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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1996
Commission file number 1-6458
JOHN DEERE CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-2386361
(State of incorporation) (IRS employer identification
number)
1 EAST FIRST STREET, SUITE 600
RENO, NEVADA 89501 (702) 786-5527
(Address of principal executive (Zip Code) (Telephone number)
offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
7.20% Notes Due 1997 New York Stock Exchange
9-5/8% Subordinated Notes Due 1998 New York Stock Exchange
8-5/8% Subordinated Debentures Due 2019 New York Stock Exchange
SECURITIES REGISTERED PURSUANT
TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
At January 1, 1997, 2,500 shares of common stock, without par value, of the
registrant were outstanding, all of which were owned by John Deere Credit
Company.
The registrant meets the conditions set forth in General Instruction J(1)(a) and
(b) of Form 10-K and is therefore filing this Form with certain reduced
disclosures as permitted by Instruction J(2).
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PART I
ITEM 1. BUSINESS.
THE COMPANY
John Deere Capital Corporation (Capital Corporation) and its subsidiaries:
Deere Credit, Inc., Deere Credit Services, Inc., Farm Plan Corporation, John
Deere Receivables, Inc., John Deere Funding Corporation and Arrendadora John
Deere, S.A. de C.V., are collectively called the Company. John Deere Credit
Company, a wholly-owned finance holding subsidiary of Deere & Company, is the
parent of the Capital Corporation.
The principal business of the Company is providing and administering
financing for retail purchases of new and used equipment manufactured by Deere &
Company's agricultural, industrial and commercial and consumer equipment
divisions. The Company purchases retail installment sales and loan contracts
(retail notes) from Deere & Company and its wholly-owned subsidiaries
(collectively called John Deere). These retail notes are acquired by John Deere
through independent John Deere retail dealers. The Company also purchases and
finances certain agricultural, industrial and lawn and grounds care retail notes
unrelated to John Deere. In addition, the Company purchases and finances
recreational product retail notes acquired from independent dealers and marine
product mortgage service companies (recreational product retail notes). The
Company also leases equipment to retail customers, finances and services
revolving charge accounts acquired from and offered through merchants in the
agricultural, lawn and grounds care and recreational product retail markets
(revolving charge accounts), and provides wholesale financing for inventories of
recreational vehicles, manufactured housing units, yachts, John Deere engines,
John Deere industrial equipment and the Sabre by John Deere line of equipment
owned by dealers of those products (wholesale notes). Retail notes, revolving
charge accounts, direct financing leases and wholesale notes receivable are
collectively called "Receivables." Receivables and operating leases are
collectively called "Receivables and Leases."
The Capital Corporation was incorporated under the laws of Delaware and
commenced operations in 1958. At January 1, 1997, the Company had 1,112 full-
and part-time employees.
BUSINESS OF THE COMPANY
The Company's operations are categorized into four primary divisions:
The AGRICULTURAL DIVISION provides agricultural market financing through
products such as agricultural equipment installment contracts and leases,
Farm Plan-TM- (a revolving charge product) and farmer operating loans.
The COMMERCIAL DIVISION provides industrial and construction equipment
financing through products such as installment loans and construction
equipment leases. In addition, the division provides wholesale financing
of recreational vehicles, manufactured housing units and other commercial
equipment.
The CONSUMER DIVISION provides consumer and recreational product equipment
financing through products such as installment loans, John Deere Credit
Revolving Plan (a revolving charge product), Preferred Resource-TM- (an
unsecured lending product), and leases of lawn and grounds care equipment.
In addition, the Consumer Division provides wholesale financing for yachts.
The INTERNATIONAL DIVISION provides financing products to the Company's
developing international markets through its subsidiaries such as
Arrendadora John Deere, S.A. de C.V., which offers leasing products on new
John Deere agricultural and industrial equipment purchased from John Deere
dealer organizations located in Mexico. In addition, in October 1996, the
Company formed a joint venture company, John Deere Credit Limited, which
will enable the Company to participate in offering equipment financing
products within the United Kingdom.
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BUSINESS OF JOHN DEERE
John Deere's operations are categorized into six business segments:
John Deere's worldwide AGRICULTURAL EQUIPMENT segment manufactures and
distributes a full line of farm equipment -- including tractors; tillage,
soil preparation, seeding and harvesting machinery; sprayers; hay and
forage equipment and integrated precision farming technology.
John Deere's worldwide INDUSTRIAL EQUIPMENT segment manufactures and
distributes a broad range of machines used in construction, earthmoving and
forestry -- including backhoe loaders; crawler dozers and loaders;
four-wheel-drive loaders; excavators; scrapers; motor graders; log
skidders; and forestry harvesters. This segment also includes the
manufacture and distribution of engines and drivetrain components for the
original equipment manufacturer (OEM) market.
John Deere's worldwide COMMERCIAL AND CONSUMER EQUIPMENT segment, formerly
the lawn and grounds care equipment segment, manufactures and distributes
equipment for commercial and residential uses -- including small tractors
for lawn, garden, commercial and utility purposes; riding and walk-behind
mowers; golf course equipment; snowblowers; hand-held products such as
chain saws, string trimmers and leaf blowers; skid-steer loaders; utility
transport vehicles; and other outdoor power products.
The products produced by the equipment segments are marketed primarily
through independent retail dealer networks and other retail outlets.
The CREDIT segment includes the operations of the Company (described
herein), John Deere Credit Company and John Deere Credit Incorporated,
which primarily purchases and finances retail notes from John Deere's
equipment sales branches in Canada, as well as recreational vehicle, marine
product and construction and transportation equipment notes from
independent dealers.
The INSURANCE segment issues policies in the United States primarily for:
general and specialized lines of commercial property and casualty
insurance; group accident and health insurance for employees of
participating John Deere dealers and disability insurance for employees of
John Deere.
The HEALTH CARE segment provides health management programs and related
administrative services in the United States to commercial clients and
employees of John Deere.
John Deere achieved record worldwide net income for 1996, totaling $817
million or $3.14 per share compared with fiscal 1995's income of $706 million or
$2.71 per share. The earnings increase was primarily due to higher worldwide
agricultural equipment production and sales levels, coupled with strong
operating margins reflecting John Deere's continuous improvement and growth
initiatives. John Deere's results also continued to benefit from the improved
performance of its financial services subsidiaries.
John Deere's worldwide net sales and revenues increased nine percent to
$11,229 million in 1996 compared with $10,291 million in 1995. Net sales of
John Deere's Equipment Operations increased nine percent in 1996 to $9,640
million from $8,830 million last year. Export sales from the United States
continued to grow, totaling $1,584 million for 1996 compared with $1,314 million
last year, an increase of over 20 percent. Overseas sales for the year remained
very strong, rising by 26 percent compared with a year ago and exceeding $2.5
billion for the first time in John Deere's history. Overall, John Deere's
worldwide physical volume of sales increased seven percent for the year,
reflecting the increased worldwide demand for John Deere products.
Worldwide demand for John Deere agricultural equipment remains very strong.
Favorable weather conditions in the major producing areas in North America,
combined with the removal of all annual acreage reduction programs in the United
States, resulted in significant increases in production of wheat, corn and
soybeans in 1996. Despite recent price declines, grain prices remain at
reasonably good overall levels.
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Improving worldwide dietary trends and rapid income growth in most of Asia
and Latin America continue to stimulate strong demand for farm commodities,
resulting in the need for high levels of future plantings. Additionally, many
United States farmers signed seven-year production flexibility contracts that
establish direct government payments until the year 2002. The payments are not
dependent on commodity price levels. During 1996, this program permits
estimated payments to farmers of nearly $9 billion. As a result of these
factors and the United States Department of Agriculture's projections for
continued relatively tight supplies of grains and oilseeds during next year,
farmers' confidence has remained at high levels, promoting strong North American
demand for agricultural equipment. Additionally, overseas agricultural equipment
sales, which were very strong during 1996, are also expected to continue to
increase in 1997 due principally to the impact of sales to the republics of the
former Soviet Union, including countries such as Ukraine and Kazakhstan.
Industrial equipment markets also remained strong in 1996. Housing demand
continued at strong levels, reflecting generally favorable mortgage interest
rates, and demand is expected to remain at approximately the same levels in
1997. Strong housing demand coupled with general expectations for moderate
economic growth in the domestic economy should promote continued strong
industrial equipment demand for next year.
John Deere's commercial and consumer equipment industry sales were
negatively affected this year by a cold, wet spring followed by a cool, dry
summer, resulting in retail sales approximately equal to 1995 levels. However,
the first "Sabre by John Deere" products were introduced during 1996, opening a
new market segment to John Deere. Retail sales volumes in 1997 are currently
expected to increase moderately over 1996 levels, assuming more normal weather
patterns, growth of the Sabre brand and a continuing strong economy.
John Deere's Financial Services operations, which experienced growth in
most markets served in 1996, also are expected to continue their profitable
growth next year, partially offset by the credit operations' higher planned
expenditures for key growth initiatives.
In response to these market conditions, John Deere's worldwide physical
volume of sales to dealers on a comparable basis is projected to increase by
approximately five percent in 1997 compared with 1996. First quarter physical
volumes are also projected to be six percent higher than the comparable levels
in the first quarter of 1996.
Overall, the outlook for John Deere's businesses is positive. John Deere
is continuing to invest in new growth initiatives throughout the world, which
should promote the sale of new as well as existing products in new markets such
as China, the republics of the former Soviet Union and India. John Deere's
excellent worldwide dealer organization continues to successfully provide a
strong and critically important linkage to the customers, assisting John Deere
in meeting their ever increasing expectations and reinforcing John Deere's
commitment to the customers' satisfaction. John Deere's operating margins have
also benefited from its growth and continuous improvement initiatives. Based on
these factors, coupled with the continued favorable market outlook for John
Deere businesses, John Deere expects another strong operating performance next
year.
RELATIONSHIPS OF THE COMPANY WITH JOHN DEERE
The operations and results of the Company are affected by its relationships
with John Deere, including among other things, the terms on which the Company
acquires Receivables and Leases and borrows funds from John Deere, the
reimbursement for waiver and low-rate finance programs from John Deere and the
payment to John Deere for various expenses applicable to the Company's
operations. In addition, the Company and John Deere have joint access to all of
the Company's lines of credit.
The Company's acquisition volume of Receivables and Leases is largely
dependent upon the level of retail sales and leases of John Deere products. The
level of John Deere retail sales and leases is responsive to a variety of
economic, financial, climatic, legislative and other factors which influence
demand for its products. All of the Company's businesses are affected by
changes in interest rates, demand for credit and competition.
3
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The Company bears all of the credit risk (net of recovery from withholdings
from certain John Deere dealers and Farm Plan merchants) associated with its
holding of Receivables and Leases, and performs all servicing and collection
functions. The Company compensates John Deere for originating retail notes and
leases on John Deere products or through John Deere dealers. John Deere is also
reimbursed for staff and other administrative services at estimated cost, and
for credit lines provided to the Company based on utilization of those lines.
The terms of retail notes and the basis on which the Company acquires
retail notes from John Deere are governed by agreements with John Deere,
terminable by either John Deere or the Company on 30 days notice. As provided
in these agreements, the Company sets its terms and conditions for purchasing
the retail notes from John Deere. Under these agreements, John Deere is not
obligated to sell retail notes to the Company, and the Company is obligated to
purchase retail notes from John Deere only if the notes comply with the terms
and conditions set by the Company.
The basis on which John Deere acquires retail notes from the dealers are
governed by agreements with the independent John Deere dealers, terminable at
will by either the dealers or John Deere. In acquiring the retail notes from
dealers, the terms and conditions, as set forth in agreements with the dealers,
conform with the terms and conditions adopted by the Company in determining the
acceptability of retail notes to be purchased from John Deere. The dealers are
not obligated to send retail notes to John Deere, and John Deere is not
obligated to accept retail notes from the dealers. In practice, retail notes
are acquired from dealers only if the terms of the retail notes and the
creditworthiness of the customers are acceptable to the Company for purchase of
the retail 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.
In October 1996, Deere & Company formalized in a written agreement its
long-standing previously expressed intention 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 1996
and 1995, the Company's ratios were 1.75 to 1 and 1.73 to 1, respectively.
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 the retail sales or lease
(including the sale to John Deere dealers for rental to users) of John Deere
products, used equipment accepted in trade for them, and equipment of unrelated
manufacturers, and also include revolving charge accounts receivable and
wholesale notes receivable. The great majority derive from retail sales and
leases of agricultural equipment, industrial equipment and commercial and
consumer equipment sold by John Deere dealers. Receivables and Leases relating
to manufactured equipment from John Deere's Commercial and Consumer segment may
be originated by the Company's Commercial Division (industrial product line) or
the Consumer Division (lawn and grounds care product line), depending on how the
equipment is used.
The Company offers secured financing of recreational products and yachts.
The Company also offers Farm Plan revolving charge accounts which are used
primarily by agri-businesses to finance purchases, which would otherwise be
carried by the merchant as accounts receivable, as well as credit cards which
are used primarily by retail customers to finance purchases of certain
commercial and residential lawn and grounds care equipment.
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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.
Since 1986, the Company also has been providing retail sales financing
through dealers of certain unrelated manufacturers of recreational vehicles and
recreational marine products. 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 500
recreational vehicle dealers and from approximately 350 marine product dealers.
Receivables and Leases are eligible for acceptance if they conform to
prescribed finance and lease plan terms. Guidelines relating to down-payments
and contract terms on retail notes and leases are described in note 2 to the
consolidated financial statements.
The John Deere Credit Revolving Plan is used primarily by retail customers
of John Deere dealers to finance purchases of lawn and grounds care equipment.
John Deere Credit Revolving Plan is also used by some of the Company's
recreational product customers to finance the purchase of such products. Through
its Farm Plan product, the Company finances revolving charge accounts offered by
approximately 4,900 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 revolving charge accounts are also used by customers patronizing other
agri-businesses, including farm supply, feed and seed, parts supply, bulk fuel,
building supply merchants and veterinarians. Additionally, Preferred Resources,
marketed primarily to executives and professionals, offers customers convenience
and security by providing a substantial, readily-available source of funding for
a variety of personal expenses. See notes 1 and 2 to the consolidated financial
statements under "Revolving Charge Accounts Receivable."
The Company finances wholesale inventories owned by approximately 900
dealers of recreational vehicles, manufactured housing units, yachts, John Deere
engines, John Deere industrial equipment and the Sabre by John Deere line of
equipment. A large portion of the wholesale financing provided by the Company
is with dealers from whom it also purchases industrial, recreational product and
yacht retail notes. See notes 1 and 2 to the consolidated financial statements
under "Wholesale Notes Receivable."
The Company requires theft and physical damage insurance be carried on all
goods leased or securing retail notes. In most cases, the customer may, at his
expense, have the Company or the seller of the goods purchase this insurance or
obtain it from other sources. Theft and physical damage insurance is also
required on goods securing wholesale notes and can be purchased through the
Company or from other sources. Insurance is not required for revolving charge
accounts.
In some circumstances, Receivables and Leases may be accepted and acquired
even though they do not conform in all respects to the established guidelines.
Acceptability and servicing of retail notes, wholesale notes and leases,
according to the finance plans and retail terms, including any waiver of
conformity with such plans and terms, is determined by Company personnel.
Officers of the Company are responsible for reviewing the performance of the
Company in accepting and collecting retail notes, wholesale notes and leases.
The Company normally makes all routine collections, compromises, settlements and
repossessions on Receivables and Leases.
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FINANCE RATES ON RETAIL NOTES
As of October 31, 1996, approximately 43 percent of the retail notes held
by the Company bore a variable finance rate. With the exception of agricultural
retail notes, retail notes are primarily fixed rate notes.
A portion of the finance income earned by the Company arises from financing
the retail sales of John Deere equipment sold in advance of the season of use or
in other sales promotions by John Deere on which finance charges are waived by
John Deere for a period from the date of sale to a specified subsequent date.
Some low-rate financing programs are also offered by John Deere. The Company
generally receives compensation from John Deere equal to a competitive interest
rate for periods during which finance charges have been waived or reduced. The
portion of the Company's finance income earned on retail notes that was received
from John Deere containing waiver of finance charges or reduced rates was 20
percent in 1996 and 19 percent in 1995.
RECEIVABLES AND LEASES ACQUIRED AND HELD
Receivable and Lease acquisition volumes during the fiscal years ended and
balances held were as follows (in millions of dollars):
FISCAL YEAR VOLUMES* BALANCE AT OCTOBER 31
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1996 1995 1996 1995
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Retail notes:
Agricultural equipment $2,160.0 $2,083.5 $2,423.6 $2,286.2
Industrial equipment 462.8 391.2 628.9 511.0
Lawn and grounds care equipment 123.9 100.1 182.6 162.3
Recreational products 233.9 288.7 840.8 865.4
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Total 2,980.6 2,863.5 4,075.9 3,824.9
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Revolving charge accounts 1,227.0 1,050.1 564.8 510.2
Financing leases 103.9 88.5 181.5 149.3
Wholesale notes 982.3 607.0 524.5 298.1
Equipment on operating leases 222.8 58.3 276.8 139.5
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Total $5,516.6 $4,667.4 $5,623.5 $4,922.0
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* Volumes as used in this annual report on Form 10-K relate to the
acquisition by the Company of new Receivables and Leases.
John Deere equipment note volumes increased by approximately $153 million
in 1996 compared with the same period last year, primarily due to an increase in
the volumes of agricultural equipment and industrial equipment retail notes.
Volumes of recreational product retail notes decreased 19 percent in the current
year due to the aggressive pricing environment that currently exists in these
credit markets. Additionally, the Company has shifted emphasis relating to
marine products towards the yacht market. Revolving charge accounts, leases and
wholesale note volumes increased significantly in 1996, due to the higher demand
for these products.
From time to time, the Company sells retail notes to other financial
institutions and limited-purpose business trusts. The Company received proceeds
from sales of John Deere retail notes of $814 million in 1996 and $726 million
in 1995. The unpaid balance of all retail notes previously sold was $1.177
billion at October 31, 1996 and $1.162 billion at October 31, 1995. For
additional information on the terms, conditions, recourse and accounting for
such sales, see note 2 to the consolidated financial statements.
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AVERAGE ORIGINAL TERM AND AVERAGE LIFE OF RETAIL NOTES AND LEASES
The following table shows the estimated average original term in months
(based on dollar amounts) for retail notes and leases acquired by the Company
during 1996 and 1995:
AVERAGE ORIGINAL TERM
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1996 1995
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Retail notes 67 71
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New equipment:
Agricultural equipment 56 56
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Industrial equipment 45 44
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Lawn and grounds care equipment 45 45
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Recreational products (excluding yachts) 159 155
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Used equipment:
Agricultural equipment 55 54
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Industrial equipment 41 38
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Lawn and grounds care equipment 49 46
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Recreational products (excluding yachts) 148 140
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Yachts (new and used) 222 224
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Leases 43 48
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The average original term for recreational products is longer than for John
Deere equipment notes because of customer preferences and industry convention.
However, because of prepayments (often from trade-ins), the average actual life
of retail notes is considerably shorter than the average original term. The
following table shows the estimated average life in months (based on dollar
amounts) for retail notes and leases liquidated in 1996 and 1995:
AVERAGE LIFE
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1996 1995
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Retail Notes (1) 31 29
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Agricultural Equipment 29 26
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Industrial Equipment 22 25
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Lawn and Grounds Care Equipment 31 33
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Recreational Products (2) 48 49
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Leases 36 40
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(1) Includes new and used equipment.
(2) Estimate based on industry averages due to limited experience with the
recreational product portfolio.
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DEPOSITS WITHHELD ON RECEIVABLES AND LEASES
Generally, the Company has limited recourse against certain John Deere
Agricultural and Commercial and Consumer dealers on retail notes and leases and
against certain Farm Plan merchants on revolving charge account balances
acquired from or through those dealers and merchants. For these John Deere
dealers and Farm Plan merchants, separate withholding accounts are maintained by
the Company. The total amount of deposits withheld from John Deere dealers and
Farm Plan merchants totaled $135 million and $127 million at October 31, 1996
and 1995, respectively. Of this amount, deposits withheld from Farm Plan
merchants totaled $1.1 million at October 31, 1996 and $1.0 million at October
31, 1995. Credit losses are charged against deposits withheld from the
originating dealer or merchant. To the extent that a loss cannot be absorbed by
the deposit withheld from the dealer or merchant from which the retail note,
lease or Farm Plan account was acquired, it is charged against the Company's
allowance for credit losses. See note 1 to the consolidated financial
statements.
The Company does not withhold deposits on recreational product retail
notes, John Deere Credit Revolving Plan receivables, industrial retail notes or
wholesale notes acquired. However, an allowance for credit losses has been
established by the Company in an amount considered to be appropriate in relation
to the total Receivables and Leases outstanding. In addition, for wholesale
notes relating to recreational vehicles, manufactured housing units and yachts,
in most cases there are agreements with the manufacturers for the repurchase or
remarketing of new inventories held by dealers. For additional information on
credit losses and deposits withheld on Receivables and Leases, see note 3 to the
consolidated financial statements.
DELINQUENCIES AND LOSSES
RETAIL NOTES. The following table shows unpaid installments 60 days or
more past due on retail notes held by the Company and the balance (principal
plus accrued interest) of retail notes outstanding with any such delinquencies
(in millions of dollars), on the basis of retail note terms in effect at the
indicated dates, and as a percentage of the ending retail notes receivable
financed by the Company:
INSTALLMENTS 60 DAYS BALANCES ON WHICH ANY INSTALLMENT IS
OR MORE PAST DUE 60 DAYS OR MORE PAST DUE
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PERCENTAGE OF PERCENTAGE OF
ENDING RETAIL ENDING RETAIL
OCTOBER 31 AMOUNT NOTES RECEIVABLE AMOUNT NOTES RECEIVABLE
----------- ---------------------------- ------------------------------------
1996 $ 7.9 0.19% $ 47.2 1.16%
1995 6.1 0.16 33.0 0.86
1994 5.5 0.17 23.9 0.73
The following table shows write-offs on retail notes (in millions of
dollars) and as a percentage of the average retail notes receivable:
PERCENTAGE OF AVERAGE
YEAR ENDED OCTOBER 31 AMOUNT RETAIL NOTES RECEIVABLE
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1996 $ 17.6 0.45%
1995 14.6 0.43
1994 15.0 0.47
Retail note write-offs increased 21 percent in 1996 compared to 1995.
Write-offs on equipment retail notes totaled $8.0 million, an increase of $4.9
million, compared with write-offs of $3.1 million in 1995, primarily due to
higher industrial and agricultural equipment write-offs. Write-offs of
recreational product retail notes totaled $9.6 million in 1996 compared with
$11.5 million in 1995, a 17 percent decrease.
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REVOLVING CHARGE ACCOUNTS. The following table shows revolving charge
account payments 60 days or more past due (in millions of dollars) and as a
percentage of ending revolving charge accounts receivable:
PERCENTAGE OF ENDING REVOLVING
OCTOBER 31 AMOUNT CHARGE ACCOUNTS RECEIVABLE
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1996 $ 8.9 1.58%
1995 7.1 1.40
1994 5.6 1.28
The following table shows write-offs on revolving charge accounts (in
millions of dollars) and as a percentage of the average revolving charge
accounts receivable:
PERCENTAGE OF AVERAGE REVOLVING
YEAR ENDED OCTOBER 31 AMOUNT CHARGE ACCOUNTS RECEIVABLE
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1996 $ 9.6 1.93%
1995 7.6 1.75
1994 4.8 1.38
Losses increased in 1996 for both Farm Plan and the John Deere Credit
Revolving Plan. The $2.0 million increase was due primarily to an 11 percent
growth in the overall revolving charge account portfolio and the relatively low
write-offs in 1995 and 1994.
LEASES. The following table shows the balance of financing and operating
lease payments 60 days or more past due (in millions of dollars) and as a
percentage of ending investment in financing and operating leases.
PERCENTAGE OF ENDING INVESTMENT IN
OCTOBER 31 AMOUNT FINANCING AND OPERATING LEASES
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1996 $ 1.7 0.38%
1995 0.8 0.28
1994 0.6 0.24
The following table shows write-offs (in millions of dollars) and as a
percentage of the average investment in financing and operating leases, on
terminated financing and operating leases.
PERCENTAGE OF AVERAGE INVESTMENT IN
YEAR ENDED OCTOBER 31 AMOUNT FINANCING AND OPERATING LEASES
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1996 $ 0.7 0.20%
1995 1.1 0.40
1994 0.5 0.25
The decrease in 1996 losses resulted primarily from lower agricultural
equipment lease write-offs.
WHOLESALE NOTES. The balance of wholesale notes receivable 60 days or more
past due totaled $.9 million at October 31, 1996 and $.1 million at October 31,
1995. These past due amounts represented 0.17 percent and 0.02 percent,
respectively, of the wholesale notes receivable held on those dates. The total
balance of wholesale notes receivable 60 days or more past due was negligible at
October 31, 1994.
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The following table shows losses on wholesale notes receivable (in millions
of dollars) and as a percentage of the average wholesale notes receivable:
PERCENTAGE OF AVERAGE WHOLESALE
YEAR ENDED OCTOBER 31 AMOUNT NOTES RECEIVABLE
1996 $ 1.0 0.25%
1995 0.4 0.19
1994 0.5 0.41
The $.6 million increase in wholesale write-offs, from $.4 million in 1995
to $1.0 million in 1996, resulted primarily from a single recreational vehicle
account write-off at year-end and the overall growth in the wholesale financing
of manufactured housing units during the year.
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 (or time-price differentials)
charged. The proportion of John Deere equipment retail sales and leases
financed by the Company is influenced by conditions prevailing in the
agricultural equipment, industrial equipment and lawn and grounds care equipment
industries, in the financial markets, and in business generally. A significant
portion of such retail sales and leases during 1996 was financed by the Company.
The Company emphasizes convenient service to customers and offers terms
desired in its specialized markets such as seasonal schedules of repayment and
rentals. The Company's installment sales and loan finance rates or time-price
differentials and lease rental rates are generally believed to be in the range
of those of sales finance and leasing companies, although not as low as those of
some banks and other lenders and lessors.
REGULATION
In a number of states, the maximum finance rate or time-price differential
on receivables is limited by state law. The present state limitations have not,
thus far, significantly limited the Company's variable-rate finance charges nor
the fixed-rate finance charges established by the Company. However, if interest
rate levels should increase significantly, maximum state rates or time-price
differentials could affect the Company by preventing the variable rates on
outstanding variable-rate retail notes from increasing above the maximum state
rate or time-price differential, and by limiting the fixed rates or time-price
differentials on new notes. In some states, the Company may be able to qualify
new retail notes for a higher maximum rate limit by using retail installment
sales contracts (rather than loan contracts) or by using fixed-rate rather than
variable-rate contracts.
In addition to rate regulation, various state and federal laws and
regulations apply to some Receivables and Leases, principally retail notes for
goods sold for personal, family or household use and Farm Plan and John Deere
Credit Revolving Plan accounts receivable for such goods. To date, such laws
and regulations have not had a significant adverse effect on the Company's
financial position or results of operations.
ITEM 2. PROPERTIES.
The Company's properties principally consist of office equipment and leased
office space in Reno, Nevada; West Des Moines, Iowa; Moline, Illinois; Madison,
Wisconsin; Alameda, California; Newport Beach, California; Shelton, Connecticut;
St. Petersburg, Florida; Ft. Lauderdale, Florida; Manasquan, New Jersey; and
Monterrey, Nuevo Leon, Mexico.
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<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
The Company is subject to various unresolved legal actions which arise in
the normal course of its business, the most prevalent of which relate to state
and federal laws and regulations concerning retail credit. Although it is not
possible to predict with certainty the outcome of these unresolved legal actions
or the range of possible loss, the Company believes these unresolved legal
actions will not have a material effect on its financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted pursuant to instruction J(2).
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
All of the Capital Corporation's common stock is owned by John Deere Credit
Company, a finance holding company that is wholly-owned by Deere & Company. The
Capital Corporation paid cash dividends to John Deere Credit Company of $70
million in 1996 and $55 million in 1995. In each case, John Deere Credit
Company paid a comparable dividend to Deere & Company. During the first
quarter of 1997, the Capital Corporation declared and paid a dividend of $20
million to John Deere Credit Company which, in turn, paid a dividend of $20
million to Deere & Company.
ITEM 6. SELECTED FINANCIAL DATA.
Omitted pursuant to instruction J(2).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
1996 COMPARED WITH 1995
The Company's consolidated net income for the fiscal year ended
October 31, 1996 was $134 million compared with $114 million in 1995. Total
revenues of $657 million in 1996 were up 19 percent from $551 million in 1995.
Revenues were affected by the higher average portfolio owned and increases from
the securitization and sale of retail notes. The ratio of earnings to fixed
charges was 1.75 to 1 for 1996 compared with 1.73 to 1 in 1995.
Finance income earned on retail notes was $372 million this year compared
with $333 million in 1995, an increase of 12 percent. The average balance of
the retail note portfolio financed during 1996 was 15 percent higher than the
comparable 1995 average balance.
Revenues earned on revolving charge accounts amounted to $95 million in
1996, a 13 percent increase over revenues of $84 million earned during 1995.
This increase was primarily due to a 20 percent increase in the average balance
of Farm Plan receivables financed and a four percent increase in the average
balance of John Deere Credit Revolving Plan receivables financed in 1996
compared with 1995.
Finance income earned on wholesale notes was $38 million in 1996, an
increase of $15 million, compared with $23 million in 1995. Increases in
finance income earned on wholesale notes were attributable to the continued
growth in the manufactured housing, industrial and yacht markets.
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The average net investment in financing and operating leases increased by
36 percent in 1996 compared with 1995. Correspondingly, total lease revenues
increased to $68 million in 1996 compared with $48 million in 1995.
The net gain on retail notes sold totaled $14 million during 1996 compared
with $11 million for 1995. Securitization and servicing fee income totaled $46
million in 1996 compared with $36 million during 1995. Securitization and
servicing fee income relates to retail notes sold to other financial
institutions or limited-purpose business trusts and primarily includes the
amortization of present value receivable amounts established at the time of
sale, adjustments related to those sales and reimbursed administrative expenses
received. Additional sales of retail notes are expected to be made in the
future.
Gains of $6 million on the sale of leased equipment contributed to an
increase in other income, from $4 million in 1995 to $12 million in 1996.
Higher average borrowings this year resulted in higher interest expense,
which totaled $274 million in 1996 compared with $238 million in 1995. Average
borrowings were $4.498 billion in 1996 compared with $3.726 billion in 1995, an
increase of 21 percent. The weighted average annual interest rate incurred on
all interest-bearing borrowings during the year decreased to 5.9 percent from
6.3 percent in 1995.
Administrative and operating expenses increased 22 percent from $78 million
in 1995 to $95 million in 1996. These increases were attributable to the costs
associated with administering a larger Receivable and Lease portfolio as well as
higher employment costs relating to the increasing level of new acquisition
volumes.
The provision for credit losses was $38 million in 1996 and $32 million in
1995. Total write-offs of Receivables and Leases financed were $29 million
during 1996 compared with $24 million in 1995. The increase in write-offs from
1995 primarily related to a $4.9 million increase in equipment retail note
write-offs and a $2.0 million increase in revolving charge account write-offs,
offset by a $1.9 million decrease in recreational product retail notes
write-offs.
Acquisition volumes of Receivables and Leases by the Company during 1996
totaled $5.517 billion, an increase of 18 percent compared with volumes of
$4.667 billion during 1995. The higher volumes this year resulted mainly from an
increased volume of John Deere equipment retail notes, leases, revolving charge
accounts and wholesale receivables. Receivables and Leases held by the Company
at October 31, 1996 totaled $5.624 billion compared with $4.922 billion one year
ago. Receivables and Leases administered, which include retail notes and leases
previously sold but still administered, amounted to $6.812 billion at the end of
1996 compared with $6.105 billion at October 31, 1995.
During 1996, retail notes (principal value financed) acquired by the
Company increased four percent compared with 1995. Retail note volumes totaled
$2.981 billion during 1996 compared with 1995 volumes of $2.864 billion. The
increase was primarily due to increased retail sales of John Deere equipment.
Volumes of recreational product retail notes accounted for eight percent of
total retail note volumes in 1996 and ten percent in 1995.
Retail note volumes from John Deere increased by $153 million in 1996, a
six percent increase over last year. Volumes of agricultural equipment retail
notes increased four percent over last year, industrial equipment retail notes
increased 18 percent and lawn and grounds care equipment retail note activity
increased 24 percent over volumes in 1995. Retail note volumes in 1996 from John
Deere continued to represent a significant proportion of the total United States
retail sales of John Deere equipment.
Volumes of recreational product retail notes, representing primarily
recreational vehicle and recreational marine product notes acquired from
independent dealers of several unrelated manufacturers, were $234 million in
1996 compared with $289 million in 1995. This decrease resulted primarily from
more competitive financing
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programs in both the recreational vehicle and recreational marine product
markets. The Company has shifted its emphasis relating to marine products
towards the yacht markets.
At October 31, 1996, retail notes receivable held by the Company were
$4.076 billion compared to $3.825 billion last year-end. Included in these
amounts were recreational product retail notes of $841 million in 1996 and $865
million in 1995. The balance of equipment retail notes held increased from
$2.960 billion at October 31, 1995 to $3.235 billion at the end of 1996. This
increase resulted primarily from equipment retail note acquisition volumes
exceeding collections during 1996. However, the Company also securitized and
sold retail notes, receiving proceeds of $814 million during 1996 compared to
$726 million during 1995. Additional information is presented in note 1 to the
consolidated financial statements. Retail notes administered by the Company,
which includes retail notes previously sold, amounted to $5.253 billion at
October 31, 1996, compared with $4.987 billion at October 31, 1995. The balance
of retail notes previously sold was $1.177 billion at October 31, 1996 compared
with $1.162 billion at October 31, 1995. Additional sales of retail notes are
expected to be made in the future. The Company's maximum exposure under all
retail note recourse provisions at October 31, 1996 and 1995 was $186 million
and $180 million, respectively.
Retail notes bearing variable finance rates totaled 43 percent of the total
retail note portfolio at October 31, 1996 compared with 52 percent one year
earlier. The Company actively manages interest rate risk through the issuance
of fixed-rate and variable-rate borrowings and the use of financial instruments
such as interest rate swaps and interest rate caps. See "Capital Resources and
Liquidity" and note 12 to the consolidated financial statements.
Revolving charge accounts receivable totaled $565 million at October 31,
1996, an increase of 11 percent compared with $510 million at October 31, 1995.
The balance at October 31, 1996 included $226 million of John Deere Credit
Revolving Plan receivables, $321 million of Farm Plan receivables and $18
million of Preferred Resource receivables, compared with $230 million, $278
million and $2 million, respectively, at October 31, 1995. Revolving charge
account volumes increased 11 percent in 1996 compared with 1995, reflecting the
increase in Farm Plan receivables.
The portfolio of financing leases totaled $182 million at October 31, 1996
and $149 million at October 31, 1995. The investment in operating leases was
$277 million and $140 million at the end of 1996 and 1995, respectively. The
Company also administers municipal leases owned by Deere & Company, which
totaled $11 million at October 31, 1996 compared with $21 million at
October 31, 1995. The Company has not sold any municipal leases to John Deere
since October 1994.
Wholesale notes receivable on recreational vehicle, manufactured housing,
yachts, John Deere engine, John Deere industrial equipment and the Sabre by John
Deere line of equipment owned by dealers totaled $524 million at October 31,
1996 compared with $298 million at October 31, 1995. Wholesale note volumes
increased 62 percent during the year and were favorably impacted by the
Company's growth in both the manufactured housing and yacht markets.
Total Receivable and Lease amounts 60 days or more past due were $19
million at October 31, 1996 compared with $14 million at October 31, 1995.
These past-due amounts represented 0.35 percent and 0.29 percent of the total
Receivables and Leases held at those respective dates. While past due amounts,
as a percentage of total Receivables and Leases held, increased in 1996, these
amounts compare favorably with historical levels.
The balance of retail notes held (principal plus accrued interest) with any
installments 60 days or more past due was $47 million at October 31, 1996
compared with $33 million one year earlier. The amount of retail note
installments 60 days or more past due was $8 million at October 31, 1996 and $6
million at October 31, 1995. These past-due installments represented 0.19
percent of retail notes receivable at October 31, 1996 and 0.16 percent at
October 31, 1995.
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The balance of revolving charge accounts receivable payments 60 days or
more past due was $9 million at October 31, 1996 compared with $7 million at
October 31, 1995. These past-due amounts represented 1.58 percent and 1.40
percent of revolving charge accounts receivable at each of those respective
dates.
The balance of financing and operating lease payments 60 days or more past
due was $1.7 million at October 31, 1996 compared with $.8 million at October
31, 1995. These past-due installments represented 0.38 percent and 0.28 percent
of the investment in financing and operating leases at each of those respective
dates.
Deposits withheld from dealers and merchants, representing mainly the
aggregate dealer retail note and lease withholding accounts from individual John
Deere dealers to which losses from retail notes and leases originating from the
respective dealers can be charged, amounted to $135 million at October 31, 1996
compared to $127 million at October 31, 1995. The Company's allowance for
credit losses on all Receivables and Leases financed at October 31, 1996 totaled
$87 million and represented 1.6 percent of the total Receivables and Leases
financed compared with $84 million and 1.7 percent, respectively, one year
earlier. The Company's allowance for credit losses, as a percentage of total
Receivables and Leases, declined in 1996 due to an ongoing evaluation of loss
experience and related estimates to insure that the allowance for credit losses
is maintained at an adequate level.
1995 COMPARED WITH 1994
The Company's consolidated net income for the fiscal year ended
October 31, 1995 was $114 million compared with $105 million in 1994. The
higher income resulted from higher earnings on a larger portfolio, partially
offset by lower financing margins. The ratio of earnings to fixed charges was
1.73 to 1 for 1995 compared with 1.96 to 1 in 1994.
Total revenues of $551 million in 1995 were up 19 percent from $463 million
in 1994. Revenues were affected by the higher average portfolio owned and the
higher overall yield on the portfolio held. Higher average borrowing rates on
increased borrowings in 1995 resulted in higher interest expense, which totaled
$238 million in 1995 compared with $167 million in 1994. Average borrowings
were $3.726 billion in 1995 compared with $3.235 billion in 1994. The weighted
average annual interest rate incurred on all interest-bearing borrowings during
1995 increased to 6.3 percent from 4.9 percent in 1994.
Finance income earned on retail notes was $333 million in 1995 compared
with $293 million in 1994, an increase of 14 percent. The average balance of
the retail note portfolio financed during 1995 was seven percent higher than the
comparable 1994 average balance.
Revenues earned on revolving charge accounts amounted to $84 million in
1995, a 26 percent increase over revenues of $67 million earned during 1994.
This increase was primarily due to a 23 percent increase in the average balance
of Farm Plan receivables financed and a 28 percent increase in the average
balance of John Deere Credit Revolving Plan receivables financed in 1995
compared with 1994.
The average net investment in financing and operating leases increased by
20 percent in 1995 compared with 1994. Correspondingly, total lease revenues
increased to $48 million in 1995 compared with $44 million in 1994.
The net gain on retail notes sold totaled $11 million during 1995 compared
with $10 million for 1994. The Company received proceeds from the sale of retail
notes in the amount of $726 million during 1995 and $560 million in 1994.
Securitization and servicing fee income totaled $36 million in 1995 compared
with $29 million during 1994. Securitization and servicing fee income relates to
retail notes sold to limited-purpose business trusts and primarily includes the
amortization of present value receivable amounts from the trusts established at
the time of sale, adjustments related to those sales and reimbursed
administrative expenses received from the trusts.
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<PAGE>
Administrative and operating expenses decreased three percent from $80
million in 1994 to $78 million in 1995.
The provision for credit losses was $32 million in 1995 and $28 million in
1994. Total write-offs of Receivables and Leases financed were $24 million
during 1995 compared with $21 million in 1994. The increase in write-offs from
1994 primarily related to an increase in the amount of revolving charge and
industrial equipment receivable write-offs. The increase in the provision was
partially offset by a favorable adjustment of $7 million in 1995 related to
current and expected losses on both revolving charge and industrial equipment
retail notes.
Total acquisition volumes of Receivables and Leases by the Company during
1995 totaled $4.667 billion, an increase of 18 percent, compared with volumes of
$3.942 billion during 1994. The higher volumes in 1995 resulted mainly from an
increased volume of John Deere agricultural and John Deere lawn and grounds care
equipment retail notes, recreational vehicles retail notes, revolving charge
accounts and wholesale receivables. Receivables and Leases held by the Company
at October 31, 1995 totaled $4.922 billion compared with $4.112 billion in 1994.
Receivables and Leases administered, which include retail notes and leases
previously sold but still administered, amounted to $6.105 billion at the end of
1995 compared with $5.326 billion at October 31, 1994.
During 1995, retail notes (principal value financed) acquired by the
Company increased 15 percent compared with 1994. Retail note volumes totaled
$2.864 billion during 1995 compared with 1994 volumes of $2.488 billion. The
increase was primarily due to increased retail sales of John Deere equipment and
an improvement in the Company's market share for the financing of John Deere
agricultural equipment. Volumes of recreational product retail notes accounted
for ten percent of total retail note volumes in 1995 and 11 percent in 1994.
Retail note volumes from John Deere increased by $349 million in 1995, a 16
percent increase over 1994. Volumes of agricultural equipment retail notes
increased 20 percent over 1994. Lawn and grounds care equipment retail note
activity increased 12 percent in 1995 over 1994. Volumes of industrial
equipment notes decreased by $4 million, or one percent, compared to 1994,
however 1995 results do not include industrial dealer purchase notes, which were
classified as part of the wholesale receivable balance. Retail note volumes in
1995 from John Deere continued to represent a significant proportion of the
total United States retail sales of John Deere equipment.
Volumes of recreational product retail notes, representing primarily
recreational vehicle and recreational marine product notes acquired from
independent dealers of several unrelated manufacturers, were $289 million in
1995 compared with $262 million in 1994. This increase resulted primarily from
more competitive financing programs in both the recreational vehicle and
recreational marine product markets.
At October 31, 1995, retail notes held by the Company were $3.825 billion
compared to $3.289 billion in 1994. Included in these amounts were recreational
product retail notes of $865 million in 1995 and $800 million in 1994. The
balance of equipment retail notes held increased from $2.489 billion at October
31, 1994 to $2.960 billion at the end of 1995. This increase resulted from
equipment retail note volumes exceeding collections during 1995. However, the
Company also securitized and sold retail notes, receiving proceeds of $726
million during 1995 compared to $560 million during 1994. Additional information
is presented in note 1 to the consolidated financial statements. The balance of
retail notes administered by the Company, which includes retail notes previously
sold, amounted to $4.987 billion at October 31, 1995, compared with $4.464
billion at October 31, 1994. The balance of retail notes previously sold was
$1.162 billion at October 31, 1995 compared with $1.175 billion at
October 31, 1994. The Company's maximum exposure under all retail note recourse
provisions at October 31, 1995 and 1994 was $180 million and $140 million,
respectively.
Retail notes bearing variable finance rates totaled 52 percent of the total
retail note portfolio at October 31, 1995 compared with 56 percent at October
31, 1994. The Company actively manages interest rate risk through
15
<PAGE>
the issuance of fixed-rate and variable-rate borrowings and the use of financial
instruments such as interest rate swaps and interest rate caps. See "Capital
Resources and Liquidity" and note 12 to the consolidated financial statements.
Revolving charge accounts receivable totaled $510 million at October 31,
1995, an increase of 17 percent compared with $437 million at October 31, 1994.
The balance at October 31, 1995 included $230 million of John Deere Credit
Revolving Plan receivables and $278 million of Farm Plan receivables, compared
with $210 million, $227 million, respectively, at October 31, 1994. Revolving
charge account volumes increased 11 percent in 1995 compared with 1994,
reflecting the increased volume of Farm Plan receivables.
The portfolio of financing leases totaled $149 million at October 31, 1995
and $118 million at October 31, 1994. The investment in operating leases was
$140 million and $125 million at the end of 1995 and 1994, respectively. The
Company also administered municipal leases owned by Deere & Company, which
totaled $21 million at October 31, 1995 compared with $39 million at
October 31, 1994. The Company sold $20 million of municipal leases to Deere &
Company in 1994.
Wholesale notes receivable on recreational vehicle, manufactured housing,
yachts, John Deere engine and John Deere industrial equipment owned by dealers
totaled $298 million at October 31, 1995 compared with $142 million at October
31, 1994. Wholesale note volumes increased 67 percent during 1995 and were
favorably impacted by the Company's growth in both the manufactured housing and
yacht markets.
Total Receivable and Lease amounts 60 days or more past due were $14
million at October 31, 1995 compared with $12 million at October 31, 1994.
These past-due amounts represent 0.29 percent and 0.28 percent of the total
Receivables and Leases held at those respective dates.
The balance (principal plus accrued interest) of retail notes with any
installments 60 days or more past due was $33 million at October 31, 1995
compared with $24 million at October 31, 1994. The amount of retail note
installments 60 days or more past due was $6 million at October 31, 1995 and $6
million at October 31, 1994. These past-due installments represented 0.16
percent of retail notes receivable at October 31, 1995 and 0.17 percent at
October 31, 1994.
The balance of revolving charge accounts receivable payments 60 days or
more past due was $7 million at October 31, 1995 compared with $6 million at
October 31, 1994. These past-due amounts represented 1.40 percent and 1.28
percent of revolving charge accounts receivable at each of those respective
dates.
The balance of financing and operating lease payments 60 days or more past
due was $.8 million at October 31, 1995 compared with $.6 million at October 31,
1994. These past-due installments represented 0.28 percent and 0.24 percent of
the investment in financing and operating leases at each of those respective
dates.
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 lease originating from the
respective dealers can be charged, amounted to $127 million at October 31, 1995
compared to $111 million at October 31, 1994. At October 31, 1995, the
Company's allowance for credit losses on all Receivables and Leases financed,
totaled $84 million and represented 1.7 percent of the total Receivables and
Leases financed compared with $80 million and 1.9 percent, respectively, at
October 31, 1994.
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
16
<PAGE>
the outlook for and the financial condition of Deere & Company, and the nature
and availability of support facilities, such as its lines of credit. For
information regarding Deere & Company and its business, see Exhibit 99.
The Company's ability to meet its debt obligations is supported in a number
of ways. All commercial paper issued is backed by bank credit lines. The assets
of the Company are self-liquidating in nature. A strong equity position is
available to absorb unusual losses on these assets. Liquidity is also provided
by the Company's ability to sell these assets. Asset-liability risk is actively
managed to minimize exposure to interest rate fluctuations.
The Company's business is somewhat seasonal, with overall acquisition
volumes of Receivables and Leases traditionally higher in the second half of the
fiscal year than in the first half, and overall collections of Receivables and
Leases traditionally somewhat higher in the first six months than in the last
six months of the fiscal year.
The aggregate net cash provided by operating and financing activities was
primarily used to increase credit receivables. Net cash provided by operating
activities was $222 million in 1996. Financing activities provided $564 million
during the same period, resulting from a $634 million increase in total
borrowings which was partially offset by dividend payments totaling $70 million
to John Deere Credit Company. Net cash used for investing activities totaled
$780 million in 1996, primarily due to Receivable and Lease acquisitions
exceeding collections by $1.628 billion, which was partially offset by the $814
million of proceeds from the sale of receivables. In addition, in October 1996,
the Company funded John Deere Credit Limited, its joint venture company in the
United Kingdom. Cash and cash equivalents increased $7 million during 1996.
See "Statement of Consolidated Cash Flows."
Over the past three years, operating activities have provided $544 million
in net cash, the sale of receivables $2.121 billion and total net borrowings
$2.120 billion. These amounts were used mainly to fund Receivable and Lease
acquisitions, which exceeded collections by $4.542 billion, and to pay $335
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 these exposures that arise in the normal course of business, and not for
the purpose of creating speculative positions or trading. In common with other
large credit companies, the Company actively manages the relationship of the
types and amounts of its funding sources to its Receivable and Lease portfolios
in an effort to diminish risk due to interest rate fluctuations, while
responding to favorable financing opportunities. Accordingly, from time to
time, the Company enters into interest rate swap and interest rate cap
agreements to hedge its interest rate exposure in amounts corresponding to a
portion of its borrowings. The Company also has a foreign exchange swap related
to a long-term borrowing. The credit and market risks under these interest rate
and foreign currency agreements are not considered to be significant. See note
12 to the consolidated financial statements for further details.
Total interest-bearing indebtedness amounted to $4.898 billion at October
31, 1996, compared with $4.264 billion at October 31, 1995, generally
corresponding with the level of Receivables and Leases financed and the level of
cash and cash equivalents. Total short-term indebtedness amounted to $3.098
billion at October 31, 1996 compared with $2.791 billion at October 31, 1995.
Total long-term indebtedness amounted to $1.800 billion at October 31, 1996 and
$1.473 billion at October 31, 1995. The ratio of total interest-bearing debt to
stockholder's equity was 6.5 to 1 and 6.2 to 1 at October 31, 1996 and 1995,
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 1996, the Company retired $200 million of 4-5/8% notes due in 1996.
In 1996, the Company also issued $1.190 billion and retired $144 million of
medium-term notes.
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The Capital Corporation paid cash dividends to John Deere Credit Company of
$70 million in 1996 and $55 million in 1995. In each case, John Deere Credit
Company paid a comparable dividend to Deere & Company. During the first quarter
of 1997, the Capital Corporation declared and paid a dividend of $20 million to
John Deere Credit Company which, in turn, paid a dividend of $20 million to
Deere & Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See accompanying table of contents of financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Omitted pursuant to instruction J(2).
ITEM 11. EXECUTIVE COMPENSATION.
Omitted pursuant to instruction J(2).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Omitted pursuant to instruction J(2).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Omitted pursuant to instruction J(2).
18
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements
(2) Financial Statement Schedule
See the table of contents to financial statements and schedule
immediately preceding the financial statements and schedule to consolidated
financial statements.
(3) Exhibits
See the index to exhibits immediately preceding the exhibits filed
with this report.
(b) Reports on Form 8-K
Current Report on Form 8-K dated August 13, 1996 (Items 5 and 7).
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
JOHN DEERE CAPITAL CORPORATION
By: /s/ Hans W. Becherer
---------------------
Hans W. Becherer, Chairman
Date: 15 January 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ Hans W. Becherer Director, Chairman and Principal ) 15 January 1997
- -------------------- Executive Officer )
Hans W. Becherer )
)
/s/ J. W. England Director )
- ----------------- )
J. W. England )
)
/s/ B. L. Hardiek Director )
- ----------------- )
B. L. Hardiek )
)
/s/ J. R. Heseman Director )
- ----------------- )
J. R. Heseman )
)
/s/ D. E. Hoffmann Director )
- ------------------ )
D. E. Hoffmann )
)
/s/ F. F. Korndorf Director )
- ------------------ )
F. F. Korndorf )
)
/s/ R. W. Lane Director, Vice President and )
- -------------- Principal Financial Officer )
R. W. Lane )
)
/s/ P. E. Leroy Director )
- ---------------- )
P. E. Leroy )
)
/s/ M. P. Orr Director and President )
- ------------- )
M. P. Orr )
)
/s/ J. S. Robertson Vice President and )
- ------------------- Principal Accounting Officer )
J. S. Robertson )
)
20
<PAGE>
/s/ E. L. Schotanus Director ) 15 January 1997
- ------------------- )
E. L. Schotanus )
)
/s/ J. D Volkert Director )
- ---------------- )
J. D. Volkert )
)
/s/ S. E. Warren Director )
- ---------------- )
S. E. Warren )
)
21
<PAGE>
[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, 1996 and 1995 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, 1996. Our audits also included the financial statement schedule listed in
the Table of Contents on page 23. These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedule 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, 1996 and 1995 and the results of their operations
and their cash flows for each of the three years in the period ended October 31,
1996 in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
November 26, 1996
22
<PAGE>
TABLE OF CONTENTS
-----------------
PAGE
----
FINANCIAL STATEMENTS:
John Deere Capital Corporation and Subsidiaries (consolidated):
Statements of Consolidated Income and Retained Earnings
for the Years Ended October 31, 1996, 1995 and 1994.............. 24
Consolidated Balance Sheets, October 31, 1996 and 1995................ 25
Statements of Consolidated Cash Flows for the Years Ended
October 31, 1996, 1995 and 1994.................................. 26
Notes to Consolidated Financial Statements............................ 27
FINANCIAL STATEMENT SCHEDULE:
Schedule II - Valuation and Qualifying Accounts for the
Years Ended October 31, 1996, 1995 and 1994...................... 41
SCHEDULES OMITTED
The following schedules are omitted because of the absence of conditions
under which they are required:
I, III, IV, and V.
23
<PAGE>
JOHN DEERE CAPITAL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME AND RETAINED EARNINGS
(dollars in millions)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED OCTOBER 31
---------------------------------------------
1996 1995 1994
---------------------------------------------
<S> <C> <C> <C>
REVENUES
Finance income earned on retail notes $ 372.4 $ 333.5 $ 292.9
Revolving charge account income 95.1 84.3 66.6
Lease revenues 67.7 48.0 43.6
Finance income earned on wholesale notes 37.7 23.1 11.0
Net gain on retail notes sold 14.4 11.4 10.3
Interest income from short-term investments 11.4 11.3 6.2
Securitization and servicing fee income 46.0 35.5 28.6
Other income 12.0 3.8 3.9
- -----------------------------------------------------------------------------------------------------
Total revenues 656.7 550.9 463.1
- -----------------------------------------------------------------------------------------------------
EXPENSES
Interest expense:
On obligations to others 271.2 234.6 163.3
On notes payable to Deere & Company 2.5 3.8 3.3
- -----------------------------------------------------------------------------------------------------
Total interest expense 273.7 238.4 166.6
- -----------------------------------------------------------------------------------------------------
Operating expenses:
Administrative and operating expenses 95.0 77.6 79.7
Provision for credit losses 38.2 32.3 27.8
Fees paid to Deere & Company 6.1 5.3 6.4
Depreciation of equipment on operating leases 37.1 21.9 20.8
- -----------------------------------------------------------------------------------------------------
Total operating expenses 176.4 137.1 134.7
- -----------------------------------------------------------------------------------------------------
Total expenses 450.1 375.5 301.3
- -----------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 206.6 175.4 161.8
PROVISION FOR INCOME TAXES 72.5 61.3 56.9
- -----------------------------------------------------------------------------------------------------
NET INCOME 134.1 114.1 104.9
CASH DIVIDENDS DECLARED (70.0) (55.0) (210.0)
RETAINED EARNINGS AT BEGINNING OF THE YEAR 580.3 521.2 626.3
- -----------------------------------------------------------------------------------------------------
RETAINED EARNINGS AT END OF THE YEAR $ 644.4 $ 580.3 $ 521.2
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges 1.75 1.73 1.96
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
</TABLE>
24
<PAGE>
JOHN DEERE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions)
<TABLE>
<CAPTION>
OCTOBER 31
--------------------------------
1996 1995
--------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 171.0 $ 164.3
Receivables and leases:
Retail notes 4,075.9 3,824.9
Revolving charge accounts 564.8 510.2
Financing leases 181.5 149.3
Wholesale notes 524.5 298.1
- ------------------------------------------------------------------------------------------------
Total receivables 5,346.7 4,782.5
Equipment on operating leases - net 276.8 139.5
- ------------------------------------------------------------------------------------------------
Total receivables and leases 5,623.5 4,922.0
Allowance for credit losses (87.4) (84.2)
- ------------------------------------------------------------------------------------------------
Total receivables and leases - net 5,536.1 4,837.8
- ------------------------------------------------------------------------------------------------
Other receivables 189.9 183.4
Investment in unconsolidated affiliate 6.3 ---
Other assets 67.8 65.3
- ------------------------------------------------------------------------------------------------
TOTAL ASSETS $5,971.1 $5,250.8
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Short-term borrowings:
Commercial paper $1,689.9 $1,986.7
Deere & Company 544.8 460.1
Current maturities of long-term borrowings 863.7 343.9
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Total short-term borrowings 3,098.4 2,790.7
- ------------------------------------------------------------------------------------------------
Accounts payable and accrued liabilities:
Accrued interest on senior debt 35.9 28.4
Other payables 144.8 139.1
- ------------------------------------------------------------------------------------------------
Total accounts payable and accrued liabilities 180.7 167.5
- ------------------------------------------------------------------------------------------------
Deposits withheld from dealers and merchants 135.4 126.6
- ------------------------------------------------------------------------------------------------
Long-term borrowings:
Senior debt 1,649.5 1,172.9
Subordinated debt 150.0 300.0
- ------------------------------------------------------------------------------------------------
Total long-term borrowings 1,799.5 1,472.9
- ------------------------------------------------------------------------------------------------
Total liabilities 5,214.0 4,557.7
- ------------------------------------------------------------------------------------------------
Stockholder's equity
Common stock, without par value (issued and outstanding -
2,500 shares owned by John Deere Credit Company) 112.8 112.8
Retained earnings 644.4 580.3
Cumulative translation adjustment (0.1) ---
- ------------------------------------------------------------------------------------------------
Total stockholder's equity 757.1 693.1
- ------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $5,971.1 $5,250.8
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
JOHN DEERE CAPITAL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(in millions)
FOR THE YEAR ENDED OCTOBER 31
----------------------------------------------
1996 1995 1994
----------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 134.1 $ 114.1 $ 104.9
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 38.2 32.3 27.8
Provision for depreciation 39.5 23.8 22.6
Provision (credit) for deferred income taxes 1.7 (2.0) (3.0)
Other 8.9 (7.0) 7.8
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 222.4 161.2 160.1
---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of receivables and leases acquired (5,516.6) (4,667.4) (3,941.9)
Collections of receivables 3,888.8 3,038.5 2,656.6
Proceeds from sales of receivables 814.0 726.3 580.2
Acquisition of business (7.4) --- ---
Other 41.6 5.2 59.5
- ---------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (779.6) (897.4) (645.6)
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in commercial paper (296.8) 405.9 1,126.8
Change in receivable/payable with Deere & Company 84.7 357.5 (336.9)
Proceeds from issuance of long-term borrowings 1,190.0 775.0 188.5
Principal payments on long-term borrowings (344.0) (625.8) (405.2)
Dividends paid (70.0) (55.0) (210.0)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 563.9 857.6 363.2
- ---------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6.7 121.4 (122.3)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR 164.3 42.9 165.2
- ---------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT THE END OF YEAR $ 171.0 $ 164.3 $ 42.9
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
</TABLE>
26
<PAGE>
JOHN DEERE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CORPORATE ORGANIZATION
John Deere Capital Corporation (Capital Corporation) is a wholly-owned
subsidiary of John Deere Credit Company, a finance holding company which is
wholly-owned by Deere & Company. The Capital Corporation and its subsidiaries,
Deere Credit Services, Inc. (DCS), Farm Plan Corporation (FPC), Deere Credit,
Inc. (DCI), John Deere Receivables, Inc. (JDRI), John Deere Funding Corporation
(JDFC) and Arrendadora John Deere, S.A. de C.V. (AJD) are collectively called
the Company. Deere & Company, together with its subsidiaries and affiliates,
are collectively called John Deere.
Retail notes, revolving charge accounts, direct financing leases, and
wholesale notes receivable are collectively called "Receivables." Receivables
and operating leases are collectively called "Receivables and Leases."
The risk of credit losses applicable to John Deere retail notes and leases,
net of recovery from withholdings from John Deere dealers, is borne by the
Company. During 1996, John Deere was compensated by the Company for originating
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 October 1996, the Company formed a joint venture company, John Deere
Credit Limited. The investment in John Deere Credit Limited is being accounted
for as an equity basis investment.
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 CHANGES
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, which the Company will adopt in fiscal year
1997. This Statement is not expected to have an effect on the Company's
financial position or results of operations.
In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, which the Company must adopt for transactions
occurring after December 31, 1996. This Statement will have no effect on the
Company's financial position or results of operations.
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, industrial and commercial and consumer
27
<PAGE>
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, industrial and lawn and grounds
care retail notes unrelated to John Deere. In addition, the Company purchases
and finances recreational product retail notes acquired from independent dealers
and marine product mortgage service companies (recreational product retail
notes).
Finance income included in the face amount of retail notes is amortized
into income over the lives of the notes on the effective-yield basis. Unearned
finance income on variable-rate notes is adjusted monthly based on fluctuations
in the base rate of a specified bank.
Costs incurred in the acquisition of retail notes are deferred and
amortized into income over the expected lives of the notes on the
effective-yield basis.
A portion of the finance income earned by the Company arises from financing
of retail sales of John Deere equipment sold in advance of the season of use or
in other sales promotions by John Deere on which finance charges are waived by
John Deere for a period from the date of sale to a specified subsequent date.
Some low-rate financing programs are also offered by John Deere. The Company
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 20 percent in 1996, 19 percent in 1995 and 14
percent in 1994.
A deposit equal to one percent of the face amount of certain John Deere
agricultural and commercial and consumer equipment retail notes originating from
each dealer is withheld by the Company from that dealer. Any subsequent retail
note losses are charged against the withheld deposits. To the extent that a
loss on a retail note cannot be absorbed by deposits withheld from the dealer
from which the retail note was acquired, it is charged against the Company's
allowance for credit losses. At the end of each calendar year, the balance of
each dealer's withholding account in excess of a specified percent (currently
three percent) of the total balance outstanding on retail notes originating with
that dealer is remitted to the dealer. At the end of the Company's fiscal year,
any negative balance in the dealer withholding account is written off and
absorbed by the Company's allowance for credit losses.
There is no withholding of dealer deposits on John Deere industrial
equipment retail notes. In addition, the Company does not withhold deposits on
recreational product retail notes.
The Company requires that theft and physical damage insurance be carried on
all goods leased or securing retail 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. Theft and physical damage insurance
is also required on wholesale notes and can be purchased through the Company or
from other sources. Insurance is not required on revolving charge accounts.
Generally, when an account becomes 120 days delinquent, accrual of finance
income is suspended, the collateral is repossessed or the account is designated
for litigation, and the estimated uncollectible amount, after charging the
dealer's withholding account, if any, is written off to the allowance for credit
losses.
REVOLVING CHARGE ACCOUNTS RECEIVABLE
Revolving charge account income is generated primarily by three revolving
credit products: Farm Plan, the John Deere Credit Revolving Plan and Preferred
Resource.
Farm Plan is primarily used by farmers and ranchers to finance day-to-day
operating expenses, such as parts and service labor. Merchants offer Farm Plan
as an alternative to carrying in-house accounts receivable,
28
<PAGE>
and can initially sell existing balances to the Company under a recourse
arrangement. Farm Plan income includes a discount paid by merchants for
transaction processing and support and finance charges paid by customers on
their existing account balances.
The John Deere Credit Revolving Plan is used primarily by retail customers
of John Deere dealers to finance lawn and grounds care equipment. Income
includes a discount paid by dealers on most transactions and finance charges
paid by customers on their outstanding account balances.
Preferred Resource (an unsecured lending product) is used primarily by
executives and professionals, and offers customers convenience and security by
providing a substantial, readily-available source of funding for a variety of
personal expenses.
Accrual of revolving charge account income is suspended generally when an
account becomes 120 days delinquent. Accounts are deemed to be uncollectible
and written off to the allowance for credit losses when delinquency reaches 180
days for a Farm Plan account, 150 days for a John Deere Credit Revolving Plan
account and 120 days for a Preferred Resource account.
DIRECT FINANCING LEASES AND EQUIPMENT ON OPERATING LEASES
The Company leases agricultural, industrial, lawn and grounds care and
certain other equipment directly to retail customers.
At the time of accepting a lease that qualifies as a direct financing lease
under FASB Statement No. 13, the Company records the gross amount of lease
payments receivable, estimated residual value of the leased equipment and
unearned lease income. The unearned lease income is equal to the excess of the
gross lease receivable plus the estimated residual value over the cost of the
equipment. The unearned lease income is recognized as revenue over the lease
term on the effective-yield method.
Leases that do not meet the criteria for direct financing leases as
outlined by FASB Statement No. 13 are accounted for as operating leases. Rental
payments applicable to equipment on operating leases are recorded as income on a
straight-line method over the lease terms. Operating lease assets are recorded
at cost and depreciated on a straight-line method over the terms of the leases.
Lease acquisition costs are accounted for in a manner similar to the procedures
for retail notes.
The Company has significant investments in residual value in its leasing
portfolios. These residual values represent estimates of the value of the
leased assets at the end of the contract terms and are initially recorded based
upon appraisals and estimates. Residual values are continually reviewed to
determine that recorded amounts are appropriate.
Deposits withheld from John Deere dealers and related losses on leases are
handled in a manner similar to the procedures for retail notes. In addition, a
lease payment discount program, allowing reduced payments over the term of the
lease, is administered in a manner similar to finance waiver on retail notes.
Equipment returned to the Company upon termination of leases and held for
subsequent sale or lease is recorded at the lower of net book value or estimated
wholesale market value of the equipment.
Generally, when an account becomes 120 days delinquent, accrual of lease
revenue is suspended, the equipment is repossessed or the account is designated
for litigation and the estimated uncollectible amount, after charging the
dealer's withholding account, if any, is written off to the allowance for credit
losses.
29
<PAGE>
WHOLESALE NOTES RECEIVABLE
The Company finances wholesale inventories of recreational vehicles,
manufactured housing units, yachts, John Deere engines, John Deere industrial
equipment and the Sabre by John Deere line of 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. Although amounts are not
withheld from dealers to cover uncollectible receivables, there are usually
repurchase agreements with manufacturers for new inventories held by dealers.
Generally, when an account becomes 60 days delinquent, accrual of finance income
is suspended, the collateral is repossessed or the amount is designated for
litigation and the estimated uncollectible amount is written off to the
allowance for credit losses.
OTHER RECEIVABLES
The Company has sold retail notes to limited-purpose business trusts and to
private third parties, which utilized the notes as collateral for the issuance
of asset backed securities. At the time of the sales, "other receivables" were
classified and recorded at net present value. The receivables relate to
deposits made pursuant to recourse provisions and other payments to be received
under the sales agreements. The receivables will be amortized to their value at
maturity using the interest method. The Company is also compensated by the
trusts or third parties for certain expenses incurred in the administration of
these receivables. Securitization and servicing fee income includes the
amortization of the above receivables, adjustments related to those sales and
reimbursed administrative expenses.
RECLASSIFICATIONS
Certain amounts for prior years have been reclassified to conform with 1996
financial statement presentations.
30
<PAGE>
NOTE 2. RECEIVABLES AND LEASES
RETAIL NOTES RECEIVABLE
Retail notes receivable by product category at October 31 are as follows
(in millions of dollars):
1996 1995
-------------------------------
Agricultural equipment - new $ 1,588.2 $ 1,506.6
Agricultural equipment - used 1,318.4 1,291.6
Industrial equipment - new 587.9 464.3
Industrial equipment - used 134.6 123.4
Lawn and grounds care equipment - new 193.4 172.0
Lawn and grounds care equipment - used 20.5 18.8
Recreational products 1,351.3 1,396.9
- --------------------------------------------------------------------------------
Total 5,194.3 4,973.6
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Unearned finance income:
Equipment (608.0) (617.1)
Recreational products (510.4) (531.6)
- --------------------------------------------------------------------------------
Total (1,118.4) (1,148.7)
- --------------------------------------------------------------------------------
Retail notes receivable $ 4,075.9 $ 3,824.9
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Retail note installments at October 31 are scheduled as follows (in
millions of dollars):
1996 1995
-------------------------------
Due in:
0-12 months $ 1,285.0 $ 1,165.7
13-24 months 1,117.9 1,042.6
25-36 months 932.0 877.7
37-48 months 690.9 673.1
49-60 months 435.9 458.1
61-72 months 177.5 209.2
Over 72 months 555.1 547.2
------------------------------------------------------------------------
Total $ 5,194.3 $ 4,973.6
------------------------------------------------------------------------
------------------------------------------------------------------------
31
<PAGE>
Company guidelines relating to down payment requirements and
maximum contract terms on retail notes are generally as follows:
DOWN CONTRACT
PAYMENT TERMS
--------------------------
Agricultural equipment (new and used):
Seasonal payments 30% 7 crop years
Monthly payments 20% 84 months
Industrial equipment:
New 20% 48-60 months
Used 20% 36 months
Lawn and grounds care equipment (new and used):
Personal use 10% 72 months
Commercial use 20% 72 months
Recreational products (excluding yachts):
New 15% 180 months
Used 15% 144 months
Yachts (new and used) 20% 240 months
During 1996, the average effective yield on retail notes held by the
Company was approximately 9.7 percent compared with 10.0 percent in 1995.
Retail notes acquired by the Company during the year ended October 31, 1996
had an estimated average original term (based on dollar amounts) of 67 months.
During 1995 and 1994, the estimated average original term was 71 and 70 months,
respectively. Historically, because of prepayments, the average actual life of
retail notes has been considerably shorter than the average original term.
During 1996, the Company received proceeds of $814 million from the sales
of retail notes in private third party transactions. During 1995 and 1994, the
Company received proceeds of $726 million and $560 million from the sale and
securitization of retail notes.
At October 31, 1996, 1995 and 1994, the balance of all retail notes
previously sold by the Company was $1.177 billion, $1.162 billion and $1.175
billion, respectively. Additional sales of retail notes are expected to be made
in the future.
The Company recognizes any gain or loss at the time of the sale of retail
notes. The Company acts as agent for the buyers in collection and administration
of all the notes it has sold. The Company's maximum exposure under all retail
note recourse provisions at October 31, 1996 and 1995 was $186 million and $180
million, respectively. All retail notes sold are collateralized by security
agreements on the related equipment sold to the customers.
REVOLVING CHARGE ACCOUNTS RECEIVABLE
Revolving charge accounts receivable at October 31, 1996 totaled $565
million compared with $510 million at October 31, 1995. Account holders may pay
the account balance in full at any time, or make payments over a number of
months according to a payment schedule. A minimum amount is due each month from
customers selecting the revolving payment option.
32
<PAGE>
DIRECT FINANCING LEASES RECEIVABLE
Financing leases receivable by product category at October 31 are as
follows (in millions of dollars):
1996 1995
----------------------------
Agricultural equipment $ 76.2 $ 89.7
Industrial equipment 85.6 56.5
Lawn and grounds care equipment 12.4 5.2
Other equipment 36.3 24.0
-----------------------------------------------------------------------------
Total 210.5 175.4
Estimated residual values 0.9 0.9
Unearned finance income (29.9) (27.0)
-----------------------------------------------------------------------------
Financing leases receivable $ 181.5 $ 149.3
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Residual values represent the amounts estimated to be recoverable at
maturity from disposition of the leased equipment under non-purchase option
financing leases.
Initial lease terms for financing leases range from 12 months to 72 months.
Payments on financing leases receivable at October 31 are scheduled as follows
(in millions of dollars):
1996 1995
----------------------------
Due in:
0-12 months $ 75.9 $ 57.9
13-24 months 59.8 49.2
25-36 months 42.3 35.7
37-48 months 23.2 23.1
Over 48 months 9.3 9.5
---------------------------------------------------------------
Total $ 210.5 $ 175.4
---------------------------------------------------------------
---------------------------------------------------------------
The Company administers municipal leases owned by John Deere which totaled
$11 million at October 31, 1996 and $21 million at October 31, 1995. The
Company sold $20 million of municipal leases to John Deere in 1994. There were
no sales of municipal leases to John Deere in 1996 or 1995.
WHOLESALE NOTES RECEIVABLE
Wholesale notes receivable on recreational vehicle, manufactured housing,
yachts, John Deere engine, John Deere industrial equipment and the Sabre by John
Deere line of equipment owned by the dealers totaled $524 million at October 31,
1996 compared with $298 million at October 31, 1995. Generally, the maximum
maturity for wholesale notes is 12 months.
33
<PAGE>
EQUIPMENT ON OPERATING LEASES
The cost of equipment on operating leases by product category at October 31
are as follows (in millions of dollars):
1996 1995
----------------------------
Agricultural equipment $ 221.3 $ 129.4
Industrial equipment 96.4 55.2
Lawn and grounds care equipment 7.5 2.0
Other equipment 6.9 0.8
-----------------------------------------------------------------------------
Total 332.1 187.4
Accumulated depreciation (55.3) (47.9)
-----------------------------------------------------------------------------
Equipment on operating leases - net $ 276.8 $ 139.5
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Initial lease terms for equipment on operating leases range from 12 months
to 72 months. Rental payments for equipment on operating leases at October 31
are scheduled as follows (in millions of dollars):
1996 1995
----------------------------
Due in:
0-12 months $ 54.7 $ 24.5
13-24 months 47.8 14.9
25-36 months 21.6 9.2
37-48 months 12.0 5.2
Over 48 months 3.1 1.6
---------------------------------------------------------------
Total $ 139.2 $ 55.4
---------------------------------------------------------------
---------------------------------------------------------------
CONCENTRATION OF CREDIT RISK
Receivables and Leases have significant concentrations of credit risk in
the agricultural, industrial, lawn and grounds care and recreational product
business sectors as shown in 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
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.
34
<PAGE>
An analysis of the allowance for credit losses on total Receivables and
Leases follows (in millions of dollars):
1996 1995 1994
-------------------------------------
Balance, beginning of the year $ 84.2 $ 80.1 $ 77.5
Provision charged to operations 38.2 32.3 27.8
Amounts written off (29.0) (23.7) (20.8)
Transfers related to retail note sales (6.0) (4.5) (4.4)
- -------------------------------------------------------------------------------
Balance, end of the year $ 87.4 $ 84.2 $ 80.1
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
The allowance for credit losses represented 1.6 percent, 1.7 percent and
1.9 percent of Receivables and Leases outstanding at October 31, 1996, 1995 and
1994, respectively. In addition, the Company had $135 million, $127 million and
$111 million at October 31, 1996, 1995 and 1994, respectively, of deposits
withheld from John Deere dealers and Farm Plan merchants available for certain
potential credit losses originating from those dealers and merchants. The
provision for credit losses in 1996 reflects the growth in the total Receivables
and Leases portfolio.
NOTE 4. SHORT-TERM BORROWINGS
On October 31, 1996, short-term borrowings were $3.098 billion, $1.690
billion of which was commercial paper. Short-term borrowings were $2.791
billion one year ago, $1.987 billion of which was commercial paper. The Capital
Corporation's short-term debt also includes amounts borrowed from Deere &
Company, which totaled $545 million at October 31, 1996. The Capital
Corporation pays a market rate of interest to Deere & Company based on the
average outstanding borrowings each month. The weighted average interest rates
on total short-term borrowings, excluding current maturities of long-term
borrowings, at October 31, 1996 and 1995 were 5.5 percent and 5.8 percent,
respectively.
At October 31, 1996, the Capital Corporation, Deere & Company and John
Deere Credit Inc. (Canada), jointly, maintained $4.208 billion of unsecured
lines of credit with various banks in North America and overseas, $2.145 billion
of which was unused. For the purpose of computing unused credit lines, the
total short-term borrowings, excluding the current portion of long-term
borrowings, of the Capital Corporation, Deere & Company and John Deere Credit
Inc. (Canada), were considered to constitute utilization. Included in the above
lines of credit is a committed long-term credit agreement expiring on February
27, 2001, for $3.675 billion. The credit agreement has various requirements of
the Company, including the maintenance of its consolidated ratio of earnings
before fixed charges to fixed charges at not less than 1.05 to 1 for each fiscal
quarter (as described below) and the Company's ratio of senior debt to total
stockholder's equity plus subordinated debt may not be more than 8 to 1 at the
end of any fiscal quarter. "Senior debt" consists of the Company's total
interest-bearing obligations, excluding subordinated debt, but including
borrowings from John Deere. The Company's ratio of senior debt to total
stockholder's equity plus subordinated debt was 4.4 to 1 at October 31, 1996
compared to 4.0 at October 31, 1995. An annual facility fee on the credit
agreement is charged to the Capital Corporation based on utilization.
In October 1996, Deere & Company formalized in a written agreement its
long-standing previously expressed intention to make income maintenance payments
to the Capital Corporation such that the Company's ratio of earnings before
fixed charges to fixed charges is not less than 1.05 to 1 for each fiscal
quarter. For purposes of these calculations, "earnings" consist of income
before income taxes, the cumulative effect of changes in accounting and fixed
charges. "Fixed charges" consist of interest on indebtedness, amortization of
debt discount and expense, an estimated amount of rental expense under
capitalized leases which is deemed to be representative of the interest factor
and rental expense under operating leases. The Company's ratio of earnings to
fixed charges was 1.75 to 1, 1.73 to 1, and 1.96 to 1, in 1996, 1995 and 1994,
respectively. Deere & Company also agreed to maintain the Capital Corporation's
tangible net worth at not less than $50 million
35
<PAGE>
and to own at least 51 percent of Capital Corporation's voting capital stock.
This arrangement is not intended to make John Deere 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):
<TABLE>
<CAPTION>
1996 1995
-----------------------------
<S> <C> <C>
Senior Debt:
Medium-term notes due 1997-2006:
Average interest rate of 6.7% as of year end 1996 and 7.0%
as of year end 1995 $1,402.0 $ 825.7
7.20% notes due 1997 --- 100.0
Floating rate notes due 1998 (federal funds rate):
Swapped to an alternative variable interest rate of 5.6% as of
year end 1996 and 6.0% as of year end 1995 150.0 150.0
5% Swiss franc bonds due 1999:
Swapped to U.S. dollars and a variable interest rate of 6.0% as
of year end 1996 and 6.4% as of year end 1995 97.5 97.5
- --------------------------------------------------------------------------------------------------------------
Total senior debt 1,649.5 1,173.2
Less unamortized debt discount --- 0.3
- --------------------------------------------------------------------------------------------------------------
Net senior debt 1,649.5 1,172.9
- --------------------------------------------------------------------------------------------------------------
Subordinated Debt:
9-5/8% Subordinated Notes due 1998:
Swapped to variable interest rate of 6.0% as of year end 1996
and 6.5% as of year end 1995 150.0 150.0
8-5/8% Subordinated Debentures due 2019:
Swapped to variable interest rate of 5.7% as of year end 1995(1) --- 150.0
- --------------------------------------------------------------------------------------------------------------
Total subordinated debt 150.0 300.0
- --------------------------------------------------------------------------------------------------------------
Total $ 1,799.5 $ 1,472.9
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reclassified to short-term borrowings in 1996 because the obligation
is callable by the creditors in 1997. Swapped to variable interest
rate of 5.3% as of year end 1996.
The approximate amounts of long-term borrowings maturing and sinking fund
payments required in each of the next five years, in millions of dollars, are as
follows: 1997 - $864, 1998 - $893, 1999 - $373, 2000 - $290 and 2001 -
$140.
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, 1996 or 1995.
At October 31, 1996, the Company had authorized, but not issued, 10,000 shares
of $1 par value preferred stock.
36
<PAGE>
NOTE 7. DIVIDENDS
The Capital Corporation paid cash dividends to John Deere Credit Company of
$70 million in 1996 and $55 million in 1995. In each case, John Deere Credit
Company paid an identical dividend to Deere & Company.
NOTE 8. PENSION AND OTHER RETIREMENT BENEFITS
The Company participates in the Deere & Company salaried pension plan,
which is a defined benefit plan in which benefits are based primarily on years
of service and employee compensation. This plan is funded according to the 1974
Employee Retirement Income Security Act (ERISA) and income tax regulations.
Plan assets consist primarily of common stocks, common trust funds, government
securities and corporate debt securities. Pension expense is actuarially
determined based on the Company's employees included in the plan. The Company's
pension expense amounted to $1.7 million in 1996, $1.4 million in 1995 and $1.5
million in 1994.
The Company generally provides defined benefit health care and life
insurance plans for retired employees through participation in the Deere &
Company's plans. Health care and life insurance benefits expense is actuarially
determined based on the Company's employees included in the plans and amounted
to $.8 million in 1996, $.9 million in 1995 and $.7 million in 1994.
Further disclosure for these plans are included in the notes to the Deere &
Company 1996 annual report.
NOTE 9. INCOME TAXES
TAXES ON INCOME AND INCOME TAX CREDITS
The taxable income of the Company is included in the consolidated United
States income tax return of Deere & Company. Provisions for income taxes are
made generally as if the Capital Corporation and each of its subsidiaries filed
separate income tax returns.
DEFERRED INCOME TAXES
Deferred income taxes arise because there are certain items that are
treated differently for financial accounting than for income tax reporting
purposes. An analysis of deferred income tax assets and liabilities at October
31 are as follows (in millions of dollars):
<TABLE>
<CAPTION>
1996 1995
------------------------------- --------------------------------
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Allowance for credit losses $ 34.3 $ 34.3
Deferred lease income $ 4.6 $ 7.6
Deferred retail note finance income 8.9 8.1
Accrual for retirement and other benefits 2.5 2.3
Securitization income 3.6 7.8
Miscellaneous accruals and other .3 .4
-----------------------------------------------------------------------------------------------------------------------------
Total deferred income tax assets and liabilities $ 40.4 $ 13.8 $ 44.4 $ 16.1
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
The provision for income taxes consisted of the following (in millions of
dollars):
1996 1995 1994
---------------------------------
Current $ 70.8 $ 63.3 $ 59.9
Deferred 1.7 (2.0) (3.0)
-----------------------------------------------------------------------------
Total provision for income taxes $ 72.5 $ 61.3 $ 56.9
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
EFFECTIVE INCOME TAX PROVISION
A comparison of the statutory and effective income tax provisions and
reasons for related differences follows (in millions of dollars):
1996 1995 1994
---------------------------------
United States federal income tax provision
at a statutory rate of 35 percent $ 72.3 $ 61.4 $ 56.6
Municipal lease income not taxable (0.5) (0.3) (0.1)
Other adjustments - net 0.7 0.2 0.4
-----------------------------------------------------------------------------
Total provision for income taxes $ 72.5 $ 61.3 $ 56.9
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
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 1996,
1995 and 1994 were $271 million, $225 million and $174 million, respectively.
Cash payments for income taxes during these same periods were $77 million, $64
million and $60 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.
38
<PAGE>
NOTE 12. FINANCIAL INSTRUMENTS
The fair values of financial instruments which do not approximate the
carrying values in the financial statements at October 31 are as follows (in
millions of dollars):
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
--------------------- ---------------------
<S> <C> <C> <C> <C>
Receivables financed and other receivables
related to asset backed securitizations $ 5,532 $ 5,519 $ 4,962 $ 4,963
Long-term borrowings and related swaps:
Long-term borrowings $(1,816) $(1,844) (1,504) (1,545)
Interest rate and foreign currency swaps 17 30 31 56
- ------------------------------------------------------------------- ---------------------
Total $(1,799) $(1,814) $(1,473) $(1,489)
- ------------------------------------------------------------------- ---------------------
- ------------------------------------------------------------------- ---------------------
</TABLE>
FAIR VALUE ESTIMATES
Fair values of the long-term receivables with fixed rates were based on the
values of their related cash flows discounted at current market interest rates.
The fair values of the remaining receivables financed approximated the carrying
amounts. The fair values of receivables related to asset backed securitizations
were based on the discounted values of their related cash flows.
Fair values of long-term borrowings with fixed rates were based on the
values of their related cash flows discounted 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 quotes from dealers.
Fair values and carrying values of the Company's other interest rate swaps
and caps associated with short-term borrowings were not material.
DERIVATIVES
The Company enters into derivative transactions only to hedge exposures
arising in the normal course of business, and not for the purpose of creating
speculative positions or trading. The following notional or contract amounts do
not represent amounts exchanged by the parties and, therefore, are not
representative of the Company's risk. The net amounts exchanged are calculated
on the basis of the notional amounts and other terms of the derivatives such as
interest rates and exchange rates, and represent only a small portion of the
notional amounts. The credit and market risks under these agreements are not
considered to be significant since the counterparties have high credit ratings
and the fair values and carrying values are not material.
INTEREST RATE SWAPS AND CAPS
The Company enters into interest rate swap and interest rate cap agreements
related to its borrowings in order to more closely match the type of interest
rates of the borrowings to those of the assets being funded. The differential
to be paid or received on all swap and cap agreements is accrued as interest
rates change and is recognized over the lives of the agreements in interest
expense. Premiums are amortized to interest expense over the lives of the
agreements.
At October 31, 1996 and 1995, the total notional principal amounts of
interest rate swap agreements hedging short-term borrowings were $346 million
and $100 million, having rates of 5.2 to 7.4 percent and 6.5
39
<PAGE>
to 7.0 percent, terminating in up to 12 months and four months respectively.
There were no interest rate cap agreements at October 31, 1996 or 1995.
The Company has entered into interest rate swap agreements with independent
parties that change the effective rate of interest on certain long-term
borrowings. The "Long-Term Borrowings" table on page 35 reflects the effective
year-end variable interest rates relating to these swap agreements. The
notional principal amounts and maturity dates of these swap agreements are the
same as the principal amounts and maturities of the related borrowings. In
addition, in 1995 the Company had interest rate swap agreements corresponding to
a portion of their fixed-rate long-term borrowings. At October 31, 1995, the
total notional principal amount of these swap agreements was $116 million,
having variable interest rates of 6.1 to 6.5 percent, terminating in up to 16
months.
The Company also has interest rate swap agreements associated with
medium-term notes. The "Long-Term Borrowings" table on page 35 reflects the
interest rates relating to these swap agreements. At October 31, 1996 and 1995,
the total notional principal amounts of these swap agreements were $520 million
and $260 million, terminating in up to 113 months and 83 months, respectively.
FOREIGN EXCHANGE SWAPS
At October 31, 1996 and 1995, the Company had a foreign exchange swap
agreement maturing in up to 27 months and 39 months, respectively, for $97
million to hedge the currency exposure of the 5% Swiss Franc Bonds due in 1999.
The foreign exchange swap gains and losses are accrued as foreign exchange rates
change and offset the equal and opposite gains and losses on the related bonds.
NOTE 13. SUPPLEMENTAL QUARTERLY INFORMATION AND DIVIDEND (UNAUDITED)
QUARTERLY INFORMATION
Supplemental quarterly information for the Company follows (in millions of
dollars):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996:
Revenues $ 150.7 $ 167.6 $ 158.7 $ 179.7 $ 656.7
Interest expense 66.3 67.6 66.8 73.0 273.7
Operating expenses 34.7 41.8 42.2 57.7 176.4
Provision for income taxes 17.4 20.3 17.4 17.4 72.5
- ----------------------------------------------------------------------------------------------------
Net income $ 32.3 $ 37.9 $ 32.3 $ 31.6 $ 134.1
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
1995:
Revenues $ 126.2 $ 144.3 $ 132.6 $ 147.8 $ 550.9
Interest expense 55.1 60.6 57.8 64.9 238.4
Operating expenses 28.9 32.4 34.3 41.5 137.1
Provision for income taxes 14.8 18.0 14.2 14.3 61.3
- ----------------------------------------------------------------------------------------------------
Net income $ 27.4 $ 33.3 $ 26.3 $ 27.1 $ 114.1
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
DIVIDEND
On December 6, 1996, the Capital Corporation declared a $20 million
dividend, to be paid to John Deere Credit Company on December 17, 1996. John
Deere Credit Company, in turn, declared a $20 million dividend to Deere &
Company, also payable on December 17, 1996.
40
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
JOHN DEERE CAPITAL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
IN THOUSANDS)
Column A Column B Column C
-------- -------- --------
Balance at Additions
----------------------------------------------
Beginning Charged to Costs Charged to Other
Description of Year and Expenses Accounts-Explain
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Year Ended October 31, 1996:
Reserve deducted from the asset
to which it applies-
Allowance for credit losses
Total $ 84,159 $ 38,194
----------- -----------
----------- -----------
Year Ended October 31, 1995:
Reserve deducted from the asset
to which it applies-
Allowance for credit losses
Total $ 80,122 $ 32,303
----------- -----------
----------- -----------
Year Ended October 31, 1994:
Reserve deducted from the asset
to which it applies-
Allowance for credit losses
Total $ 77,486 $ 27,831
----------- -----------
----------- -----------
<CAPTION>
Column D Column E
-------- --------
Deductions
- -----------------------------------------------------
Balance at
Description Amount End of Year
- ---------------------------------------------------------------------------
Transfers related
to retail note sales $ 6,002
Uncollectible receivables 28,951
-----------
Total Deductions $ 34,953 $ 87,400
----------- -----------
----------- -----------
Transfers related
to retail note sales $ 4,580
Uncollectible receivables 23,686
-----------
Total Deductions $ 28,266 $ 84,159
----------- -----------
----------- -----------
Transfers related
to retail note sales $ 4,390
Uncollectible receivables $ 20,805
-----------
Total Deductions $ 25,195 $ 80,122
----------- -----------
----------- -----------
</TABLE>
41
<PAGE>
INDEX TO EXHIBITS
2. Not applicable.
3.1 Certificate of Incorporation, as amended (Exhibit 3.1 to Form 10-K of
the registrant for the year ended October 31, 1994*).
3.2 Bylaws, as amended (Exhibit 3.2 to Form 10-K of the registrant for the
year ended October 31, 1994*).
4.1 Credit agreements among registrant, Deere & Company, various financial
institutions, and Chemical Bank, The Chase Manhattan Bank (National
Association), Bank of America National Trust and Savings Association,
Deutsche Bank AG, and the Toronto-Dominion Bank as Managing Agents,
dated as of April 5, 1995 (Exhibit 4.1 to Form 10-Q of Deere & Company
for the quarter ended April 30, 1995, Securities and Exchange
Commission file number 1-4121*).
4.2 Senior Indenture dated as of June 15, 1995 between the registrant and
The Chase Manhattan Bank (National Association), as Trustee (Exhibit
4.1 to Form 10-Q of the registrant for the quarter ended July
31, 1995*).
4.3 Subordinated Indenture dated as of June 15, 1995 between the
registrant and First National Bank of Chicago, as Trustee (Exhibit 4.2
to Form 10-Q of the registrant for the quarter ended July 31, 1995*).
4.4 Form of certificate for common stock (Exhibit 4.3 to Form 10-Q of the
registrant for the quarter ended April 30, 1993*)
Certain instruments relating to long-term debt constituting less than
10% of the registrant's total assets may not be filed as exhibits
herewith pursuant to Item 604(b)(4)(iii)(A) of Regulation S-K. The
registrant will file copies of such instruments upon request of the
Commission.
9. Not applicable.
10.1 Agreement dated May 11, 1993 between the registrant and Deere &
Company concerning agricultural retail notes (Exhibit 10.1 to Form
10-Q of the registrant for the quarter ended April 30, 1993*).
10.2 Amendment dated November 4, 1994 between the registrant and Deere &
Company concerning agricultural retail notes. (Exhibit 10.2 to Form
10-K of the registrant for the year ended October 31, 1995*).
10.3 Agreement dated May 11, 1994 between the registrant and Deere &
Company concerning lawn and grounds care retail notes (Exhibit 10.2 to
the Form 10-Q of the registrant for the quarter ended April 30,
1993*).
10.4 Amendment dated November 4, 1994 between the registrant and Deere &
Company concerning lawn and grounds care retail notes. (Exhibit 10.4
to Form 10-K of the registrant for the year ended October 31, 1995*).
42
<PAGE>
10.5 Agreement dated January 26, 1983 between the registrant and Deere &
Company relating to agreements with United States sales branches on
retail notes (Exhibit 10.4 to Form 10-Q of the registrant for the
quarter ended April 30, 1993*).
10.6 Insurance policy no. CL-001 of Sierra General Life Insurance Company
providing insurance on lives of purchasers of certain equipment
financed with receivables (Exhibit 10.5 to Form 10-Q of the registrant
for the quarter ended April 30, 1993*).
10.7 Agreement dated October 15, 1996 between the registrant and Deere &
Company relating to fixed charges ratio, ownership and minimum net
worth.
11. Not applicable.
12. Computation of Ratio of Earnings to Fixed Charges for each of the five
years in the period ended October 31, 1996.
13. Not applicable.
16. Not applicable.
18. Not applicable.
21. Omitted pursuant to instruction J(2).
22. Not applicable.
23. Consent of Deloitte & Touche LLP.
24. Not applicable.
27. Financial Data Schedule.
28. Not applicable.
99. Parts I and II of the Deere & Company Form 10-K for the fiscal year
ended October 31, 1996 (Securities and Exchange Commission file number
1-4121*).
- ------------------------
* Incorporated by reference. Copies of these exhibits are available
from the Company upon request.
43
<PAGE>
EXHIBIT 10.7
AGREEMENT
AGREEMENT dated as of October 15, 1996, by and between Deere & Company, a
Delaware corporation ("Deere") and John Deere Capital Corporation, a Delaware
corporation ("JDCC").
WITNESSETH:
WHEREAS, Deere owns all of the outstanding common stock of JDCC; and
WHEREAS, Deere and JDCC believe that it is their respective best interest
to demonstrate Deere's support for JDCC to debt holders and derivative
counterparties.
NOW, THEREFORE, in consideration of the foregoing, the mutual advantage and
benefit of the parties hereto and other good and valuable consideration, the
parties hereto hereby agree as follows:
1. FIXED CHARGES RATIO. Deere shall make income maintenance payments to
JDCC, constituting additions to the pre-tax income of JDCC, to the extent that
such payments are necessary to cause the ratio of Net Earnings Available for
Fixed Charges to Fixed Charges of JDCC and consolidated affiliates (determined
on a consolidated basis and in accordance with GAAP) to be not less than 1.05
for each JDCC fiscal quarter.
2. OWNERSHIP. Deere or one or more of its direct or indirect wholly-owned
subsidiaries or a combination thereof will continue to own at least fifty-one
percent (51%) of the shares of capital stock of JDCC having voting power for the
election of directors, PROVIDED, HOWEVER, that JDCC may merge or consolidate
with, or sell or convey substantially all of its assets, to Deere, if in
connection therewith, Deere shall expressly assume the due and punctual payment
of all of JDCC's rated debt.
3. MINIMUM NET WORTH. Deere shall cause JDCC to have as at the end of
any fiscal quarter a Consolidated Tangible Net Worth of at least $50,000,000.
4. NO GUARANTY. This Agreement is not, and nothing herein contained and
nothing done pursuant hereto by Deere shall be deemed to constitute, a guaranty
by Deere of the payment of any indebtedness, obligation or liability of any kind
or character whatsoever of JDCC or any of JDCC's direct or indirect
subsidiaries.
5. TERM. This Agreement may be modified, amended or terminated, at
Deere's election, upon thirty days prior written notice to JDCC and to Moody's
Investors Service, Inc. ("Moody's"), Standard & Poors Ratings Group ("S&P") and
Fitch Investors Service, Inc. ("Fitch") if (a) such modification, amendment or
termination would not result in a downgrade of JDCC's rated public debt ("Debt")
by Moody's, S&P or Fitch; or (b) the modification, amendment or notice of
termination provides that this Agreement will continue in effect with respect to
Debt outstanding on the effective date of the modification, amendment or
termination; or (c) JDCC has no
44
<PAGE>
outstanding rated public long-term Debt. For purposes hereof, no portion of any
Debt shall be considered "outstanding" if such Debt shall be defeased or
discharged in accordance with the indenture or other governing instrument
defining the rights of the holders of such Debt. Upon termination of this
Agreement, no further obligation on the part of Deere shall thereafter arise
hereunder.
6. DEFINED TERMS. Capitalized terms used herein, but not defined herein,
shall be as defined in the $3,500,000,000 Credit Agreement dated as of April 5,
1995, amended as of February 27, 1996 and among Deere and JDCC and The Chase
Manhattan Bank (formerly Chemical Bank) as Administrative Agent and as Auction
Agent, Deutsche Bank AG Chicago Branch as Syndication Agent, Bank of America
National Trust and Savings Association as Documentation Agent, and The
Toronto-Dominion Bank as Canadian Administrative Agent and various institutions
as Managing Agents and co-agents, as such credit agreement or any successor or
replacement agreement may be amended from time to time.
7. WAIVER. Deere hereby waives any failure or delay on the part of JDCC
in asserting or enforcing any of its rights or in making any claims or demands
hereunder.
8. RIGHTS OF LENDERS. The obligations of Deere to JDCC pursuant to this
Agreement are to JDCC only and do not run to, and are not enforceable directly
by, any creditor of JDCC; nor shall this Agreement cause Deere to be responsible
for the payment of any obligation of JDCC to any creditor thereof; PROVIDED,
HOWEVER that any Lender to JDCC shall have the right to demand that JDCC enforce
JDCC's rights under this Agreement and if JDCC fails or refuses to take timely
action to enforce such rights such Lender may proceed against JDCC to enforce
JDCC's rights under this Agreement. The term Lender in this paragraph 8 shall
mean any person, firm or corporation from whom JDCC is indebted for borrowed
money or that is a derivative counterparty to JDCC.
9. SUCCESSORS. The Agreements herein set forth shall be mutually binding
upon, and shall inure to the benefit of, Deere and JDCC and their respective
successors and assigns.
10. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE
STATE OF NEW YORK.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed the day and year first above written.
DEERE & COMPANY
By: /s/ R. W. Lane
---------------------
JOHN DEERE CAPITAL CORPORATION
By: /s/ M. P. Orr
---------------------
45
<PAGE>
EXHIBIT 12
JOHN DEERE CAPITAL CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED OCTOBER 31
-------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Earnings:
Income before income
taxes and changes
in accounting $ 206,588 $ 175,360 $ 161,809 $ 169,339 $ 142,920
Fixed charges 276,726 240,913 168,507 170,226 191,930
----------- ---------- ----------- ---------- -----------
Total earnings $ 483,314 $ 416,273 $ 330,316 $ 339,565 $ 334,850
----------- ---------- ----------- ---------- -----------
----------- ---------- ----------- ---------- -----------
Fixed charges:
Interest expense $ 273,748 $ 238,445 $ 166,591 $ 167,787 $ 189,288
Rent expense 2,978 2,468 1,916 2,439 2,642
----------- ---------- ----------- ---------- -----------
Total fixed charges $ 276,726 $ 240,913 $ 168,507 $ 170,226 $ 191,930
----------- ---------- ----------- ---------- -----------
----------- ---------- ----------- ---------- -----------
Ratio of earnings to
fixed charges * 1.75 1.73 1.96 1.99 1.74
----------- ---------- ----------- ---------- -----------
----------- ---------- ----------- ---------- -----------
</TABLE>
- ------------------
"Earnings" consist of income before income taxes, the cumulative effect of
changes in accounting and fixed charges. "Fixed charges" consist of interest
on indebtedness, amortization of debt discount and expense, an estimated amount
of rental expense under capitalized leases which is deemed to be representative
of the interest factor and rental expense under operating leases.
* The Company has not issued preferred stock. Therefore, the ratios of
earnings to combined fixed charges and preferred stock dividends are the
same as the ratios presented above.
46
<PAGE>
EXHIBIT 23
[LETTERHEAD]
INDEPENDENT AUDITORS' CONSENT
- -----------------------------
We consent to the incorporation by reference in Registration Statement Nos.
33-65088 and 333-10561 of John Deere Capital Corporation on Form S-3 of our
report dated November 26, 1996, appearing in this Annual Report on Form 10-K of
John Deere Capital Corporation for the year ended October 31, 1996, and to the
reference to us under the heading "Experts" in the Prospectuses, which are part
of such Registration Statements.
/s/ DELOITTE & TOUCHE LLP
January 15, 1997
47
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from 10-K and is
qualified in its entirety by reference to such financial information.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<CASH> 171
<SECURITIES> 0
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0
0
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</TABLE>
