned subsidiary of John Deere Credit Company, a finance holding
company that is wholly-owned by Deere & Company. The Capital Corporation and
its subsidiaries, Deere Credit Services, Inc., Farm Plan Corporation, Deere
Credit, Inc., John Deere Receivables, Inc., John Deere Funding Corporation,
Arrendadora John Deere, S.A. de C.V. (Mexico), and John Deere Credit Limited
(Australia), are collectively called the Company. Deere & Company, together
with its subsidiaries and affiliates, are collectively called John Deere.
Retail notes, revolving charge accounts, financing leases, and
wholesale notes receivable are collectively called "Receivables." Receivables
and operating leases are collectively called "Receivables and Leases."
The risk of credit losses applicable to John Deere retail notes and
leases, net of recovery from withholdings from John Deere dealers, is borne
by the Company. During 1998, the Company compensated John Deere for
originating certain retail notes and leases on John Deere products. John
Deere is also reimbursed by the Company for staff support and other
administrative services at estimated cost, and for credit lines provided by
John Deere based on utilization of the lines.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial
statements of the Capital Corporation and its subsidiaries.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and related disclosures. Actual
results could differ from those estimates.
ACCOUNTING PRONOUNCEMENTS
In 1997 and 1998, the Financial Accounting Standards Board (FASB)
issued Statements No. 130, Reporting Comprehensive Income, No. 131,
Disclosures about Segments of an Enterprise and Related Information, and No.
132, Employer's Disclosures about Pensions and Other Post Retirement
Benefits, which must be adopted by fiscal year 1999. These Statements will
have no effect on the Company's financial position or results of operations.
In 1998, the FASB issued Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, which the Company will adopt
in fiscal year 2000. This Statement is not expected to have a material effect
on the Company's financial position or results of operations.
RECLASSIFICATIONS
Certain amounts for prior years have been reclassified to conform
with 1998 financial statement presentations.
23
NOTE 2. RECEIVABLES AND LEASES
RETAIL NOTES RECEIVABLE
The principal business of the Company is providing and administering
financing for retail purchases of new and used equipment manufactured by John
Deere's agricultural, construction and commercial and consumer equipment
divisions. The Company purchases retail installment sales and loan contracts
(retail notes) from John Deere. These retail notes are acquired by John Deere
through independent John Deere retail dealers. The Company also purchases and
finances certain agricultural, construction and lawn and grounds care retail
notes unrelated to John Deere. In addition, the Company purchases and
finances recreational product retail notes acquired from independent dealers
and marine product mortgage service companies (recreational product retail
notes).
Retail notes receivable by product category at October 31 are as
follows (in millions of dollars):
1998 1997
---------- ----------
Agricultural equipment - new $ 1,338.9 $ 1,607.1
Agricultural equipment - used 1,380.7 1,464.5
Construction equipment - new 667.0 626.4
Construction equipment - used 132.7 128.7
Lawn and grounds care equipment - new 289.0 226.8
Lawn and grounds care equipment - used 27.5 22.6
Recreational products 941.1 1,507.0
- -----------------------------------------------------------------------------
Total 4,776.9 5,583.1
- -----------------------------------------------------------------------------
Unearned finance income:
Equipment (577.9) (643.8)
Recreational products (359.6) (589.9)
- -----------------------------------------------------------------------------
Total (937.5) (1,233.7)
- -----------------------------------------------------------------------------
Retail notes receivable $ 3,839.4 $ 4,349.4
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Retail notes acquired by the Company during the year ended October
31, 1998 had an estimated average original term (based on dollar amounts) of
54 months. During 1997 and 1996, the estimated average original term was 66
and 67 months, respectively. Historically, because of prepayments, the
average actual life of retail notes has been considerably shorter than the
average original term. Average actual life for retail notes liquidated in
1998, 1997 and 1996 were 25, 25 and 31 months, respectively.
Retail note installments at October 31 are scheduled as follows (in millions
of dollars):
1998 1997
-------- ---------
Due in:
0-12 months $1,325.0 $ 1,379.1
13-24 months 1,094.5 1,207.6
25-36 months 849.7 978.6
37-48 months 590.4 691.2
49-60 months 371.5 438.9
61-72 months 131.1 211.9
Over 72 months 414.7 675.8
- --------------------------------------------------------------
Total $4,776.9 $5,583.1
- --------------------------------------------------------------
- --------------------------------------------------------------
24
Company guidelines relating to down payment requirements and
contract terms on retail notes are generally as follows:
DOWN CONTRACT
PAYMENT TERMS
------- --------------
Agricultural equipment (new and used):
Seasonal payments 30% 4-8 crop years
Monthly payments 20% 48-96 months
Construction equipment:
New 20% 48-60 months
Used 20% 36 months
Lawn and grounds care equipment (new and used):
Seasonal payments 10% 3-6 years
Monthly payments 10% 36-72 months
Recreational products (excluding yachts):
New 10% 180 months
Used 10% 144 months
Yachts (new and used) 20% 240 months
During 1998, 1997 and 1996, the Company received proceeds of $1.738
billion, $837 million and $814 million, respectively, from the sale of retail
notes (including securitized sales). The Company acts as agent for the buyers
in collection and administration for a majority of the notes it has sold. All
retail notes sold are collateralized by security agreements on the related
equipment sold to the customers. The Company's estimated maximum exposure
under all retail note recourse provisions at October 31, 1998 and 1997 was
$181 million and $168 million, respectively. At October 31, 1998, 1997 and
1996, the balance of all retail notes previously sold but still administered
by the Company was $2.189 billion, $1.314 billion and $1.177 billion,
respectively.
Finance income is recognized over the lives of the notes on the
effective-yield basis. During 1998, the average effective yield on retail
notes held by the Company was approximately 9.6 percent, compared with 9.5
percent in 1997 and 9.7 percent in 1996. Unearned finance income on
variable-rate notes is adjusted monthly based on fluctuations in the base
rate of a specified bank. Costs incurred in the acquisition of retail notes
are deferred and recognized over the expected lives of the notes on the
effective-yield basis.
A portion of the finance income earned by the Company arises from
financing of retail sales of John Deere equipment on which finance charges
are waived or reduced by John Deere for a period from the date of sale to a
specified subsequent date. The Company generally receives compensation from
John Deere equal to a competitive interest rate for periods during which
finance charges have been waived or reduced on retail notes and leases. The
portions of the Company's finance income earned that were received from John
Deere on retail notes containing waiver of finance charges or reduced rates
were 23 percent in 1998, 19 percent in 1997 and 20 percent in 1996.
A deposit equal to one percent of the face amount of certain John
Deere agricultural and commercial and consumer equipment retail notes
originating from each dealer is withheld by the Company from that dealer. Any
subsequent retail note losses are charged against the withheld deposits. To
the extent that these deposits withheld from the dealer from whom the retail
note was acquired cannot absorb a loss on a retail note, 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. At the
end of the Company's fiscal year, any negative balance in the dealer
withholding account is written off and absorbed by the Company's allowance
for credit losses. There is no withholding of dealer deposits on John Deere
construction equipment retail notes or recreational product retail notes.
25
The Company requires that theft and physical damage insurance be
carried on all goods leased or securing retail notes and wholesale notes. In
most cases, the customer may, at his own expense, have the Company or the
seller of the goods purchase this insurance or obtain it from other sources.
REVOLVING CHARGE ACCOUNTS RECEIVABLE
Revolving charge account income is generated primarily by four
revolving credit products: Farm Plan, the John Deere Credit Revolving Plan,
Preferred Resource and agricultural production loans. Farm Plan is primarily
used by farmers and ranchers to finance day-to-day operating expenses, such
as parts and service labor. Merchants offer Farm Plan as an alternative to
carrying in-house accounts receivable, and can initially sell existing
balances to the Company under a recourse arrangement. Farm Plan income
includes a discount paid by merchants for transaction processing and support
and finance charges paid by customers on their existing account balances. The
John Deere Credit Revolving Plan is used primarily by retail customers of
John Deere dealers to finance lawn and grounds care equipment. Income
includes a discount paid by dealers on most transactions and finance charges
paid by customers on their outstanding account balances. Preferred Resource
(an unsecured lending product) is used primarily by executives and
professionals, and offers customers convenience and security by providing a
substantial, readily available source of funding for a variety of personal
expenses. Agricultural production loans are offered through several leading
farm input providers to finance the acquisition of seeds and fertilizers.
Income on this product is generated from finance charges applied to
outstanding customer account balances.
Revolving charge accounts receivable at October 31, 1998 totaled
$751 million compared with $619 million at October 31, 1997. Generally,
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.
FINANCING LEASES AND EQUIPMENT ON OPERATING LEASES
The Company leases agricultural, construction, lawn and grounds care
and certain other equipment directly to retail customers. At the time of
accepting a lease that qualifies as a financing lease under FASB Statement
No. 13, Accounting for Leases, the Company records the gross amount of lease
payments receivable, estimated residual value of the leased equipment and
unearned finance income. The unearned finance income is equal to the excess
of the gross lease receivable plus the estimated residual value over the cost
of the equipment. The unearned finance income is recognized as revenue over
the lease term on the effective-yield method. Rental payments applicable to
equipment on operating leases are recorded as income on a straight-line
method over the lease terms. Operating lease assets are recorded at cost and
depreciated to their estimated residual value on a straight-line method over
the terms of the leases. Lease acquisition costs are accounted for in a
manner similar to the procedures for retail notes. Residual values represent
estimates of the value of the leased assets at the end of the contract terms
and are initially recorded based upon appraisals and estimates. Residual
values are continually reviewed to determine that recorded amounts are
appropriate.
Financing leases receivable by product category at October 31 are as follows
(in millions of dollars):
1998 1997
------ -------
Agricultural equipment $ 69.7 $ 62.2
Construction equipment 117.8 100.0
Lawn and grounds care equipment 56.6 37.7
Other equipment 13.4 23.7
- ---------------------------------------------------------------------------
Total 257.5 223.6
Estimated residual values 21.6 26.2
Unearned finance income (37.3) (35.2)
- ---------------------------------------------------------------------------
Financing leases receivable $241.8 $214.6
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
26
Initial lease terms for financing leases range from 12 months to 60
months. Payments on financing leases receivable at October 31 are scheduled
as follows (in millions of dollars):
1998 1997
------ ------
Due in:
0-12 months $ 96.6 $ 84.4
13-24 months 75.1 65.6
25-36 months 51.4 43.2
37-48 months 25.1 22.2
Over 48 months 9.3 8.2
- ------------------------------------------------------------
Total $257.5 $223.6
- ------------------------------------------------------------
- ------------------------------------------------------------
Deposits withheld from John Deere dealers and related losses on
financing and operating leases are handled in a manner similar to the
procedures for retail notes. In addition, a lease payment discount program,
allowing reduced payments over the term of the lease, is administered in a
manner similar to finance waiver on retail notes.
Equipment returned to the Company upon termination of leases and
held for subsequent sale or lease is recorded at the lower of net book value
or estimated market value of the equipment.
The cost of equipment on operating leases by product category at
October 31 is as follows (in millions of dollars):
1998 1997
-------- ------
Agricultural equipment $ 727.4 $403.9
Construction equipment 244.8 181.9
Lawn and grounds care equipment 56.6 25.1
Other equipment 39.3 16.2
- ----------------------------------------------------------------------------
Total 1,068.1 627.1
Accumulated depreciation (176.6) (99.9)
- ----------------------------------------------------------------------------
Equipment on operating leases - net $ 891.5 $527.2
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Initial lease terms for equipment on operating leases range from 36
months to 60 months. Rental payments for equipment on operating leases at
October 31 are scheduled as follows (in millions of dollars):
1998 1997
------ ------
Due in:
0-12 months $170.6 $113.1
13-24 months 129.8 85.6
25-36 months 54.7 41.4
37-48 months 24.0 19.3
Over 48 months 5.7 5.1
- ----------------------------------------------------------
Total $384.8 $264.5
- ----------------------------------------------------------
- ----------------------------------------------------------
27
WHOLESALE NOTES RECEIVABLE
The Company finances wholesale inventories of recreational vehicles,
manufactured housing units, yachts, John Deere engines, John Deere
agricultural equipment, and John Deere construction equipment owned by
dealers of those products. Wholesale finance income is generally recognized
monthly based on the daily balance of wholesale receivables outstanding and
the applicable effective interest rate. Interest rates vary with a prevailing
bank base rate, the type of equipment financed and the balance outstanding.
Wholesale receivables are secured by equipment financed.
Wholesale notes receivable totaled $804 million at October 31, 1998
compared with $593 million at October 31, 1997. Generally, the maximum
maturity for wholesale notes is 12 months.
OTHER RECEIVABLES
The Company has sold retail notes to limited-purpose business trusts
and to private third parties, which utilized the notes as collateral for the
issuance of asset-backed securities. Other receivables related to
securitizations are recorded at net present value and relate to payments to
be received for retained interests. These retained interests are subsequently
carried at estimated fair value with changes in fair value included in
income. Securitization and servicing fee income includes the interest earned
on these retained interests and reimbursed administrative expenses.
CONCENTRATION OF CREDIT RISK
Receivables and Leases have significant concentrations of credit
risk in the agricultural, construction, lawn and grounds care, and
recreational product business sectors as shown in the previous tables. On a
geographic basis, there is not a disproportionate concentration of credit
risk in any area in which the Company operates. The Company retains as
collateral a security interest in the goods associated with Receivables and
Leases other than certain revolving charge accounts.
NOTE 3. ALLOWANCE FOR CREDIT LOSSES, DELINQUENCIES AND WRITE-OFFS
ALLOWANCE FOR CREDIT LOSSES
Allowances for credit losses on Receivables and Leases are
maintained in amounts considered to be appropriate in relation to the
Receivables and Leases outstanding based on estimated collectibility and
collection experience.
An analysis of the allowance for credit losses on total Receivables
and Leases follows (in millions of dollars):
1998 1997 1996
------- ------- -------
Balance, beginning of the year $ 85.9 $ 87.4 $ 84.2
Provision charged to operations 46.1 33.2 38.2
Amounts written off (32.2) (29.7) (29.0)
Transfers related to retail note sales (18.5) (5.0) (6.0)
- ---------------------------------------------------------------------------------------
Balance, end of the year $ 81.3 $ 85.9 $ 87.4
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
The allowance for credit losses represented 1.2 percent, 1.4 percent
and 1.6 percent of Receivables and Leases financed at October 31, 1998, 1997
and 1996, respectively. In addition, the Company had $156 million, $144
million and $135 million at October 31, 1998, 1997 and 1996, respectively, of
deposits primarily withheld from John Deere dealers available for certain
potential credit losses originating from those dealers.
28
DELINQUENCIES
Generally, when retail notes become 120 days delinquent, accrual of
finance income is suspended, the collateral is repossessed or the account is
designated for litigation and the estimated uncollectible amount, after
charging the dealer's withholding account, if any, is written off to the
allowance for credit losses. Accrual of revolving charge account income is
suspended generally when the account becomes 120 days delinquent. Accounts
are deemed to be uncollectible and written off to the allowance for credit
losses when delinquency reaches 180 days for a Farm Plan account, 150 days
for a John Deere Credit Revolving Plan account and 120 days for Preferred
Resource accounts. When a lease account becomes 120 days delinquent, the
accrual of lease revenue is suspended, the equipment is repossessed or the
account is designated for litigation, and the estimated uncollectible amount,
after charging the dealer's withholding account, if any, is written off to
the allowance for credit losses. When a wholesale account becomes 60 days
delinquent, accrual of finance income is suspended, the collateral is
repossessed or the account is designated for litigation, and the estimated
uncollectible amount is written off to the allowance for credit losses.
Although amounts are not withheld from dealers to cover uncollectible
wholesale receivables, there are usually repurchase agreements with
manufacturers for new inventories held by dealers.
Total Receivable and Lease amounts 60 days or more past due, by
product and as a percentage of total balances held were as follows (dollars
in millions):
OCTOBER 31, OCTOBER 31, OCTOBER 31,
1998 1997 1996
----------------------- ----------------------- ----------------------
Dollars Percent Dollars Percent Dollars Percent
------- ------- ------- ------- ------- -------
Retail notes:
Agricultural equipment $ 9.5 .42% $ 6.8 .27% $ 4.4 .18%
Construction equipment 2.0 .28 2.0 .31 2.5 .39
Lawn and grounds care equipment .7 .26 .6 .28 .7 .38
Recreational products .2 .03 .3 .03 .3 .03
------ ------ ------
Total retail notes 12.4 .32 9.7 .22 7.9 .19
Revolving charge accounts 8.4 1.12 8.3 1.34 8.9 1.57
Wholesale notes .6 .07 2.0 .33 1.0 .17
Leases 3.8 .34 2.0 .27 1.7 .38
------ ------ ------
Total Receivables and Leases $ 25.2 .39 $ 22.0 .35 $ 19.5 .35
------ ------ ------
------ ------ ------
29
WRITE-OFFS
Total Receivable and Lease write-off amounts, by product and as a
percentage of average balances held during the year were as follows (dollars
in millions):
1998 1997 1996
------------------ ------------------ ------------------
Dollars Percent Dollars Percent Dollars Percent
------- ------- ------- ------- ------- -------
Retail notes:
Agricultural equipment $ 3.3 .11% $ 1.5 .05% $ 2.4 .10%
Construction equipment 5.3 .79 3.7 .58 5.3 .93
Lawn and grounds care equipment .6 .25 .2 .12 .3 .17
Recreational products 6.3 .76 8.0 .90 9.6 1.11
------ ------ ------
Total retail notes 15.5 .33 13.4 .30 17.6 .45
Revolving charge accounts 11.1 1.75 11.3 2.08 9.7 1.93
Wholesale notes 2.0 .33 2.0 .39 1.0 .25
Leases 3.6 .38 3.0 .51 .7 .20
------ ------ ------
Total Receivables and Leases $ 32.2 .47 $ 29.7 .49 $ 29.0 .56
------ ------ ------
------ ------ ------
NOTE 4. SHORT-TERM BORROWINGS
On October 31, 1998, short-term borrowings were $3.417 billion,
$1.672 billion of which was commercial paper. Short-term borrowings were
$3.387 billion on October 31, 1997, $1.992 billion of which was commercial
paper. The Capital Corporation's short-term debt also includes amounts
borrowed from John Deere, which totaled $60 million and $350 million at
October 31, 1998 and 1997, respectively. The Capital Corporation pays a
market rate of interest to John Deere based on the average outstanding
borrowings each month. The weighted average interest rate on total short-term
borrowings at October 31, 1998 and 1997, excluding current maturities of
long-term borrowings, was 5.3 percent and 5.5 percent, respectively.
At October 31, 1998, the Capital Corporation, Deere & Company, John
Deere Limited (Canada) and John Deere Credit Inc. (Canada), jointly,
maintained $5.026 billion of unsecured lines of credit with various banks in
North America and overseas, $1.609 billion of which was unused. For the
purpose of computing unused credit lines, total short-term borrowings,
excluding the current portion of long-term borrowings, of the Capital
Corporation, Deere & Company, John Deere Limited (Canada) and John Deere
Credit Inc. (Canada), were considered to constitute utilization. Included in
the total credit lines is a long-term commitment credit agreement, expiring
February 24, 2003, for $3.500 billion. The credit agreement has various
requirements of the Company, including the maintenance of its consolidated
ratio of earnings before fixed charges to fixed charges at not less than 1.05
to 1 for each fiscal quarter (as described below) and the Company's ratio of
senior debt to total stockholder's equity plus subordinated debt may not be
more than 8 to 1 at the end of any fiscal quarter. "Senior debt" consists of
the Company's total interest-bearing obligations, excluding subordinated
debt, but including borrowings from John Deere. The Company's ratio of senior
debt to total stockholder's equity plus subordinated debt was 4.3 to 1 at
October 31, 1998 compared to 4.6 to 1 at October 31, 1997. An annual facility
fee on the credit agreement is charged to the Capital Corporation based on
utilization.
Deere & Company has an agreement with the Capital Corporation to
make income maintenance payments to the Capital Corporation such that its
consolidated ratio of earnings before fixed charges to fixed charges is not
less than 1.05 to 1 for each fiscal quarter. For purposes of these
calculations, "earnings before fixed charges" consist of income before income
taxes, the cumulative effect of changes in accounting and fixed charges.
"Fixed charges" consist of interest on indebtedness, amortization of debt
discount and expense, an estimated amount of rental expense under capitalized
leases which is deemed to be representative of the interest factor and rental
expense under operating leases. The Company's ratio of earnings to fixed
charges was 1.63 to
30
1, 1.64 to 1, and 1.75 to 1 in 1998, 1997 and 1996, respectively. Deere &
Company also agreed to maintain the Capital Corporation's tangible net worth
at not less than $50 million and to own at least 51 percent of Capital
Corporation's voting capital stock. This arrangement is not intended to make
Deere & Company responsible for the payment of any indebtedness, obligation
or liability of the Company or any of its direct or indirect subsidiaries.
NOTE 5. LONG-TERM BORROWINGS
Long-term borrowings of Capital Corporation at October 31 consisted of
the following (in millions of dollars):
1998 1997
--------- ---------
Senior Debt:
Medium-term notes due 1999-2007:
Average interest rate of 6.4% as of year end 1998 and 6.7% as of
year end 1997 $ 1,549.5 $ 1,284.5
5% Swiss franc bonds due 1999:
Swapped to U.S. dollars and a variable interest rate of 6.1% as
of year end 1997 97.5
5.35% Notes due 2001 200.0
5.85% Notes due 2001 200.0
6.30% Notes due 1999 200.0
6% Notes due 1999 200.0
- -----------------------------------------------------------------------------------------------------------
Total senior debt 1,949.5 1,782.0
Unamortized debt premium (discount) (.3) .9
- -----------------------------------------------------------------------------------------------------------
Net senior debt 1,949.2 1,782.9
- -----------------------------------------------------------------------------------------------------------
Subordinated Debt:
9-5/8% Subordinated Notes due 1998:
Swapped to variable interest rate of 6.1% as of year end 1997 150.0
8-5/8% Subordinated Debentures due 2019 150.0 150.0
- -----------------------------------------------------------------------------------------------------------
Total subordinated debt 150.0 300.0
- -----------------------------------------------------------------------------------------------------------
Total $ 2,099.2 $ 2,082.9
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
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: 1999 - $1,679, 2000 - $830, 2001 - $690, 2002 - $255
and 2003 - $75.
NOTE 6. COMMON STOCK
All of Capital Corporation's common stock is owned by John Deere
Credit Company, a wholly-owned finance holding subsidiary of Deere & Company.
No shares of common stock of the Company were reserved for officers or
employees or for options, warrants, conversions or other rights at October
31, 1998 or 1997. At October 31, 1998, the Company had authorized, but not
issued, 10,000 shares of $1 par value preferred stock.
NOTE 7. DIVIDENDS
The Capital Corporation paid cash dividends to John Deere Credit
Company of $50 million in 1998 and $75 million in 1997. In each case, John
Deere Credit Company paid an identical dividend to Deere & Company.
31
NOTE 8. PENSION AND OTHER RETIREMENT BENEFITS
The Company participates in the Deere & Company salaried pension
plan, which is a defined benefit plan in which benefits are based primarily
on years of service and employee compensation. This plan is funded according
to the 1974 Employee Retirement Income Security Act (ERISA) and income tax
regulations. Plan assets consist primarily of common stocks, common trust
funds, government securities and corporate debt securities. Pension expense
is actuarially determined based on the Company's employees included in the
plan. The Company's pension expense amounted to $1.6 million in 1998, $1.6
million in 1997 and $1.7 million in 1996. The Company generally provides
defined benefit health care and life insurance plans for retired employees
through participation in Deere & Company's plans. Health care and life
insurance benefits expense is actuarially determined based on the Company's
employees included in the plans and amounted to $1.0 million in 1998 and $.8
million in both 1997 and 1996. Further disclosure for these plans is included
in the notes to the Deere & Company 1998 annual report.
NOTE 9. INCOME TAXES
TAXES ON INCOME AND INCOME TAX CREDITS
The taxable income of the Company is included in the consolidated
United States income tax return of Deere & Company. Provisions for income
taxes are made generally as if the Capital Corporation and each of its
subsidiaries filed separate income tax returns.
DEFERRED INCOME TAXES
Deferred income taxes arise because certain items are treated
differently for financial accounting than for income tax reporting purposes.
An analysis of deferred income tax assets and liabilities at October 31 are
as follows (in millions of dollars):
1998 1997
------------------------ ------------------------
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
Allowance for credit losses $ 33.0 $ 35.1
Deferred lease income $29.5 $ 6.8
Deferred retail note finance income 7.6 9.3
Accrual for retirement and other benefits 4.2 4.2
Securitization income 1.7 2.7
Miscellaneous accruals and other .9 .2
- ---------------------------------------------------------------------------------- ---------------------
Total deferred income tax assets and liabilities $ 39.8 $ 37.1 $ 42.0 $ 16.3
- ---------------------------------------------------------------------------------- ---------------------
- ---------------------------------------------------------------------------------- ---------------------
The provision for income taxes consisted of the following (in millions of
dollars):
1998 1997 1996
------ ------ ------
Current $ 59.4 $ 73.1 $ 70.8
Deferred 23.0 .9 1.7
- -----------------------------------------------------------------------
Total provision for income taxes $ 82.4 $ 74.0 $ 72.5
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
32
EFFECTIVE INCOME TAX PROVISION
A comparison of the statutory and effective income tax provisions
and reasons for related differences follows (in millions of dollars):
1998 1997 1996
------ ------ ------
United States federal income tax provision
at a statutory rate of 35 percent $ 81.7 $ 73.8 $ 72.3
Municipal lease income not taxable (1.2) (1.1) (.5)
Other adjustments - net 1.9 1.3 .7
- ----------------------------------------------------------------------------------
Total provision for income taxes $ 82.4 $ 74.0 $ 72.5
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
NOTE 10. CASH FLOW INFORMATION
For purposes of the statements of consolidated cash flows, the
Company considers investments with original maturities of three months or
less to be cash equivalents. Substantially all of the Company's short-term
borrowings mature within three months or less.
Cash payments by the Company for interest incurred on borrowings in
1998, 1997 and 1996 were $380 million, $346 million and $271 million,
respectively. Cash payments for income taxes during these same periods were
$61 million, $68 million and $77 million, respectively.
NOTE 11. LEGAL PROCEEDINGS
The Company is subject to various unresolved legal actions which
arise in the normal course of its business, the most prevalent of which
relate to state and federal laws and regulations concerning retail credit.
Although it is not possible to predict with certainty the outcome of these
unresolved legal actions or the range of possible loss, the Company believes
these unresolved legal actions will not have a material effect on its
financial position or results of operations.
NOTE 12. FINANCIAL INSTRUMENTS
The fair values of financial instruments that do not approximate the
carrying values in the financial statements at October 31 are as follows (in
millions of dollars):
1998 1997
---------------------- -----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ------- -------- -------
Receivables financed $ 5,555 $ 5,560 $ 5,690 $ 5,664
- -------------------------------------------------------------------------- ----------------------
- -------------------------------------------------------------------------- ----------------------
Long-term borrowings and related swaps:
Long-term borrowings $ 2,099 $ 2,153 $ 2,089 $ 2,127
Interest rate and foreign currency swaps (15) (6) (19)
- -------------------------------------------------------------------------- ----------------------
Total $ 2,099 $ 2,138 $ 2,083 $ 2,108
- -------------------------------------------------------------------------- ----------------------
- -------------------------------------------------------------------------- ----------------------
33
FAIR VALUE ESTIMATES
Fair values of the long-term financing receivables with fixed rates
were based on the discounted values of their related cash flows at current
market interest rates. The fair values of the remaining financing receivables
approximated the carrying amounts.
Fair values of long-term borrowings with fixed rates were based on
discounted values of their related cash flows at current market interest
rates. Certain long-term borrowings of the Company have been swapped to
current variable interest rates and United States dollars. Fair values of
these swaps were based on discounted values of their related cash flows at
current market interest rates.
Fair values and carrying values of the Company's other interest rate
swaps associated with short-term borrowings and foreign exchange forward
contracts were not material.
DERIVATIVES
The Company enters into derivative transactions only to hedge
exposures arising in the normal course of business, and not for the purpose
of creating speculative positions or trading. The following notional or
contract amounts do not represent amounts exchanged by the parties and,
therefore, are not representative of the Company's risk. The net amounts
exchanged are calculated on the basis of the notional amounts and other terms
of the derivatives such as interest rates and exchange rates, and represent
only a small portion of the notional amounts. The credit and market risks
under these agreements are not considered to be significant since the
counterparties have high credit ratings and the fair values and carrying
values are not material.
INTEREST RATE SWAPS
The Company enters into interest rate swap agreements related to its
borrowings in order to more closely match the type of interest rates of the
borrowings to those of the assets being funded. The differential to be paid
or received on all swap agreements is accrued as interest rates change and is
recognized over the lives of the agreements in interest expense.
At October 31, 1998 and 1997, the total notional principal amounts
of interest rate swap agreements related to short-term borrowings were $472
million and $490 million, having rates of 4.6 to 6.4 percent and 5.6 to 6.3
percent, terminating in up to 48 months and 12 months, respectively.
The Company has entered into interest rate swap agreements with
independent parties that change the effective rate of interest on certain
long-term borrowings. See the table in Note 5 - Long-Term Borrowings, which
reflects the effective year-end variable interest rates relating to these
swap agreements. The notional principal amounts and maturity dates of these
swap agreements are the same as the principal amounts and maturities of the
related borrowings. The Company also has interest rate swap agreements
associated with medium-term notes. Note 5 - Long-Term Borrowings also
includes a table that reflects the interest rates relating to these swap
agreements. At October 31, 1998 and 1997, the total notional principal
amounts of these swap agreements were $375 million and $380 million,
terminating in up to 104 months and 116 months, respectively.
FOREIGN EXCHANGE SWAPS
At October 31, 1998 and 1997, the Company had a foreign exchange
swap agreement maturing in 3 months and 15 months, respectively, for $97
million to hedge the currency exposure of the 5% Swiss Franc Bonds due in
1999. The foreign exchange swap gains and losses are accrued as foreign
exchange rates change and offset the equal and opposite gains and losses on
the related bonds.
34
SUPPLEMENTAL INFORMATION (UNAUDITED)
QUARTERLY INFORMATION
Supplemental quarterly information for the Company follows (in
millions of dollars):
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- -------
1998:
Revenues $ 198.2 $ 213.5 $ 226.4 $ 249.0 $ 887.1
Interest expense 88.3 91.1 95.3 93.7 368.4
Operating expenses 62.4 71.8 69.7 81.3 285.2
Provision for income taxes 16.7 17.9 21.6 26.2 82.4
Equity in income (loss) of unconsolidated
affiliates (.2) .2 .1 .1
- -------------------------------------------------------------------------------------------------------------
Net income $ 30.6 $ 32.9 $39.9 $47.8 $ 151.2
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
1997:
Revenues $ 163.5 $ 179.1 $ 200.3 $ 211.4 $ 754.3
Interest expense 71.5 78.6 86.6 90.2 326.9
Operating expenses 45.7 55.4 55.4 59.7 216.2
Provision for income taxes 16.1 15.8 20.2 21.9 74.0
Equity in income (loss) of unconsolidated
affiliates (.5) (.3) (.3) (.3) (1.4)
- -------------------------------------------------------------------------------------------------------------
Net income $ 29.7 $ 29.0 $ 37.8 $ 39.3 $ 135.8
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
SENSITIVITY ANALYSIS
The following is a sensitivity analysis for the Company's
derivatives and other financial instruments that have interest rate risk. The
gains or losses in the table below represent the changes in the financial
instruments' fair values that would be caused by increasing the interest
rates by 10 percent of the current market rates at October 31, 1998 and 1997.
The fair values were determined based on the discounted values of their
related cash flows. The gains or losses in fair values at October 31, 1998
and 1997 would have been (in millions of dollars):
FAIR VALUE GAINS (LOSSES)
-------------------------------
October 31, October 31,
1998 1997
----------- -----------
Financing receivables $(31) $(36)
Long-term borrowings and related swaps:
Long-term borrowings 21 27
Interest rate and foreign currency swaps (4) (7)
- -----------------------------------------------------------------------------
Total $(14) $(16)
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
35
DIVIDENDS AND OTHER EVENTS
On December 4, 1998, the Capital Corporation declared a $5 million
dividend, to be paid to John Deere Credit Company on December 15, 1998. John
Deere Credit Company, in turn, declared a $5 million dividend to Deere &
Company, also payable on December 15, 1998.
At October 31, 1998, the Company owned 50 percent of John Deere
Credit Limited, a joint venture located in Gloucester, England. Subsequent to
year end, the Company and Lombard North Central PLC, the finance house
subsidiary of NatWest Group, reached an agreement for the Company to acquire
in February 1999 the 50 percent share in John Deere Credit Limited held by
Lombard's subsidiary, Farming and Agricultural Finance (FAF). The joint
venture's total assets, stockholders' equity and net income for its year
ended September 30, 1998 were $315 million, $32 million and $1 million,
respectively. The Company has also agreed to purchase an additional
receivable portfolio of approximately $251 million from FAF in February 1999.
Subsequent to year end, the Company also entered into a 50 percent
joint venture with Caisse Nationale de Credit Agricole to offer certain
financing products in France. This operation supports John Deere and
independent John Deere retail dealers by offering financing products specific
to the market in France. This investment will be accounted for under the
equity method of accounting.
36
INDEX TO EXHIBITS
2. Not applicable.
3.1 Certificate of Incorporation, as amended (Exhibit 3.1 to Form 10-K of
the registrant for the year ended October 31, 1994*).
3.2 Bylaws, as amended (Exhibit 3.2 to Form 10-K of the registrant for
the year ended October 31, 1994*).
4.1 Credit agreements among registrant, Deere & Company, various
financial institutions, and Chemical Bank, The Chase Manhattan Bank
(National Association), Bank of America National Trust and Savings
Association, Deutsche Bank AG, and the Toronto-Dominion Bank as
Managing Agents, dated as of April 5, 1995 (Exhibit 4.1 to Form 10-Q
of Deere & Company for the quarter ended April 30, 1995, Securities
and Exchange Commission file number 1-4121*).
4.2 Amended and restated credit agreements among Deere & Company, the
registrant, various financial institutions and The Chase Manhattan
Bank, Bank of America National Trust Savings Association, Deutsche
Bank AG New York Branch, The Toronto-Dominion Bank, Morgan Guaranty
Trust Company of New York, Nationsbank, N.A. and The First National
Bank of Chicago as Managing Agents, dated as of February 24, 1998
(Exhibit 4.1 to From 10-Q of Deere & Company for the quarter ended
April 30, 1998, Securities and Exchange Commission file number
1-4121*).
4.3 Third Amending Agreements to Loan Agreements among John Deere
Limited, John Deere Credit Inc., various financial institutions and
The Toronto-Dominion Bank as agent, dated as of February 24, 1998
(Exhibit 4.2 to Form 10-Q of Deere & Company for the quarter ended
April 30, 1998, Securities and Exchange Commission file number
1-4121*).
4.4 Senior Indenture dated as of June 15, 1995 between the registrant and
The Chase Manhattan Bank (National Association), as Trustee (Exhibit
4.1 to Form 10-Q of the registrant for the quarter ended July 31,
1995*).
4.5 Subordinated Indenture dated as of June 15, 1995 between the
registrant and First National Bank of Chicago, as Trustee (Exhibit
4.2 to Form 10-Q of the registrant for the quarter ended July 31,
1995*).
4.6 Form of certificate for common stock.
Certain instruments relating to long-term debt constituting less than
10% of the registrant's total assets may not be filed as exhibits
herewith pursuant to Item 604(b)(4)(iii)(A) of Regulation S-K. The
registrant will file copies of such instruments upon request of the
Commission.
9. Not applicable.
10.1 Agreement as amended November 1, 1994 between the registrant and
Deere & Company concerning agricultural retail notes (Exhibit 10.1 to
Form 10-K of Deere & Company for the year ended October 31, 1998*).
37
10.2 Agreement as amended November 1, 1994 between the registrant and
Deere & Company concerning lawn and grounds care retail notes
(Exhibit 10.2 to the Form 10-K of Deere & Company for the year ended
October 31, 1998*).
10.3 Agreement as amended November 1, 1994 between the registrant and John
Deere Industrial Equipment Company concerning industrial retail notes
(Exhibit 10.3 to the Form 10-K of Deere & Company for the year ended
October 31, 1998*).
10.4 Agreement dated January 26, 1983 between the registrant and Deere &
Company relating to agreements with United States sales branches on
retail notes (Exhibit 10.4 to Form 10-K of Deere & Company for the
year ended October 31, 1998*).
10.5 Agreement dated October 15, 1996 between the registrant and Deere &
Company relating to fixed charges ratio, ownership and minimum net
worth (Exhibit 10.7 to Form 10-K of the registrant for the year ended
October 31, 1996*).
10.6 Agreement dated July 14, 1997 between the registrant and John Deere
Construction Equipment Company concerning construction retail notes
(Exhibit 10.8 to Form 10-K of the registrant for the year ended
October 31, 1997*).
11. Not applicable.
12. Computation of Ratio of Earnings to Fixed Charges for each of the
five years in the period ended October 31, 1998.
13. Not applicable.
16. Not applicable.
18. Not applicable.
21. Omitted pursuant to instruction I(2).
22. Not applicable.
23. Consent of Deloitte & Touche LLP.
24. Not applicable.
27. Financial Data Schedule.
99. Parts I and II of the Deere & Company Form 10-K for the fiscal year
ended October 31, 1998 (Securities and Exchange Commission file
number 1-4121*).
- -------------------
* Incorporated by reference. Copies of these exhibits are available from the
Company upon request.
38