-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SOV0sCWjq6NZcAQ01v3VnMPYKaNf4Y+YjsQIoti0VEcFAXV6/7wXI4ojWemunJHQ KBm1c/zIia54ei+iRWCGKw== 0000027673-99-000041.txt : 19990906 0000027673-99-000041.hdr.sgml : 19990906 ACCESSION NUMBER: 0000027673-99-000041 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990731 FILED AS OF DATE: 19990903 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DEERE JOHN CAPITAL CORP CENTRAL INDEX KEY: 0000027673 STANDARD INDUSTRIAL CLASSIFICATION: SHORT-TERM BUSINESS CREDIT INSTITUTIONS [6153] IRS NUMBER: 362386361 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06458 FILM NUMBER: 99706193 BUSINESS ADDRESS: STREET 1: FIRST INTERSTATE BANK BLDG STREET 2: 1 E FIRST ST STE 600 CITY: RENO STATE: NV ZIP: 89501 BUSINESS PHONE: 7027865527 MAIL ADDRESS: STREET 1: JOHN DEERE RD CITY: MOLINE STATE: IL ZIP: 61265 FORMER COMPANY: FORMER CONFORMED NAME: DEERE JOHN CREDIT CO DATE OF NAME CHANGE: 19890130 10-Q 1 =============================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 1999 Commission file no: 1-6458 -------------------------- JOHN DEERE CAPITAL CORPORATION Delaware 36-2386361 (State of incorporation) (IRS employer identification no.) 1 East First Street, Suite 600 Reno, Nevada 89501 (Address of principal executive offices) Telephone Number: (702) 786-5527 --------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No At July 31, 1999, 2,500 shares of common stock, without par value, of the registrant were outstanding, all of which were owned by John Deere Credit Company, a wholly-owned subsidiary of Deere & Company. The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with certain reduced disclosures as permitted by those instructions. ============================================================= PART I. FINANCIAL INFORMATION Item 1. Financial Statements -------------------- John Deere Capital Corporation and Subsidiaries Statements of Consolidated Income and Retained Earnings (Unaudited) (in millions) Three Months Nine Months Ended Ended July 31, July 31, 1999 1998 1999 1998 ----------------------------------------- Revenues Finance income earned on retail notes $ 100.7 $ 112.1 $ 304.4 $ 323.7 Lease revenues 69.7 51.1 192.6 135.6 Revolving charge account income 31.8 30.4 85.5 80.3 Finance income earned on wholesale notes 18.0 15.8 52.4 44.1 Securitization and servicing fee income 7.6 6.4 23.2 20.8 Net gain on retail notes sold 22.4 4.3 37.7 16.9 Interest income from short-term investments 1.4 1.9 6.0 6.9 Other income 9.8 4.4 17.4 9.8 - - ---------------------------------------------------------------- Total revenues 261.4 226.4 719.2 638.1 - - ---------------------------------------------------------------- Expenses Interest expense 91.2 95.3 269.6 274.7 Operating expenses: Administrative and operating expenses 33.4 29.1 94.5 84.1 Provision for credit losses 15.3 7.9 41.2 32.4 Fees paid to John Deere 1.8 2.4 7.9 8.3 Depreciation of equipment on operating leases 43.2 30.3 117.0 79.1 - - ----------------------------------------------------------------- Total operating expenses 93.7 69.7 260.6 203.9 - - ----------------------------------------------------------------- Total expenses 184.9 165.0 530.2 478.6 - - ----------------------------------------------------------------- Income of consolidated group before income taxes 76.5 61.4 189.0 159.5 Provision for income taxes 26.0 21.6 65.2 56.2 - - ----------------------------------------------------------------- Income of consolidated group 50.5 39.8 123.8 103.3 Equity in income (loss) of unconsolidated affiliates (.3) .1 .3 .1 - - ----------------------------------------------------------------- Net income $ 50.2 $ 39.9 $ 124.1 $ 103.4 Cash dividends declared (5.0) (12.5) (15.0) (37.5) Retained earnings at beginning of period 870.3 743.7 806.4 705.2 - - ----------------------------------------------------------------- Retained earnings at end of period $ 915.5 $ 771.1 $ 915.5 $ 771.1 = ================================================================= See Notes to Interim Financial Statements. Page 2 John Deere Capital Corporation and Subsidiaries Consolidated Balance Sheets (Unaudited) (in millions) July 31, October 31, July 31, 1999 1998 1998 ---------------------------------------- Assets Cash and cash equivalents $ 167.9 $ 191.1 $ 175.9 Receivables and leases: Retail notes 4,116.3 3,839.4 4,521.7 Revolving charge accounts 842.5 751.1 730.6 Wholesale notes 891.3 803.9 725.8 Financing leases 263.8 241.8 234.2 - - ------------------------------------------------------------------ Total receivables 6,113.9 5,636.2 6,212.3 Equipment on operating leases - net 1,136.4 891.5 826.2 - - ------------------------------------------------------------------ Total receivables and Leases 7,250.3 6,527.7 7,038.5 Allowance for credit Losses (80.6) (81.3) (86.1) - - ------------------------------------------------------------------ Total receivables and leases - net 7,169.7 6,446.4 6,952.4 - - ------------------------------------------------------------------ Other receivables 95.1 154.8 152.7 Investment in unconsolidated affiliates 9.5 20.0 18.9 Other assets 117.8 54.1 70.8 - - ------------------------------------------------------------------ Total Assets $7,560.0 $6,866.4 $7,370.7 = ================================================================== Liabilities and Stockholder's Equity Short-term borrowings: Commercial paper $1,465.8 $1,672.0 $1,968.2 John Deere 69.7 59.9 290.6 Current maturities of long-term borrowings 2,084.7 1,678.5 1,997.5 Other notes payable 6.8 7.5 - - ------------------------------------------------------------------ Total short-term Borrowings 3,620.2 3,417.2 4,263.8 - - ------------------------------------------------------------------ Accounts payable and accrued liabilities: Accrued interest on debt 60.7 45.5 65.8 Other payables 285.1 229.7 216.4 - - ------------------------------------------------------------------ Total accounts payable and accrued liabilities 345.8 275.2 282.2 - - ------------------------------------------------------------------ Deposits withheld from dealers and merchants 121.2 156.4 151.0 - - ------------------------------------------------------------------ Long-term borrowings: Senior debt 2,295.3 1,949.2 1,640.3 Subordinated debt 150.0 150.0 150.0 - - ------------------------------------------------------------------ Total long-term Borrowings 2,445.3 2,099.2 1,790.3 - - ------------------------------------------------------------------ Total liabilities 6,532.5 5,948.0 6,487.3 - - ------------------------------------------------------------------ Stockholder's equity Common stock, without par value (issued and outstanding - 2,500 shares owned by John Deere Credit Company) 112.8 112.8 112.8 Retained earnings 915.5 806.4 771.1 Cumulative translation Adjustment (.8) (.8) (.5) - - ------------------------------------------------------------------ Total stockholder's equity 1,027.5 918.4 883.4 - - ------------------------------------------------------------------ Total Liabilities and Stockholder's Equity $7,560.0 $6,866.4 $7,370.7 = ================================================================== See Notes to Interim Financial Statements Page 3 John Deere Capital Corporation and Subsidiaries Statements of Consolidated Cash Flows (Unaudited) (in millions) Nine Months Ended July 31, 1999 1998 -------------------------- Cash Flows from Operating Activities: Net income $ 124.1 $ 103.4 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 41.2 32.4 Provision for depreciation 119.1 81.3 Equity in income of unconsolidated affiliates (.3) (.1) Other (13.7) 40.2 - - ---------------------------------------------------------------- Net cash provided by operating activities 270.4 257.2 - - ---------------------------------------------------------------- Cash Flows from Investing Activities: Cost of receivables and leases acquired (6,008.2) (5,591.4) Collections of receivables 4,181.2 3,909.8 Proceeds from sales of receivables 1,344.5 804.9 Other 63.3 41.3 - - ---------------------------------------------------------------- Net cash used for investing activities (419.2) (835.4) - - ---------------------------------------------------------------- Cash Flows from Financing Activities: Decrease in commercial paper (259.1) (23.7) Change in receivable/payable with John Deere 10.2 (57.7) Change in other notes payable (6.8) 5.1 Proceeds from issuance of long-term borrowings 1,750.0 996.0 Principal payments on long-term borrowings (1,353.7) (332.5) Dividends paid (15.0) (37.5) - - ---------------------------------------------------------------- Net cash provided by financing activities 125.6 549.7 - - ---------------------------------------------------------------- Net decrease in cash and cash equivalents (23.2) (28.5) Cash and cash equivalents at beginning of period 191.1 204.4 - - ---------------------------------------------------------------- Cash and cash equivalents at end of period $ 167.9 $ 175.9 = ================================================================= See Notes to Interim Financial Statements. Page 4 John Deere Capital Corporation and Subsidiaries Notes to Interim Financial Statements (1) The consolidated financial statements of John Deere Capital Corporation (Capital Corporation) and its subsidiaries (the Company) have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted as permitted by such rules and regulations. All adjustments, consisting of normal recurring adjustments, have been included. Management believes that the disclosures are adequate to present fairly the financial position, results of operations and cash flows at the dates and for the periods presented. It is suggested that these interim financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report on Form 10-K. Results for interim periods are not necessarily indicative of those to be expected for the fiscal year. 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. (2) In the third quarter of 1999, the Company sold the yacht retail note portfolio ($107 million principal value) to Republic Security Bank and recognized a gain on the sale of $2.5 million. In addition, the Company sold intangible assets related to this lending activity and recognized a gain of $5.7 million, which is classified in "Other income". The Company continues to offer wholesale financing for yacht products. (3) In the second quarter of 1999, the Company purchased the remaining 50 percent interest in John Deere Credit Limited (JDCL) located in Gloucester, England from Farming and Agricultural Finance Limited (FAF), a subsidiary of Lombard North Central Plc, for $18 million, which included a premium on portfolios owned by JDCL of $2 million. In addition, the Company acquired an installment receivable portfolio from FAF and began administering a separate receivable portfolio of FAF in exchange for a servicing fee. An additional $2 million was paid representing a premium on the FAF receivable portfolio. Both of these premiums will be amortized to expense over approximately three years. The purchase of JDCL and the acquisition of FAF's receivable portfolio added approximately $437 million to the Company's net agricultural installment portfolio owned at acquisition date. (4) The principal business of the Company is providing and administering financing for retail purchases of new and used equipment manufactured by Deere & Company's agricultural, construction and commercial and consumer equipment divisions. The Company purchases retail installment sales and loan contracts (retail notes) from Deere & Company and its wholly-owned subsidiaries (collectively called John Deere). John Deere acquires these retail notes through independent John Deere retail dealers. The Company also purchases and finances certain agricultural, construction and lawn and grounds care retail notes unrelated to John Deere. In addition, the Company purchases and finances recreational product retail notes acquired from independent dealers (recreational product retail notes). The Company also leases equipment to retail customers, finances and services revolving charge accounts acquired from and offered through merchants or farm input providers in the agricultural, construction, and lawn and grounds care markets (revolving charge accounts), and provides wholesale financing for inventories of recreational vehicles, manufactured housing units, yachts, John Deere engines, and John Deere agricultural and John Deere construction equipment owned by dealers of those products (wholesale notes). Retail notes, revolving charge accounts, financing leases and Page 5 wholesale notes receivable are collectively called "Receivables." Receivables and operating leases are collectively called "Receivables and Leases." (5) The Company's ratio of earnings before fixed charges to fixed charges was 1.83 to 1 for the third quarter of 1999 compared with 1.63 to 1 for the third quarter of 1998. The ratio of earnings before fixed charges to fixed charges was 1.69 to 1 for the first nine months of 1999 and 1.57 to 1 for the first nine months of 1998. "Earnings before fixed charges" consist of income before income taxes, the cumulative effect of changes in accounting and fixed charges. "Fixed charges" consist of interest on indebtedness, amortization of debt discount and expense, an estimated amount of rental expense under capitalized leases which is deemed to be representative of the interest factor and rental expense under operating leases. (6) In the first quarter of 1999, the Company adopted Financial Accounting Standards Board (FASB) Statement No. 130, Reporting Comprehensive Income. Comprehensive income includes all changes in the Company's equity during the reporting period, except transactions with stockholders of the Company. Comprehensive income for the first nine months of 1999 and 1998 consisted of the following in millions of dollars: Three Months Ended Nine Months Ended July 31, July 31, -------------------------------------- 1999 1998 1999 1998 -------------------------------------- Net income $50.2 $39.9 $124.1 $103.4 Change in cumulative translation adjustment (.9) (.2) (.3) -------------------------------------- Comprehensive income $49.3 $39.7 $124.1 $103.1 ====================================== Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations Net income was $50.2 million in the third quarter and $124.1 million for the first nine months of 1999, compared with $39.9 million and $103.4 million for the same periods last year. The 1999 third quarter and year-to-date results benefited from higher gains on the sale of retail notes, the sale of the yacht retail note portfolio and related intangibles (see Note 2 to the Interim Financial Statements), and higher income on a 6 percent increase in the average balance of Receivables and Leases financed during the first nine months. Revenues totaled $261.4 million and $719.2 million for the third quarter and for the first nine months, respectively, of 1999, compared to $226.4 million and $638.1 million for the same periods a year ago. Finance income earned on retail notes totaled $304.4 million for the first nine months of 1999, compared to $323.7 million for the same period in 1998. This decrease was primarily the result of a 7 percent lower average retail note portfolio outstanding due to recreational product retail note sales over the last twelve months. Lease revenues increased $57.0 million, to $192.6 million in the first nine months of 1999, from $135.6 million in the first nine months of 1998, due to a 46 percent increase in the average balance of equipment on operating leases and financing leases. Finance income earned on wholesale notes increased $8.3 million, to $52.4 million for the first nine months of 1999, from $44.1 million in the first nine months of 1998. This increase was primarily the result of continued growth in the financing for inventories of John Deere construction equipment, used agricultural equipment, recreational vehicles and yachts. Revolving charge account income increased $5.2 million, to $85.5 million for the first nine months of 1999, from $80.3 million in the first nine months of 1998. This increase was primarily due to growth in the agricultural operating loan portfolio. Page 6 Net gains on the sales of retail notes, including adjustments to prior sales, totaled $22.4 million and $37.7 million for the third quarter and for the first nine months of 1999, compared to $4.3 million and $16.9 million for the same periods a year ago. The third quarter and year-to-date increases were primarily related to the increased sale of recreational vehicle, agricultural and construction retail notes compared to the same periods last year. The sale of the yacht retail note portfolio on July 30, 1999 also contributed to the third quarter and year-to-date increases (see Note 2 to the Interim Financial Statements). Additional sales of retail notes are expected to be made in the future. Interest expense totaled $91.2 million for the third quarter of 1999 and $269.6 million for the first nine months of 1999, compared to $95.3 million and $274.7 million for the same periods in 1998. This decrease in the first nine months of 1999 was primarily due to a reduction in the weighted average annual interest rate incurred on all interest-bearing borrowings from 6.13 percent for the first nine months of 1998 to 5.83 percent for the first nine months of 1999. This decrease was mostly offset by higher average borrowings of $6.068 billion in the first nine months of 1999, compared to $5.836 billion in the first nine months of 1998. Administrative and operating expenses were $33.4 million in the third quarter of 1999 and $94.5 million for the first nine months of 1999, compared with $29.1 million and $84.1 million for the same periods in 1998. These increases were attributable to the costs associated with administering a larger Receivables and Lease portfolio as well as higher employment costs relating to the increasing level of new acquisition volumes. Depreciation of equipment on operating leases increased to $43.2 million in the third quarter of 1999 and $117.0 million for the first nine months of 1999, compared to $30.3 million and $79.1 million for the same periods in 1998, as a result of the increase in operating leases financed. During the third quarter and the first nine months of 1999, the provision for credit losses totaled $15.3 million and $41.2 million, respectively, compared with $7.9 million and $32.4 million in the same periods last year. This increase in the provision for credit losses for the first nine months of 1999 was primarily the result of an increase in the average portfolio of Receivables and Leases financed as well as higher write-offs on the owned portfolio. The annualized provision for credit losses, as a percentage of the total average portfolio outstanding, was 0.84 percent for the third quarter of 1999 and 0.77 percent for the first nine months of 1999, compared with 0.45 percent and 0.64 percent for the same periods last year. Receivable and Lease acquisition volumes were as follows (in millions of dollars): Three Months Ended July 31, 1999 1998 $ Change % Change -------------------------------------- Retail notes: Agricultural equipment* $431 $565 $(134) (24)% Construction equipment 185 123 62 50 Lawn and grounds care equipment 87 71 16 23 Recreational products 77 106 (29) (27) ------------------------------ Total 780 865 (85) (10) ------------------------------ Revolving charge accounts 601 535 66 12 Wholesale notes 416 403 13 3 Financing leases 47 43 4 9 Equipment on operating leases 147 155 (8) (5) -------------------------------- Total $1,991 $2,001 $(10) 0 ================================ Page 7 Nine Months Ended July 31, 1999 1998 $ Change % Change -------------------------------------- Retail notes: Agricultural equipment* $1,935 $2,010 $(72) (4)% Construction equipment 414 329 85 26 Lawn and grounds care equipment 188 138 47 34 Recreational products 256 271 (15) (6) ------------------------------ Total 2,793 2,748 45 2 ------------------------------ Revolving charge accounts 1,414 1,232 182 15 Wholesale notes 1,226 1,077 149 14 Financing leases 103 95 8 8 Equipment on operating leases 465 439 26 6 ------------------------------- Total $6,001 $5,591 $410 7 =============================== *Does not include the acquisition of JDCL or FAF installment portfolios. (See Note 3 to the Interim Financial Statements.) Retail note volumes, excluding the acquisition of the JDCL and FAF installment portfolios, increased by $45 million for the first nine months of 1999 compared to the first nine months of 1998, primarily due to increases in the construction and lawn and grounds care equipment retail note volumes. However, the agricultural retail note volumes declined in the third quarter and the first nine months of 1999 due to the weakening of the U.S. agricultural market. Recreational product retail note volumes also declined in the third quarter and the first nine months of 1999 primarily due to lower acceptances in the yacht market. (See Note 2 to the Interim Financial Statements.) Revolving charge volumes increased due to the strong demand for the Farm Plan and John Deere Credit Revolving Plan products and operating loans offered to agricultural customers. Wholesale note volumes increased significantly during the first nine months of 1999 primarily due to higher construction equipment floor planning notes, recreational vehicle and yacht wholesale notes, and a used agricultural equipment floor planning program introduced in April 1998. Operating lease volumes increased in the first nine months over last year due to agricultural low-rate and guaranteed residual value leasing programs sponsored by the Company or John Deere. Total Receivables and Leases held were as follows (in millions of dollars): July 31, October 31, July 31, 1999 1998 1998 -------------------------------------- Retail notes: Agricultural equipment* $3,191 $2,285 $2,800 Construction equipment 434 703 682 Lawn and grounds care equipment 333 270 256 Recreational products 158 581 783 ------------------------------------ Total 4,116 3,839 4,521 ------------------------------------ Revolving charge accounts 843 751 731 Wholesale notes 891 804 726 Financing leases 264 242 234 Equipment on operating leases 1,136 892 826 ------------------------------------ Total $7,250 $6,528 $7,038 ==================================== * Agricultural equipment retail notes at July 31, 1999 include the JDCL and FAF installment portfolio balances. (See Note 3 to the Interim Financial Statements.) Page 8 Receivables and Leases administered by the Company, which include retail notes sold, were as follows (in millions of dollars): July 31, October 31, July 31, 1999 1998 1998 ----------------------------------- Receivables and Leases administered: Receivables and Leases owned by the Company $7,250 $6,528 $7,038 Retail notes sold and securitized (with limited recourse)* 1,658 1,812 1,246 Retail notes sold (without recourse)** 511 376 183 Receivables serviced (without recourse)*** 52 ----------------------------------- Total Receivables and Leases Administered $9,471 $8,716 $8,467 =================================== * The Company's maximum exposure under all retail note recourse provisions at July 31, 1999, October 31, 1998 and July 31, 1998 was $170 million, $184 million and $169 million, respectively. In addition, the Company has guaranteed letters of credit on behalf of John Deere Credit Inc., the John Deere finance subsidiary in Canada, as part of two retail note sales. At July 31, 1999, the maximum exposure under these agreements was approximately $8 million. ** On recreational product retail note sales, the Company continues to administer the portfolio outstanding for a fee until the servicing rights are assumed by their owner. The Company anticipates the servicing relationship will terminate within twelve months from the date of sale. *** On February 1, 1999, the Company began servicing a receivable portfolio on behalf of FAF. These servicing rights were obtained in conjunction with the Company's acquisition of JDCL. (See Note 3 to the Interim Financial Statements.) Total Receivable and Lease amounts 60 days or more past due, by product and as a percentage of total balances held were as follows (in millions of dollars): July 31, October 31, July 31, 1999 1998 1998 $ % $ % $ % ---------------------------------------- Retail notes: Agricultural equipment $11.2 .35% $9.5 .42% $8.6 .31% Construction equipment 2.2 .51 2.0 .28 2.0 .29 Lawn and grounds care equipment .8 .24 .7 .26 .7 .29 Recreational products .1 .06 .2 .03 .2 .02 ----------------------------------------- Total 14.3 .35 12.4 .32 11.5 .25 ----------------------------------------- Revolving charge accounts 8.4 1.00 8.4 1.12 7.2 .98 Wholesale notes 1.8 .20 .6 .07 1.3 .18 Leases 6.4 .46 3.8 .34 3.4 .32 ----------------------------------------- Total $30.9 .43 $25.2 .39 $23.4 .33 ========================================= The balance of retail notes owned (principal plus accrued interest) with any installment 60 days or more past due was $54 million, $54 million and $46 million at July 31, 1999, October 31, 1998 and July 31, 1998, respectively. The balance of retail notes held on which any installment is 60 days or more past due as a percentage of Page 9 ending retail notes receivable was 1.30 percent, 1.42 percent and 1.02 percent at July 31, 1999, October 31, 1998 and July 31, 1998, respectively. Increases in past due leases are primarily in the agricultural and construction portfolios. During the third quarter and the first nine months of 1999, write- offs (net of recoveries) of Receivables and Leases totaled $11.1 million and $27.0 million, respectively, compared with $4.5 million and $23.3 million in the same periods last year. Annualized write- offs, as a percentage of the total average portfolio outstanding, were 0.62 percent for the third quarter of 1999 and 0.50 percent for the first nine months of 1999, compared with 0.26 percent and 0.46 percent for the same periods last year. Write-offs relating to retail notes increased 21 percent, or $2.4 million, in the first nine months of 1999, when compared with the first nine months of 1998, primarily due to increased write-offs of agricultural equipment retail notes, partially offset by decreased write-offs of construction equipment and recreational product retail notes. Lease write-offs increased $.8 million in the first nine months of 1999 when compared to last year primarily due to higher write-offs on agricultural leases. Revolving charge account write-offs increased $1.1 million in the first nine months of 1999 when compared to last year primarily due to higher write-offs on agricultural accounts. Wholesale note write-offs decreased $.7 million in the first nine months of 1999 when compared to the same period last year. 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 $121 million at July 31, 1999, compared with $156 million at October 31, 1998 and $151 million at July 31, 1998. Effective February 1, 1999, the U.S. John Deere agricultural dealer reserve program was modified to evaluate and adjust reserves outstanding quarterly rather than annually under the previous program. In addition, the minimum required reserve for select dealers was adjusted from 3 percent to 2 percent of the aggregate balance outstanding on all installment contracts originated through that dealer. Approximately 48 percent of U.S. John Deere agricultural dealers qualified for the lower reserve program. The Company's allowance for credit losses on all Receivables and Leases financed totaled $81 million at July 31, 1999, $81 million at October 31, 1998 and $86 million at July 31, 1998. The allowance for credit losses represented 1.11 percent of the total Receivables and Leases financed at July 31, 1999, 1.25 percent at October 31, 1998, and 1.22 percent at July 31, 1998. The Company's allowance for credit losses, as a percentage of total Receivables and Leases, has declined during the last twelve months due to an ongoing evaluation of loss experience and related estimates to ensure the allowance for credit losses is maintained at an adequate level. Management believes the allowance for credit losses at July 31, 1999 is sufficient to provide adequate protection against losses. Year 2000 The Company has established a global program (the "Year 2000 Program") to address the inability of certain computer and infrastructure systems to process dates in the Year 2000 and later. The major assessment areas include business information systems, mainframe and personal computers, software, the distributed network, facilities systems, the Company's products, and the readiness of the Company's suppliers and distribution network. The program includes the following phases: identification and assessment, business criticality analysis, project work prioritization, compliance plan development remediation and testing, production implementation, and contingency plan development for mission critical systems. The Company is on schedule to become Year 2000 ready with its mission critical activities and systems, allowing substantial time for further testing, verification and the final conversion of less important systems. Approximately 99 percent of the Company's systems identified as being mission critical have been tested Page 10 and verified as being Year 2000 compliant. The Company's goal has been to have all mission critical and non-mission critical systems compliant by October 31, 1999, and the progress to date makes this goal appear realistic. The Company has initiated information and infrastructure systems modifications in its effort to ensure that both information technology (IT) and non-IT systems are compliant. The Company is requiring suppliers of new software or equipment and third parties who develop or modify software to provide written certification that their products are Year 2000 compliant and have been tested accordingly. In some instances, the Company is independently testing this software. The Company is working with suppliers to confirm embedded systems are compliant and perform the necessary testing. The Company is assessing the Year 2000 readiness of its critical suppliers and merchants. The Company has surveyed its major suppliers and has surveyed the largest volume generating merchants and is following up as appropriate with prioritization based on mission criticality. The total cost of the modifications and upgrades including internal costs to date has been immaterial or approximately $5 million pretax since the beginning of 1997. Future costs to become Year 2000 ready are expected to be less than $1 million pretax. These costs are expensed as incurred and do not include the cost of scheduled replacement hardware or software. Other major systems projects have not been deferred due to the Year 2000 compliance projects. Although no assurances can be given as to the Company's readiness, particularly as it relates to third parties, based upon the progress to date, the Company does not expect consequences of any of the Company's unanticipated or unsuccessful modifications to have a material adverse effect on the Company's financial position or results of operation. However, the failure to correct a material Year 2000 problem could result in the interruption of certain normal business activities and operations. The Company's most reasonably likely worst case scenario is that the Year 2000 noncompliance of a critical third party could result in lost revenues or profits. The Company is developing contingency plans, which will be an ongoing activity during 1999, should any Year 2000 failures occur in any to the assessment areas noted above. Euro Conversion The Company is well advanced in the process of identification, implementation and testing of its systems to adopt the euro currency in its operations. The transition period for this change is January 1, 1999 through January 1, 2002. The Company's affected suppliers, distribution network and financial institutions have been contacted and to date the currency change has not had a significant impact on these relationships. The cost of information systems modifications, effects on product pricing and purchase contracts, and the impact on foreign currency financial instruments, including derivatives, are not expected to be material. Safe Harbor Statement Statements under the "Year 2000" heading and other statements herein that relate to future operating periods are subject to important risks and uncertainties that could cause actual results to differ materially. Further information, including factors that potentially could materially affect the Company's and John Deere's financial results, is included in the most recent Deere & Company Form 10-K and other John Deere and Company filings with the Securities and Exchange Commission 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 Page 11 market and in private sales. The Company's ability to obtain funds is affected by its debt ratings, which are closely related to the outlook for and the financial condition of Deere & Company, and the nature and availability of support facilities, such as its lines of credit. For information regarding Deere & Company and its business, see Exhibit 99. The Company's ability to meet its debt obligations is supported in a number of ways. All commercial paper issued is backed by bank credit lines. The assets of the Company are self-liquidating in nature. A strong equity position is available to absorb unusual losses on these assets. Liquidity is also provided by the Company's ability to sell these assets. The Company's business is somewhat seasonal, with overall acquisition volumes of Receivables and Leases traditionally higher in the second half of the fiscal year than in the first half, and overall collections of Receivables and Leases traditionally somewhat higher in the first six months than in the last six months of the fiscal year. During the first nine months of 1999, the aggregate net cash provided by operating and financing activities was primarily used to increase Receivables and Leases. Net cash provided by operating activities was $270 million in the first nine months of 1999. Financing activities provided $126 million during the same period, resulting from a $141 million net increase in total borrowings, which was partially offset by $15 million in dividend payments to John Deere Credit Company. Net cash used for investing activities totaled $419 million in the first nine months of 1999, primarily due to Receivable and Lease acquisitions exceeding collections by $1,827 million, which was partially offset by the $1,345 million in proceeds from the sale of receivables. Cash and cash equivalents decreased $23 million during the first nine months of 1999. During the first nine months of 1998, the aggregate net cash provided by operating and financing activities was primarily used to increase Receivables and Leases. Net cash provided by operating activities was $257 million in the first nine months of 1998. Financing activities provided $550 million during the same period, resulting from a $588 million net increase in total borrowings, which was partially offset by $38 million in dividend payments to John Deere Credit Company. Net cash used for investing activities totaled $835 million in the first nine months of 1998, primarily due to Receivable and Lease acquisitions exceeding collections by $1,682 million, which was partially offset by the $805 million in proceeds from the sale of receivables. Cash and cash equivalents decreased $29 million during the first nine months of 1998. Total interest-bearing indebtedness amounted to $6.065 billion at July 31, 1999, compared with $5.516 billion at October 31, 1998 and $6.054 billion at July 31, 1998, generally corresponding with the level of Receivables and Leases financed and the level of cash and cash equivalents. Total short-term indebtedness amounted to $3.620 billion at July 31, 1999, compared with $3.417 billion at October 31, 1998 and $4.264 billion at July 31, 1998. Total long-term indebtedness amounted to $2.445 billion, $2.099 billion and $1.790 billion at July 31, 1999, October 31, 1998 and July 31, 1998, respectively. The ratio of total interest-bearing debt to stockholder's equity was 5.9 to 1, 6.0 to 1 and 6.9 to 1 at July 31, 1999, October 31, 1998 and July 31, 1998, respectively. During the first nine months of 1999, the Capital Corporation issued $300 million of 6% notes due in 2009, and retired $150 million of 9-5/8% subordinated notes, $97 million of 5% Swiss franc bonds, $200 million of 6% notes and $200 million of 6.3% notes all due in the first nine months of 1999. The Capital Corporation's subsidiary, John Deere Credit Limited in Gloucester, England, also retired $67 million of long-term debt due in 1999. The Capital Corporation issued $1,450 million and retired $640 million of medium-term notes during the same period. At July 31, 1999, the Capital Corporation, Deere & Company, John Deere Limited (Canada) and John Deere Credit Inc. (Canada), jointly, maintained $5.527 billion of unsecured lines of credit with various Page 12 banks in North America and overseas, $2.588 billion of which was unused. For the purpose of computing unused credit lines, total short-term borrowings, excluding the current portion of long-term borrowings, of the Capital Corporation, Deere & Company, John Deere Limited (Canada) and John Deere Credit Inc. (Canada) were considered to constitute utilization. Included in the total credit lines is a long-term credit agreement commitment for $3.500 billion expiring on February 24, 2003. An annual facility fee on the credit agreement is charged to the Capital Corporation based on utilization. The Capital Corporation declared and paid a cash dividend of $5 million to John Deere Credit Company in each of the first three quarters of 1999. John Deere Credit Company paid comparable dividends to Deere & Company. On August 27, 1999, the Capital Corporation declared a cash dividend of $5 million to John Deere Credit Company, which in turn declared a cash dividend of $5 million to Deere & Company, each payable on September 7, 1999. Item 3. Quantitative and Qualitative Disclosures About Market Risk. See the information under "Management's Discussion and Analysis," Note 12 "Financial Instruments" and "Supplemental Information (Unaudited)" in the Company's most recent annual report filed on Form 10-K. There has been no material change in this information. Page 13 PART II. OTHER INFORMATION Item 1. 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 2. Changes in Securities and Use of Proceeds. Omitted pursuant to instruction H(2). Item 3. Defaults Upon Senior Securities. Omitted pursuant to instruction H(2). Item 4. Submission of Matters to a Vote of Security Holders. Omitted pursuant to instruction H(2). Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. (a)Exhibits. See the index to exhibits immediately preceding the exhibits filed with this report. Certain instruments relating to long-term debt, constituting less than 10% of the registrant's total assets, are not filed as exhibits herewith pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. The registrant will file copies of such instruments upon request of the Commission. (b)Reports on Form 8-K. Current report on Form 8-K dated May 18, 1999 (Items 5 and 7). Page 14 SIGNATURES Pursuant to the requirements 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 Date: September 3, 1999 By: /s/ Nathan J. Jones -------------------------------- Nathan J. Jones Senior Vice President and Principal Financial Officer Page 15 INDEX TO EXHIBITS Exhibit (12) Computation of ratio of earnings to fixed charges (27) Financial data schedule (99) Part I of Deere & Company Form 10-Q for the quarter ended July 31, 1999 --(Securities and Exchange Commission file number 1-4121*). __________________________ *Incorporated by reference. Copies of these exhibits are available from the Company upon request. EX-12 2 Exhibit 12 John Deere Capital Corporation and Subsidiaries Computation of Ratio of Earnings to Fixed Charges (thousands of dollars) Nine Months Ended July 30, ------------------------------ 1999 1998 ----------- ----------- Earnings: Income before income taxes and changes in accounting $189,047 $159,519 Fixed charges 273,500 278,524 ----------- ---------- Total earnings $462,547 $438,043 =========== ========== Fixed charges: Interest expense $269,626 $274,837 Rent expense 3,874 3,687 ----------- ---------- Total fixed charges $273,500 $278,524 =========== ========== Ratio of earnings to fixed charges * 1.69 1.57 =========== ========== For the Years Ended October 31, ------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- ------- Earnings: Income before income taxes and changes in accounting $233,534 $211,251 $206,588 $175,360 $161,809 Fixed charges 373,237 330,649 276,726 240,913 168,507 -------- -------- -------- -------- -------- Total earnings $606,771 $541,900 $483,314 $416,273 $330,316 ======== ======== ======== ======== ======== Fixed charges: Interest expense $368,381 $326,867 $273,748 $238,445 $166,591 Rent expense 4,856 3,782 2,978 2,468 1,916 -------- -------- -------- -------- -------- Total fixed charges $373,237 $330,648 $276,726 $240,913 $168,507 ======== ======== ======== ======== ======== Ratio of earnings to fixed charges * 1.63 1.64 1.75 1.73 1.96 ======== ======== ======== ======== ======== _______ "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. EX-27 3
5 This schedule contains summary financial information extracted from Form 10-Q and is qualified in its entirety by reference to such financial information. 0000027673 JOHNDEERECAPITALCORP 1,000,000 U.S. DOLLARS 9-MOS OCT-31-1999 NOV-01-1998 JUL-31-1999 1 168 0 6,209 81 0 0 35 16 7,560 0 2,445 0 0 113 915 7,560 0 719 0 117 0 41 270 189 65 124 0 0 0 124 0 0
-----END PRIVACY-ENHANCED MESSAGE-----