Item 1. Business.
General
Case Credit Corporation is a subsidiary of CNH Capital Corporation ("CNH Capital"), formerly Case Capital. CNH Capital, a wholly owned subsidiary of Case Corporation ("Case"), provides broad-based financial services for the global marketplace. Case is a wholly owned subsidiary of CNH Global N.V. ("CNH"). Through New Holland Holdings N.V., a wholly-owned subsidiary of Fiat S.p.A. ("Fiat"). Fiat owns approximately 71% of CNH's outstanding common shares. As a result, Fiat controls all matters submitted to a vote of CNH's shareholders, including approval of annual dividends, election and removal of its directors and approval of extraordinary business combinations.
On November 12, 1999, New Holland N.V. acquired Case for $4.6 billion in cash, including related costs and expenses. Of the total purchase price, $674 million was allocated to Case Credit. Effective with the closing of the merger, New Holland N.V. changed its name to CNH Global N.V.
Case Credit Corporation, its wholly owned operating subsidiaries, Case Credit Ltd. (Canada) and Case Credit Australia Pty Ltd and Case Credit Corporation's joint ventures, Case Credit Europe S.A.S. and UzCaseagroleasing (collectively, "Case Credit") provide and administer financing for the retail purchase or lease of new and used Case and other agricultural and construction equipment. Case Credit offers various types of retail financing to end-use customers to facilitate the sale or lease of Case products in the United States, Canada, Australia, Europe, and Uzbekistan. Case Credit's business principally involves purchasing retail installment sales contracts from Case dealers. In addition, Case Credit facilitates and finances the sale of insurance products to retail customers, provides financing for Case dealers and Case rental equipment yards, and also provides other retail financing programs in North America. In North America, customers use Case Credit's private-label credit card to purchase parts, service, rentals, implements and attachments from Case dealers. Case Credit also provides financing options to Case's dealers for a variety of purposes including inventory, working capital, real estate acquisitions, construction and remodeling, business acquisitions, dealer systems, and service and maintenance equipment.
Case Credit's business is dependent on the ability of Case and its dealers to generate sales and leasing activity, the willingness of customers to enter into financing transactions with Case Credit and the availability of funds to Case Credit to finance such transactions. Numerous factors affect the ability of Case and its dealers to sell agricultural and construction equipment and thereby generate retail receivables, including:
. the general level of activity in the agricultural and construction industries;
. the rate of North American agricultural production and demand;
. weather conditions;
. commodity prices;
. consumer confidence;
. government subsidies for the agricultural sector;
. prevailing levels of construction (especially housing starts); and
. levels of total industry capacity and equipment inventory.
In addition, changes in market interest rates, which in turn are related to general economic and capital market conditions, demand for credit, inflation, governmental policies and other factors, affect Case's business.
Case Credit obtains funding for its operations from a variety of sources including the issuance of commercial paper, medium-term notes and public debt; the issuance of securities in asset-backed securitization, or ABS, transactions; bank revolving credit facilities, earnings retained in the business, and advances and equity
capital from Case. Case Credit sells substantial amounts of retail receivables in ABS transactions that typically involve the sale of a pool of retail installment sales contracts to limited-purpose business trusts or similar securitization entities. Case Credit remains as servicer of these receivables, for which it is typically paid a servicing fee.
Case Credit continues to expand its financing business by providing retail and dealer financing in new geographic regions and for a broader range of equipment, and by offering new financing products to Case dealers, end-use customers and to others. Case Credit established Soris Financial ("Soris") as a brand name to serve Case Credit's diversified client base in the agricultural, construction, industrial mobile and other equipment industries. Soris offers a broad range of retail and wholesale financing products, including equipment and commercial loans and leases for North American manufacturers, dealers, distributors, and their customers. Soris also facilitates and finances the sale of insurance products to retail customers.
Case Credit Corporation was incorporated in Delaware on January 26, 1993. The principal offices of Case Credit are located at 233 Lake Avenue, Racine, Wisconsin, 53403.
Business of Case Corporation
Case is a leading worldwide designer, manufacturer, marketer and distributor of farm equipment and light- to medium-sized construction equipment, and offers a broad array of financial products and services through CNH Capital, Case's financial services business. Case's market position is particularly significant in several product categories including loader/backhoes, skid steer loaders, large, high-horsepower farm tractors and self-propelled combines.
In 1999, Case's sales of farm and construction equipment represented 91% of total revenues, and financing operations accounted for 9% of total revenues. In 1999, Case's sales of farm equipment represented 56% of revenues from equipment sales, and sales of construction equipment represented 44% of revenues from equipment sales.
Relationship with Case Corporation
CNH Capital owns all of Case Credit's common stock. CNH Capital is a wholly owned subsidiary of Case. Case provides CNH Capital with certain operational and financial support. This support constitutes an integral part of the conduct of Case Credit's business.
Employee Benefits, Intercompany Services and Tax Sharing
Case Credit and Case have entered into agreements relating to, among other things, various employee benefit plans covering Case Credit's staff that Case administers and Case Credit's reimbursement of Case and CNH Capital for its staff and corporate services expenses. Case Credit has also entered into tax sharing arrangements with Case.
Special Marketing Programs
In conjunction with Case, Case dealers and other manufacturers and their dealers, Case Credit periodically offers below-market interest rate and waived interest rate financing to customers as part of its marketing strategy. When Case Credit acquires retail installment sales contracts and finance leases subject to below-market interest rate and waived interest rate financing, Case, Case dealers and other manufacturers compensate Case Credit for the difference between market interest rates and the amounts received by Case Credit. Case Credit refers to these amounts, collectively, as "financing subsidies." These participating manufacturers, rather than Case Credit, currently bear the full cost of these financing subsidies. Case Credit and these manufacturers settle any outstanding financing subsidies monthly. Case Credit recognizes financing subsidies as income by Case Credit
over the term of the related financing contracts. If Case Credit subsequently sells any of these contracts, Case Credit recognizes the related financing subsidy on that contract as part of the gain on retail notes sold.
Dividends
Case Credit did not pay dividends in 1999, 1998 or 1997.
Support Agreement
Case Credit and Case have entered into a Support Agreement. The Support Agreement provides, among other things, that Case will remain, directly or indirectly, the sole owner of all of the voting stock of Case Credit. The Support Agreement also provides that Case will make quarterly payments to Case Credit to the extent necessary to ensure that Case Credit's consolidated pre- tax earnings available for fixed charges equal at least 1.10 times Case Credit's fixed charges in all periods composed of four consecutive fiscal quarters. The Support Agreement provides that Case does not directly or indirectly guarantee any indebtedness, liability or other obligation of Case Credit. Either Case or Case Credit may modify or amend the Support Agreement, and the parties may also terminate the Support Agreement upon 30 days' prior written notice. The Support Agreement further provides that the parties must send a copy of any modification, amendment or notice of termination to Moody's Investors Service, Inc., Standard & Poor's Ratings Group, and any other nationally recognized statistical rating organizations then rating the debt of Case Credit. Any such amendment or termination will become effective if:
(1) Moody's and S&P confirm in writing that their ratings on Case Credit debt then rated or capable of being rated by them would not be downgraded or withdrawn as a result of such modification, amendment or termination,
(2) the modification, amendment or notice of termination provides that the Support Agreement will continue in effect with respect to debt of Case Credit outstanding on the effective date of that modification, amendment or termination, or
(3) the holders of at least a majority of the aggregate unpaid principal amount of all outstanding debt of Case Credit with an original maturity in excess of 270 days consent in writing, so long as the holders of debt of Case Credit having an original maturity of 270 days or less shall continue to have the benefit of the Support Agreement until the maturity of such debt.
Under the terms of the Support Agreement, no portion of any debt is "outstanding" if that debt has been, or is deemed to have been, discharged and not outstanding in accordance with the indenture or other governing instrument defining the rights of the holders of that debt.
The calculation of pre-tax earnings available for fixed charges under the Support Agreement differs from the calculation of the ratio of earnings to fixed charges mandated under the rules and regulations of the Securities and Exchange Commission. Under the Support Agreement, the definition of "earnings" includes all cash extraordinary, non-recurring items of income or expense (other than cash debt defeasance costs). Under the Securities and Exchange Commission's rules and regulations, the definition of "earnings" does not include these items. Through the date of this report, Case has not been required to make any payment to meet its commitments under the Support Agreement.
Item 2.
Item 2. Properties.
Case Credit does not own any real estate. Its principal executive offices are located at 233 Lake Avenue, Racine, WI 53403.
As of December 31, 1999, Case Credit had additional offices in or near Memphis, Tennessee; Dallas, Texas; Minneapolis, Minnesota; Lincolnshire, IL; Columbus, Ohio; Toronto, Ontario; Seattle, WA; Tashkent, Uzbekistan; and St. Mary's, Australia.
Item 3.
Item 3. Legal Proceedings.
Case Credit is party to various litigation matters and claims arising from its operations. Management believes that the outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on Case Credit's financial position or results of operations.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
Information for this Item 4 is not required pursuant to General Instruction I(2) of Form 10-K.
Part II.
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.
As of December 31, 1999, all of the Company's common stock was owned by CNH Capital and was not publicly traded. CNH Capital is a wholly owned subsidiary of Case Corporation. Case Corporation is a wholly owned subsidiary of CNH Global N.V. Through New Holland Holdings N.V., a wholly-owned subsidiary of Fiat S.p.A. ("Fiat"). Fiat owns approximately 71% of CNH's outstanding common shares. As a result, Fiat controls all matters submitted to a vote of CNH's shareholders, including approval of annual dividends, election and removal of its directors and approval of extraordinary business combinations.
The Company did not pay dividends in 1999, 1998 or 1997.
Item 6.
Item 6. Selected Financial Data.
Information for this Item 6 is not required pursuant to General Instruction I(2) of Form 10-K.
Item 7.
Item 7. Management's Analysis of Results of Operations.
Presentation and Results of Operations
On November 12, 1999, New Holland N.V. acquired Case for $4.6 billion in cash, including related costs and expenses. Of the total purchase price, $674 million was allocated to Case Credit. This acquisition was accounted for as a purchase and, accordingly, the purchase price was allocated to the assets and liabilities of Case Credit based upon their respective estimated fair values, including identifiable intangibles, with the remainder allocated to goodwill. The allocation of purchase price resulted in goodwill of approximately $129 million, which is amortized on a straight-line basis over 20 years. For detailed discussion of the effects of purchase accounting on other balance sheet categories, see Note 3--"Merger." The effects of adjustments, other than goodwill, will be amortized to the consolidated statements of income over a period estimated to be from one to eight years.
The amounts presented below for 1999 include amounts for the post- acquisition period November 12 through December 31, 1999 and for the pre- acquisition period prior to November 12, 1999.
1999 Compared to 1998
Net Income
Case Credit recorded net income of $61 million in 1999, as compared to net income of $85 million in 1998. The $24 million decrease in net income is due to amortization expense resulting from purchase accounting adjustments related to the merger, lower margins on receivables and lower gains on asset-backed securitizations due to a rising interest rate environment and increased provision for credit losses. These amounts were partially offset by income resulting from increased levels of on-balance-sheet receivables.
Revenues
Case Credit reported total revenues of $439 million for 1999, an increase of $62 million or 16% over the $377 million of revenues reported for 1998. Finance income earned on retail and other notes and finance leases increased to $174 million in 1999, as compared to $140 million for the same period in 1998, primarily due to increased levels of on-balance-sheet receivables. Operating lease revenues increased $38 million to $102 million for 1999, reflecting the growth in Case Credit's operating lease portfolio. The increases were partially offset by reduced gains on asset-backed- securitizations.
Expenses
Operating expenses for Case Credit increased $52 million to a total of $155 million in 1999, as compared to $103 million in 1998. This increase primarily resulted from a $26 million increase in depreciation expense for equipment on operating leases relating to Case Credit's larger operating lease portfolio, and a $15 million increase in Case Credit's provision for credit losses as a result of the significant growth in Case Credit's on-balance-sheet receivables, the downturn in the agricultural market, and the impact of portfolio diversification into markets which historically have higher loss rates than Case Credit's core agricultural and construction equipment businesses.
Case Credit's interest expense for 1999 was $188 million, up $45 million from the $143 million reported in 1998. The increased interest expense resulted primarily from higher average debt levels during 1999, primarily due to the growth in Case Credit's on balance sheet receivables and increased equipment on operating leases.
Serviced Portfolio
As of December 31, 1999, Case Credit's serviced portfolio increased 11% over the same period last year to $7.5 billion. Gross receivables acquired in 1999 were $4.3 billion versus $4.4 billion in 1998. Case Credit retained approximately $458 million of additional retail and other notes and finance leases as compared to December 31, 1998, consistent with the Company's asset- management strategy. Case Credit's portfolio losses increased to $58 million in 1999 as compared to $15 million in 1998. This increase is attributable to the increased portfolio, the downturn in the agricultural market, and the portfolio diversification into markets which historically have higher loss rates than Case Credit's core agricultural and construction equipment business.
Case Credit sold $2.1 billion of retail notes in 1999 and 1998, to limited- purpose business trusts organized by Case in the United States and Canada. These trusts were formed for the purpose of purchasing receivables from Case Credit and the receivables were used as collateral for the issuance of asset- backed securities to outside investors. The proceeds from the sale of the retail notes were used to repay indebtedness and to finance additional receivables.
In March 2000, a limited-purpose business trust organized by CNH Capital issued $1,137 million of asset-backed securities to outside investors, of which $427 million was prefunded and will be sold to the trusts as receivables are generated. These receivables were sourced from both New Holland N.V. and Case Credit originations. The proceeds from this securitization will be used to repay outstanding debt and to fund CNH Capital's growing portfolio of receivables.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Interest Rate Risk Management
Case Credit is exposed to market risk from changes in interest rates. Case Credit monitors its exposure in this risk and manages the underlying exposure through the use of financial instruments, including swaps and forward rate agreements. These instruments aim to stabilize funding costs by managing the exposure created by the differing maturities and interest rate structures of Case Credit's financial assets and liabilities. Case Credit does not hold or issue derivative or other financial instruments for speculative or trading purposes.
Case Credit uses a model to monitor interest rate risk and to achieve a predetermined level of matching between the interest rate structure of its financial assets and liabilities. Fixed-rate financial instruments, including receivables, debt, asset-backed-securities ("ABS") certificates and other investments, are segregated from floating-rate instruments in evaluating the potential impact of changes in applicable interest rates. The potential change in fair market value of financial instruments including derivative instruments held at December 31, 1999 and 1998, resulting from a hypothetical, instantaneous 10% change in the interest rate applicable to such financial instruments would be approximately $3 million and $2 million, respectively, based on the discounted values of their related cash flows.
The above sensitivity analyses are based on the assumption of a 10% movement of the interest rates applicable to each homogeneous category of financial assets and liabilities. A homogeneous category is defined according to the currency in which financial assets and liabilities are denominated and assumes the same interest rate movement within each homogeneous category. As a result, Case Credit's inherent rate risk sensitivity model may overstate the impact of interest rate fluctuations for such financial instruments, as consistently unfavorable movements of all interest rates are unlikely.
Commodity Price and Foreign Currency Risk Management
Commodity prices impact Case Corporation's sales, which may have an impact on Case Credit's originations. Commodity risk is managed through diversification, including Case Credit's Soris Financial brand to service Case Credit's diverse client base in the agricultural, construction, industrial mobile and other equipment industries. It is not possible to determine the impact of commodity prices on earnings, cash flows, or fair values on Case Credit's portfolio.
Case Credit is subject to foreign currency risk in Canada, Australia, and Europe as the investments in these countries are impacted by currency fluctuations. The currency fluctuations result in non-cash gains and losses that do not impact net income, but instead are recorded as adjustments to "Accumulated other comprehensive income" in the accompanying Consolidated Balance Sheets. At December 31, 1999, Case Credit performed a sensitivity analysis on it's significant foreign operations that have foreign currency exchange risk. Case Credit calculated that the fair value impact would be $12 million and $8 million at December 31, 1999 and 1998, as a result of a 10% change in the foreign currency exchange rate.
Year 2000
As used in this "Year 2000" disclosure, the "Company," or "Case" refers to Case Corporation and its consolidated subsidiaries, including Case Credit Corporation.
The Year 2000 issue refers to the risk that systems, products and equipment having date-sensitive components will not recognize the year 2000, resulting in potential system failures or miscalculations that could cause disruption of operations.
Case has implemented those procedures that it deemed necessary to safeguard it from computer-related issues associated with adverse effects as a result of improperly recognizing the millennial date change. As a result of Case's Year 2000 preparation efforts, Case experienced no significant Year 2000-related failures to date. Case plans to continue monitoring its systems, and Case has contingency plans available in the event that a Year 2000 failure should occur. These contingency plans were designed to mitigate the impact on Case if its Year 2000 compliance efforts were not successful. As Case Industrial and Case Credit share many technology resources and internal-use systems, all the remediation costs to address Year 2000 issues are borne by Case Industrial.
As of December 31, 1999, Case has incurred, in the aggregate, approximately $38 million of costs for Year 2000 remediation, including approximately $17 million in 1999. These costs were expensed as incurred and include approximately $36 million in the aggregate, including $14 million in 1999, for Case's Year 2000 remediation expenses that were incurred prior to the merger. Case's cost estimates do not include the cost of implementing contingency plans and also do not include any potential litigation or warranty costs related to Year 2000 issues if Case's remediation efforts are not successful. Case anticipates that remaining Year 2000 remediation costs will be minimal.
Item 8.
Item 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS OF CASE CREDIT CORPORATION AND CONSOLIDATED SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholder of Case Credit Corporation:
We have audited the accompanying consolidated balance sheets of Case Credit Corporation (a Delaware corporation) and subsidiaries, as of December 31, 1999 and 1998, and the related consolidated statements of income, cash flows, and stockholder's equity, for the periods January 1, 1999 through November 11, 1999 and November 12, 1999 through December 31, 1999 and for the years ended December 31, 1998 and 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Case Credit Corporation and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for the periods January 1, 1999 through November 11, 1999 and November 12, 1999 through December 31, 1999 and for the years ended December 31, 1998 and 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin January 24, 2000
CASE CREDIT CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (in millions)
The accompanying notes to financial statements are an integral part of these Statements of Income.
CASE CREDIT CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (in millions, except share data)
The accompanying notes to financial statements are an integral part of these Balance Sheets.
CASE CREDIT CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions)
The accompanying notes to financial statements are an integral part of these Statements of Cash Flows.
CASE CREDIT CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (in millions)
The accompanying notes to financial statements are an integral part of these Statements of Changes in Stockholder's Equity.
CASE CREDIT CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Note 1: Nature of Operations
Case Credit Corporation is a subsidiary of CNH Capital Corporation ("CNH Capital"), formerly Case Capital. CNH Capital, a wholly owned subsidiary of Case Corporation ("Case"), provides broad-based financial services for the global marketplace. Case Corporation is a wholly owned subsidiary of CNH Global N.V. ("CNH"). Through New Holland Holdings N.V., Fiat owns approximately 71% of CNH's outstanding common shares. As a result, Fiat controls all matters submitted to a vote of CNH's shareholders, including approval of annual dividends, election and removal of its directors and approval of extraordinary business combinations.
Case Credit Corporation, its wholly owned operating subsidiaries, Case Credit Ltd. (Canada) and Case Credit Australia Pty Ltd, and Case Credit Corporation's joint ventures, Case Credit Europe S.A.S. and UzCaseagroleasing (collectively, "Case Credit" or the "Company") provide and administer financing for the retail purchase or lease of new and used Case and other agricultural and construction equipment. Case Credit offers various types of retail financing to end-use customers to facilitate the sale or lease of Case products in the United States, Canada, Australia, Europe and Uzbekistan. The Company's business principally involves purchasing retail installment sales contracts from Case dealers. In addition, the Company facilitates and finances the sale of insurance products to retail customers, provides financing for Case dealers and Case rental equipment yards, and also provides other retail financing programs in North America. In North America, Case Credit's private- label credit card is used by customers to purchase parts, service, rentals, implements and attachments from Case dealers. Case Credit also provides financing options to dealers for a variety of purposes, including inventory, working capital, real estate acquisitions, construction and remodeling, business acquisitions, dealer systems, and service and maintenance equipment.
Note 2: Summary of Significant Accounting Policies
Principles of Consolidation and Presentation
The accompanying financial statements reflect the consolidated results of Case Credit Corporation and its consolidated subsidiaries and joint ventures. All significant intercompany transactions have been eliminated in consolidation.
All references to balance sheet items for 1999 are on a post-acquisition basis. All items prior to 1999 are on a pre-acquisition basis. Income statement items for 1999 include both pre-acquisition totals and post- acquisition totals including the impacts of purchase accounting items.
Certain reclassifications have been made to conform prior years' financial statements to the 1999 presentation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Foreign Currency Translation
The assets and liabilities of foreign subsidiaries are translated into U.S. dollars using year-end exchange rates. Revenues and expenses are translated at average rates during the year. Adjustments resulting from this translation are deferred and included in "Accumulated other comprehensive income" in the accompanying Consolidated Balance Sheets. "Cumulative translation adjustment" in the accompanying Consolidated Statements of Changes in Stockholder's Equity was closed into the "paid-in capital" in the accompanying Consolidated Statements of Changes in Stockholder's Equity at the date of the merger.
CASE CREDIT CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
Purchase Accounting Amortization
Amortization of purchase accounting adjustments, excluding goodwill, is recognized over the remaining term of the related asset or liability account based on the weighted average change during the month for each asset class. The remaining terms range from 3 to 95 months as of December 31, 1999.
Recognition of Finance and Interest Income
Retail and Other Notes, Finance Leases and Operating Leases--The Company records finance income earned on retail and other notes and finance leases using the effective interest method. A portion of the earned finance income arises from sales programs offered by Case and other manufacturers on which finance charges are waived or low-rate financing programs are offered. When the Company acquires retail installment sales contracts and finance leases subject to below-market interest rate and waived interest rate financing, the Company is compensated for the difference between market rates and the amounts received by the Company. Case Credit receives compensation from Case and other manufacturers in an amount equal to the difference between the competitive interest rate and the amount paid by the customer. This amount is initially recognized as an unearned finance charge and is recognized as interest income over the term of the retail notes and finance leases. The amounts received from Case for below-market interest rate and waived interest rate financing are included in "Interest income from Case Corporation" in the accompanying Consolidated Statements of Income, and amounted to $21 million, $20 million and $19 million in 1999, 1998 and 1997, respectively.
Purchase accounting adjustments due to the merger resulted in a $33 million increase in receivables, which is primarily included in "Retail and other notes and finance leases" in the accompanying Consolidated Balance Sheets. Amortization of the related purchase accounting adjustments resulted in a decrease to income of approximately $6 million for the period November 12, 1999 through December 31, 1999 and is included in "Retail and other notes and finance lease income" in the accompanying Consolidated Statements of Income. The remaining purchase accounting adjustments as of December 31, 1999 total $27 million and will be primarily recognized as a decrease to "Retail and other notes and finance lease income" in the accompanying Consolidated Statements of Income over the next 3 to 40 months.
For selected operating leases, the Company is also compensated from Case for the difference between the market rental rates and the amount paid by the customer. The amounts received were $7 million and $4 million in 1999 and 1998 respectively, and are included in "Interest income from Case Corporation." The Company is also compensated for the funding of various receivables on behalf of Case. The amount earned was $12 million and $6 million in 1999 and 1998 respectively, and is included in "Interest income from Case Corporation." Compensation received for below-market interest rates and waived interest rate financing from other manufacturers is included in "Finance income earned on retail and other notes and finance leases" in the accompanying Consolidated Statements of Income. When the receivables are sold, the unrecognized portion of the unearned finance charges is included in the calculation of the net gain on retail notes sold. The Company included in its gain calculations income from Case amounting to $55 million, $62 million and $63 million in 1999, 1998 and 1997, respectively, as part of the sale of retail notes. These amounts are included in "Net gain on retail notes sold" in the accompanying Consolidated Statements of Income.
Purchase accounting adjustments due to the merger resulted in a $34 million net decrease in "Equipment on operating leases, at cost" in the accompanying Consolidated Balance Sheets. Amortization of the related purchase accounting adjustments resulted in a reduction of depreciation expense of approximately $1 million for the period November 12, 1999 through December 31, 1999 which is included in "Depreciation of equipment on operating leases" in the accompanying Consolidated Statements of Income. The remaining purchase accounting adjustments as of December 31, 1999 total $33 million which will be recognized as a decrease in "Depreciation of equipment on operating leases" in the accompanying Consolidated Statements of Income over the next 22 to 26 months.
CASE CREDIT CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
Recognition of income on loans is generally suspended when an account becomes 120 days delinquent or when management determines that collection of future income is not probable. Income accrual is resumed if the receivable becomes contractually current and collection doubts are removed. Previously suspended income is recognized at that time. The amount of loans and related finance charges for which income recognition has been suspended is not material.
Case Credit offers retail and other notes with interest rates that float with the prime rate, plus an applicable margin. At December 31, 1999 and 1998, these notes amount to $296 million and $325 million, respectively.
Goodwill
Goodwill represents the excess of the purchase price allocated to Case Credit plus the liabilities assumed over the fair value of the tangible and identifiable intangible assets purchased. Goodwill is amortized on a straight- line basis over 20 years. Case Credit continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of goodwill may warrant revision or that the remaining balance of goodwill may not be recoverable. When factors indicate that goodwill should be evaluated for possible impairment, Case Credit uses an estimate of the undiscounted cash flows over the remaining life of the goodwill in measuring whether the goodwill is recoverable.
At December 31, 1999, goodwill, net of $1 million accumulated amortization, totaled $128 million. Amortization expense totaled $1 million for the year ended December 31, 1999. There was no goodwill in 1998 or 1997.
Receivables Sold and Serviced
Retail notes receivable have been securitized and sold to limited-purpose business trusts ("Trusts") with recourse up to specified amounts. For sales occurring during 1999 and 1998, receivables, net of retained interests, are removed from the balance sheet, and a gain or loss on sale is recognized in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities."
Prior to the third quarter of 1999, no servicing asset or liability has been recorded under the provisions of SFAS No. 125 by the Company as management believed that the servicing fee income received is fair compensation for the services provided. Based upon an evaluation that the Company's servicing fee income now exceeds the fair market value of the services provided, the Company began recording a servicing asset. The servicing asset equaled $8 million, which approximates the fair market value, as of December 31, 1999 and is included in "Due from trusts" in the accompanying Consolidated Balance Sheets. The fair market value of the servicing asset was determined by discounting future cash flows and using current prepayment assumptions. This asset is being amortized over the period in which Case Credit collects the related servicing fees. Amortization was not significant in 1999 and is included in "Securitization and service fee income" in the accompanying Consolidated Statement of Income. The income recognition of the servicing asset was $8 million for 1999 and is included in "Net gain on retail notes sold" and is included in the accompanying Consolidated Statement of Income.
Case Credit stratifies its servicing assets based on geographic location and original term. As a result, Case Credit has two categories of servicing assets as of December 31, 1999. One category consists of serviced assets located in the United States with 3 to 5 year original terms, which amounted to $7 million as of December 31, 1999. The other category consists of serviced assets located in Canada with 3 to 5 year original terms, which amounted to $1 million as of December 31, 1999.
Case Credit is required to remit the cash collected on the serviced portfolio to the Trusts within two business days. At December 31, 1999 and 1998, $25 million and $20 million, respectively, of unremitted cash payable to
CASE CREDIT CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
the Trusts is included in "Accounts payable and other accrued liabilities" in the accompanying Consolidated Balance Sheets.
Accounting Pronouncements
Effective January 1, 1999, the Company adopted Statement of Position ("SOP") No. 98-5, "Reporting on the Costs of Start-Up Activities." The Company's accounting for the costs of start-up activities is consistent with the guidelines established in the SOP and, as a result, the adoption of this statement had no effect on the Company's financial position or results of operations.
The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The required adoption of this statement was extended to January 1, 2001, by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-- Deferral of the Effective Date of FASB Statement No. 133--an Amendment of FASB Statement No. 133," although earlier application is permitted. The Company is currently evaluating the impact of adopting SFAS No. 133.
Cash and Cash Equivalents
Cash equivalents are comprised of all highly liquid investments with an original maturity of three months or less.
Deposits Withheld from Dealers
These deposits represent amounts withheld from dealers relating to retail sales financed using retail and other notes and finance leases. Any subsequent losses on retail and other notes or finance leases that were acquired with limited recourse are charged against the amounts withheld from the dealer. To the extent that a loss on a retail or other note or finance lease exceeds the dealers' reserves, the amount is charged against the Company's allowance for credit losses. Annually, the balance of each dealer's withholding account, in excess of minimum levels, is remitted to the dealer.
Derivatives
The Company uses derivative financial instruments to manage its interest rate exposures. Case Credit does not hold or issue such instruments for trading purposes. As these instruments are accounted for as a hedge of existing assets or liabilities, unrealized fair market value gains and losses are not recognized at the balance sheet date. Hedge accounting is applied if the changes in the fair market value of the derivative instruments are highly correlated to changes in the fair market value of the hedged assets or liabilities. Amounts to be received or paid under these instruments are recognized in the results of operations as interest expense or are recorded as part of the gain on sale of receivables, as appropriate, in the periods to which they relate.
Reference is made to Note 11, "Financial Instruments," for further information regarding the Company's use of derivative financial instruments.
Note 3: Merger
On November 12, 1999, New Holland N.V. acquired Case for $4.6 billion in cash, including related costs and expenses. Of the total purchase price, $674 million was allocated to Case Credit. Effective with the closing of the merger, New Holland N.V. changed its name to CNH Global N.V. ("CNH").
This acquisition was accounted for as a purchase and, accordingly, the purchase price was allocated to the assets and liabilities of Case Credit based upon their respective estimated fair values, including identifiable intangibles, with the remainder allocated to goodwill. The purchase price allocation resulted in goodwill of approximately $129 million, which is being amortized on a straight-line basis over 20 years. The historical
CASE CREDIT CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
shareholders' equity of the Company was eliminated in the Company's Consolidated Balance Sheets. The fair value adjustments to the historical balance sheet and the resulting goodwill were as follows (in millions):
Case Credit has prepared the following unaudited pro forma income statements to illustrate the estimated effects of the acquisition of Case by New Holland as if this transaction had occurred as of the beginning of each of the years presented. The pro forma data reflects the impact of the fair market value adjustments to the Case Credit assets and liabilities acquired. These adjustments are being amortized over the periods estimated to be benefited and primarily include reduced depreciation of equipment on operating leases, the amortization of the fair value adjustments for acquired receivables, discount on notes payable, and goodwill.
CASE CREDIT CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
Case Credit has presented this unaudited pro forma financial data for illustrative purposes only. This pro forma data is based on a preliminary allocation of the purchase price and is not necessarily indicative of (i) the results of operations that would have occurred had the transaction been effective as of the beginning of each of the years presented, or (ii) the results of operations that Case Credit will attain in the future. In addition, the pro forma financial data does not reflect any synergies or cost savings that may occur as a result of the merger.
Note 4: Receivables
A summary of receivables is as follows (in millions):
Retail and Other Notes and Finance Leases
The terms of retail and other notes and finance leases generally range from two to six years and allow for prepayment at any time without penalty. The average effective yield on retail and other notes and finance leases held by the Company was approximately 9.0% and 9.1% at December 31, 1999 and 1998, respectively.
Purchase accounting adjustments, net of amortization, included in "Retail and other notes and finance leases" in the accompanying Consolidated Balance Sheets as of December 31, 1999 were $27 million as described in Note 2.
Maturities of retail and other notes and finance leases as of December 31, 1999, are as follows (in millions):
CASE CREDIT CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
The allowance for credit losses is established to cover probable losses for receivables owned by the Company. Changes in the allowance for credit losses are as follows (in millions):
The preceding table reflects the Company's provision for credit losses, but does not include losses charged to dealers or those absorbed by the Trusts. Total losses incurred on the Company's serviced portfolio were $58 million, $15 million and $8 million in 1999, 1998, and 1997, respectively.
Case Credit sold $2.1 billion of retail notes (net of unearned finance charges) in 1999 and 1998 to Trusts in the United States and Canada. The Trusts were formed for the purpose of purchasing Case Credit receivables and the receivables were used as collateral for the issuance of asset-backed securitization ("ABS") transactions to outside investors. The proceeds received from the sales of notes were reduced by $61 million and $56 million in 1999 and 1998, respectively, pursuant to recourse provisions in the sale agreements. These reductions in cash proceeds are held in escrow by the Trusts to provide security in the event of uncollectible notes and are released to the Company when the notes are collected. Escrow amounts held by the Trusts of $155 million and $170 million at December 31, 1999 and 1998, respectively, are recorded in "Due from Trusts" in the accompanying Consolidated Balance Sheets. Case Credit has established reserves for the estimated losses on amounts held in escrow, and these reserves are also included in "Due from Trusts" in the accompanying Consolidated Balance Sheets. A security interest in the equipment financed by the retail notes is maintained such that in the event of non- performance, the related equipment can be repossessed to minimize losses. As these Trusts are controlled by third parties and meet minimum equity capitalization standards, the assets of the Trust are not included in the consolidated financial statements of the Company.
Case Credit's portfolio of managed receivables, including receivables owned and receivables serviced for others, has grown from $6.8 billion at December 31, 1998, to $7.5 billion at December 31, 1999. Case Credit's serviced portfolio at December 31, 1999, included $6.7 billion of managed receivables (net of unearned finance charges), including retail and other notes amounting to $3.3 billion (net of unearned finance charges) that were owned by Trusts in the United States and Canada. At December 31, 1998, Case Credit's serviced portfolio included $6.0 billion of managed receivables (net of unearned finance charges), including retail and other notes amounting to $3.1 billion (net of unearned finance charges) that were owned by Trusts in the United States and Canada.
At December 31, 1999 and 1998, approximately $206 million and $69 million, respectively, of retail notes receivable (net of unearned finance charges) have been pledged as collateral under the Company's, $750 million, U.S. asset- backed commercial paper liquidity facility.
Retail and other notes receivable and serviced receivables have significant concentrations of credit risk in the farm and construction business sectors. On a geographic basis, there is not a disproportionate concentration of credit in any area of the United States, Canada or Australia.
CASE CREDIT CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 5: Property, Plant and Equipment
Property, plant and equipment are stated at cost prior to the merger. Property, plant and equipment consist of leasehold improvements, furniture and fixtures and construction in progress. Depreciation is provided on a straight- line basis over the estimated useful lives of the respective assets. Useful lives range from 5 to 14 years for leasehold improvements, 3 to 10 years for furniture and fixtures. Expenditures for maintenance and repairs are charged to expense as incurred.
Purchase accounting adjustments related to the merger resulted in a fair market value write-up of approximately $1 million to Property, plant and equipment at the date of the merger. This write-up will be amortized over the weighted average remaining life of each asset class. Amortization of the adjustment was immaterial for the period November 12, 1999 through December 31, 1999. The related $2 million balance in "Accumulated depreciation" at the date of the merger was eliminated and is included in "Property and equipment, at cost" in the accompanying Consolidated Balance Sheets.
Note 6: Equipment on Operating Leases
A summary of equipment on operating leases, is as follows (in millions):
Lease payments owed to Case Credit for equipment under non-cancelable operating leases as of December 31, 1999, are as follows (in millions):
Case Credit purchases equipment from dealers that is leased to retail customers under operating leases. Income from operating leases is recognized over the term of the lease. The Company's investment in operating leases is based on estimated residual values of the leased equipment, which are calculated at the lease inception date. Realization of the residual values is dependent on the Company's future ability to market the equipment under the then prevailing market conditions. Although realization is not assured, management believes that it is more likely than not that the estimated residual values will be realized. Case Corporation guarantees a portion of the residual values on some of Case Credit's operating leases. On these leases, if the guaranteed residual value is not realized, Case Credit will receive a payment from Case Corporation for a portion of the recognized loss. Payments received from Case Corporation for such losses were not significant in any of the periods presented.
Each item of equipment under operating lease is depreciated on a straight- line basis over a period of time consistent with the lease term. Depreciation expense totaled $59 million for the period January 1 through
CASE CREDIT CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
November 11, 1999 and $12 million for the period November 12 through December 31, 1999. Depreciation expense was $43 million and $22 million for the years ended December 31, 1998 and 1997, respectively. Expenditures for maintenance and repairs are the responsibility of the lessee.
Purchase accounting adjustments, net of amortization, included in "Equipment on operating leases" in the accompanying Consolidated Balance Sheets as of December 31, 1999 were $33 million as described in Note 2.
Note 7: Other Assets
The components of other assets as of December 31, 1999 and 1998 are as follows:
Certificates of deposits support retail receivables related to purchases of agricultural equipment by Brazilian customers from Case Corporation. These U.S. dollar indexed certificates are reflected at historical cost on the balance sheet and have maturities that range between three months and six years and bear interest rates between 8.75% and 10.00%. The receivables underlying the certificates of deposit are guaranteed by Case Corporation.
ABS certificates are stated at historical cost on the balance sheet and bear interest rates between 5.75% and 7.05%. These certificates are classified as held to maturity securities. Interest income is included in "Securitization and servicing fee income" in the accompanying Consolidated Statements of Income.
The joint venture is accounted for under the equity method of accounting. Income is included in "Other income" in the accompanying Consolidated Statements of Income.
Purchase accounting adjustments due to the merger resulted in a $36 million net decrease in "Other assets" in the accompanying Consolidated Balance Sheets. Amortization of the related purchase accounting adjustments resulted in income of approximately $5 million for the period November 12, 1999 through December 31, 1999, which is primarily included in "Finance income earned on retail and other notes and finance lease" in the accompanying Consolidated Statements of Income. The remaining purchase accounting adjustments as of December 31, 1999 total $31 million, which will be primarily recognized as an increase to "Finance income earned on retail and other notes and finance leases" in the Consolidated Statements of Income over the next 2 to 38 months.
Note 8: Short-Term Debt
The Company has various lines of credit and liquidity facilities that include borrowings under both committed credit facilities and uncommitted lines of credit and similar arrangements. The Company also has the ability to issue commercial paper in the United States, Canada and Australia. Under the terms of the Company's commercial paper programs, the principal amount of the commercial paper outstanding, combined with the
CASE CREDIT CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
amounts outstanding under the applicable revolving credit facility mentioned below, cannot exceed the total amount available under the revolving credit facility.
In August 1999, Case Credit renewed its existing three-year, $750 million U.S. commercial paper liquidity facility (the "Liquidity Facility") and extended its maturity to August 2000. Case Credit established the following credit facilities in August 1996: a five-year, $1.2 billion revolving credit facility and a five-year, C$500 million revolving credit facility.
In October 1997, Case Credit's Australian subsidiary, Case Credit Australia Pty Ltd, established a A$400 million revolving credit facility comprised of a five-year, A$300 million revolving credit facility and a 364-day, A$100 million revolving credit facility.
A summary of short-term debt is set forth in the following table (in millions):
- -------- (a) The credit agreements include borrowings under both committed credit facilities and uncommitted lines of credit and similar arrangements.
The weighted-average interest rates on total short-term debt outstanding at December 31, 1999 and 1998, were 6.2% and 5.6%, respectively. At December 31, 1999, the unused portion of the combined committed credit facilities and the commercial paper program was $1,021 million, and the unused portion of the asset-backed commercial paper liquidity facility was $543 million. At December 31, 1998, the unused portion of the combined committed credit facilities and the commercial paper program was $764 million, and the unused portion of the asset-backed commercial paper liquidity facility was $691 million.
At the option of the Company, borrowings under the revolving credit facilities bear interest at: (1) prime rate; (2) LIBOR, plus an applicable margin; or (3) banker's bills of acceptance rates, plus an applicable margin. Borrowings may be obtained in U.S. dollars and certain other foreign currencies. Borrowings under the Liquidity Facility bear interest at prevailing commercial paper rates at the date of the borrowing. Case Credit's revolving credit facilities (other than the Liquidity Facility) contain restrictive covenants that require that Case Credit maintain certain financial conditions including a maximum ratio of debt to net worth and a minimum fixed- charge coverage ratio. The revolving credit facilities (other than the Liquidity Facility) also impose restrictions on certain indebtedness, liens on Company assets and ownership of certain subsidiaries. Case Credit is in compliance with all restrictive covenants as of December 31, 1999.
Due to the availability of financing under the Company's credit facilities and the Company's intent to refinance short-term debt under these facilities, Case Credit has classified $120 million, $230 million and $50 million of borrowings under the commercial paper facilities of Case Credit Corporation, Case Credit Australia Pty Ltd, and Case Credit Ltd., respectively, as long term at December 31, 1999. In 1998, Case Credit classified $341 million, $105 million and $245 million of borrowings under the commercial paper facilities of Case Credit Corporation, Case Credit Australia Pty Ltd and Case Credit Ltd., respectively, as long-term debt.
CASE CREDIT CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
The credit facilities generally provide for facility fees on the total commitment, whether used or unused, and also provide for annual agency fees to the administrative agents for the facilities.
Note 9: Long-Term Debt
In 1999, Case Credit issued $375 million of floating-rate and fixed-rate, medium-term notes in the United States. The floating-rate note has a maturity of 12 months and bears interest based on three-month LIBOR; the fixed-rate notes have maturities of two to three years and interest rates ranging from 5.85% to 6.15%. These note issuances were offered pursuant to the Case Credit's shelf registration statements as filed with the Securities and Exchange Commission in January 1999 and May 1998. The net proceeds from these issuances were used to fund Case Credit's growth initiatives and for other corporate purposes, including the repayment of short-term indebtedness.
During the first quarter of 1999, Case Credit's Canadian subsidiary, Case Credit Ltd., issued C$200 million of its medium-term notes pursuant to a short-form prospectus and prospectus supplement filed with the Canadian Securities Administrators. These notes mature in June 2001 and bear interest at 6.3%. The net proceeds from this issuance were used to fund Case Credit Ltd.'s growth initiatives and for other corporate purposes, including the repayment of short-term indebtedness.
Also during the first quarter, Case Credit Australia Pty. Ltd. issued A$175 million of its medium-term notes pursuant to its medium-term note program. These notes have maturities that range from twenty-four to thirty months and bear interest based on BBSW for the floating-rate notes, and 5.75% for the fixed-rate notes. The net proceeds from this issuance were used to fund Case Credit Australia Pty Ltd's growth initiatives and for other corporate purposes, including the repayment of short-term indebtedness.
Purchase accounting related adjustments due to the merger totaled $27 million, which is included in "Long-term debt" in the accompanying Consolidated Balance Sheets. Amortization of the related purchase accounting adjustments resulted in expense of approximately $2 million for the period November 12, 1999 through December 31, 1999, which is included in "Interest expense" in the accompanying Consolidated Statements of Income. The remaining purchase accounting adjustments as of December 31, 1999 total $25 million, which will be recognized as an increase to "Interest expense" in the accompanying Consolidated Statements of Income over the next 9 to 95 months.
CASE CREDIT CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
A summary of long-term debt is set forth in the following table (in millions):
A summary of the minimum annual repayments of long-term debt as of December 31, 1999, is as follows (in millions):
CASE CREDIT CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 10: Income Taxes
The income and expenses of Case Credit and its domestic subsidiaries are included in the consolidated income tax return of Case. The Company's Canadian subsidiaries file separate income tax returns. In addition, Case Credit's Australian subsidiaries are permitted income tax relief with Case's Australian subsidiaries. Provisions for income taxes for all periods are made as if Case Credit filed a separate income tax return. Any liability incurred by Case resulting from the inclusion of Case Credit in its income tax returns was reimbursed to or paid by Case Credit or the appropriate subsidiary.
At December 31, 1999 and 1998, the Company has current taxes receivable of $29 million and $25 million, respectively, which are included in "Affiliated receivables" in the accompanying Consolidated Balance Sheets.
The sources of income before taxes were as follows (in millions):
The provision (benefit) for income taxes is as follows (in millions):
CASE CREDIT CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
Following is a reconciliation of income taxes computed at the U.S. Federal income tax rate to the tax provision reflected in the accompanying Consolidated Statements of Income (in millions):
Case Credit has not recorded valuation allowances against deferred tax assets in tax jurisdictions where Case and Case Credit have been profitable as management believes it is more likely than not that such assets will be realizable. Deferred tax assets and deferred tax liability are included in "Other assets" and "Accounts payable and other accrued liabilities", respectively, in the accompanying Consolidated Balance Sheets. The Company had valuation allowances in certain tax jurisdictions where future profitability was uncertain. In 1997, the remaining valuation allowances were reversed in full.
The components of the net deferred tax assets/(liabilities) are as follows (in millions):
Note 11: Financial Instruments
Fair Market Value of Financial Instruments
The estimated fair market values of financial instruments that do not approximate the carrying values in the financial statements are as follows (in millions):
CASE CREDIT CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
The fair market value of notes receivable was based on discounting the estimated future payments of fixed-rate receivables at prevailing market rates. The fair value of the interest only strip component of the "Due from Trusts" included in total receivables was based on loss, prepayment and interest rate assumptions approximating those currently experienced by the Company. The carrying amounts of floating-rate receivables, ABS certificates, and certificates of deposit approximate their fair market value. The fair value of fixed-rate, long-term debt was based on the market value of debt with similar maturities and interest rates; the carrying amount of floating-rate, long-term debt approximates its fair value. The carrying amount and fair value of derivatives was not material at December 31, 1998.
Derivatives
The Company uses derivative financial instruments to manage its interest rate exposures. Case Credit does not hold or issue such instruments for trading purposes. The net amounts exchanged are calculated on the basis of the notional amounts and other terms of the contracts, such as interest rates, and only represent a small portion of the notional amounts. The credit risk under these agreements is minimized through diversification among counterparties with high credit ratings.
Depending on the item being hedged, gains and losses on derivative financial instruments are either recognized in the results of operations as they accrue or are deferred until the hedged transaction occurs. Derivatives used as hedges are effective at reducing the risk associated with the exposure being hedged and are designated as a hedge at the inception of the derivative contract. Accordingly, changes in the market value of the derivative are highly correlated with changes in the market value of the underlying hedged item at the inception of the hedge and over the life of the hedge contract.
Interest Rate Swaps
Case Credit enters into interest rate swaps to stabilize funding costs by minimizing the effect of potential interest rate increases on floating-rate debt in a rising interest rate environment. Under these agreements, the Company contracts with a counterparty to exchange the difference between a fixed rate and a floating rate applied to the notional amount of the swap. Swap contracts are principally between one to three years in duration. The differential to be paid or received on interest rate swap agreements is accrued as interest rates change and is recognized in net income as an adjustment to interest expense.
Gains and losses resulting from terminated interest rate swap agreements are deferred and recognized in net income over the shorter term of the remaining contractual life of the swap agreement or the remaining term of the debt underlying the swap agreement. If swap agreements are terminated due to the underlying debt being extinguished, any resulting gain or loss is recognized in net income as an adjustment to interest expense at the time of the termination.
The weighted-average pay and receive rates for the swaps outstanding at December 31, 1999, were 5.65% and 5.10%, respectively, at a notional amount of approximately $1,125 million. The weighted-average pay and receive rates for the swaps outstanding at December 31, 1998, were 5.55% and 5.10%, respectively, at a notional amount of approximately $347 million.
Back-to-Back Interest Rate Caps
The Liquidity Facility requires a subsidiary of Case Credit to have interest rate cap agreements in place. Due to the relatively high expense of obtaining such an instrument, Case Credit sells an identical cap, concurrent with the cap purchase, to the same counterparty. This effectively minimizes the overall expense to Case Credit, meets the requirements of the Liquidity Facility and eliminates any risk of financial loss on the purchased cap. The defined term of the cap is approximately 48 months.
CASE CREDIT CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
Premiums paid for interest rate cap agreements purchased and sold are included in "Other assets" and "Accounts payable and other accrued liabilities," respectively, in the accompanying Consolidated Balance Sheets, and are amortized to interest expense over the terms of the agreements. Amounts receivable or payable under cap agreements are recognized in net income as adjustments to interest expense over the term of the related debt. If interest rate cap agreements are terminated due to the underlying debt being extinguished, in conjunction with an ABS transaction, any resulting gain or loss is recognized in net income as a component of "Net gain on retail notes sold" at the time of the termination.
At December 31, 1999, Case Credit had a back-to-back cap at a rate of 7.00%, at a notional amount of approximately $255 million. At December 31, 1998, Case Credit had a back-to-back cap at a rate of 7.00%, at a notional amount of approximately $55 million.
Treasury Rate Lock Agreements
A Treasury rate lock is a commitment to either purchase or sell the designated financial instrument at a future date (the determination date) for a specified price (the reference yield). The purpose of this instrument is to protect fixed-rate debt from fluctuations in the yield of the Treasury Note that forms the basis of pricing the debt. As of December 31, 1999, Case Credit had entered into $200 million of Treasury rate locks based on one, two and three-year Treasury Notes at a weighted-average yield of 6.11%. At December 31, 1998, Case Credit had Treasury Rate locks with a notional value of $125 million, based on two year Treasury Notes, at a weighted-average yield of 4.59%.
Case Credit accounts for these Treasury rate locks as hedges of the anticipated issuance of fixed-rate securities to outside investors in ABS transactions as changes in the fair market value of these instruments are highly correlated to changes in the fair value of the securities to be issued. Unrealized gains or losses are deferred until the Treasury rate locks are terminated upon the issuance of the related securities at which time they are recognized in net income as a component of the "Net gain on retail notes sold". The unrealized gains on Treasury rate locks in place as of December 31, 1999 total $1 million and are being deferred until consummation of Case Credit's anticipated ABS transaction in March, 2000.
Note 12: Related Party Transactions
Case Credit receives compensation from Case for retail lease contracts that were created under certain low-rate financing programs and interest waiver programs offered by Case. The amount of such compensation not yet paid by Case as of December 31, 1999 and 1998, was $6 million and $10 million respectively, and is included in "Affiliated receivables" in the accompanying Consolidated Balance Sheets.
Operating expenses include charges from Case for administrative expenses related to employees who perform specific functions for Case Credit. Such charges amounted to $31 million for the period January 1, to November 11, 1999 and $2 million for the period November 12, to December 31, 1999, and $24 million and $18 million for the years ended December 31, 1998 and 1997, respectively. Management believes that these charges reasonably reflect the actual costs of services provided.
Note 13: Commitments and Contingencies
Legal Matters
The Company is party to various litigation matters and claims arising from its operations. Management believes that the outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on Case Credit's financial position or results of operations.
CASE CREDIT CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
Commitments
Commitments under capital and operating leases are not significant to the financial statements. Total rental expense for operating leases was minimal for the periods January 1 to November 11, 1999 and November 12 to December 31, 1999 and for the years ended December 31, 1998 and 1997.
Note 14: Segment and Geographical Information
The Company's reportable segments are strategic business units that are organized around differences in geographic areas. Each segment is managed separately as they require different knowledge of regulatory environments and marketing strategies.
Each of Case Credit's segments provides financing for retail installment sales contracts and leases. These financing arrangements are established in conjunction with the purchase or lease of new and used Case farm and construction equipment and other new and used products to end-use customers. The North American segments also include commercial lending within the equipment industry, multiple lines of insurance products and private-label credit cards.
The accounting policies of the segments are described in Note 2, "Summary of Significant Accounting Policies." Case Credit evaluates segment performance based on segment profit, defined as segment net income. Transfers between segments are accounted for at market value.
CASE CREDIT CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Concluded)
A summary of Case Credit's reportable segment and geographical information is set forth in the following table (in millions):
- -------- * Includes equipment on operating lease and property, plant, and equipment
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10, "Directors and Executive Officers of the Registrant," Item 11, "Executive Compensation," Item 12, "Security Ownership of Certain Beneficial Owners and Management," and Item 13, "Certain Relationships and Related Transactions," are not required pursuant to General Instruction I (2) of Form 10-K.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
FINANCIAL STATEMENTS INCLUDED IN ITEM 8
See "Index to Financial Statements of Case Credit Corporation and Consolidated Subsidiaries" set forth in Item 8, "Financial Statements and Supplementary Data."
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE INCLUDED IN ITEM 14
SCHEDULES OMITTED AS NOT REQUIRED OR INAPPLICABLE
EXHIBITS
A list of the exhibits included as part of this Form 10-K is set forth in the Index to Exhibits that immediately precedes such exhibits, which is incorporated herein by reference.
REPORTS ON FORM 8-K
In a Current Report filed on 8-K dated November 15, 1999, CNH Global, N.V. ("CNH"), the indirect parent of Case Corporation, issued three press releases announcing its Board of Directors, its senior management team and certain details regarding CNH's future operations.
In a Current Report filed on 8-K dated November 12, 1999, Case Corporation and New Holland announced that the merger of Case Corporation and New Holland had been completed.
In a Current Report filed on 8-K dated November 4, 1999, Case Corporation announced that the United States Department of Justice had approved the Case- New Holland merger, and that the anticipated closing date of the merger was Friday, November 12, 1999.
In a Current Report filed on form 8-K dated October 28, 1999, Case Corporation announced that the European Commission had approved the Case-New Holland merger.
In a Current Report filed on Form 8-K dated October 26, 1999, Case Capital Corporation announced its unaudited financial results for the quarter ended September 30, 1999.
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.
Case Credit Corporation
/s/ Andrew E. Graves By: _________________________________ Andrew E. Graves President and Chief Executive Officer
Date: March 30, 2000
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.
Date: March 30, 2000
Supplemental Information To Be Furnished With Reports Filed Pursuant to Section 15(d) Of The Act By Registrants Which Have Not Registered Securities Pursuant To Section 12 Of The Act.
No annual report to security holders covering the registrant's fiscal year ended December 31, 1999, or any proxy material has been sent to the registrant's security holders.
EXHIBIT INDEX