<PAGE 1>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission file number 1-8175
_____________________________
IBM CREDIT CORPORATION
______________________________________________________
(Exact name of registrant as specified in its charter)
DELAWARE 22-2351962
________________________ ____________________________________
(State of incorporation) (IRS employer identification number)
1133 Westchester Avenue
White Plains, New York 10604-3505
________________________________________ ____________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 914-642-3000
____________
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
________________________________ _______________________
5.36% Notes due October 27, 1998 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
___ ___ As of February 28, 1998, 936 shares of capital
stock, par value $1.00 per share, were held by International
Business Machines Corporation. Aggregate market value of
the voting stock held by nonaffiliates of the registrant at
February 28, 1998: NONE.
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 the reduced disclosure format.
<PAGE 2>
TABLE OF CONTENTS
_________________
PART I Page
Item 1. Business 3
Item 2. Properties 3
Item 3. Legal Proceedings 3
Item 4. Submission of Matters to a Vote of Security Holders 3
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 3
Item 6. Selected Financial Data 4
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5
Item 8. Financial Statements and Supplementary Data 15
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 40
PART III
Item 10. Directors and Executive Officers of the Registrant 40
Item 11. Executive Compensation 40
Item 12. Security Ownership of Certain Beneficial Owners and
Management 40
Item 13. Certain Relationships and Related Transactions 40
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 40
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<PAGE 3>
PART I
ITEM 1. BUSINESS:
The principal business of IBM Credit Corporation (the
Company) is the financing of IBM products and services. All
of the outstanding capital stock of the Company is owned by
International Business Machines Corporation (IBM), a New
York corporation. The Company finances the purchase and
lease of IBM products and related products and services by
customers of IBM in the United States and finances inventory
and accounts receivable for dealers and remarketers of IBM
and non-IBM products and services.
Pursuant to a Support Agreement between IBM and the
Company, IBM has agreed to retain 100 percent of the voting
capital stock of the Company, unless required to dispose of
any or all such shares of stock pursuant to a court decree
or order of any governmental authority that, in the opinion
of counsel to IBM, may not be successfully challenged. IBM
has also agreed to cause the Company to have a tangible net
worth of at least $1.00 at all times.
ITEM 2. PROPERTIES:
The Company's principal executive offices are located
at an IBM owned facility in White Plains, New York. The
executive offices comprise approximately 200,000 square feet
of office space. The Company occupies this space under an
arrangement with IBM.
ITEM 3. LEGAL PROCEEDINGS:
None material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
Omitted pursuant to General Instruction J.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS:
All shares of the Company's capital stock are owned by
IBM, and accordingly, there is no market for such stock.
The Company paid IBM cash dividends of $50,000,000 and
$45,000,000 during 1997 and 1996, respectively. Dividends
are declared by the Board of Directors of the Company.
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<TABLE>
ITEM 6. SELECTED FINANCIAL DATA:
The following selected financial data should be read in conjunction with the financial statements of
IBM Credit Corporation and the related notes to the financial statements included in this document.
<CAPTION>
(Dollars in thousands) 1997 1996 1995 1994 1993
___________ ___________ __________ ___________ ___________
<S> <C> <C> <C> <C> <C>
For the year:
FINANCE AND OTHER INCOME. . . . . . . $1,630,895 $1,497,800 $1,452,285 $1,484,680 $1,770,430
GROSS PROFIT ON EQUIPMENT SALES . . . 60,574 50,936 74,613 68,508 63,580
INTEREST EXPENSE. . . . . . . . . . . 538,560 436,109 394,572 306,125 365,675
NET EARNINGS. . . . . . . . . . . . . 283,893 271,082 230,475 250,589 220,220
DIVIDENDS . . . . . . . . . . . . . . 50,000 45,000 146,419 295,000 325,000
PRODUCTS PURCHASED FOR LEASES . . . . 4,803,985 3,903,052 2,931,619 1,659,019 2,165,577
LOANS RECEIVABLE FINANCING. . . . . . 1,460,214 1,211,318 892,796 496,308 441,939
IBM state and local installment
RECEIVABLES AND LEASES. . . . . . . 411,029 410,328 364,636 232,845 294,166
OTHER CAPITAL EQUIPMENT FINANCING . . 274,869 225,744 291,688 376,296 488,594
WORKING CAPITAL FINANCING . . . . . . 15,005,200 13,387,014 10,297,600 7,597,300 5,866,300
RETURN ON AVERAGE ASSETS. . . . . . . 2.1% 2.4% 2.3% 2.7% 2.0%
RETURN ON AVERAGE EQUITY. . . . . . . 18.6% 20.7% 20.9% 24.1% 19.1%
At end of year:
TOTAL ASSETS. . . . . . . . . . . . . $16,572,116 $12,946,139 $11,425,551 $9,667,715 $10,041,543
NET INVESTMENT IN CAPITAL LEASES. . . 4,931,292 4,214,822 3,966,255 3,687,971 4,437,257
EQUIPMENT ON OPERATING LEASES, NET. . 3,583,641 2,551,382 1,695,812 1,573,242 1,753,121
LOANS RECEIVABLE. . . . . . . . . . . 2,381,261 1,846,947 1,473,822 1,070,619 1,037,864
WORKING CAPITAL FINANCING RECEIVABLES 3,249,310 2,898,688 3,158,932 2,135,020 1,425,781
SHORT-TERM DEBT . . . . . . . . . . . 8,591,781 6,566,400 6,472,627 4,355,038 4,227,724
LONG-TERM DEBT. . . . . . . . . . . . 2,476,488 1,515,937 1,115,440 1,583,822 2,279,796
STOCKHOLDER'S EQUITY. . . . . . . . . 1,668,949 1,435,056 1,208,574 1,121,218 1,150,729
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</TABLE>
<PAGE 5> ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS:
OVERVIEW
Net earnings for 1997 were $283.9 million, yielding a return
on average equity of 18.6 percent, as compared with 1996 net
earnings of $271.1 million, yielding a return on average
equity of 20.7 percent.
FINANCING ORIGINATED
For the year ended December 31, 1997, the Company originated
capital equipment financing for end users of $6,950.1
million, a 21 percent increase from $5,750.4 million for
1996. For the year ended December 31, 1997, originations of
working capital financing for dealers and remarketers of
information industry products increased by 12 percent to
$15,005.2 million, from $13,387.0 million for 1996.
The growth in capital equipment financing originated is
related to IBM's increase in placements of its products and
services in the United States and an increase in the
propensity for customers to finance their acquisitions with
the Company throughout 1997, compared with 1996.
Capital equipment financings for end users comprised
purchases of $3,998.1 million of information handling
systems from IBM, financing for IBM software and services of
$1,182.9 million, installment and lease financing for state
and local government customers of $411.0 million for the
account of IBM, financing originated for installment
receivables of $285.9 million and other financing of
$1,072.2 million for IBM equipment, as well as related
non-IBM equipment to meet IBM customers' total solution
requirements. The purchases of $3,998.1 million from IBM
consisted of $2,252.9 million for capital leases and
$1,745.2 million for operating leases.
The Company's capital lease portfolio primarily includes
direct financing leases. Direct financing leases consist
principally of IBM information handling equipment with terms
generally from three to five years. Operating leases
consist principally of IBM information handling equipment
with terms generally from two to four years.
The growth in working capital financing originations
reflects volume increases in IBM's personal system client
products for remarketers financed by the Company throughout
1997. Working capital financing receivables arise primarily
from secured inventory and accounts receivable financing for
dealers and remarketers of IBM and non-IBM products.
Payment terms for inventory secured financing generally
range from 30 days to 45 days. Payment terms for accounts
receivable secured financing generally range from 30 days to
90 days.
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<PAGE 6>
REMARKETING ACTIVITIES
In addition to originating new financing, the Company
remarkets used IBM equipment. This equipment is primarily
sourced from the conclusion of lease transactions and is
typically remarketed in cooperation with the IBM sales
force. The equipment is generally leased or sold to end
users. These transactions may be with existing lessees or,
when equipment is returned, with new customers.
Remarketing activities are fully integrated in the Company's
financial statements. Remarketing activities comprise
income from follow-on capital and operating leases and gross
profit on equipment sales, net of write-downs in residual
values of certain leased equipment. For the year ended
December 31, 1997, the remarketing activities contributed
$211.4 million to pretax earnings, an increase of 42 percent
compared with $149.2 million for 1996.
At December 31, 1997, the investment in remarketed equipment
on capital and operating leases totaled $285.5 million, a
decrease of 6 percent from the 1996 year-end investment of
$305.3 million.
FINANCIAL CONDITION
ASSETS
Total assets increased to $16.6 billion at December 31,
1997, compared with $12.9 billion at December 31, 1996.
This increase is primarily the result of growth in end user
and working capital financings originated during 1997. Also
contributing to the increase in total assets were factored
receivables acquired from IBM, which totaled $824.0 million
at December 31, 1997, and the lease portfolio purchased from
General Electric Capital Technology Management Services
Corporation (GECTMSC), a subsidiary of General Electric
Capital Corporation (GECC).
Total financing assets serviced by the Company, at December
31, 1997, were $16.0 billion, compared with $12.7 billion at
December 31, 1996. Total financing assets serviced include
the remaining balance of financing receivables securitized
and sold ($176.8 million in 1997, $324.2 million in 1996),
capital and operating leases ($8,514.9 million in 1997,
$6,766.2 million in 1996), loans receivable ($2,381.3
million in 1997, $1,846.9 million in 1996), working capital
financing receivables ($3,249.3 million in 1997, $2,898.7
million in 1996), subordinated interests in trusts resulting
from the securitization and sale of financing receivables
($11.4 million in 1997, $37.0 million in 1996) and other
assets ($13.9 million in 1997, $44.6 million in 1996). Also
included in total financing assets serviced are state and
local government installment and lease financing receivables
of IBM ($849.9 million in 1997, $805.9 million in 1996),
which are not reflected on the Company's Statement of
Financial Position and accounts receivable purchases from
selected IBM subsidiaries during 1997 ($824.0 million).
The carrying amount of marketable securities, as reported in
the Company's Consolidated Statement of Financial Position,
approximates market value. At December 31, 1997, the
marketable securities consisted entirely of debt securities,
and were available-for-sale.
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<PAGE 7>
FINANCIAL CONDITION (Continued)
LIABILITIES AND STOCKHOLDER'S EQUITY
The assets of the Company were financed with $11,068.3
million of debt at December 31, 1997. Total short-term and
long-term debt increased by approximately $2,986.0 million,
from $8,082.3 million at December 31, 1996. This increase
was the result of increases in short-term notes of $1,826.8
million, short-term debt payable to IBM of $1,014.1 million,
long-term debt of $371.3 million and long-term debt payable
to IBM of $589.3 million, offset by a decrease in commercial
paper outstanding of $815.5 million. Included in the
increase in total debt are short-term borrowings associated
with accounts receivable purchases from selected IBM
subsidiaries during 1997. Included in short-term debt at
December 31, 1997, was $539.0 million payable to IBM at
market terms and conditions, maturing on January 5, 1998.
Included in long-term debt at December 31, 1997, were $407.0
million and $182.3 million payable to IBM at market terms
and conditions, maturing on August 21, 2000 and February 26,
2001, respectively. Included in short-term debt at December
31, 1996, was $125.0 million payable to IBM at market terms
and conditions, which matured on November 1, 1997.
At December 31, 1997, the Company had available $878.2
million of a shelf registration with the Securities and
Exchange Commission (SEC) for the issuance of debt
securities. On January 12, 1998, the Company's registration
of an additional $5.0 billion of debt securities was filed
with the SEC. Currently, the Company has available a total
of $4.6 billion on the shelf registration with the SEC for
the issuance of debt securities. This allows the Company
rapid access to domestic financial markets. The Company
intends to continue to issue debt securities under this
shelf registration. The Company has no firm commitments for
the purchase of debt securities that it may issue from the
unused portion of this shelf registration.
The Company has the option, as approved by the Board of
Directors on November 1, 1997, to issue and sell up to $5.0
billion of debt securities in domestic and foreign financial
markets through December 31, 1998. Included within this
$5.0 billion authorization is the option, together with IBM
and IBM International Finance, N.V., to issue and sell debt
securities in an aggregate nominal amount of up to 3.0
billion in European Currency Units (ECU), or its equivalent
in any other currency. At December 31, 1997, there was 1.4
billion in ECU available for the issuance of debt securities
under this program. The Company may issue debt securities
over the next twelve months under this program, dependent on
prevailing market conditions and its need for such funding.
The Company has the option, as approved by the Board of
Directors on November 1, 1996, to sell, assign, pledge or
transfer up to $3.0 billion of assets to third parties
through December 31, 1999. Included within this $3.0
billion authorization is $450.0 million of a separate shelf
registration for issuance of asset-backed securities, which
a subsidiary of the Company has available. The subsidiary's
issuance of any asset-backed securities over the next twelve
months under this shelf registration is dependent on
prevailing market conditions and its need for such
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<PAGE 8>
FINANCIAL CONDITION (Continued)
funding. The Company is an authorized borrower of up to $3.0
billion under a $10.0 billion IBM committed global credit
facility, and has a liquidity agreement with IBM for $500.0
million. The Company has no borrowings outstanding under
the committed global credit facility or the liquidity
agreement. The Company and IBM have also signed master loan
agreements providing additional funding flexibility to each
other. These agreements allow for short-term (up to
270-day) funding, made available at market terms and
conditions, upon the request of either the Company or IBM.
The Company had borrowings outstanding under this
arrangement of $600.2 million at December 31, 1997. The
Company had no borrowings outstanding under this agreement
at December 31, 1996. These financing sources, along with
the Company's internally generated cash and medium-term note
and commercial paper programs, provide flexibility to the
Company to grow its lease, working capital financings and
loan portfolios, to fund working capital requirements and to
service debt.
Amounts due to IBM and affiliates include trade payables
arising from purchases of equipment for term leases and
installment receivables, working capital financing
receivables for dealers and remarketers, and software
license fees. Also included in amounts due to IBM and
affiliates are income taxes currently payable under the
intercompany tax allocation agreement. Amounts due to IBM
and affiliates increased by approximately $235.5 million to
$2,524.5 million at December 31, 1997, from $2,289.0 million
at December 31, 1996. The increase was primarily
attributable to a $235.1 million increase in the amount
payable for capital equipment purchases during 1997,
compared with the same 1996 period.
Total stockholder's equity at December 31, 1997, was
$1,668.9 million, up $233.9 million from year-end 1996. The
increase in stockholder's equity reflects 1997 net earnings
of $283.9 million, offset by the payment of $50.0 million in
cash dividends to IBM during 1997.
At December 31, 1997, the Company's debt to equity ratio was
6.6:1, compared with 5.6:1 at December 31, 1996.
TOTAL CASH PROVIDED BEFORE DIVIDENDS
Total cash provided before dividends was $209.6 million in
1997, compared with total cash provided before dividends of
$341.0 million in 1996. Total cash provided before
dividends reflects $2,410.8 million of cash used in
investing and financing activities before dividends, offset
by $2,620.4 million of cash provided by operating activities
in 1997. For 1996, total cash provided before dividends
reflects $2,235.1 million of cash used in investing and
financing activities before dividends, offset by $2,576.1
million of cash provided by operating activities. Cash and
cash equivalents at December 31, 1997, totaled $792.4
million, an increase of $159.6 million, compared with the
balance at December 31, 1996.
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<PAGE 9>
FINANCIAL CONDITION (Continued)
MARKET RISK
In the normal course of business, the financial position of
the Company is routinely subjected to a variety of risks. In
addition to the market risk associated with interest and
currency rate movements on outstanding debt and non-U.S.
dollar denominated assets and liabilities, other examples of
risk include collectibility of accounts receivable and
recoverability of residual values on leased assets.
The Company regularly assesses these risks and has
established policies and business practices to protect
against the adverse effects of these and other potential
exposures. As a result, the Company does not anticipate any
material losses in these areas. The Company manages this
risk, in part, through the use of a variety of financial
instruments including derivatives, as explained in
Significant Accounting Policies in the Notes to Consolidated
Financial Statements on page 21.
For purposes of specific risk analysis, the Company uses
sensitivity analysis to determine the impacts that market
risk exposures may have on the fair values of the Company's
debt and financial instruments.
The financial instruments included in the sensitivity
analysis consist of all of the Company's cash and cash
equivalents, marketable securities, long-term non-lease
receivables, investments, long-term and short-term debt and
all derivative financial instruments. Interest rate swaps,
interest rate options and foreign currency swaps constitute
the Company's portfolio of derivative financial instruments.
To perform sensitivity analysis, the Company assesses the
risk of loss in fair values from the impact of hypothetical
changes in interest rates and foreign currency exchange
rates on market sensitive instruments. The market values for
interest and foreign currency exchange risk are computed
based on the present value of future cash flows as impacted
by the changes in the rates attributable to the market risk
being measured. The discount rates used for the present
value computations were selected based upon market interest
and foreign currency exchange rates in effect at December
31, 1997.
The market values that result from these computations are
compared with the market values of these financial
instruments at December 31, 1997. The differences in this
comparison are the hypothetical gains or losses associated
with each type of risk.
The results of the sensitivity analysis at December 31,
1997, are as follows:
INTEREST RATE RISK:
A 10 percent decrease in the levels of interest rates with
all other variables held constant would result in a decrease
in the fair value of the Company's financial instruments by
$34.2 million. A 10 percent increase in the levels of
interest rates with all other variables held constant would
result in an increase in the fair value of the Company's
financial instruments by $34.9 million.
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<PAGE 10>
FINANCIAL CONDITION (Continued)
FOREIGN CURRENCY EXCHANGE RATE RISK:
A 10 percent increase or decrease in the levels of foreign
currency exchange rates against the U.S. dollar with all
other variables held constant would result in a decrease in
the fair value of the Company's financial instruments by
$18.5 million or an increase in the fair value of the
Company's financial instruments by $18.5 million,
respectively.
RESULTS OF OPERATIONS
INCOME FROM LEASES
Income from leases increased 15 percent to $600.8 million
for the year ended December 31, 1997, from $524.0 million in
1996. The growth in capital equipment financings for end
users under capital and operating leases during 1997
contributed to the overall increase in income from leases.
This increase in income from leases was partially offset by
a more competitive environment for end user financing.
Income from leases includes lease income resulting from
remarketing transactions. Lease income from remarketing
transactions was $185.5 million in 1997, an increase of 29
percent from 1996.
On a periodic basis, the Company reassesses the future
residual values of its portfolio of leases. In accordance
with generally accepted accounting principles, anticipated
increases in specific future residual values may not be
recognized before realization and are thus a source of
potential future profits. Anticipated decreases in specific
future residual values that are considered to be other than
temporary must be recognized currently. A review of the
Company's $1,105.6 million residual value portfolio at
December 31, 1997, indicated that the overall estimated
future value of the portfolio continues to be greater than
the value currently recorded, which is the lower of the
Company's cost or net realizable value. The Company
however, did record a $34.7 million reduction to income from
leases during 1997 to recognize decreases in the expected
future residual value of specific leased equipment, compared
with $36.4 million during 1996.
INCOME FROM WORKING CAPITAL FINANCING
Income from working capital financing decreased 3 percent to
$257.6 million in 1997, compared with $265.3 million in
1996. This decrease was primarily due to declines in the
average working capital receivables outstanding during 1997,
compared with 1996. The year-to-year decline in average
working capital financing receivables outstanding was due to
an increase in cash collected prior to normal payment terms
from the dealer.
INCOME FROM LOANS
Income from loans increased 13 percent to $168.0 million in
1997, compared with $148.8 million in 1996. This increase
resulted from higher asset balances, which in turn were
primarily due to an increase in financing originated for
software and services during 1996 and 1997.
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<PAGE 11>
RESULTS OF OPERATIONS (Continued)
EQUIPMENT SALES
Equipment sales amounted to $442.1 million in 1997, compared
with $419.3 million in 1996. Contributing to this increase
in equipment sales is the growth of equipment remarketed as
sales, rather than as operating leases. The revenue
associated with outright sales and sales-type leases is
included in equipment sales. Company-owned equipment may be
sold or released to existing lessees or, when equipment is
returned, to new users of that equipment.
Gross profit on equipment sales in 1997 was $60.6 million,
an increase of 19 percent, compared with $50.9 million in
1996. The gross profit margin in 1997 increased to 13.7
percent, compared with 12.1 percent in 1996. The mix of
products available for sale and changing market conditions
for certain used equipment during the applicable periods are
factors contributing to the increase in gross profit
margins.
INCOME FROM FACTORED IBM RECEIVABLES
Income from factored IBM receivables was $26.5 million for
the 12 months ended December 31, 1997. Refer to Related
Company Transactions in the Notes to Consolidated Financial
Statements on page 32 for additional details.
OTHER INCOME
Other income decreased 3 percent to $135.9 million in 1997,
compared with $140.4 million in 1996. The decrease in other
income is primarily attributable to a decline in the fees
for the servicing of IBM financing receivables sold,
resulting from a decrease in the securitized asset
portfolios during 1997, as compared with the same 1996
period. Partially offsetting the decrease in other income is
an increase in the Company's interest income earned on cash
and cash equivalents during 1997, compared with 1996.
The Company continues to service financing receivables
securitized and sold in prior years, and earns a fee, which
is included in other income. During 1997 and 1996, there
were no securitizations or sales of financing receivables by
the Company.
Also included in other income is interest income earned on
notes, as well as fees for managing IBM's state and local
government installment and lease financing receivables
portfolio.
INTEREST EXPENSE
As a result of the growth in end user and working capital
financings originated, the Company has experienced an
increase in the average outstanding debt balance. This
increase in the average outstanding debt balance resulted in
a 24 percent growth in interest expense to $538.6 million in
1997, compared with $436.1 million in 1996. The Company's
1997 average cost of debt decreased to 5.7 percent, from 5.8
percent for 1996.
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<PAGE 12>
RESULTS OF OPERATIONS (Continued)
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses were $228.2
million in 1997, an increase of 13 percent compared with
$201.2 million in 1996. This increase is primarily due to
planned growth in the Company's resources during 1996 and
1997, resulting in an increase in compensation related
expenses.
PROVISION FOR RECEIVABLE LOSSES
The Company's portfolio of capital equipment leases and
loans is predominantly with investment grade customers. The
Company generally retains ownership or takes a security
interest in any underlying equipment financed. The Company
provides for receivable losses at the time financings are
originated and from time to time for capital equipment as
conditions warrant. The portfolio is diversified by
geography, industry and individual unaffiliated customer.
The Company provides for working capital financing
receivable losses on the basis of actual collection
experience and estimated collectibility of the related
financing receivables. With the continued growth of the
Company's working capital financing business in 1996 and
1997, and with the continuation of the trend toward
consolidation in this industry segment, the concentration of
such financings for certain large dealers and remarketers of
information industry products is significant. At December
31, 1997, and December 31, 1996, approximately 62 percent of
the working capital financing receivables outstanding were
concentrated in ten working capital accounts. The Company's
working capital financing business is predominantly with
non-investment grade customers. Such financing receivables
are typically collateralized by the inventory and accounts
receivable of the dealers and remarketers. The Company did
not experience material losses in 1997 or 1996. The Company
does not believe that there is a risk of loss in this area
that would have a material impact on its financial position
or results of operations.
The overall provision for receivable losses decreased to
$35.5 million in 1997, compared with $44.9 million in 1996.
The decline in the provision for receivable losses was
attributable to lower reserve requirements, based upon the
Company's historical loss experience, assessment of
collectibility of specific receivables and its ability to
effectively manage credit risk and contain losses.
INCOME TAXES
Income taxes decreased 7 percent to $163.2 million for the
year ended December 31, 1997, from $176.1 million for the
same period in 1996. The decrease in the effective tax rate
was primarily caused by reestimations made in the current
period of tax liabilities established in prior periods.
The Company expects its effective tax rate to approximate
the statutory federal (35%) and state (6.4%) income tax
rates in future years.
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<PAGE 13>
RETURN ON AVERAGE EQUITY
The 1997 results yielded an annualized return on average
equity of 18.6 percent, compared with 20.7 percent in 1996.
ACCOUNTING CHANGES
The Company implemented new accounting standards in 1997,
and 1995. None of these standards had a material effect on
the financial position or results of operations of the
Company.
Effective January 1, 1997, the Company implemented SFAS 125,
"Accounting for Transfer and Servicing of Financial Assets
and Extinguishments of Liabilities." This standard provides
accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of
liabilities. The Company was generally in compliance with
this standard prior to adoption.
Effective January 1, 1995, the Company implemented SFAS 114,
"Accounting by Creditors for Impairment of a Loan," and SFAS
118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures." These standards
prescribe impairment measurements and reporting related to
certain loans.
In 1995, the Company implemented SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." This standard prescribes the
method for asset impairment evaluation for long-lived assets
and certain identifiable intangibles that are to be either
held and used or intended for disposal. The Company was
generally in compliance with this standard prior to
adoption.
In 1998, the Company will implement two accounting standards
issued by the Financial Accounting Standards Board (FASB) in
June of 1997. SFAS 130, "Reporting Comprehensive Income,"
and SFAS 131, "Disclosures About Segments of an Enterprise
and Related Information," will have no effect on the
Company's financial position or results of operations as
they require only changes to or additions to current
disclosures.
CLOSING DISCUSSION
The Company's resources continue to be sufficient to enable
it to carry out its mission of offering customers
competitive leasing and financing and providing information
technology remarketers with inventory and accounts
receivable financing, which contributes to the growth and
stability of IBM earnings.
-13-
<PAGE 14>
FORWARD LOOKING STATEMENTS
Except for the historical information and discussions
contained herein, statements contained in this Report on
Form 10-K may constitute "forward looking statements" within
the meaning of the Private Securities Litigation Reform Act
of 1995. These statements involve a number of risks,
uncertainties and other factors that could cause actual
results to differ materially, including, but not limited to,
the Company's level of equipment financing originations; the
propensity for customers to finance their acquisition of IBM
products and services with the Company; the competitive
environment in which the Company operates; the success of
the Company in developing strategies to manage debt levels;
non-performance by a customer of contractual requirements;
the concentration of credit risk and creditworthiness of the
customer; the Company's associated collection and asset
management efforts; the Company's determination of residual
values; currency fluctuations on the associated debt and
liabilities; change in interest rates; non-performance by
the counterparty in derivative transactions; the Company's
ability to attract and retain key personnel; the Company's
ability to manage acquisitions and alliances; legal,
political and economic changes and other risks,
uncertainties and factors inherent in the Company's business
and otherwise discussed in this Form 10-K and in the
Company's other filings with the Securities and Exchange
Commission.
YEAR 2000
What is commonly known as the "Year 2000 issue" arises
because many computer hardware and software systems use only
two digits to represent the year. As a result, these systems
and programs may not calculate dates beyond 1999, which may
cause errors in information or systems failures.
With respect to its internal systems, the Company is taking
appropriate steps to remediate the Year 2000 issues and does
not expect the costs of these efforts to be material.
However, the Year 2000 readiness of the Company's customers
and the hardware and software offerings from the Company's
suppliers, subcontractors and business partners may vary.
The Company is also aware of the potential for claims
against it and other companies for damages from products and
services that were not Year 2000 ready. The Company believes
that any such claims against it will be without merit.
While the Company does not believe that the Year 2000
matters discussed above will have a material impact on its
business, financial condition or results of operation, it is
uncertain whether or to what extent the Company may be
affected by such matters.
-14-
<PAGE 15>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
<AUDIT-REPORT>
Report of Independent Accountants
To the Stockholder and Board of Directors of
IBM Credit Corporation
In our opinion, the consolidated financial statements listed
in the index appearing under Item 14(a) 1. on page 40
present fairly, in all material respects, the financial
position of IBM Credit Corporation and its subsidiaries at
December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. These financial
statements are the responsibility of the Company's
management; our responsibility is to express an opinion on
these financial statements based on our audits. We
conducted our audits of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles
used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
Stamford, CT
January 20, 1998, except as to the Subsequent Event note on page
38, which is as of February 26, 1998
</AUDIT-REPORT>
-15-
<PAGE 16>
<TABLE>
IBM CREDIT CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
at December 31:
(Dollars in thousands)
<CAPTION>
1997 1996
___________ ___________
<S> <C> <C>
ASSETS:
Cash and cash equivalents. . . . . . . . . $ 792,471 $ 632,834
Marketable securities. . . . . . . . . . . 127,847 159,348
Net investment in capital leases . . . . . 4,931,292 4,214,822
Equipment on operating leases, net . . . . 3,583,641 2,551,382
Loans receivable . . . . . . . . . . . . . 2,381,261 1,846,947
Working capital financing receivables. . . 3,249,310 2,898,688
Factored IBM receivables . . . . . . . . . 824,031 -
Investments and other assets . . . . . . . 682,263 642,118
___________ ___________
Total Assets $16,572,116 $12,946,139
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY:
Liabilities:
Short-term debt. . . . . . . . . . . . . . $ 7,452,668 $ 6,441,400
Short-term debt, IBM . . . . . . . . . . . 1,139,113 125,000
Due to IBM and affiliates. . . . . . . . . 2,524,475 2,288,968
Interest and other accruals. . . . . . . . 423,243 378,284
Deferred income taxes. . . . . . . . . . . 887,180 761,494
Long-term debt . . . . . . . . . . . . . . 1,887,235 1,515,937
Long-term debt, IBM. . . . . . . . . . . . 589,253 -
___________ __________
Total liabilities . . . . . . . . . . . 14,903,167 11,511,083
___________ __________
Stockholder's equity:
Capital stock, par value $1.00 per share
Shares authorized: 10,000
Shares issued and outstanding:
936 in 1997 and 1996. . . . . . . . . 457,411 457,411
Retained earnings. . . . . . . . . . . . . 1,211,538 977,645
___________ __________
Total stockholder's equity. . . . . . . 1,668,949 1,435,056
___________ ___________
Total Liabilities and Stockholder's Equity $16,572,116 $12,946,139
=========== ============
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
-16-
<PAGE 17>
<TABLE>
IBM CREDIT CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS AND RETAINED EARNINGS
For the year ended December 31:
(Dollars in thousands)
<CAPTION> 1997 1996 1995
___________ ___________ ___________
<S> <C> <C> <C>
FINANCE AND OTHER INCOME:
Income from leases:
Capital leases . . . . . . . . . . . . $ 276,956 $ 301,803 $ 281,072
Operating leases (net of depreciation:
1997 - $1,487,727, 1996 - $1,051,056
and 1995 - $1,035,480). . . . . . . . 323,868 222,223 185,317
___________ ___________ ___________
600,824 524,026 466,389
Income from working capital financing. . 257,646 265,301 242,508
Income from loans. . . . . . . . . . . . 167,955 148,781 117,728
Equipment sales. . . . . . . . . . . . . 442,105 419,292 493,619
Income from factored IBM receivables . . 26,505 - -
Other income . . . . . . . . . . . . . . 135,860 140,400 132,041
___________ ___________ ___________
Total finance and other income . . . . 1,630,895 1,497,800 1,452,285
___________ ___________ ___________
COST AND EXPENSES:
Interest . . . . . . . . . . . . . . . . 538,560 436,109 394,572
Cost of equipment sales. . . . . . . . . 381,531 368,356 419,006
Selling, general, and administrative . . 228,155 201,248 190,360
Provision for receivable losses. . . . . 35,541 44,883 68,417
___________ ___________ ___________
Total cost and expenses. . . . . . . . 1,183,787 1,050,596 1,072,355
___________ ___________ ___________
EARNINGS BEFORE INCOME TAXES . . . . . . . 447,108 447,204 379,930
Provision for income taxes . . . . . . . . 163,215 176,122 149,455
___________ ___________ ___________
NET EARNINGS . . . . . . . . . . . . . . . 283,893 271,082 230,475
Dividends . . . . . . . . . . . . . . . . (50,000) (45,000) (146,419)
Retained earnings, January 1 . . . . . . . 977,645 751,563 667,507
___________ ___________ ___________
Retained earnings, December 31 . . . . . . $1,211,538 $ 977,645 $ 751,563
=========== =========== ===========
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
-17-
<PAGE 18>
<TABLE>
IBM CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended December 31:
(Dollars in thousands) 1997 1996 1995
<CAPTION> ____________ ____________ ____________
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings . . . . . . . . . . . .$ 283,893 $ 271,082 $ 230,475
Adjustments to reconcile net
earnings to cash provided by
operating activities:
Depreciation and amortization. . . . 1,503,375 1,058,273 1,039,812
Provision for receivable losses. . . 35,541 44,883 68,417
Change in deferred income taxes. . . 125,686 96,328 11,599
Increase (decrease) in interest and
other accruals . . . . . . . . . . 44,959 20,973 (70,403)
Gross profit on equipment sales. . . (60,574) (50,936) (74,613)
Other items that provided cash:
Proceeds from equipment sales. . . 442,105 419,292 493,619
Change in amounts due IBM and
affiliates. . . . . . . . . . . . 235,507 682,535 70,729
Other, net . . . . . . . . . . . . 9,924 33,699 82,586
____________ ____________ ____________
Cash provided by operating activities . 2,620,416 2,576,129 1,852,221
____________ ____________ ____________
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in capital leases . . . .(2,508,547) (2,102,530) (1,863,923)
Collection of capital leases, net
of income earned. . . . . . . . . . 1,756,020 1,609,881 1,336,054
Investment in equipment on
operating leases. . . . . . . . . .(2,295,438) (1,800,522) (1,067,696)
Investment in loans receivable . . .(1,460,214) (1,211,318) (892,796)
Collection of loans receivable,
net of interest earned. . . . . . . 935,924 818,233 484,593
(Investment in) collection of
working capital financing
receivables, net. . . . . . . . . . (360,266) 246,561 (1,056,420)
Purchase of factored IBM
receivables . . . . . . . . . . . .(4,159,221) - -
Collection of factored IBM
receivables . . . . . . . . . . . . 3,335,190 - -
Purchases of marketable securities . (21,500) (69,418) (255,888)
Maturities of marketable securities. 53,001 - 165,958
Cash payment for business acquired . - - (92,478)
Cash payment for lease portfolio
acquired. . . . . . . . . . . . . . (334,909) - -
Other, net . . . . . . . . . . . . . (335,675) (219,189) (354,420)
____________ ____________ ____________
Cash used in investing activities . . .(5,395,635) (2,728,302) (3,597,016)
____________ ____________ ____________
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
-18-
<PAGE 19>
<TABLE>
IBM CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
For the year ended December 31:
(Dollars in thousands) 1997 1996 1995
<CAPTION> ____________ ____________ ____________
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of
long-term debt. . . . . . . . . . . 2,516,557 789,024 379,539
Repayment of debt with original
maturities of one year or more. . . (238,900) (639,855) (665,601)
Issuance of debt with original
maturities within one year 707,199 343,999 1,898,357
Cash dividends paid to IBM . . . . . (50,000) (45,000) (145,000)
____________ ____________ ____________
Cash provided by financing activities . 2,934,856 448,168 1,467,295
____________ ____________ ____________
Change in cash and cash equivalents . . 159,637 295,995 (277,500)
Cash and cash equivalents, January 1. . 632,834 336,839 614,339
____________ ____________ ____________
Cash and cash equivalents, December 31.$ 792,471 $ 632,834 $ 336,839
============ ============ ============
<FN>
<F1>
Supplemental schedule of noncash investing and financing
activities:
The purchase price for the acquisitions of selected assets
from the leasing portfolio of General Electric Capital
Technology Management Services Corporation during the second
and third quarters of 1997 was financed by the Company, in
part, through credits of $18.4 million that were applied
against certain existing obligations to the Company.
During the first quarter of 1996 and the fourth quarter of
1995, respectively, the Company issued to IBM 4 and 33
shares of capital stock, par value $1.00 per share, in
exchange for assets IBM transferred to the Company. The
assets transferred during 1996 had a net book value of $50.0
thousand, which approximated fair value, and a deferred tax
asset value of $350.0 thousand. The assets transferred
during 1995 had a net book value of $0.5 million, which
approximated fair value, and a deferred tax asset value of
$2.8 million. As a result, stockholder's equity was
increased by $0.4 million and $3.3 million during 1996 and
1995, respectively.
During the second quarter of 1995, the Company paid IBM $1.4
million in noncash dividends, representing financing
receivables transferred to IBM by the Company. There were
no noncash dividends paid to IBM in 1997 or 1996. <F2> The
accompanying notes are an integral part of this statement.
</FN> </TABLE>
-19-
<PAGE 20> IBM CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation: The consolidated financial
statements include the accounts of the Company and those of
its subsidiaries that are more than 50 percent owned.
Investments in partnerships in which the Company has
typically a 20 percent ownership are accounted for using the
equity method.
Cash and Cash Equivalents: Time deposits with original
maturities generally of three months or less are included in
cash and cash equivalents. Cash paid for interest was
$523.1 million, $443.2 million and $388.3 million in 1997,
1996 and 1995, respectively.
Marketable Securities: The Company's marketable securities,
all of which are debt securities, are available-for-sale.
The carrying amount of the debt securities approximates
market value.
Finance Income Recognition: Income attributable to direct
financing leases and loans receivable is initially recorded
as unearned income and subsequently recognized as finance
income at level rates of return over the term of the leases
or receivables. Income recognized from leveraged leases
includes the amortization of unearned finance income and
deferred investment and other tax credits over the term of
the leases, at level rates of return, during periods when
the net investment balance is positive.
Equipment on Operating Leases: Equipment is depreciated on
a straight-line basis to its estimated residual value over
the lease term.
Equipment Sales Income Recognition: Revenue from equipment
sales to existing lessees is recognized at the effective
date a purchase provision is exercised. Revenue from sales
to parties other than existing lessees is recognized when
title transfers.
Allowance for Receivable Losses: The allowance for
receivable losses is determined on the basis of actual
collection experience and estimated collectibility of the
related assets.
Income Taxes: Income tax expense is based on reported
earnings before income taxes. Deferred income taxes reflect
the impact of temporary differences between assets and
liabilities recognized for financial reporting purposes and
such amounts recognized for tax purposes on a separate
company basis. In accordance with Statement of Financial
Accounting Standards (SFAS) 109, "Accounting for Income
Taxes," these deferred taxes are measured by applying
currently enacted tax laws.
-20-
<PAGE 21>
SIGNIFICANT ACCOUNTING POLICIES (Continued):
Financial Instruments: The Company uses agreements related
to currencies and interest rates to lower costs of funding
its business, to diversify sources of funding, or to manage
interest rate and currency exposures arising from mismatches
between assets and liabilities. The Company enters into
such financial instruments solely for hedging purposes. The
Company does not enter into such financial instrument
transactions for trading or for other speculative purposes.
Debt obligations denominated in foreign currencies and
subject to foreign currency swap agreements are included in
the Consolidated Statement of Financial Position at the
contractual rate of exchange in the respective foreign
currency swap agreement. Gains and losses on forward
contracts and purchased options, designated as hedges, are
deferred and included in the settlement of the related
transaction. The Company routinely evaluates existing and
potential counterparty credit exposures associated with such
financial instrument transactions to ensure that these
exposures remain within credit guidelines.
Under interest rate swaps, the Company agrees with other
parties to exchange, at specified intervals, the difference
between interest amounts calculated by reference to a
floating index or a fixed rate on an agreed upon notional
principal amount. Swap contracts are primarily between one
and five years in duration. The Company enters into
interest rate cap and floor agreements to reduce the
potential impact of changes in interest rates on floating
rate debt supporting fixed rate assets. Interest rate
agreements generally involve the exchange of interest
payments without the exchange of the underlying notional
amount on which the interest payments are calculated. The
Company enters into currency exchange agreements to hedge
debt denominated in foreign currencies. The term of the
currency derivatives is generally less than five years. The
purpose of the Company's foreign currency hedging activities
is to protect itself from the risk that the eventual dollar
net cash outflows will be affected by changes in exchange
rates. The Company does not anticipate any material adverse
effect on its financial position or results of operations
resulting from its use of these instruments, nor does it
anticipate nonperformance by any of its counterparties.
Use of Estimates: Management uses estimates in preparing
the consolidated financial statements, in conformity with
generally accepted accounting principles. Significant
estimates include collectibility of receivables,
recoverability of residual values of equipment on capital
and operating leases, and useful economic lives of long-term
fixed assets. The Company regularly assesses these
estimates, and while actual results may differ from these
estimates, management believes that material changes will
not occur in the near term.
-21-
<PAGE 22>
RELATIONSHIP WITH IBM:
Pursuant to a Support Agreement between IBM and the Company,
IBM has agreed to retain 100 percent of the voting capital
stock of the Company, unless required to dispose of any or
all such shares of stock pursuant to a court decree or order
of any governmental authority that in the opinion of counsel
to IBM may not be successfully challenged. IBM has also
agreed to cause the Company to have a tangible net worth of
at least $1.00 at all times. The Support Agreement provides
that it shall not be deemed to constitute a guarantee by IBM
to any party of the payment of any debt or other obligation,
indebtedness or liability of the Company. The Support
Agreement may not be modified, amended or terminated while
there is outstanding any debt of the Company, unless all
holders of such debt have consented in writing.
Pursuant to an operating agreement, IBM provides collection,
administration and other services and products for the
Company and is reimbursed for the cost of these services and
products. The Company is compensated for services performed
for IBM, primarily for management of IBM's state and local
government installment receivables portfolio, the fees for
which are reflected in other income.
The operating agreement with IBM also provides that
installment receivables, which include finance charges, may
be purchased by the Company at a mutually agreed-upon price.
The Company is reimbursed by IBM for any price adjustments
and concessions that reduce the amount of receivables
previously purchased by the Company.
The operating agreement with IBM also provides that IBM
will offer term leases of the Company to creditworthy
potential lessees. IBM's sales price of the equipment to
the Company will typically be at the purchase price
payable by the lessee, unless the Company is participating
in IBM product promotions.
The Company also has an indemnification agreement with IBM.
IBM reimburses the Company for losses on working capital
financing receivables with specific dealers and for specific
transactions. Approximately $2.2 million, $10.5 million and
$9.3 million of such losses have been reimbursed by IBM in
1997, 1996 and 1995, respectively.
The Company received compensation for services and benefits
provided to IBM. Included in income from working capital
financing is fee income earned from IBM Personal Systems
Group of $73.1 million, $63.1 million and $51.1 million in
1997, 1996 and 1995, respectively. Also included in income
from working capital financing is fee income from other IBM
divisions of $27.3 million, $15.3 million and $7.1 million
in 1997, 1996 and 1995, respectively. Included in other
income are fees received for the management of IBM's
portfolio of state and local government installment
receivables of $51.8 million, $51.0 million and $46.8
million in 1997, 1996 and 1995, respectively.
The Company has a liquidity agreement with IBM International
Finance, N.V. (IIF), whereby the Company has agreed to
advance funds to IIF as an enhancement to IIF's ability to
carry out business. The amount of the advances is not to
exceed the greater of $500.0 million or 5 percent of
-22-
<PAGE 23>
RELATIONSHIP WITH IBM (Continued):
the Company's total assets. To support this agreement, the
Company has entered into a backup agreement with IBM,
whereby IBM has agreed to advance funds to the Company, in
an amount not to exceed the greater of $500.0 million or 5
percent of the Company's total assets, if at any time the
Company requires such funds to satisfy its agreement with
IIF. The Company has neither received nor made any advances
with respect to these agreements at December 31, 1997 and
1996.
The Company, together with IBM and IIF, has the option to
issue and sell debt securities in an aggregate nominal
amount of up to 3.0 billion in European Currency Units, or
its equivalent in any other currency. This option is part
of a $5.0 billion Board of Directors' authorization the
Company has to issue and sell debt securities in domestic
and foreign financial markets through December 31, 1998. As
previously mentioned, at December 31, 1997, there was 1.4
billion in ECU available for the issuance of debt securities
under this program. The Company's intention to issue any
debt securities over the next twelve months under this
program is dependent on prevailing market conditions and the
Company's need for such funding.
From time to time, the Company will either borrow funds from
or lend funds to IBM and its affiliates, at prevailing
interest rates. During the fourth quarter of 1994, the
Company and IBM signed master loan agreements providing
additional funding flexibility to each other. These
agreements allow for short-term (up to 270-day) funding,
made available at market terms and conditions, upon the
request of either the Company or IBM. The purpose of these
agreements is to finance the borrower's assets, for working
capital or for other general corporate purposes. At
December 31, 1997, the Company had borrowings outstanding
under these agreements of $600.2 million, payable to IBM.
These borrowings were repaid on January 5, 1998. At
December 31, 1996, the Company had no borrowings outstanding
under these agreements.
The Company is an authorized borrower of up to $3.0 billion
under a $10.0 billion IBM committed global credit facility
and has a liquidity agreement with IBM for $500.0 million.
The Company has no borrowings outstanding under the
committed global credit facility or the liquidity agreement.
MARKETABLE SECURITIES:
The following is a summary of marketable securities at
December 31, 1997 and December 31, 1996 which were
available-for-sale. The marketable securities consisted
entirely of debt securities. Contractual maturities of
marketable debt securities at December 31, 1997 and December
31, 1996, are between one and five years. It is expected
that actual maturities will differ from contractual
maturities because some borrowers have the right to call or
prepay certain obligations, sometimes without call or
prepayment penalties.
(Dollars in thousands) 1997 1996
________ _________
Corporate . . . . . . . . . . . . . . . . $ 95,023 $125,138
U.S. federal agency . . . . . . . . . . . 32,824 34,210
_________ _________
Total, which approximates market value. . $127,847 $159,348
========= =========
-23-
<PAGE 24>
NET INVESTMENT IN CAPITAL LEASES:
The Company's capital lease portfolio includes direct
financing and leveraged leases. The Company originates
financing for customers in a variety of industries and
throughout the United States. The Company has a diversified
portfolio of capital equipment financings for end users.
Direct financing leases consist principally of IBM
information handling equipment with terms generally from
three to five years. The components of the net investment
in direct financing leases at December 31, 1997 and 1996,
are as follows:
(Dollars in thousands) 1997 1996
___________ ___________
Gross lease payments receivable . . . . . $4,922,989 $4,299,250
Estimated unguaranteed residual values. . 327,239 260,004
Deferred initial direct costs . . . . . . 36,325 30,087
Unearned income . . . . . . . . . . . . . (502,564) (528,830)
Allowance for receivable losses . . . . . (52,373) (44,131)
___________ ___________
$4,731,616 $4,016,380
=========== ===========
The scheduled maturities of minimum lease payments
outstanding at December 31, 1997, expressed as a percentage
of the total, are due approximately as follows:
Within 12 months. . . . . . . . . . . . . . . . . . . . 46%
13 to 24 months . . . . . . . . . . . . . . . . . . . . 34
25 to 36 months . . . . . . . . . . . . . . . . . . . . 15
37 to 48 months . . . . . . . . . . . . . . . . . . . . 4
After 48 months . . . . . . . . . . . . . . . . . . . . 1
____
100%
====
Included in the net investment in capital leases are $29.8
million and $55.6 million of seller interest at December 31,
1997 and 1996, respectively, relating to the securitization
of such leases.
-24-
<PAGE 25>
NET INVESTMENT IN CAPITAL LEASES (Continued):
Leveraged lease investments include coal-fired electric
generating facilities, commercial aircraft and other non-IBM
manufactured equipment. Leveraged leases have remaining
terms ranging from five to twenty-one years. The components
of the net investment in leveraged leases at December 31,
1997 and 1996, are as follows:
(Dollars in thousands) 1997 1996
__________ __________
Net rents receivable. . . . . . . . . . $ 254,059 $ 258,022
Estimated unguaranteed residual values. 39,752 39,752
Unearned and deferred income. . . . . . (90,773) (93,296)
Allowance for receivable losses . . . . (3,362) (6,036)
__________ __________
Investment in leveraged leases. . . . . 199,676 198,442
Less: Deferred income taxes. . . . . . (188,074) (196,460)
__________ __________
Net investment in leveraged leases. . . $ 11,602 $ 1,982
========== ==========
Refer to the note on page 28, Allowance for Receivable
Losses, for a reconciliation of the direct financing leases
and leveraged leases allowances for receivable losses.
EQUIPMENT ON OPERATING LEASES:
Operating leases consist principally of IBM information
handling equipment with terms generally from two to four
years. The components of equipment on operating lease at
December 31, 1997 and 1996, are as follows:
(Dollars in thousands) 1997 1996
____________ ____________
Cost. . . . . . . . . . . . . . . . . . . $ 6,640,874 $ 4,839,547
Accumulated depreciation. . . . . . . . . (3,057,233) (2,288,165)
____________ ____________
$ 3,583,641 $ 2,551,382
============ ============
Minimum future rentals were approximately $3,201.1 million
at December 31, 1997. The scheduled maturities of the
minimum future rentals at December 31, 1997, expressed as a
percentage of the total, are due approximately as follows:
Within 12 months. . . . . . . . . . . . . . . . . . . . 50%
13 to 24 months . . . . . . . . . . . . . . . . . . . . 34
25 to 36 months . . . . . . . . . . . . . . . . . . . . 13
37 to 48 months . . . . . . . . . . . . . . . . . . . . 2
After 48 months . . . . . . . . . . . . . . . . . . . . 1
____
100%
====
-25-
<PAGE 26>
LOANS RECEIVABLE:
Loans receivable include installment receivables that are
principally financings of customer purchases of IBM
information handling products. Also included are other
financings, comprising primarily IBM software and services.
The components of loans receivable at December 31, 1997 and
1996, are as follows:
(Dollars in thousands) 1997 1996
___________ ___________
Gross loans receivable . . . . . . . $2,736,356 $2,166,019
Deferred initial direct costs. . . . 17,890 13,168
Unearned income. . . . . . . . . . . (301,756) (268,876)
Allowance for receivable losses. . . (71,229) (63,364)
___________ ___________
$2,381,261 $1,846,947
=========== ===========
The scheduled maturities of loans receivable outstanding at
December 31, 1997, expressed as a percentage of the total,
are due approximately as follows:
Within 12 months . . . . . . . . . . . . . . . . . . . 44%
13 to 24 months. . . . . . . . . . . . . . . . . . . . 31
25 to 36 months. . . . . . . . . . . . . . . . . . . . 15
37 to 48 months. . . . . . . . . . . . . . . . . . . . 8
After 48 months. . . . . . . . . . . . . . . . . . . . 2
____
100%
====
Included in loans receivable are $17.9 million and $40.0
million at December 31, 1997 and 1996, respectively, that
are due from the Company's term lease partnerships. Such
loans are secured by the general pool of leases in the
partnerships. Also included in loans receivable are $6.2
million and $16.1 million of seller interest at December 31,
1997, and 1996, respectively, relating to the securitization
of such loans.
Refer to the note on page 28, Allowance for Receivable
Losses, for a reconciliation of the loans receivable
allowance for receivable losses.
-26-
<PAGE 27>
WORKING CAPITAL FINANCING RECEIVABLES:
Working capital financing receivables arise primarily from
secured inventory and accounts receivable financing for
dealers and remarketers of IBM and non-IBM products and
services. Inventory financing includes the financing of the
purchase by these dealers and remarketers of information
handling products. As previously discussed in the note on
pages 22 and 23, Relationship with IBM, the Company is
reimbursed by IBM for certain losses on working capital
financing receivables with specific dealers and for specific
transactions. Approximately $2.2 million, $10.5 million and
$9.3 million of such losses have been reimbursed by IBM in
1997, 1996 and 1995, respectively. With the growth of the
Company's working capital financing business in 1997 and
1996, the concentration of such financings for certain large
dealers and remarketers of information industry products is
significant. However, the Company has a secured position on
most of its inventory and accounts receivable financing,
which mitigates the amount of potential loss. The Company
does not believe that there is a risk of loss that would
have a material impact on its financial position or results
of operations, and it provides for unsecured exposures based
upon historical experience.
Payment terms for inventory-secured financing generally
range from 30 days to 45 days. Accounts receivable
financing includes the financing of trade accounts
receivable for these dealers and remarketers. Payment terms
for accounts receivable secured financing typically range
from 30 days to 90 days. The components of working capital
financing receivables at December 31, 1997, and 1996, are as
follows:
(Dollars in thousands)
1997 1996
___________ ___________
Working capital financing receivables $3,289,860 $2,955,411
Allowance for receivable losses . . . (40,550) (56,723)
___________ ___________
$3,249,310 $2,898,688
=========== ===========
Included in working capital financing receivables are $742.9
million and $608.7 million of seller interest at December
31, 1997, and 1996, respectively, relating to the
securitization of such receivables. Additionally, the
Company has $2,069.1 million of approved but unused working
capital financing credit lines available to customers at
December 31, 1997.
Refer to the note on page 28, Allowance for Receivable
Losses, for a reconciliation of the working capital
financing receivables allowance for receivable losses.
-27-
<PAGE 28>
ALLOWANCE FOR RECEIVABLE LOSSES:
The following is a reconciliation of the allowance for
receivable losses, by portfolio, for the years ended
December 31, 1997, 1996 and 1995:
(Dollars in thousands) Direct Working
Financing Leveraged Loans Capital
1997 Total Leases Leases Receivable Fin. Rec.
_____________________ _________ _________ __________ __________ _________
Beginning of year . . $170,254 $ 44,131 $ 6,036 $ 63,364 $ 56,723
Provision for
receivable losses. . 35,541 22,271 (2,674) 11,800 4,144
Accounts written off
(net of recoveries). (46,328) (15,321) - (5,453) (25,554)
Transfers from
allowance for losses
on receivables sold
and other, net . . . 8,047 1,292 - 1,518 5,237
_________ _________ __________ __________ _________
End of year . . . . . $167,514 $ 52,373 $ 3,362 $71,229 $40,550
========= ========= ========== ========== =========
Direct Working
Financing Leveraged Loans Capital
1996 Total Leases Leases Receivable Fin. Rec.
_____________________ _________ _________ __________ __________ _________
Beginning of year . . $159,543 $ 46,266 $ 6,104 $ 59,369 $ 47,804
Provision for
receivable losses. . 44,883 17,940 - 13,260 13,683
Accounts written off
(net of recoveries). (40,849) (22,104) - (11,686) (7,059)
Transfers (to) from
allowance for losses
on receivables sold
and other, net . . . 6,677 2,029 (68) 2,421 2,295
_________ _________ __________ __________ _________
End of year . . . . . $170,254 $ 44,131 $ 6,036 $ 63,364 $ 56,723
========= ========= ========== ========== =========
Direct Working
Financing Leveraged Loans Capital
1995 Total Leases Leases Receivable Fin. Rec.
_____________________ _________ _________ __________ __________ _________
Beginning of year . . $ 89,489 $ 24,389 $ 7,171 $ 41,665 $ 16,264
Provision for
receivable losses. . 68,417 16,208 - 21,200 31,009
Accounts written off
(net of recoveries). (5,680) 2,967 (1,067) (7,232) (348)
Transfers from
allowance for losses
on receivables sold
and other, net . . . 7,317 2,702 - 3,736 879
_________ _________ __________ __________ _________
End of year . . . . . $159,543 $ 46,266 $ 6,104 $ 59,369 $ 47,804
========= ========= ========== ========== =========
-28-
<PAGE 29>
ALLOWANCE FOR RECEIVABLE LOSSES (Continued):
The reconciliation of the allowance for receivable losses,
by portfolio, presented on page 28, excludes the allowance
for estimated credit losses on receivables sold, which was
$1.7 million and $5.1 million at December 31, 1997 and 1996,
respectively. Provisions for expected losses, as they
relate to receivables sold, are provided during the periods
in which the receivables were originated. No material
provisions were made for the years ended December 31, 1997
and December 31, 1996.
Also excluded from the reconciliation of the allowance for
receivable losses, by portfolio, presented on page 28, is
the allowance for estimated credit losses on factored IBM
receivables, which was $31.3 million at December 31, 1997.
IBM factored receivables written off, net of recoveries,
during 1997 were $2.8 million. There were no factored IBM
receivables at December 31, 1996. Provisions for expected
losses, as they relate to factored IBM receivables, are
provide during the periods in which the receivables are
purchased.
At December 31, 1997, 1996 and 1995, the allowance for
receivable losses approximated 1.3 percent, 1.5 percent and
1.6 percent, respectively, of the Company's portfolio of
leases, loans, factored IBM receivables and working capital
financing receivables. The decline in this ratio from 1996
to 1997 was due to lower reserve requirements, based upon
the Company's historical experience and its ability to
effectively manage credit risk and contain losses.
INVESTMENTS AND OTHER ASSETS:
The components of investments and other assets at December
31, 1997, and 1996, are as follows:
(Dollars in thousands)
1997 1996
________ ________
Receivables from customers . . . . . . . . . $303,077 $259,588
Investments in partnerships and other . . . . 170,994 142,742
Receivables from affiliates . . . . . . . . . 79,121 99,214
Due and deferred from receivable sales. . . . 35,928 63,046
Remarketing inventory . . . . . . . . . . . . 58,383 35,986
Other assets . . . . . . . . . . . . . . . . 34,760 41,542
________ ________
$682,263 $642,118
======== ========
Due and deferred from receivable sales are net of the
allowance for estimated credit losses on receivables sold
and include subordinated interests in trusts, cash deposits
held by trustee, receivables from investors and interest in
excess servicing cash flows. Due and deferred from
receivable sales are restricted assets subject to limited
recourse provisions. There were no sales in 1997 and 1996
of financing receivables to investors. The Company acts as
servicer for receivables securitized and sold, and is
contingently liable for up to $197.8 million in the event of
nonperformance, default or other loss relating to the
outstanding pool balance at December 31, 1997, of IBM state
and local government installment receivables securitized and
sold. Adequate reserves exist to cover
-29-
<PAGE 30>
INVESTMENTS AND OTHER ASSETS (Continued):
potential losses. Included in other assets at December 31,
1997, and 1996, are $14.4 million and $10.0 million,
respectively, on deposit in restricted accounts, held as
security deposits received from customers. Also included in
other assets at December 31, 1997 and 1996, respectively,
are $4.1 million on deposit in restricted accounts for
purposes of credit enhancement. The Company, as servicer,
deposited the cash in connection with certain tax-exempt
grantor trusts comprised of pools of IBM state and local
government installment receivables. The trustee of each
grantor trust is entitled to draw upon the amounts in the
restricted accounts, in the event of nonperformance, default
or other loss relating to such installment receivables.
SHORT-TERM DEBT:
The components of short-term debt at December 31, 1997, and
1996, are as follows:
(Dollars in thousands) 1997 1996
__________ __________
Commercial paper, with rates averaging
5.8% in 1997 and 5.5% in 1996. . . . . . . . . $3,902,029 $4,717,531
Other short-term debt, with rates averaging
5.7% in 1997 and 5.5% in 1996. . . . . . . . . 2,134,245 1,509,994
Current maturities of long-term debt. . . . . . 1,416,394 213,875
__________ __________
7,452,668 6,441,400
IBM short-term borrowings . . . . . . . . . . . 1,139,113 125,000
__________ __________
$8,591,781 $6,566,400
========== ==========
The approximate weighted average effective interest rates
above, are before the effects of interest rate swap
agreements and have been calculated on the basis of rates in
effect at December 31, 1997 and 1996. The approximate
weighted average stated rates (after the effects of interest
rate swap agreements) on commercial paper outstanding at
December 31, 1997, and 1996, were 6.2% and 5.6%,
respectively. The approximate weighted average stated rates
(after the effects of interest rate swap agreements) on
other short-term debt outstanding at December 31, 1997, and
1996, were 5.7% and 5.8%, respectively. Other short-term
debt primarily includes notes having maturities between nine
and twelve months offered through the Company's medium-term
note program.
-30-
<PAGE 31>
LONG-TERM DEBT:
The components of long-term debt at December 31, 1997, and
1996, are as follows:
(Dollars in thousands) 1997 1996
___________ ___________
Medium-term notes with original maturities
ranging from 1998 to 2008, with rates
averaging 6.0% in 1997 and 5.9% in 1996. . . $3,302,600 $1,731,344
IBM loan payable, due 2001. . . . . . . . . . 589,253 -
___________ ___________
3,891,853 1,731,344
Net unamortized premiums/(discounts). . . . . 1,029 (1,532)
___________ ___________
3,892,882 1,729,812
Less: Current maturities . . . . . . . . . . 1,416,394 213,875
___________ ___________
$2,476,488 $1,515,937
=========== ===========
The approximate weighted average effective interest rates
above are before the effects of interest rate swap
agreements and have been calculated on the basis of rates in
effect at December 31, 1997, and 1996. The approximate
weighted average stated rates (after the effects of interest
rate swap agreements) on medium-term notes outstanding at
December 31, 1997, and 1996, were 6.0% and 5.9%,
respectively. Discounts and premiums have the effect of
modifying the stated rate of interest on long-term debt
offerings.
Annual maturity of long-term debt at December 31, 1997, is
as follows:
(Dollars in thousands)
1998 . . . . . . . . . . . . . . . . . . . $1,416,394
1999 . . . . . . . . . . . . . . . . . . . 1,216,206
2000 . . . . . . . . . . . . . . . . . . . 191,000
2001 . . . . . . . . . . . . . . . . . . . 185,000
2002 . . . . . . . . . . . . . . . . . . . 50,000
2003 and thereafter . . . . . . . . . . . 244,000
__________
$3,302,600
==========
RATIO OF EARNINGS TO FIXED CHARGES:
The ratio of earnings to fixed charges calculated in
accordance with applicable Securities and Exchange
Commission requirements was 1.83, 2.02 and 1.96 for the
years ended December 31, 1997, 1996 and 1995, respectively.
-31-
<PAGE 32>
RELATED COMPANY TRANSACTIONS:
IBM charged the Company $84.4 million, $64.8 million and
$62.6 million in 1997, 1996 and 1995, respectively,
representing costs for lease services, employee benefit
plans, facilities rental and staff support.
Amounts due to IBM and affiliates include current income
taxes payable, as well as amounts for software, services,
purchases of receivables and purchases of equipment for term
leases. At December 31, 1997, and 1996, amounts due to IBM
and affiliates were $2,524.5 million and $2,289.0 million,
respectively.
Interest and finance income of $6.7 million, $1.9 million
and $6.9 million was earned from loans to IBM and affiliates
in 1997, 1996 and 1995, respectively. Interest expense of
$29.3 million, $10.6 million and $10.2 million was incurred
on loans from IBM and affiliates during 1997, 1996 and 1995,
respectively.
The Company also provides equipment financing at market
rates to IBM and affiliated companies for both IBM and
non-IBM products. The Company originated $1,054.4 million
and $682.0 million of such financings during 1997 and 1996,
respectively. At December 31, 1997, and 1996, approximately
$1,255.0 million and $828.0 million, respectively, of such
financings were included in the lease and loan portfolio.
Of these amounts, $1,136.1 million and $723.4 million were
included in the Company's operating lease portfolio at
December 31, 1997, and 1996, respectively. The finance
income earned from operating leases to IBM and affiliated
companies, net of depreciation expense, was $151.3 million,
$107.6 million and $91.9 million in 1997, 1996 and 1995,
respectively.
In June 1997, IBM Credit International Factoring Corporation
(ICIFC) and IBM Credit EMEA Factoring Co., Ltd (ICEFC),
subsidiaries of the Company, entered into factoring
agreements with selected IBM subsidiaries. Under these
agreements, ICIFC and ICEFC will periodically purchase,
without recourse, all the rights, title and interest to
certain outstanding IBM customer receivables.
During 1997, ICIFC and ICEFC acquired IBM customer
receivables having a nominal value of $4,222.2 million for
approximately $4,159.2 million. The receivables acquired
are short-term in nature and are denominated in non-U.S.
currencies. The purchase was financed by the Company
through the issuance of short-term debt. Transactions
related to these receivables are fully integrated in the
Company's consolidated financial statements.
-32-
<PAGE 33>
RELATED COMPANY TRANSACTIONS (Continued):
An intercompany tax allocation agreement (the Agreement)
exists between the Company and its parent company, IBM. The
Agreement aligns the settlement of federal and state tax
benefits and/or obligations with the Company's provision for
income taxes determined on a separate company basis. The
Company is part of the IBM consolidated federal tax return
and files separate state tax returns in selected states.
Included in amounts due to IBM and affiliates at December
31, 1997, and 1996, are $27.1 million and $5.5 million,
respectively, of current income taxes payable determined in
accordance with the Agreement. Cash paid for income taxes
to IBM and to states that require separate tax returns in
1997, 1996 and 1995 was $18.4 million, $113.3 million and
$339.2 million, respectively.
PROVISION FOR INCOME TAXES:
The components of the provision for income taxes are as
follows:
(Dollars in thousands)
1997 1996 1995
_________ __________ __________
Federal:
Current . . . . . . . . . . $ 32,401 $ 60,741 $ 114,262
Deferred. . . . . . . . . . 100,332 83,637 9,306
_________ __________ __________
132,733 144,378 123,568
_________ __________ __________
State and local:
Current . . . . . . . . . . 8,575 19,216 23,405
Deferred. . . . . . . . . . 21,907 12,528 2,482
_________ __________ __________
30,482 31,744 25,887
_________ __________ __________
Total provision . . . . . . $ 163,215 $ 176,122 $ 149,455
========== ========== ==========
Changes in the deferred tax assets and liabilities resulting
from temporary differences between financial and tax
reporting are as follows:
(Dollars in thousands) 1997 1996
__________ __________
Deferred tax assets (liabilities):
Provision for receivable losses. . . . . . $ 75,477 $ 90,909
Lease income and depreciation. . . . . . . (1,014,615) (901,514)
Other, net . . . . . . . . . . . . . . . . 51,958 49,111
__________ __________
Deferred income taxes . . . . . . . . . . . . $ (887,180) $(761,494)
========== ==========
-33-
<PAGE 34>
PROVISION FOR INCOME TAXES (Continued):
The provision for income taxes varied from the U.S. federal
statutory income tax rate as follows:
1997 1996 1995
______ ______ ______
Federal statutory rate. . . . . . . . 35.0% 35.0% 35.0%
State and local taxes, net of
federal tax benefit . . . . . . . . 4.4 4.4 4.4
Adjustments to prior years' tax
liabilities . . . . . . . . . . . . (2.9) - -
Other, net. . . . . . . . . . . . . . - - (0.1)
______ ______ ______
Effective income tax rate . . . . . . 36.5% 39.4% 39.3%
====== ====== ======
FINANCIAL INSTRUMENTS:
The Company has used derivative instruments as an element of
its risk management strategy for many years. Although
derivatives entail risk of non-performance by
counterparties, the Company manages this risk by
establishing explicit dollar and term limitations that
correspond to the credit rating of each carefully selected
counterparty. The Company has not sustained a material loss
from these instruments nor does it anticipate any material
adverse effect on its results of operations or financial
position in the future.
The majority of the Company's derivative transactions relate
to the matching of liabilities to assets. The Company
issues debt, using the most efficient capital markets and
products, which may result in a currency or interest rate
mismatch with the underlying asset. Interest rate swaps or
currency swaps are then used to match the interest rates and
currencies of its debt to the related asset. Interest and
currency rate differentials accruing under interest rate and
currency swap contracts are recognized over the life of the
contracts in interest expense. When the terms of the
underlying instrument are modified, or if it ceases to
exist, all changes to fair value of the swap contract are
recognized in income each period until it matures.
The tables on page 35 summarize the notional value, maturity
dates, weighted average receive and pay rates and net
unrealized gain (loss) of derivative financial instruments
by category at December 31, 1997, and 1996. The notional
value at December 31 provides an indication of the extent of
the Company's involvement in such instruments at that time,
but does not represent exposure to market risk.
-34-
<PAGE 35>
FINANCIAL INSTRUMENTS (Continued):
(Dollars in thousands)
At December 31, 1997:
Notional Weighted Average Rate
Type Amount Maturities Receive Pay
____________________ __________ __________ _____________________
Swap to Fixed $2,675,750 1998-2002 5.68% 6.22%
Swap to Floating 2,605,800 1999-2007 6.73% 5.70%
Currency Related 435,297 1998-1999 n/a * n/a *
Int. Rate Cap/Floor 615,000 1998-1999 n/a * n/a *
__________
$6,331,847
==========
At December 31, 1997 (Continued):
Notional Unrealized Unrealized Net Unrealized
Type Amount Gross Gain Gross (Loss) Gain (Loss)
____________________ __________ __________ ____________ ______________
Swap to Fixed $2,675,750 $ 1,027 $(16,557) $(15,530)
Swap to Floating 2,605,800 22,500 (483) 22,017
Currency Related 435,297 2,213 (39,024) (36,811)
Int. Rate Cap/Floor 615,000 - - -
__________ __________ ____________ ______________
$6,331,847 $25,740 $(56,064) $(30,324)
========== ========== ============ ==============
At December 31, 1996:
Notional Weighted Average Rate
Type Amount Maturities Receive Pay
____________________ __________ __________ _____________________
Swap to Fixed $2,400,000 1997-2001 5.77% 6.27%
Swap to Floating 1,670,800 1997-2001 5.86% 5.58%
Currency Related 245,445 1998-1999 n/a * n/a *
Int. Rate Cap 500,000 1997-1999 n/a * n/a *
__________
$4,816,245
==========
At December 31, 1996 (Continued):
Notional Unrealized Unrealized Net Unrealized
Type Amount Gross Gain Gross (Loss) Gain (Loss)
____________________ __________ __________ ____________ ______________
Swap to Fixed $2,400,000 $ 1,848 $(17,876) $(16,028)
Swap to Floating 1,670,800 4,838 (4,413) 425
Currency Related 245,445 961 (19,569) (18,608)
Int. Rate Cap 500,000 675 - 675
__________ __________ ____________ ______________
$4,816,245 $ 8,322 $(41,858) $(33,536)
========== ========== ============ ==============
* n/a: not applicable
-35-
<PAGE 36>
FINANCIAL INSTRUMENTS (Continued):
At December 31, 1997, approximately 57 percent of the
Company's total debt was hedged through the use of currency
and interest rate related agreements. Before the effects of
such agreements, the Company's debt comprised approximately
27 percent fixed rate debt and 73 percent floating rate
debt. After the effects of such agreements, the Company's
debt consisted of approximately 41 percent fixed rate debt
and 59 percent floating rate debt. At December 31, 1996,
about 61 percent of the Company's total debt was hedged
through the use of currency and interest rate related
agreements. Before the effects of such agreements, the
Company's debt comprised approximately 36 percent fixed rate
debt and 64 percent floating rate debt. After the effects
of such agreements, the Company's debt consisted of
approximately 45 percent fixed rate debt and 55 percent
floating rate debt.
The approximate weighted average effective interest rates
for the commercial paper, other short-term debt, medium-term
notes and other long-term debt, as disclosed in the notes on
pages 30 and 31, Short-Term Debt and Long-Term Debt, include
the effects of interest rate swap agreements.
Fair value is a very subjective and imprecise measurement
that is based on numerous estimates and assumptions that
require substantial judgment and may be valid only at a
particular point in time. As such, fair value can represent
only a very general approximation of possible value that may
never actually be realized.
The following methods and assumptions were used to estimate
the fair value of each class of financial instrument for
which it is practicable to estimate.
Cash and cash equivalents: The carrying amount approximates
fair value due to the short maturity of these instruments.
Marketable securities: The carrying amount approximates
fair value, which is estimated using quoted market prices.
Loans receivable: The fair value is estimated by
discounting the future cash flows using current rates at
which similar loans would be made to borrowers with similar
credit ratings with the same remaining maturities.
Working capital financing receivables: The carrying amount
approximates fair value due to the short maturity of most of
these instruments.
Due and deferred from receivable sales: The carrying amount
approximates fair value.
Short and long-term debt and current maturities of long-term
debt: The fair value of these instruments is estimated by
discounting the future cash flows using the current rates
offered to the Company for debt with the same maturities.
Interest rate related and currency related agreements: The
fair value of these instruments has been estimated as the
amount the Company would receive or pay to terminate the
agreements, taking into consideration current interest and
currency exchange rates.
-36-
<PAGE 37>
FINANCIAL INSTRUMENTS (Continued):
Commitments to extend credit: The fair value of commitments
to extend credit is estimated as the amount of approved but
unused working capital financing credit lines available to
customers.
Financial guarantees: The fair value of financial
guarantees is estimated as the amounts that would be paid if
the Company had to settle the obligations.
The following table summarizes the carrying amount and the
estimated fair value of all of the Company's financial
instruments:
(Dollars in thousands)
Carrying Estimated
At December 31, 1997: Amount Fair Value
__________ ___________
Cash and cash equivalents $ 792,471 $ 792,471
Marketable securities 127,847 127,847
Loans receivable 2,381,261 2,462,666
Working capital financing receivables 3,249,310 3,249,310
Short-term debt (excluding current
maturities of long-term debt) 7,175,387 7,109,671
Long-term debt and current
maturities of long-term debt 3,892,882 3,962,879
Off-balance-sheet derivatives:
Currency related --
Assets - 2,370
Liabilities - 41,274
Interest rate related --
Assets - 14,385
Liabilities - 22,267
Commitments to extend credit - 2,069,076
Financial guarantees - 8,888
Carrying Estimated
At December 31, 1996: Amount Fair Value
__________ ___________
Cash and cash equivalents $ 632,834 $ 632,834
Marketable securities 159,348 159,348
Loans receivable 1,846,947 1,899,413
Working capital financing receivables 2,898,688 2,898,688
Short-term debt (excluding current
maturities of long-term debt) 6,352,525 6,573,150
Long-term debt and current
maturities of long-term debt 1,729,812 1,373,218
Off-balance-sheet derivatives:
Currency related --
Assets - 961
Liabilities - 19,569
Interest rate related --
Assets - 7,361
Liabilities - 22,289
Commitments to extend credit - 2,051,496
Financial guarantees - 12,884
-37-
<PAGE 38>
TRANSACTIONS WITH GENERAL ELECTRIC CAPITAL CORPORATION:
During the second and third quarters of 1997, the Company
entered into agreements to purchase selected assets from the
leasing portfolio of General Electric Capital Technology
Management Services Corporation (GECTMSC), a subsidiary of
General Electric Capital Corporation (GECC). The purchase
price of approximately $353.3 million was primarily financed
by the Company through short-term and long-term borrowings.
The acquired capital and operating lease and loan portfolio
consists of both IBM and non-IBM products.
Additionally, the Company entered into an alliance with
General Electric Capital Information Technology Solutions
Corporation (ITS), a GECC affiliate, wherein the Company
will serve as the preferred financing provider for customers
of ITS's products and services.
INDUSTRY SEGMENT REPORTING:
The Company operates principally in a single business
segment offering customer financing of information industry
products and services.
SUBSEQUENT EVENT:
On February 26, 1998, the Company's Board of Directors
declared a $25.0 million dividend, payable to IBM on March
19, 1998.
-38-
<PAGE 39>
SELECTED QUARTERLY FINANCIAL DATA: (Unaudited)
(Dollars in thousands)
Finance Gross Profit
and Other Interest Equipment on Equipment Net
Income Expense Sales Sales Earnings
___________ ________ _________ ____________ ________
1997
____
First Quarter . .$ 365,891* $112,966 $ 86,655 $11,305 $ 79,183
Second Quarter. . 363,110 126,824 85,459 12,566 68,583
Third Quarter . . 421,590 143,749 128,961 18,343 62,439
Fourth Quarter. . 480,304 155,021 141,030 18,360 73,688
___________ ________ _________ _______ ________
$1,630,895 $538,560 $442,105 $60,574 $283,893
=========== ======== ========= ======= ========
1996
____
First Quarter . .$ 374,179* $106,280 $106,488 $18,689 $ 73,928
Second Quarter. . 368,114 106,931 101,432 17,626 74,075
Third Quarter . . 359,648 110,362 76,367 7,670 71,610
Fourth Quarter. . 395,859 112,536 135,005 6,951 51,469
___________ ________ ________ _______ ________
$1,497,800 $436,109 $419,292 $50,936 $271,082
=========== ======== ======== ======= ========
* During the first quarter of 1997 and 1996, the Company recognized a
pretax gain of $10.7 million and $9.3 million, respectively, upon
the sale of certain restricted securities.
-39-
<PAGE 40>
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 General Instruction J.
ITEM 11. EXECUTIVE COMPENSATION:
Omitted pursuant to General Instruction J.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT:
Omitted pursuant to General Instruction J.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
Omitted pursuant to General Instruction J.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K:
(a) The following documents are filed as part of this
report:
1. Consolidated Financial Statements
included in Part II of this report:
Report of Independent Accountants (page 15).
Consolidated Statement of Financial Position at
December
31, 1997 and 1996 (page 16).
Consolidated Statement of Earnings and Retained
Earnings
for the year ended December 31, 1997, 1996 and
1995
(page 17).
Consolidated Statement of Cash Flows for the
year ended
December 31, 1997, 1996 and 1995 (pages 18 and
19).
Notes to Consolidated Financial Statements
(pages 20
through 38).
2. Financial statement schedules required to be
filed by
Item 8 of this Form 10-K:
Schedules are omitted because of the absence
of the conditions under which they are required
or
because the information is disclosed in the
financial
statements or in the notes thereto.
-40-
<PAGE 41>
3. Exhibits required to be filed by Item 601 of
Regulation S-K:
Included in this Form 10-K:
Exhibit Number
_______________
I. Agreement to furnish information
defining the
rights of debt holders
II. Statement re computation of ratios
III. Consent of experts and counsel
IV. Financial data schedule
Not included in this Form 10-K:
The Certificate of Incorporation of IBM Credit
Corporation
is filed pursuant to the quarterly report on
Form 10-Q for
the quarterly period ended June 30, 1993, on
August 10,
1993, and is hereby incorporated by reference.
The By-Laws of IBM Credit Corporation are filed
pursuant
to the annual report of Form 10-K for the
fiscal year
ended December 31, 1996, on March 25, 1997, and
are
hereby incorporated by reference.
The Support Agreement dated as of April 15,
1981, between
the Company and IBM is filed with Form SE dated
March 26,
1987, and is hereby incorporated by reference.
Power of Attorney of Jeffrey D. Serkes
(b) Reports on Form 8-K:
A Form 8-K dated October 21, 1997, was filed
with respect
to the Company's financial results for the
period ended
September 30, 1997.
-41-
<PAGE 42>
[SIGNATURE]
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.
IBM CREDIT CORPORATION
(Registrant)
By: /s/W. Wilson Lowery, Jr.
________________________
(W. Wilson Lowery, Jr.)
Chairman
Date: March 27, 1998
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 on March 27, 1998.
Signature Title
_________ _____
_/s/W. Wilson Lowery, Jr.__
___________________________
(W. Wilson Lowery, Jr.) Chairman and Director
_/s/Kimberly A. Kispert____
___________________________
(Kimberly A. Kispert) Vice President, Finance,
and Chief Financial Officer and Director
_/s/Michael J. Twomey______
___________________________
(Michael J. Twomey) Controller and Treasurer
|
|
| /s/Kimberly A. Kispert
Jeffrey D. Serkes Director |By: ________________________
| (Kimberly A. Kispert)
| Attorney-in-fact
|
-42-
<PAGE 43>
EXHIBIT INDEX
_____________
Reference Number Exhibit Number
per Item 601 of in This
Regulation S-K Description of Exhibits Form 10-K
________________ _________________________________________ ______________
(2) Plan of acquisition, reorganization, Not
liquidation or succession. applicable
(3) Certificate of Incorporation and By-Laws
The Certificate of Incorporation of IBM
Credit Corporation is filed pursuant to
Form 10Q for the quarterly period ended
June 30, 1993, on August 10, 1993, and is
hereby incorporated by reference.
The By-Laws of IBM Credit Corporation are
filed pursuant to the annual report on
Form 10-K for the fiscal year ended December
31, 1996, on March 25, 1997, and are hereby
incorporated by reference.
(4)(a) Instruments defining the rights of
security holders.
An agreement to furnish to the Securities I
and Exchange Commission, on request, a
copy of instruments defining the rights
of debt holders.
(4)(b) Indenture dated as of January 15, 1989,
filed electronically as Exhibit No. 4 to
Amendment No. 1 to Form S-3 on April 3,
1989, is hereby incorporated by
reference.
(9) Voting trust agreement. Not
applicable
(10) Material contracts.
The Support Agreement dated April 15,
1981, between the Company and IBM is
filed with Form SE dated March 26, 1987,
and is hereby incorporated by reference.
(11) Statement regarding computation of per Not
share earnings. applicable
(12) Statement regarding computation of ratios. II
(16) Letter on change in certifying accountant. Not
applicable
-43-
<PAGE 44>
EXHIBIT INDEX
_____________
(continued)
Reference Number Exhibit Number
per Item 601 of in This
Regulation S-K Description of Exhibits Form 10-K
________________ _________________________________________ ______________
(18) Letter regarding change in accounting Not
principles. Applicable
(21) Subsidiaries of the registrant. Omitted
(22) Published report regarding matters Not
submitted to vote of security holders. Applicable
(23) Consent of experts and counsel. III
(24) Power of Attorney of Jeffrey D. Serkes
(incorporated by reference to Exhibit IV(j)
to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995,
electronically transmitted to the Securities
and Exchange Commission on March 18, 1996).
(27) Financial data schedule. IV
(28) Information from reports furnished to Not
state insurance regulatory authorities. applicable
(99) Additional exhibits. Not
applicable
-44-
<PAGE 1>
[SIGNATURE]
EXHIBIT I
_________
AGREEMENT TO FURNISH INFORMATION DEFINING
_________________________________________
THE RIGHTS OF DEBT HOLDERS
__________________________
Securities and Exchange Commission
450 Fifth Avenue
Washington, D.C. 20549
Subject: IBM Credit Corporation Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 - File No. 1-8175
Ladies and Gentlemen:
IBM Credit Corporation (the Company) including its
subsidiaries does not have outstanding any instrument other
than the Indenture dated January 15, 1989, as filed
electronically as Exhibit No. 4 to Form S-3 with the
Securities and Exchange Commission on April 3, 1989,
defining the rights of the holders of its long-term debt
under which the total amount of securities authorized
exceeds 10 percent of the total assets of the Company and
its subsidiaries on a consolidated basis.
In accordance with paragraph (b)(4)(iii) of Item 601 of
Regulation S-K, the Company hereby agrees to furnish to the
Securities and Exchange Commission, upon request, a copy of
each instrument that defines the rights of the holders of
its long-term debt.
Very truly yours,
IBM CREDIT CORPORATION
By: /s/Kimberly A. Kispert
_____________________________
Date: March 27, 1998 (Kimberly A. Kispert)
Vice President, Finance
and Chief Financial Officer
-45-
<PAGE 1>
<TABLE>
<CAPTION>
EXHIBIT II
__________
IBM CREDIT CORPORATION
STATEMENT RE COMPUTATION OF RATIOS
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31:
1997 1996 1995 1994 1993
________ ________ ________ ________ ________
<S> <C> <C> <C> <C> <C>
Fixed Charges:
Interest expense $538,560 $436,109 $394,572 $306,125 $365,675
Approximate portion of rental
expense representative of
the interest factor 283 479 507 2,780 3,290
________ ________ ________ ________ ________
Total fixed charges 538,843 436,588 395,079 308,905 368,965
Net earnings 283,893 271,082 230,475 250,589 220,220
Provision for income taxes 163,215 176,122 149,455 162,703 173,172
________ ________ ________ ________ ________
Earnings before income taxes
and fixed charges $985,951 $883,792 $775,009 $722,197 $762,357
======== ======== ======== ======== ========
Ratio of earnings to fixed
charges 1.83 2.02 1.96 2.34 2.07
==== ==== ==== ==== ====
-46-
</TABLE>
<PAGE 1>
[SIGNATURE]
EXHIBIT III
___________
CONSENT OF INDEPENDENT ACCOUNTANTS
__________________________________
We hereby consent to the incorporation by reference in
the Prospectus constituting part of the Registration
Statements on Form S-3 (Nos. 333-42755 and 333-26211) of IBM
Credit Corporation of our report dated January 20, 1998,
except as to the subsequent event note on page 38, which is
as of February 26, 1998, appearing on page 15 of this Form
10-K.
/s/Price Waterhouse LLP
Stamford, CT
March 27, 1998
-47-
<TABLE> <S> <C>
<ARTICLE> 5
EXHIBIT IV
__________
FINANCIAL DATA SCHEDULE
_______________________
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM IBM CREDIT CORPORATION'S CONSOLIDATED FINANCIAL STATEMENTS AT AND
FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 792,471
<SECURITIES> 127,847
<RECEIVABLES> 6,454,602
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 16,572,116
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 457,411
0
0
<OTHER-SE> 1,211,538
<TOTAL-LIABILITY-AND-EQUITY> 1,668,949
<SALES> 442,105
<TOTAL-REVENUES> 1,630,895
<CGS> 381,531
<TOTAL-COSTS> 381,531
<OTHER-EXPENSES> 228,155
<LOSS-PROVISION> 35,541
<INTEREST-EXPENSE> 538,560
<INCOME-PRETAX> 447,108
<INCOME-TAX> 163,215
<INCOME-CONTINUING> 283,893
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 283,893
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
