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, Senstar Capital Corporation, Arrendadora John Deere, S.A. de C.V. (Mexico), John Deere Credit Limited (Australia), John Deere Credit Group Plc and John Deere Credit Limited (United Kingdom), are collectively called the Company. Growcash Limited (United Kingdom) and John Deere Credit S.A.S. (France), both joint ventures, and John Deere Credit-Germany, a partnership, offer equipment financing and operating loan products within the United Kingdom, France and Germany, respectively, 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, commercial 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 (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 and lawn and grounds care markets as well as insured international export financing products (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, 2000, the Company had 1,307 full-time and part-time employees.
Business of John Deere
John Deere's operations are categorized into four major 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.
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.
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. (Canada), and primarily finances sales and leases by John Deere dealers of new and used equipment and sales by non-Deere dealers of recreational products. In addition, it provides wholesale financing to dealers of the foregoing equipment and finances retail and commercial revolving charge accounts.
In response to a recent accounting pronouncement, John Deere's segments have been redefined to coincide with its internal organizational structure, the way the operations are managed and evaluated by management and materiality considerations. The manufacture and distribution of engines and drivetrain components for the original equipment manufacturer market, previously aggregated with the construction equipment segment, are now allocated to all three major equipment segments. In addition, the operations of certain units involved in the development and marketing of special technologies, which were previously aggregated with the agricultural equipment and the commercial and consumer equipment segments, have been aggregated and included with the health care and insurance operations in the "Other" category, as they do not meet the materiality threshold included in the new accounting standard. The insurance operations were sold in 1999.
John Deere's net income in 1999 totaled $239 million, or $1.02 per share diluted ($1.03 basic), compared with last year's net income of $1,021 million, or $4.16 per share diluted ($4.20 basic). The decline in profits was largely due to a continuation of weak demand for agricultural equipment caused by depressed farm commodity prices. Cash flow from operations, however, was higher due to a reduction in worldwide agricultural equipment receivables of approximately $800 million, and a decline in construction equipment receivables of approximately $200 million. During the year, John Deere implemented aggressive production schedule reductions in order to help balance receivables and inventories with forecasted levels of demand.
John Deere's net sales and revenues decreased 15 percent to $11,751 million in 1999, compared with $13,822 million in 1998. Net sales of John Deere's equipment operations decreased 19 percent in 1999 to $9,701 million from $11,926 million last year. Overseas net sales were $2,678 million for the year, compared with $3,049 million in 1998. Overall, John Deere's worldwide physical volume of sales decreased 18 percent for the year.
Outlook for John Deere
Agricultural Equipment. As a result of continued weakness in farm commodity prices, industry retail sales of farm machinery in North America are currently expected to be off by 5 to 10 percent next year. Declines of a similar nature are expected in other major markets. At the same time, farmers are in relatively good financial condition due to higher government payments. In light of this outlook, John Deere has adopted a cautious approach, expecting sales and production volumes to trail prior-year levels early in 2000, but to be higher for the full year. The anticipated rise in sales is due to production being increased to track more closely with retail demand than in 1999. Sales are also expected to benefit from a positive response to several important new products.
Construction Equipment. Although higher interest rates and lower housing starts are expected to result in a moderate slowdown in industry sales of construction equipment next year, John Deere expects to have higher sales in the year 2000 due largely to an expanded product line. John Deere sales in the early part of the year, however, are expected to be lower as a result of a continuation of dealer inventory adjustments. Made in conjunction with the Estimate to Cash initiative, these reductions should place John Deere in a favorable inventory position going into fiscal 2000. Industry inventory levels, however, are a source of concern with respect to price realization.
Commercial and Consumer Equipment. Following strong gains this year, retail demand for John Deere's commercial and consumer equipment is expected to achieve further growth next year, assuming normal weather patterns and a continuation of current economic conditions. These operations are expected to benefit from market-share growth, positive customer response to new products and continued international expansion.
Credit Operations. Credit should continue to benefit from a larger receivable and lease portfolio next year. However, higher growth expenditures, lower gains on the sale of retail notes and a weakened agricultural economy are expected to keep pressure on margins and bring about a sizable reduction in overall results.
Based on these conditions, John Deere's worldwide physical volume of sales is currently expected to increase by approximately 10 percent for the year 2000. First-quarter physical volumes are expected to be slightly higher than in the comparable 1999 period. However, the mix of sales is expected to deteriorate and put significant downward pressure on profits for the first quarter.
Despite the lower 1999 results, John Deere has put itself in position to benefit from an upturn in the farm economy, whenever it occurs. At the same time, John Deere remains on track with its product development plans, and numerous growth, quality, technology and Internet-related initiatives. In addition, John Deere fulfilled its 1999 goal of generating strong cash flow and is setting the stage for markedly better results once the agricultural economy starts moving ahead and as other business opportunities take shape.
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.
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 1999 and 1998, the Company's ratios were 1.64 to 1 and 1.63 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 and used equipment accepted in trade for them, and from retail sales of equipment of unrelated manufacturers. Receivables and Leases also include revolving charge accounts receivable and wholesale notes receivable. 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 also provides retail sales financing through dealers and directly to customers of certain unrelated manufacturers of recreational vehicles. Recreational product retail notes conform to industry standards different from those for John Deere retail notes and often have smaller down payments and longer repayment terms. In addition, the acquisition volumes, margins and collectibility of recreational product retail notes are affected by economic, marketing and competitive factors and cycles, such as fluctuations in fuel prices and recreational spending patterns, that are different from those affecting retail notes arising from the sale of John Deere equipment. Recreational product retail notes are acquired from more than 650 recreational vehicle dealers and directly from some customers. The Company continuously sells recreational vehicle retail note portfolios to several outside financial institutions. These portfolio sales typically require an immediate release of servicing by the Company.
Through the acquisition of Senstar Capital Corporation and its subsidiaries, the Company holds retail notes, leases and revolving charge receivables related to mining, transportation and other commercial equipment. See Note 1 to the Consolidated Financial Statements.
The Company offers several revolving charge products. The John Deere Credit Revolving Plan is used primarily by retail customers of John Deere dealers to finance purchases of lawn and grounds care equipment. Through its Farm Plan™ product, the Company finances revolving charge accounts offered by approximately 4,500 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 crop input production loans for materials such as seeds and fertilizer. These loans are secured by the crops being grown. Additionally, the Company provides production loans directly to farmers for their total operating needs. These loans are secured by crops and equipment. 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. The Company also offers insured international export financing products to select customers. See Note 2 to the Consolidated Financial Statements under "Revolving Charge Accounts Receivable."
The Company finances wholesale inventories owned by approximately 490 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, and recreational product 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 goods purchased pursuant to revolving charge accounts.
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.
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, settlements and repossessions on Receivables and Leases.
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.
Finance Rates on Retail Notes
As of October 31, 1999 and 1998, approximately 49 percent and 45 percent of the retail notes held by the Company bore a variable finance rate, respectively. With the exception of agricultural 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 Consolidated Financial Statements for additional information.
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):
The average original term for recreational products 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 1999.
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.
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 laws, customs and regulations.
Item 2.
Item 2. Properties.
The Company's properties principally consist of office equipment, a Company-owned office building in Madison, Wisconsin, and leased office space in Reno, Nevada; West Des Moines, Iowa; Pittsburgh, Pennsylvania; Bloomington, Illinois; Brisbane, Australia; Gloucester, England; and Monterrey, Mexico.
Item 3.
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.
Item 4. Submission of Matters to a Vote of Security Holders.
Omitted pursuant to instruction I(2).
PART II
Item 5.
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 $75 million in 1999 and $50 million in 1998. In each case, John Deere Credit Company paid a comparable dividend to Deere & Company. During the first quarter of 2000, 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.
Item 6. Selected Financial Data.
Omitted pursuant to instruction I(2).
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations
1999 Compared with 1998
Consolidated net income for the fiscal year ended October 31, 1999 was $153 million compared with $151 million in 1998. Results for 1999 reflect increased income on a 5 percent higher average balance of Receivables and Leases financed, a reduction in leverage position and a gain on the sale of the yacht retail note portfolio and related intangibles, partially offset by lower financing spreads, higher receivable write-offs and higher operating expenses. The ratio of earnings to fixed charges was 1.64 to 1 for 1999 compared with 1.63 to 1 for 1998.
Revenues totaled $959 million in 1999 compared to $887 million a year ago. Revenues increased primarily due to a 5 percent increase in the average balance of Receivables and Leases financed. Finance income earned on retail notes totaled $396 million in 1999 compared to $431 million in 1998. This decrease was primarily due to a 56 percent decrease in the average balance of recreational product retail notes financed. Lease revenues increased $78 million, to $270 million in 1999, from $192 million in 1998, primarily due to a 42 percent increase in the average balance of financing and operating leases financed. Finance income earned on wholesale notes increased $11 million, to $72 million in 1999, from $61 million earned in 1998 primarily as a result of the continued growth in the financing for inventories of construction equipment, yachts and recreational vehicles.
Revenues earned on revolving charge accounts amounted to $120 million in 1999, a 6 percent increase over revenues of $113 million earned during 1998. The increase was primarily due to growth of agricultural production loans in 1999 compared with 1998.
The net gain on retail notes sold totaled $40 million during 1999 compared with $39 million for 1998. Securitization and servicing fee income totaled $31 million in 1999 compared with $28 million during 1998. 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 and reimbursed administrative expenses received. Additional sales of retail notes are expected to be made in the future.
Interest expense totaled $361 million in 1999 compared with $368 million in 1998. Average borrowings were $6.021 billion in 1999 compared with $5.875 billion in 1998, an increase of 2 percent. The weighted average annual interest rate incurred on all interest-bearing borrowings during 1999 was 5.8 percent compared to 6.1 percent in 1998.
Administrative and operating expenses increased 9 percent from $117 million in 1998 to $128 million in 1999. These increases were attributable to the costs associated with administering a larger Receivable
and Lease portfolio as well as higher employment costs relating to the increasing level of new acquisition volumes.
The provision for credit losses was $62 million in 1999 and $46 million in 1998. Total write-offs of Receivables and Leases financed were $40 million during 1999 compared with $32 million in 1998. The increase in write-offs from 1998 primarily related to a $10.5 million increase in agricultural equipment retail note write-offs, partially offset by a $2.8 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 1999 totaled $8.090 billion, an increase of 10 percent compared with volumes of $7.349 billion during 1998. The higher volumes in 1999 resulted mainly from increased volumes of John Deere construction and lawn and grounds care equipment retail notes, revolving charge accounts, wholesale receivables and leases. Receivables and Leases held by the Company at October 31, 1999 totaled $7.231 billion compared with $6.528 billion at October 31, 1998. For the 1999 and 1998 fiscal years, Receivable and Lease acquisition volumes and balances held were as follows (in millions of dollars):
*Does not include the acquisition of John Deere Credit Limited (JDCL), Farming and Agricultural Finance Limited (FAF) and Senstar Capital Corporation (Senstar) installment, lease and revolving charge balances. (See Note 1 to the Consolidated Financial Statements.)
**Agricultural equipment retail notes at October 31, 1999 include the JDCL and FAF balances. Construction equipment retail notes, revolving charge accounts, financing leases and equipment on operating leases include the Senstar balances. (See Note 1 to the Consolidated Financial Statements.)
Retail note volumes increased by approximately $221 million in 1999 compared with 1998, primarily due to an increase in the volumes of construction equipment and lawn and grounds care equipment retail notes. However, agricultural retail note volumes remained relatively unchanged in 1999 due to the weakening of the U.S. agricultural market. Recreational products retail note volumes declined in 1999 primarily due to decreases in yacht installment financing. (See Note 1 to the Consolidated Financial Statements.)
Revolving charge account volumes increased primarily due to the increased demand for agricultural production loans, Farm Plan and John Deere Credit Revolving Plan products. Wholesale note volumes increased significantly in 1999 primarily due to higher recreational vehicle and yacht wholesale notes, construction equipment floor planning notes, and a used agricultural equipment floor plan program
introduced in April 1998. Operating lease volumes increased in 1999 due to agricultural low-rate and guaranteed residual value leasing programs sponsored by the Company or John Deere.
Retail notes receivable decreased primarily due to the Company selling retail notes, receiving proceeds of $2.281 billion during 1999 compared to $1.738 billion during 1998. This decrease was partially offset by retail note acquisition volumes exceeding collections during 1999 and the acquisition of JDCL, FAF and Senstar installment portfolios. 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):
*The Company's maximum exposure under all retail note recourse provisions at October 31, 1999 and 1998 was $161 million and $181 million, respectively. In addition, the Company has guaranteed letters of credit on behalf of John Deere Credit Inc., the John Deere finance subsidiary in Canada, as part of two retail note sales. At October 31, 1999, the maximum exposure under these agreements was approximately $8 million.
**On recreational product retail note sales, the Company continues to administer the portfolio outstanding for a fee until the servicing rights are assumed by their owner.
***On February 1, 1999, the Company began servicing a receivable portfolio on behalf of FAF. These servicing rights were obtained in conjunction with the Company's acquisition of JDCL. (See Note 1 to the Consolidated Financial Statements).
Retail notes bearing variable finance rates totaled 49 percent of the total retail note portfolio at October 31, 1999, compared with 45 percent at October 31, 1998.
Total Receivable and Lease amounts 60 days or more past due were $30 million at October 31, 1999, compared with $25 million at October 31, 1998. These past due amounts represented .41 percent and .39 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 both October 31, 1999 and 1998, respectively. The balances of retail notes held on which any installment was 60 days or more past due as a percentage of the ending retail notes receivable was 1.45 percent at October 31, 1999 and 1.42 percent at October 31, 1998. While past due amounts, as a percentage of total Receivables and Leases held, increased in 1999, 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 $123 million at October 31, 1999, compared to $156 million at October 31, 1998. During the second quarter of 1999, the U.S. John Deere agricultural dealer reserve program was modified to evaluate and adjust reserves outstanding quarterly rather than annually as under the previous program. In addition, the minimum required reserve for select dealers was adjusted from 3 percent to 2 percent of the aggregate balance outstanding on all
installment contracts originated through that dealer. The Company's allowance for credit losses on all Receivables and Leases financed at October 31, 1999 totaled $84 million and represented 1.2 percent of the total Receivables and Leases financed, compared with $81 million and 1.2 percent, respectively, one year earlier. The Company's allowance for credit losses, as a percentage of total Receivables and Leases, remained relatively unchanged in 1999. The allowance is subject to an ongoing evaluation based on loss experience and related estimates to ensure the allowance for credit losses is maintained at an adequate level.
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 in 1997. 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.
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 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):
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.
Receivables and Leases administered by the Company, which include retail notes sold, were as follows (in millions):
*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.
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, at October 31, 1997. 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.
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 $341 million in 1999. Net cash used for investing activities totaled $225 million in 1999, primarily due to Receivable and Lease acquisitions exceeding collections by $2.582 billion, which was partially offset by the $2.281 billion of proceeds from the sale of receivables. Acquisitions of businesses totaled $59 million in the current year. Financing activities used $158 million during the same period, resulting from a $83 million net decrease in total borrowings and dividend payments totaling $75 million to John Deere Credit Company. Cash and cash equivalents decreased $42 million during 1999. See "Statements of Consolidated Cash Flows."
Over the past three years, operating activities have provided $911 million in cash. In addition, the sale of receivables provided $4.855 billion and an increase in total net borrowings provided $552 million. These amounts were used mainly to fund Receivable and Lease acquisitions, which exceeded collections by $6.341 billion, and to pay $200 million in dividends.
The Company is naturally exposed to various interest rate and foreign currency risks. As a result, the Company enters into derivative transactions to hedge certain of these exposures that arise in the normal course of business, and not for the purpose of creating speculative positions or trading. Similar to other large credit companies, the Company manages the relationship of the types and amounts of its funding
sources to its Receivable and Lease portfolios in an effort to diminish risk due to interest rate fluctuations, while responding to favorable financing opportunities. Accordingly, from time to time, the Company enters into interest rate swap agreements to hedge its interest rate exposure in amounts corresponding to a portion of its borrowings. The credit and market risks under these interest rate and foreign currency agreements are not considered to be significant. See Note 13 to the Consolidated Financial Statements for further details.
Total interest-bearing indebtedness amounted to $6.028 billion at October 31, 1999, compared with $5.516 billion at October 31, 1998, generally corresponding with the level of Receivables and Leases financed and the level of cash and cash equivalents. Total short-term indebtedness amounted to $3.526 billion at October 31, 1999 compared with $3.417 billion at October 31, 1998. Total long-term indebtedness amounted to $2.501 billion at October 31, 1999 and $2.099 billion at October 31, 1998. The ratio of total interest-bearing debt to stockholder's equity was 6.0 to 1 at both October 31, 1999 and 1998, 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 1999, the Capital Corporation issued $300 million of 6% notes due in 2009 and $300 million of 7% notes due in 2002, and retired $150 million of 95/8% subordinated notes, $97 million of 5% Swiss franc bonds, $200 million of 6% notes and $200 million of 6.3% notes. The Capital Corporation's subsidiary, John Deere Credit Limited in Gloucester, England, also retired $99 million of long-term debt due in 1999. In 1999, the Capital Corporation also issued $1.682 billion and retired $1.031 billion of medium-term notes.
The Capital Corporation paid cash dividends to John Deere Credit Company of $75 million in 1999 and $50 million in 1998. In each case, John Deere Credit Company paid a comparable dividend to Deere & Company. During the first quarter of 2000, 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 and personal computers, software, the distributed network, facilities systems, the Company's products, and the readiness of the Company's suppliers and distribution network.
No public infrastructure problems or any facilities related problems were encountered at the Company's locations during the rollover to the Year 2000. After extensive system verification and testing, the Company's systems are operating normally. The Company is not aware of any significant issues related to the Year 2000 problem. We are continuing to monitor the status of our critical suppliers and merchants in the days and weeks ahead to ensure there are no significant business interruptions.
The total cost of the modifications and upgrades including internal costs has been approximately $6 million pretax since the beginning of 1997. The future costs for non-mission critical systems to become Year 2000 ready are expected to be less than $.5 million. 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.
Safe Harbor Statement
Statements under the "Outlook for John Deere" and "Year 2000" headings above, the "Supplemental Information (Unaudited)" on pages 38 and 39, 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, 1999 filed with the Securities and Exchange Commission and filed with this report as Exhibit 99.
Item 7A.
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 36, and the supplementary data under "Sensitivity Analysis" on page 39.
Item 8.
Item 8. Financial Statements and Supplementary Data.
See accompanying table of contents of financial statements.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
Omitted pursuant to instruction I(2).
Item 11.
Item 11. Executive Compensation.
Omitted pursuant to instruction I(2).
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Omitted pursuant to instruction I(2).
Item 13.
Item 13. Certain Relationships and Related Transactions.
Omitted pursuant to instruction I(2).
PART IV
Item 14.
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 17, 1999 (Items 5 and 7).
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.
Each person signing below also hereby appoints Hans W. Becherer, Jon D. Volkert and Michael A. Harring, and each of them singly, his or her lawful attorney-in-fact with full power to execute and file any and all amendments to this report together with exhibits thereto and generally to do all such things as such attorney-in-fact may deem appropriate to enable John Deere Capital Corporation to comply with the provisions of the Securities Exchange Act of 1934 and all requirements of the Securities and Exchange Commission.
JOHN DEERE CAPITAL CORPORATION
By:
/s/ H. W. BECHERER H. W. Becherer
Chairman
Date: January 25, 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.
Signature
Title
Date
/s/ H. W. BECHERER H. W. Becherer
Director, Chairman and
Principal Executive Officer
January 25, 2000
/s/ JAMES W. EILER James W. Eiler
Director
January 25, 2000
/s/ JAMES R. HESEMAN James R. Heseman
Director
January 25, 2000
/s/ JAMES A. ISRAEL James A. Israel
Director
January 25, 2000
/s/ NATHAN J. JONES Nathan J. Jones
Director, Senior Vice President
and Principal Financial Officer
January 25, 2000
/s/ F. F. KORNDORF F. F. Korndorf
Director
January 25, 2000
/s/ R. W. LANE R. W. Lane
Director
January 25, 2000
/s/ PIERRE E. LEROY Pierre E. Leroy
Director
January 25, 2000
/s/ M. P. ORR M. P. Orr
Director
January 25, 2000
/s/ JON D. VOLKERT Jon D. Volkert
Director and President
January 25, 2000
/s/ STEVEN E. WARREN Steven E. Warren
Director, Senior Vice President
and Principal Accounting Officer
January 25, 2000
[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, 1999 and 1998 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, 1999. 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, such consolidated financial statements present fairly, in all material respects, the financial position of John Deere Capital Corporation and subsidiaries at October 31, 1999 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1999 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Chicago, Illinois
November 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.
John Deere Capital Corporation and Subsidiaries
Statements of Consolidated Income and Retained Earnings
(in millions)
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
John Deere Capital Corporation and Subsidiaries
Consolidated Balance Sheets
(in millions)
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
John Deere Capital Corporation and Subsidiaries
Statements of Consolidated Cash Flows
(in millions)
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
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, Inc., Deere Credit Services, Inc., Farm Plan Corporation, John Deere Receivables, Inc., John Deere Funding Corporation, Senstar Capital Corporation, Arrendadora John Deere, S.A. de C.V. (Mexico), John Deere Credit Limited (Australia), John Deere Credit Group Plc and John Deere Credit Limited (United Kingdom), are collectively called the Company. Growcash Limited (United Kingdom) and John Deere Credit S.A.S. (France), both joint ventures, and John Deere Credit-Germany, a partnership, offer equipment financing and operating loan products within the United Kingdom, France and Germany, respectively, and are considered unconsolidated affiliates of 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 1999, 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.
In the second quarter of 1999, the Company purchased the remaining 50 percent interest in John Deere Credit Limited (JDCL) located in Gloucester, England from Farming and Agricultural Finance Limited (FAF), a subsidiary of Lombard North Central Plc, for $18 million, which included a premium on portfolios owned by JDCL of $2 million. In addition, the Company acquired an installment receivable portfolio from FAF and began administering a separate receivable portfolio of FAF in exchange for a servicing fee. An additional $2 million was paid representing a premium on the FAF receivable portfolio. Both of these premiums will be amortized to expense over approximately three years. The purchase of JDCL and the acquisition of FAF's receivable portfolio added approximately $437 million to the Company's Receivables and Leases held at the acquisition date.
In the third quarter of 1999, the Company sold the yacht retail note portfolio ($107 million principal value) to Republic Security Bank and recognized a gain on the sale of $2.5 million. In addition, the Company sold intangible assets related to this lending activity and recognized a gain of $5.7 million, which is classified in "Other Income." The Company continues to offer wholesale financing for yacht products.
In the fourth quarter of 1999, the Company acquired Senstar Capital Corporation and its wholly-owned subsidiaries, Senstar Finance Company and SFC Alabama (collectively referred to as Senstar), from SENCORP, for $41 million. Senstar is located in Pittsburgh, Pennsylvania and is primarily a middle-market lessor, but also offers installment and insured international export financing receivable products. Senstar's total assets, stockholder's equity and net income for its year ended March 31, 1999 were $270 million,
$30 million and $3 million, respectively. The purchase of the Senstar portfolio added approximately $237 million to the Company's Receivables and Leases held at the acquisition date.
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 1999, the Company adopted Financial Accounting Standards Board (FASB) Statements No. 130, Reporting Comprehensive Income (see Note 12), No. 131, Disclosures about Segments of an Enterprise and Related Information (see Note 14) and No. 132, Employer's Disclosures about Pensions and Other Post Retirement Benefits (see Note 8). These Statements had 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. Under the new standard, all derivatives will be recorded at fair value in the financial statements. The Company will adopt this statement in fiscal year 2001 and its effect on the Company's financial position or net income is not expected to be material. In 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. This SOP requires the capitalization of costs for software developed for internal use, which was previously expensed. The SOP will be adopted in fiscal year 2000 and the effect on the Company's financial position or net income is not expected to be material.
Reclassifications
Certain amounts for prior years have been reclassified to conform with 1999 financial statement presentations.
Note 2. Receivables and Leases
Retail Notes Receivable
The principal business of the Company is providing and administering financing for retail purchases of new and used equipment manufactured by John Deere's agricultural, construction and commercial and consumer equipment divisions. The Company purchases retail installment sales and loan contracts (retail notes) from John Deere. These retail notes are acquired by John Deere through independent John Deere retail dealers. The Company also purchases and finances certain agricultural, construction, and lawn and grounds care retail notes unrelated to John Deere. In addition, the Company purchases and finances recreational product retail notes acquired from independent dealers (recreational product retail notes).
Retail notes receivable by product category at October 31 are as follows (in millions of dollars):
Retail notes acquired by the Company during the year ended October 31, 1999 had an estimated average original term (based on dollar amounts) of 65 months. During 1998 and 1997, the estimated average original term was 54 and 66 months, respectively. Historically, because of prepayments, the average actual life of retail notes has been considerably shorter than the average original term. The average actual life for retail notes liquidated in 1999, 1998 and 1997 was 26, 25 and 25 months, respectively.
Retail note installments at October 31 are scheduled as follows (in millions of dollars):
Company guidelines relating to down payment requirements and contract terms on retail notes are generally as follows:
During 1999, 1998 and 1997, the Company received proceeds of $2.281 billion, $1.738 billion and $837 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, 1999 and 1998 was $161 million and $181 million, respectively. In addition, the Company has guaranteed letters of credit on behalf of John Deere Credit Inc., the John Deere finance subsidiary in Canada, as part of two retail note sales. At October 31, 1999 the maximum exposure under these agreements was approximately $8 million. At October 31, 1999, 1998 and 1997, the balance of all retail notes previously sold, but still administered by the Company, was $2.393 billion, $2.189 billion and $1.314 billion, respectively.
Finance income is recognized over the lives of the notes on the effective-yield basis. During 1999, the average effective yield on retail notes held by the Company was approximately 9.5 percent, compared with 9.6 percent in 1998 and 9.5 percent in 1997. 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 29 percent in 1999, 23 percent in 1998 and 19 percent in 1997.
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 quarter, the balance of each dealer's withholding account in excess of a specified percent (generally 3 percent, 2 percent for select dealers) 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.
The Company requires that theft and physical damage insurance be carried on all goods leased or securing retail notes and wholesale notes. In most cases, the customer may, at his own expense, have the Company or the seller of the goods purchase this insurance or obtain it from other sources.
Revolving Charge Accounts Receivable
Revolving charge account income is generated primarily by three revolving credit products: Farm Plan, the John Deere Credit Revolving Plan and agricultural production loans. Farm Plan is primarily used by farmers and ranchers to finance day-to-day operating expenses, such as parts and services. 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 outstanding 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. 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 paid by customers on their outstanding account balances.
Revolving charge accounts receivable at October 31, 1999 totaled $901 million compared with $751 million at October 31, 1998. 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 generally on a straight-line method over the terms of the leases. Residual values represent estimates of the value of the leased assets at the end of the contract terms and are initially determined based upon appraisals and estimates. Residual values are continually reviewed to determine that estimated amounts are appropriate. Lease acquisition costs are accounted for in a manner similar to the procedures for retail notes.
Financing leases receivable by product category at October 31 are as follows (in millions of dollars):
*Other equipment at October 31, 1999 includes Senstar lease balances. (See Note 1 to the Consolidated Financial Statements.)
Initial lease terms for financing leases generally range from 36 months to 60 months. Payments on financing leases receivable at October 31 are scheduled as follows (in millions of dollars):
The cost of equipment on operating leases by product category at October 31 is as follows (in millions of dollars):
*Other equipment at October 31, 1999 includes Senstar lease equipment balances. (See Note 1 to the Consolidated Financial Statements.)
Initial lease terms for equipment on operating leases generally 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):
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.
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 $957 million at October 31, 1999 compared with $804 million at October 31, 1998. 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 utilize the notes as collateral for asset-backed securities issued. 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):
The allowance for credit losses represented 1.2 percent, 1.2 percent and 1.4 percent of Receivables and Leases financed at October 31, 1999, 1998 and 1997, respectively. In addition, the Company had $123 million, $156 million and $144 million at October 31, 1999, 1998 and 1997, respectively, of deposits primarily withheld from John Deere dealers available for certain potential credit losses originating from those dealers.
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 and 150 days for a John Deere Credit Revolving Plan account. 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):
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):
Note 4. Short-Term Borrowings
On October 31, 1999, short-term borrowings were $3.526 billion, $1.265 billion of which was commercial paper. Short-term borrowings were $3.417 billion on October 31, 1998, $1.672 billion of which was commercial paper. The Capital Corporation's short-term debt also includes amounts borrowed from John Deere, which totaled $118 million and $60 million at October 31, 1999 and 1998, 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, 1999 and 1998, excluding current maturities of long-term borrowings, was 5.4 percent and 5.3 percent, respectively.
At October 31, 1999, the Company, Deere & Company, John Deere Limited (Canada) and John Deere Credit Inc. (Canada), jointly, maintained $5.534 billion of unsecured lines of credit with various banks in North America and overseas, $3.479 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 Company, 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 5.1 to 1 at October 31, 1999 compared to 4.3 to 1 at October 31, 1998. 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 before fixed charges to fixed charges was 1.64 to 1, 1.63 to 1 and 1.64 to 1 in 1999, 1998 and 1997, 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):
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: 2000-$2,138, 2001-$1,216, 2002-$656, 2003-$80 and 2004-$1.
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, 1999 or 1998. At October 31, 1999, the Company had authorized, but not issued, 10,000 shares of $1 par value preferred stock.
Note 7. Dividends
The Capital Corporation paid cash dividends to John Deere Credit Company of $75 million in 1999 and $50 million in 1998. In each case, John Deere Credit Company paid a comparable dividend to Deere & Company.
Note 8. Pension and Other Retirement Benefits
The Company participates in the Deere & Company salaried pension plan, which is a defined benefit plan in which benefits are based primarily on years of service and employee compensation. Pension expense is actuarially determined based on the Company's employees included in the plan. The Company's pension expense amounted to $2.0 million in 1999, $1.6 million in 1998 and $1.6 million in 1997. 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 $1.5 million in 1999, $1.0 million in 1998 and $.8 million in 1997. Further disclosure for these plans is included in the notes to the Deere & Company 1999 annual report, which adopted FASB Statement No. 132 in 1999.
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 is as follows (in millions of dollars):
The provision for income taxes consisted of the following (in millions of dollars):
Effective Income Tax Provision
A comparison of the statutory and effective income tax provisions and reasons for related differences follows (in millions of dollars):
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 1999, 1998 and 1997 were $381 million, $380 million and $346 million, respectively. Cash payments for income taxes during these same periods were $47 million, $61 million and $68 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. Comprehensive Income Items
Comprehensive income includes all changes in the Company's equity during the period, except transactions with stockholders of the Company. Comprehensive income for the twelve months ended October 31, 1999, 1998 and 1997 consisted of the following (in millions of dollars):
Note 13. 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):
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, 1999 and 1998, the total notional principal amounts of interest rate swap agreements related to short-term borrowings were $426 million and $472 million, having rates of 4.9 to 6.8 percent and 4.6 to 6.4 percent, terminating in up to 59 months and 48 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, 1999 and 1998, the total notional principal amounts of these swap agreements were $462 million and $375 million, terminating in up to 92 months and 104 months, respectively.
Foreign Exchange Swaps
At October 31, 1999, the Company had no foreign exchange swaps. At October 31, 1998, the Company had a foreign exchange swap agreement with a notional amount of $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.
Note 14. Geographic Area Information
In 1999, the Company adopted FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information. Based on the way the operations are managed and evaluated by management and materiality considerations, the Company is viewed as one operating segment. However, geographic area information for revenues and operating profit, which is income before income taxes, attributed to the United States and foreign countries for the year ended October 31, 1999 is shown below (in millions of dollars)*:
*Operations in foreign countries were not significant in 1998 and 1997. No individual foreign country's revenues were material for disclosure purposes. Total property and equipment for the United States and foreign countries also were not material for disclosure purposes. Geographic operating profit has been given in addition to the reporting requirements.
Supplemental Information (Unaudited)
Quarterly Information
Supplemental quarterly information for the Company follows (in millions of dollars):
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, 1999 and 1998. 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, 1999 and 1998 would have been (in millions of dollars):
Dividends and Other Events
On December 3, 1999, the Capital Corporation declared a $5 million dividend, to be paid to John Deere Credit Company on December 14, 1999. John Deere Credit Company, in turn, declared a $5 million dividend to Deere & Company, also payable on December 14, 1999.
Index to Exhibits
2.
Not applicable.
3.1
Certificate of Incorporation, as amended.
3.2
Bylaws, as amended.
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 Form 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
Amended and restated credit agreement among Deere & Company, the registrant, various financial institutions, and The Chase Manhattan Bank, Bank of Americas National Trust and Savings Association, Deutsche Bank AG New York Branch, and The Toronto-Dominion Bank, as Managing Agents, dated as of February 23, 1999 (Exhibit 4 to Form 8-K of Deere & Company dated May 18, 1999, Securities and Exchange Commission file no. 1-4121*).
4.5
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*).
4.6
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*).
4.7
Form of certificate for common stock (Exhibit 4.6 to Form 10-K of the registrant for the year ended October 31, 1998*).
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, Securities and Exchange Commission number 1-4121*).
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, Securities and Exchange Commission number 1-4121*).
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, Securities and Exchange Commission number 1-4121*).
10.4
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*) .
10.5
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, 1999.
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, 1999 (Securities and Exchange Commission file number 1-4121*).
* Incorporated by reference. Copies of these exhibits are available from the Company upon request.
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
PART I
PART II
PART III
PART IV
SIGNATURES
SCHEDULES OMITTED
Index to Exhibits