<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, 1999
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)
North Castle Drive, MS NCA-306
Armonk, New York 10504-1785
______________________________________________ ___________
(Address of principal executive offices) (Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
____________________________ ________________________
5.76% Notes due May 15, 2001 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Registrant's telephone number, including area code 914-765-1900
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, 2000, 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, 2000: NONE.
The registrant meets the conditions set forth in General Instruction H
(1)(a) and (b) of Form 10-K and is therefore filing this Form with the
reduced disclosure format.
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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 7A. Qualitative and Quantitative Disclosure about
Market Risk 14
Item 8. Financial Statements and Supplementary Data 16
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 45
PART III
Item 10. Directors and Executive Officers of the Registrant 45
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial Owners and
Management 45
Item 13. Certain Relationships and Related Transactions 45
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 45
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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 Armonk, New York. The executive offices comprise
approximately 252,200 square feet of office space. The Company occupies
this space under an arrangement with IBM.
ITEM 3. LEGAL PROCEEDINGS:
The Company is subject to a variety of claims and suits that
arise from time to time out of the ordinary course of business. The
Company does not believe that any such current action will have a
material impact on the Company's business, financial condition or results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
Omitted pursuant to General Instruction I.
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 $75,000,000 and $100,000,000 during 1999 and 1998,
respectively. Dividends are declared by the Board of Directors of the
Company.
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<TABLE>
ITEM 6. SELECTED FINANCIAL DATA:
The following selected financial data should be read in conjunction with
the financial statements of IBM Credit Corporation and the related notes
to the financial statements included in this document.
<CAPTION>
(Dollars in thousands)
1999 1998 1997 1996 1995
__________ ___________ ___________ __________ __________
<S> <C> <C> <C> <C> <C>
For the year:
Finance and other
income . . . .$ 1,919,833 $ 1,816,498 $ 1,630,895 $ 1,497,800
$1,452,285 Gross profit on
equipment sales. 51,216 63,441 60,574 50,936
74,613 Interest expense . 569,545 611,206 538,560 436,109
394,572 Net earnings . . . 429,620 308,765 283,893 271,082
230,475 Dividends. . . . . 75,000 100,000 50,000
45,000 146,419
Products purchased
for leases . . .4,154,263 4,638,015 4,803,985 3,903,052
2,931,619 Loans receivable
financing. . . .2,039,793 1,913,501 1,460,214 1,211,318
892,796 IBM state and local
installment
receivables and
leases. . . . . 405,975 429,400 411,029 410,328
364,636 Other capital equip-
ment financing. . 194,707 195,324 274,869 225,744
291,688 Working capital
financing . . .14,530,300 14,181,900 15,005,200 13,387,014
10,297,600 Return on average
assets. . . . . 2.8% 2.0% 2.1% 2.4%
2.3% Return on average
equity. . . . . 21.4% 17.2% 18.6% 20.7%
20.9%
At end of year:
Total assets. . $16,344,705 $16,397,359 $16,572,116 $12,946,139
$11,425,551 Net investment
in capital
leases . . . 5,337,200 5,265,941 4,931,292 4,214,822
3,966,255 Equipment on
operating
leases, net . 3,386,686 3,619,585 3,583,641 2,551,382
1,695,812 Loans receivable 3,535,498 3,041,22 2,381,261 1,846,947
1,473,822 Working capital
financing
receivables . 2,963,583 2,789,029 3,249,310 2,898,688
3,158,932
Short-term debt. 7,132,888 6,777,222 8,591,781 6,566,400
6,472,627 Long-term debt . 3,671,139 3,973,839 2,476,488 1,515,937
1,115,440 Stockholder's
equity . . . . 2,232,334 1,877,714 1,668,949 1,435,056
1,208,574
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS:
OVERVIEW
Net earnings for 1999 were $429.6 million, yielding a return on average
equity of 21.4 percent, as compared with 1998 net earnings of $308.8
million, yielding a return on average equity of 17.2 percent.
FINANCING ORIGINATED
For the year ended December 31, 1999, the Company originated customer
equipment financing for end users of $6,794.7 million, a 5 percent
decrease from $7,176.2 million for 1998. The decline in customer
equipment financing originated is related to IBM's decrease in placements
of its products in the United States.
Customer financing originations for end users included purchases of
$3,523.2 million of information handling systems from IBM, consisting of
$2,081.7 million for capital leases and $1,441.5 million for operating
leases. In addition, customer financing originations for end users
included the following: (1) financing originated for installment
receivables of $364.3 million; (2) financing for IBM software and
services of $1,675.4 million; (3) installment and lease financing for
state and local government customers of $406.0 million for the account of
IBM; and (4) other financing of $825.8 million for IBM equipment, as well
as related non-IBM equipment, software and services to meet IBM
customers' total solution requirements.
The Company's capital lease portfolio primarily includes direct financing
leases. Both direct financing leases and operating leases consist
principally of IBM advanced information processing products with terms
generally from two to three years.
For the year ended December 31, 1999, originations of working capital
financing for dealers and remarketers of information industry products
increased by 2 percent to $14,530.3 million, from $14,181.9 million for
1998. The growth in working capital financing originations reflects
volume increases in IBM's workstation products and non-IBM products for
remarketers financed by the Company throughout 1999.
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 75 days. Payment terms for
accounts receivable secured financing generally range from 30 days to 90
days.
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REMARKETING ACTIVITIES
In addition to originating new financing, the Company remarkets used IBM
and non-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 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, 1999, the remarketing activities contributed $277.4 million
to pretax earnings, an increase of 25 percent compared with $222.0
million for 1998, primarily due to operating lease extensions and the
sale of leased assets to IBM relating to the sale of IBM's global network
to AT&T.
At December 31, 1999, the investment in remarketed equipment on capital
and operating leases totaled $281.5 million, compared with 1998 year-end
investment of $259.7 million.
FINANCIAL CONDITION
ASSETS
Total assets decreased to $16.3 billion at December 31, 1999, compared
with $16.4 billion at December 31, 1998. This decrease is primarily
attributable to the sale of all the remaining factored IBM receivables in
the first quarter of 1999. The assets were sold at book value, which
approximated fair value, and therefore no gain or loss was recognized on
the transaction (Refer to Relationship with IBM and Related Company
Transactions in the Notes to the Consolidated Financial Statements on
page 24 for additional details). Additionally, a decrease in cash and
cash equivalents and marketable securities contributed to the decline.
These decreases were offset by the increase in loans receivable.
Total financing assets serviced by the Company, at December 31, 1999,
were $16.2 billion, compared with $16.0 billion at December 31, 1998.
Total financing assets serviced include the remaining balance of
financing receivables securitized and sold ($0 in 1999, $129.1 million in
1998), capital and operating leases ($8,723.9 million in 1999, $8,885.5
million in 1998), loans receivable ($3,535.5 million in 1999, $3,041.2
million in 1998), working capital financing receivables ($2,963.6 million
in 1999, $2,861.8 million in 1998), subordinated interests in trusts
resulting from the securitization and sale of financing receivables ($0
in 1999, $2.0 million in 1998), factored accounts receivable from
selected IBM subsidiaries ($0 in 1999, $292.3 million in 1998) and other
assets ($0 in 1999, $.9 million in 1998). Also included in total
financing assets serviced are federal, state and local government
installment and lease financing receivables of IBM ($992.5 million in
1999, $900.3 million in 1998), which are not reflected on the Company's
Consolidated Statement of Financial Position.
-7-
<PAGE> 7
FINANCIAL CONDITION (Continued)
LIABILITIES AND STOCKHOLDER'S EQUITY
The assets of the Company were financed with $10,804.0 million of debt at
December 31, 1999. Total short-term and long-term debt increased by
approximately $52.9 million, from $10,751.1 million at December 31, 1998.
This increase was the result of increases in commercial paper outstanding
of $920.0 million, short-term debt payable to IBM of $1,482.9 million,
and long-term debt of $376.2 million, offset by a decrease in short-term
debt of $2,047.3 million and long-term debt payable to IBM of $678.9
million. Included in long-term debt at December 31, 1999, was $1,391.7
million payable to IBM at market terms and conditions, with maturity
dates ranging from January 26, 2001 to May 13, 2004.
At December 31, 1999, the Company had available $10.05 billion of a shelf
registration with the Securities and Exchange Commission (SEC) for the
issuance of debt securities. On September 6, 1999, the Company filed an
additional shelf registration statement with the Securities and Exchange
Commission for $10.0 billion which incorporated the remaining balance on
the prior shelf registration and is included in the above amount. The
Company intends to issue debt securities under this shelf registration as
the need arises. This allows the Company rapid access to domestic
financial markets. 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, together with IBM and IBM International
Finance, N.V., to issue and sell debt securities under a Euro Medium Term
Note Programme (EMTN)in an aggregate nominal amount of up to Euro 4.0
billion, or its equivalent in any other currency. At December 31, 1999,
there was Euro 1.6 billion 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 the Company
has available. The Company'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 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 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 no borrowings outstanding under this agreement at December 31, 1999.
At December 31, 1998, the Company had $58.2 million of borrowings
outstanding under this agreement.
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<PAGE> 8
FINANCIAL CONDITION (Continued)
The Company and IBM have also signed an additional master loan agreement
which allows for longer-term funding, made available at market terms and
conditions, upon the request of the Company. At December 31, 1999, and
1998, the Company had $2,350.0 million and $1,481.7 million,
respectively, of borrowings outstanding under this agreement.
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 financing
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 decreased by approximately
$378.5 million to $1,976.2 million at December 31, 1999, from $2,354.7
million at December 31, 1998. The decrease was primarily attributable to
a $477.5 million decrease in the amount payable for capital equipment
purchases during 1999.
At December 31, 1999, the Company's debt to equity ratio was 4.8:1,
compared with 5.7:1 at December 31, 1998.
TOTAL CASH USED BEFORE DIVIDENDS
Total cash used before dividends was $147.7 million in 1999, compared
with total cash provided before dividends of $130.4 million in 1998. For
1999, total cash used before dividends reflects $2,433.3 million of cash
used in investing and financing activities before dividends, offset by
$2,285.6 million of cash provided by operating activities. For 1998,
total cash provided before dividends reflects $2,549.8 million of cash
used in investing and financing activities before dividends, offset by
$2,680.2 million of cash provided by operating activities. Cash and cash
equivalents at December 31, 1999, totaled $600.1 million, a decrease of
$222.7 million, compared with the balance at December 31, 1998.
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<PAGE> 9
RESULTS OF OPERATIONS
INCOME FROM LEASES
Income from leases increased 22 percent to $849.8 million for the year
ended December 31, 1999, from $698.3 million in 1998. Improved average
lease yields and declining residual value writedowns contributed to the
overall increase in lease income for the year ended December 31, 1999.
Income from leases includes lease income resulting from remarketing
transactions. Lease income from remarketing transactions was $234.2
million in 1999, an increase of 22 percent from $192.4 million in 1998.
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 are not 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 are
recognized currently. A review of the Company's $1,216.1 million
residual value portfolio at December 31, 1999, 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. However, the Company did record an $8.1 million
reduction to income from leases during 1999 to recognize decreases in the
expected future residual value of specific leased equipment, compared
with $33.9 million during 1998.
INCOME FROM WORKING CAPITAL FINANCING
Income from working capital financing increased 1 percent to $240.3
million in 1999, compared with $236.8 million in 1998. This increase was
primarily due to additional income from an increase in participation
loans. Refer to Working Capital Financing Receivables in the Notes to
Consolidated Financial Statements on page 29 for additional details.
This increase was partially offset by a decrease in income from dealer
interest caused by lower average outstanding receivable balances
throughout 1999 and a decline in fee income from IBM due to shorter
payment terms.
INCOME FROM LOANS
Income from loans increased 21 percent to $251.2 million in 1999,
compared with $208.4 million in 1998. This increase resulted from higher
asset balances, which were due to continued growth of financing
originated for software and services.
EQUIPMENT SALES
Equipment sales amounted to $474.0 million in 1999, compared with $510.2
million in 1998. Gross profit on equipment sales in 1999 was $51.2
million, a decrease of 19 percent, compared with $63.4 million in 1998.
The gross profit margin in 1999 decreased to 10.8 percent, compared with
12.4 percent in 1998. The mix of products available for sale and
changing market conditions for certain used equipment during 1999
contributed to the decrease in sales, gross profit and gross profit
margins, compared with 1998. These factors were partially offset by the
increase in sales and
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<PAGE> 10
RESULTS OF OPERATIONS (Continued)
gross profit from the sale of leased assets to IBM relating to the sale
of IBM's global network to AT&T.
INCOME FROM FACTORED IBM RECEIVABLES
Income from factored IBM receivables was $3.1 million for the year ended
December 31, 1999, as compared with $52.3 million for year ended December
31, 1998. This decrease is due to the sale of the net assets of IBM
Credit International Factoring Corporation (ICIFC) to IBM International
Holdings Finance Company, Ltd. (IIHFC). Refer to Relationship with IBM
and Related Company Transactions in the Notes to Consolidated Financial
Statements on page 24 for additional details.
OTHER INCOME
Other income decreased 8 percent to $101.5 million in 1999, compared with
$110.4 million in 1998. The decrease in other income is primarily
attributable to a decline in the fees for the servicing of IBM financing
receivables sold, and a decrease in interest income on cash. Partially
offsetting the decrease in other income is the gain on the sale of the
Company's ownership interests in part of our non-IT lease portfolio in
December, 1999. The Company sold these interests to third parties,
resulting in a pretax gain of $19.2 million. Refer to Net Investment in
Capital Leases on page 27 and Equipment on Operating Leases on page 28 in
the Notes to Consolidated Financial Statements for additional details.
INTEREST EXPENSE
As a result of a decrease in the Company's average outstanding debt
balance and a decline in interest rates, interest expense decreased 7
percent to $569.5 million in 1999, as compared with $611.2 million in
1998. Due to lower interest rates, the Company's year-to-date average
cost of debt for 1999 decreased to 5.4 percent, from 5.7 percent for
1998.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses were $213.6 million in
1999, remaining relatively flat as compared with $211.3 million in 1998.
The Company is currently in the process of renegotiating its operating
agreement with IBM at IBM's request regarding the services IBM performs
for the Company. The Company expects this to be completed in the first
half of 2000. This could result in a material increase in the Company's
selling, general and administrative 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
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RESULTS OF OPERATIONS (Continued)
conditions warrant. The portfolio is diversified by region, 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 trend toward
consolidation in this industry, the concentration of such financings for
certain large dealers and remarketers of information industry products is
significant.
At December 31, 1999, and December 31, 1998, approximately 55 percent and
56 percent, respectively, 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 1999
or 1998.
The overall provision for receivable losses decreased to $5.0 million in
1999, compared with $37.8 million in 1998. The decline in the provision
for receivable losses was primarily attributable to a revision in the
Company's methodology for calculating the reserve relating to operating
leases. Additionally, 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 contributed to the decline in the provision for
receivable losses.
INCOME TAXES
Income taxes increased 39 percent to $279.3 million for the year ended
December 31, 1999, from $200.7 million for the same period in 1998. This
increase is primarily attributable to the increase in pretax earnings for
1999, as compared with 1998.
The Company expects its effective tax rate to approximate the statutory
federal (35%) and state (4.4%, net of federal tax benefit) income tax
rates in future years.
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<PAGE> 12
RETURN ON AVERAGE EQUITY
The 1999 results yielded an annualized return on average equity of 21.4
percent, compared with 17.2 percent in 1998.
ACCOUNTING CHANGES
The Company implemented new accounting standards in 1999, 1998 and 1997.
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 Statement of Financial
Accounting Standards (SFAS) No. 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
adoption of FAS 125 did not have a material effect on the Company.
In the first quarter of 1998, the Company adopted SFAS No. 130,
_Reporting Comprehensive Income,_ which establishes standards for
displaying comprehensive income and components. For the years ended
December 31, 1999, and 1998, respectively, other than net earnings, there
were no items to report.
Effective December 31, 1998, the Company adopted SFAS No. 131,
_Disclosures About Segments of an Enterprise and Related Information,_
which establishes standards for reporting operating segments and
disclosures about products and services, geographic areas and major
customers. Refer to Segment Reporting in the Notes to Consolidated
Financial Statements on page 40.
In June 1999, the Financial Accounting Standards Board issued SFAS No.
137, _Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133._
This statement defers the effective date of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, to fiscal years beginning
after June 15, 2000, although early adoption is permitted. SFAS No. 133
establishes accounting and reporting standards for derivative
instruments. It requires an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. Additionally, the fair value
adjustments will affect either stockholder's equity or net income
depending on whether the derivative instrument qualifies as a hedge for
accounting purposes and, if so, the nature of the hedging activity.
Management does not expect the adoption to have a material effect on the
Company's results of operations, however, the effect on the Company's
financial position depends on the fair values of the Company's
derivatives and related financial instruments at the date of adoption.
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.
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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; the ultimate
impact of the various Year 2000 issues on the Company's business,
financial condition or results of operations; non-performance by a
customer of contractual requirements; the concentration of credit risk
and creditworthiness of the customers; the Company's associated
collection and asset management efforts; the Company's determination and
subsequent recoverabiltiy of recorded 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
and in IBM's filings with the SEC.
YEAR 2000
The issues raised by the transition to the Year 2000 presented a
pervasive and unprecedented global challenge to the Company, its
customers, partners, suppliers and employees, as well as to governments,
communities and individuals. The Company believes that the overall
uneventful arrival of the Year 2000 is testimony to the hard work and
investment of organizations and individuals around the world.
With respect to the Company's own operations, the Company now estimates
that it will have spent a total of approximately $11.0 million over a
multi-year period in its efforts, including conversion, testing and
contingency planning. In the near term, the Company recognizes the need
to maintain its vigilance in the event issues arise. Further, some
commentators believe that a significant amount of litigation will arise
from Year 2000 issues. The company continues to believe that it has good
defenses to any such claims brought against it.
The Year 2000 statements set forth above are designated as "Year 2000
Readiness Disclosures" pursuant to the Year 2000 Information and
Readiness
Disclosure Act (P.L. 105-271).
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ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
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 22.
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 and
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, 1999.
The market values that result from these computations are compared with
the actual market values of these financial instruments. 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, 1999 and 1998,
are as follows:
-15-
<PAGE> 15
INTEREST RATE RISK:
The following table gives the changes in fair market value of the
Company's financial instruments, with all other variables held constant:
(in millions)
Level of Interest Rates
+10% -10%
__________ __________
December 31, 1999 $(39.0) $41.0
December 31, 1998* $(30.0) $28.0
* Please note that the amounts at December 31, 1998 have been restated to
reflect more accurate information now available due to system
modifications.
The variances in the changes in fair values for December 31, 1999, as
compared with December 31, 1998, is due to fluctuations in the components
of Company's portfolio of derivative financial instruments.
FOREIGN CURRENCY EXCHANGE RATE RISK:
Since all of the Company's market sensitive financial instruments are
denominated in U.S. dollars, the Company has no sensitivity to foreign
currency fluctuations.
-16-
<PAGE> 16
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 45 present fairly, in all material
respects, the financial position of IBM Credit Corporation and its
subsidiaries at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. 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 auditing
standards generally accepted in the United States 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.
PricewaterhouseCoopers LLP
Stamford, CT
January 19, 2000
</AUDIT-REPORT>
-17-
<PAGE> 17
<TABLE>
IBM CREDIT CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
at December 31:
(Dollars in thousands)
<CAPTION> 1999
1998
_____________ ____________
<S> <C> <C>
ASSETS:
Cash and cash equivalents. . . . . . . $ 600,111 $ 822,844
Marketable securities. . . . . . . . . - 68,838
Net investment in capital leases . . . 5,337,200 5,265,941
Equipment on operating leases, net . . 3,386,686 3,619,585
Loans receivable . . . . . . . . . . . 3,535,498 3,041,222
Working capital financing receivables. 2,963,583 2,861,780
Factored IBM receivables . . . . . . . - 292,310
Investments and other assets . . . . . 521,627 424,839
___________ ___________
Total Assets $16,344,705 $16,397,359
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY:
Liabilities:
Short-term debt. . . . . . . . . . . . $ 5,491,441 $ 6,618,695
Short-term debt, IBM . . . . . . . . . 1,641,447 158,527
Due to IBM and affiliates. . . . . . . 1,976,167 2,354,650
Interest and other accruals. . . . . . 454,261 440,248
Deferred income taxes. . . . . . . . . 877,916 973,686
Long-term debt . . . . . . . . . . . . 2,279,437 1,903,188
Long-term debt, IBM. . . . . . . . . . 1,391,702 2,070,651
___________ ___________
Total liabilities . . . . . . . . . 14,112,371 14,519,645
___________ ___________
Stockholder's equity:
Capital stock, par value $1.00 per share
Shares authorized: 10,000
Shares issued and outstanding:
936 in 1999 and 1998 . . . . . . 457,411 457,411
Retained earnings. . . . . . . . . . . 1,774,923 1,420,303
__________ ___________
Total stockholder's equity. . . . . 2,232,334 1,877,714
__________ ___________
Total Liabilities and Stockholder's
Equity . . . . . . . . . . . . . . . . $16,344,705 $16,397,359
=========== ===========
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
-18-
<PAGE> 18
<TABLE>
IBM CREDIT CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS AND RETAINED EARNINGS
For the years ended December 31:
(Dollars in thousands)
<CAPTION> 1999 1998 1997
__________ __________ __________
<S> <C> <C> <C>
FINANCE AND OTHER INCOME:
Income from leases:
Capital leases . . . . . . . . . . $ 385,969 $ 334,365 $ 276,956
Operating leases, net of depreciation:
1999-$2,112,840; 1998-$1,944,157
and 1997-$1,487,727 . . . . . . 463,869 363,975 323,868
__________ __________
__________
849,838 698,340 600,824
Income from working capital
financing. . . . . . . . . . . . . 240,253 236,848 257,646
Income from loans. . . . . . . . . . 251,175 208,434 167,955
Equipment sales. . . . . . . . . . . 473,960 510,156 442,105
Income from factored IBM
receivables. . . . . . . . . . . . 3,138 52,283 26,505
Other income . . . . . . . . . . . . 101,469 110,437 135,860
__________ __________ __________
Total finance and other income. . 1,919,833 1,816,498 1,630,895
__________ __________ __________
COST AND EXPENSES:
Interest . . . . . . . . . . . . . . 569,545 611,206 538,560
Cost of equipment sales. . . . . . . 422,744 446,715 381,531
Selling, general and administrative. 213,608 211,259 228,155
Provision for receivable losses. . . 4,986 37,805 35,541
__________ __________ __________
Total cost and expenses. . . . . 1,210,883 1,306,985 1,183,787
__________ __________ __________
EARNINGS BEFORE INCOME TAXES. . . . . 708,950 509,513 447,108
Provision for income taxes. . . . . . 279,330 200,748 163,215
__________ __________ __________
NET EARNINGS. . . . . . . . . . . . . 429,620 308,765 283,893
Dividends . . . . . . . . . . . . . . (75,000) (100,000) (50,000)
Retained earnings, January 1. . . . . 1,420,303 1,211,538 977,645
__________ __________ __________
Retained earnings, December 31. . . . $1,774,923 $1,420,303 $1,211,538
========== ========== ==========
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
-19-
-20-
<PAGE> 19
<TABLE>
IBM CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
For the years ended December 31:
(Dollars in thousands)
<CAPTION>
1999 1998 1997
____________ ___________
___________
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings . . . . . . . . . . $ 429,620 $ 308,765 $
283,893
Adjustments to reconcile net
earnings to cash provided by
operating activities:
Depreciation and amortization. . 2,113,302 1,944,420
1,503,375 Provision for receivable
losses . . . . . . . . . . . . 4,986 37,805
35,541
(Decrease) increase in deferred
income taxes. . . . . . . . . (95,770) 86,058
125,686
(Decrease) increase in interest
and other accruals . . . . . . (180,803) 18,594
44,959
Gross profit on equipment sales. (51,216) (63,441)
(60,574)
Other items that provided (used)
cash:
Proceeds from equipment sales. 473,960 510,156
442,105 (Decrease) increase in amounts
due IBM and affiliates. . . . (378,483) (168,090)
235,507
Other, net . . . . . . . . . . (29,990) 5,938
9,924
____________ ___________
___________
Cash provided by operating
activities 2,285,606 2,680,205
2,620,416
____________ ___________
___________
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in capital leases . . (2,243,271) (2,655,735)
(2,508,547)
Collections on capital leases,
net of income earned . . . . . 2,304,914 2,066,450
1,756,020
Investment in equipment on
operating leases . . . . . . . (1,910,992) (1,982,280)
(2,295,438)
Investment in loans receivable . (2,039,793) (1,913,501)
(1,460,214)
Collections on loans receivable,
-21-
net of interest earned . . . . 1,694,637 1,244,806
935,924
Purchase of factored IBM
receivables. . . . . . . . . . (120,900) (6,179,774)
(4,159,221)
Collections on factored IBM
receivables. . . . . . . . . . 138,862 6,183,446
3,335,190
Collections on (investments in)
working capital financing
receivables, net . . . . . . . 31,822 455,869
(360,266)
____________ ___________
___________
Total carried forward . . . . . . . $ (2,144,721) $(2,780,719)
(4,756,552)
____________ ___________ ___________ <FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
-22-
<PAGE> 20
<TABLE>
IBM CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
For the years ended December 31:
(Continued)
(Dollars in thousands) 1999 1998 1997
<CAPTION> ___________ ___________ ___________
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES (Continued):
Total brought forward . . . . . . $(2,144,721) $(2,780,719)$(4,756,552)
Investment in participation
loans. . . . . . . . . . . . . (288,422) 97,993 50,596
Purchases of marketable
securities . . . . . . . . . . (24,390) (82,165) (21,500)
Proceeds from redemption of
marketable securities. . . . . 93,203 141,207 53,001
Proceeds from the sale of the
net assets of IBM Credit
International Factoring
Corporation. . . . . . . . . . 273,759 11,737 -
Cash payment for lease portfolio
acquired . . . . . . . . . . . (176,613) - (334,909)
Other, net . . . . . . . . . . (120,387) (138,000)
(386,271)
___________ ____________ ___________
Cash used in investing activities (2,387,571) (2,749,947) (5,395,635)
___________ ____________
___________
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of
long-term debt . . . . . . . . 2,523,833 3,081,436 2,516,557
Repayment of debt with original
maturities of one year or more. (1,000,776) (1,330,194) (238,900)
(Repayment) issuance of debt
with original maturities within
one year, net . . . . . . . . . (1,568,825) (1,551,127) 707,199
Cash dividends paid to IBM . . . (75,000) (100,000) (50,000)
___________ ____________ ___________
Cash (used in) provided by financing
activities . . . . . . . . . . . (120,768) 100,115 2,934,856
___________ ____________ ___________
Change in cash and cash equivalents (222,733) 30,373 159,637
Cash and cash equivalents,
January 1. . . . . . . . . . . . 822,844 792,471 632,834
-23-
___________ ___________
____________
Cash and cash equivalents,
December 31 . . . . . . . . . . $ 600,111 $ 822,844 $ 792,471
=========== ===========
============
</TABLE>
-24-
<PAGE> 21
<TABLE>
IBM CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
For the years ended December 31:
(Continued)
(Dollars in thousands) 1999 1998 1997
<CAPTION> ___________ ___________ ___________
<S> <C> <C> <C>
<FN>
<F1>
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 568,571 $ 635,658 $ 523,139
========= ========== =========
Cash paid for income taxes $ 106,144 $ 109,313 $ 18,408
========= ========== =========
<F2>
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.
In May 1999, the Company purchased selected assets from the leasing
portfolio of Comdisco, Inc. The purchase price was financed, in part,
through the assumption of debt of $102.0 million and through the issuance
of a credit on account of $195.4 million, which had been fully utilized
at December 31, 1999.
<F3>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
-25-
<PAGE> 22
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.
Marketable Securities: The Company's marketable securities were
available-for-sale and the carrying amount of the securities approximated
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
established based upon management's historical collection experience and
is charged to the provision for receivable losses. Receivable losses are
charged against the allowance when management believes the
uncollectibility of the receivable is confirmed. Subsequent recoveries,
if any, are credited to the allowance.
The allowance for receivable losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibilty of the receivables in light of historical experience, the
nature and volume of the Company's portfolios, adverse situations that
may affect the customer's ability to repay, estimated value of the
underlying collateral (if any) and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes
available.
-26-
<PAGE> 23
SIGNIFICANT ACCOUNTING POLICIES (Continued):
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 SFAS 109, "Accounting for
Income Taxes," these deferred taxes are measured by applying currently
enacted tax laws.
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. To be consistent with
IBM, the Company changed its useful life on internal use PCs from five
years to three years. This change did not have a material impact on
earnings or financial position.
-27-
<PAGE> 24
SIGNIFICANT ACCOUNTING POLICIES (Continued):
Reclassifications: Certain amounts included in the Consolidated Statement
of Financial Position at December 31, 1998, and the Statement of Cash
Flows for the years ended December 31, 1998, and 1997, have been
reclassified to conform to current year presentation.
RELATIONSHIP WITH IBM AND RELATED PARTY TRANSACTIONS:
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
any debt of the Company is outstanding, 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. IBM charged the
Company $114.2 million, $97.5 million and $84.4 million in 1999, 1998 and
1997, respectively, representing costs for lease services, employee
benefit plans, facilities rental and staff support.
Additionally, the Company is compensated, at market rates as determined
by management, for services performed for IBM, primarily for management
of IBM's federal, state and local government installment receivables
portfolio. These fees, amounting to $45.5 million, $50.3 million and
$51.8 million in 1999, 1998 and 1997, respectively, are included in other
income.
The operating agreement with IBM also provides that installment
receivables, which include finance charges, may be purchased by the
Company at fair market value as determined by management. The Company is
reimbursed by IBM for any price adjustments and concessions that reduce
the amount of receivables previously purchased by the Company.
Additionally, the operating agreement with IBM 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 unique IBM product offerings.
The Company is currently in the process of renegotiating its operating
agreement with IBM at IBM's request regarding the services IBM performs
for the Company. The Company expects this to be completed in the first
half of 2000. This could result in a material increase in the Company's
selling, general and administrative expenses.
The Company provides accounts receivable and inventory financing, at
market rates, to dealers and remarketers of IBM products. Included in
income from working capital financing is fee income earned from IBM
Personal Systems
-28-
<PAGE> 25
RELATIONSHIP WITH IBM AND RELATED PARTY TRANSACTIONS (Continued):
group of $54.8 million, $75.1 million and $ 73.1 million in 1999, 1998
and 1997, respectively. Also included in income from working capital
financing
is fee income from other IBM divisions of $43.7 million, $37.6 million
and $27.3 million in 1999, 1998 and 1997, respectively.
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 $1.1 million, $8.2 million and $2.2 million of such losses
have been reimbursed by IBM in 1999, 1998 and 1997, respectively. See
Working Capital Financing Receviables note on page 30 for additional
information.
The Company also provides equipment, software and services financing at
market rates to IBM and affiliated companies for both IBM and non-IBM
products. The Company originated $848.3 million and $971.5 million of
such financings during 1999 and 1998, respectively. At December 31,
1999, and 1998, approximately $1,437.1 million and $1,550.5 million,
respectively, of such financings were included in the Company's lease and
loan portfolio. Of these amounts, $1,255.5 million and $1,289.2 million
were included in the Company's operating lease portfolio at December 31,
1999, and 1998, respectively. The finance income earned from operating
leases to IBM and affiliated companies, net of depreciation expense, was
$180.9 million, $172.0 million and $158.9 million in 1999, 1998 and 1997,
respectively. Interest and finance income of $9.6 million, $9.2 million,
and $6.7 million was earned from loans to IBM and affiliates in 1999,
1998 and 1997, 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 periodically purchased, without
recourse, all the rights, title and interest to certain outstanding IBM
customer receivables. In December 1998 and February 1999, respectively,
ICC and ICIFC sold to a subsidiary of IBM, IBM International Holdings
Finance Company, Ltd. (IIHFC), all of their factoring assets and
substantially all of their related liabilities.
During 1999 and 1998, ICIFC and ICEFC acquired IBM customer receivables
having a nominal value of $122.0 million and $6,257.2 million,
respectively, for approximately $120.9 million and $6,168.8 million,
respectively. The receivables acquired were short-term in nature and were
denominated in non-U.S. currencies. The purchase was financed by the
Company through the issuance of short-term debt.
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
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
-29-
<PAGE> 26
RELATIONSHIP WITH IBM AND RELATED PARTY TRANSACTIONS (Continued):
neither received nor made any advances with respect to these agreements
at December 31, 1999 and 1998.
The Company, together with IBM and IIF, has the option to issue and sell
debt securities under a Euro Medium Term Note Programme (EMTN) in an
aggregate nominal amount of up to Euro 4.0 billion, or its equivalent in
any other currency. At December 31, 1999, there was Euro 1.6 billion
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. 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. The Company had no borrowings
outstanding under this agreement at December 31, 1999. At December 31,
1998, the Company had borrowings outstanding under these agreements of
$58.2 million payable to IBM.
The Company and IBM have signed an additional master loan agreement which
allows for long-term funding, made available at market terms and
conditions, upon the request of the Company. As of December 31, 1999 and
1998, the Company had $2,350.0 million and $1,481.7 million of borrowings
outstanding under this agreement. These borrowings have due dates
ranging from January 26, 2001 to May 13, 2004.
Additionally, under separate agreements with IBM, the Company has
borrowings outstanding of $683.1 million and $689.4 million at December
31, 1999, and 1998, respectively with maturity dates of August 21, 2000
through November 26, 2001.
Interest expense of $152.5 million, $60.8 million and $29.3 million was
incurred on loans from IBM and affiliates during 1999, 1998 and 1997,
respectively.
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.
An intercompany tax allocation agreement (the Agreement) exists between
the Company and 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, 1999, and 1998, are $296.7 million and $30.5 million,
respectively, of current income taxes payable determined in accordance
with the Agreement.
-30-
<PAGE> 27
MARKETABLE SECURITIES:
The following is a summary of marketable securities at December 31, 1998
all of which were available-for-sale. At December 31, 1999, there were
no marketable securities on hand. At December 31, 1998, marketable
securities consisted of debt securities and certificates of deposit.
Contractual maturities of marketable securities at December 31, 1998,
were between nine months and five years.
(Dollars in thousands) 1999 1998
___________ __________
Corporate . . . . . . . . . . . . . . $ - $ 20,840
Certificates of deposit. . . . . . . . - 47,998
___________ __________
Total, which approximates market value. $ - $ 68,838
=========== ==========
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 advanced
information processing products with terms generally from two to three
years. The components of the net investment in direct financing leases
at December 31, 1999 and 1998, are as follows:
(Dollars in thousands) 1999 1998
___________ __________
Gross lease payments receivable . . . . $5,335,352 $5,278,060
Estimated unguaranteed residual values. 442,288 397,529
Deferred initial direct costs . . . . . 18,339 30,634
Unearned income . . . . . . . . . . . . (604,035) (571,168)
Allowance for receivable losses . . . . (47,220) (65,644)
__________ __________
Total . . . . . . . . . . . . . . . . . $5,144,724 $5,069,411
========== ==========
The scheduled maturities of minimum lease payments outstanding at
December 31, 1999, expressed as a percentage of the total, are due
approximately as follows:
Within 12 months. . . . . . . . . . . . . . . 50%
13 to 24 months . . . . . . . . . . . . . . . 33
25 to 36 months . . . . . . . . . . . . . . . 13
37 to 48 months . . . . . . . . . . . . . . . 3
After 48 months . . . . . . . . . . . . . . . 1
____
100%
====
Included in the net investment in capital leases is $17.7 million of
seller interest at December 31, 1998, relating to the securitization of
such leases. These securitizations were terminated and settled in 1999.
-31-
<PAGE> 28
NET INVESTMENT IN CAPITAL LEASES (Continued):
Leveraged lease investments include coal-fired electric generating
facilities and commercial aircraft. Leveraged leases have remaining
terms ranging from two to twenty years. The components of the net
investment in leveraged leases at December 31, 1999 and 1998, are as
follows:
(Dollars in thousands) 1999 1998
_________ __________
Net rents receivable. . . . . . . . . . . $ 239,173 $ 245,928
Estimated unguaranteed residual values . 33,568 39,752
Unearned and deferred income. . . . . . . (76,903) (85,788)
Allowance for receivable losses . . . . . (3,362) (3,362)
_________ __________
Investment in leveraged leases. . . . . . $ 192,476 $ 196,530
========= ==========
Deferred income taxes relating to leverage leases amounted to $157.4
million and $175.5 million at December 31, 1999 and 1998, respectively.
In December 1999, the Company sold ownership interests in several
leverage leases. The Company sold these interests to third parties
resulting in a pretax gain of $2.3 million.
Refer to the note on page 31, 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 advanced information
processing products with terms generally from two to three years. The
components of equipment on operating lease at December 31, 1999 and 1998,
are as follows:
(Dollars in thousands) 1999 1998
____________ ____________
Cost. . . . . . . . . . . $ 7,166,892 $ 7,046,757
Accumulated depreciation. (3,780,206) (3,427,172)
____________ ____________
Total . . . . . . . . . . $ 3,386,686 3,619,585
============ ============
Minimum future rentals were approximately $3,094.2 million at December
31, 1999. The scheduled maturities of the minimum future rentals at
December 31, 1999, expressed as a percentage of the total, are due
approximately as follows:
Within 12 months. . . . . . . . . . . . . 57%
13 to 24 months . . . . . . . . . . . . . 30
25 to 36 months . . . . . . . . . . . . . 10
37 to 48 months . . . . . . . . . . . . . . . 2
After 48 months. . . . . . . . . . . . . . . 1
____
100%
====
-32-
<PAGE> 29
EQUIPMENT ON OPERATING LEASES (Continued):
In December, 1999, the Company sold its ownership interests in several
non-IT operating leases. The Company sold these interests to third
parties resulting in a pretax gain of $16.9 million, which is included in
other income.
LOANS RECEIVABLE:
Loans receivable include installment receivables that are principally
financings of customer purchases of IBM software, services and
information handling products, as well as non-IBM software and services.
The components of loans receivable at December 31, 1999 and 1998, are as
follows:
(Dollars in thousands) 1999 1998
___________ ___________
Gross loans receivable . . . . . $3,931,388 $3,456,900
Deferred initial direct costs. . 28,509 20,658
Unearned income . . . . . . . . (358,245) (361,192)
Allowance for receivable losses. (66,154) (75,144)
___________ ___________
Total. . . . . . . . . . . . . . $3,535,498 $3,041,222
=========== ===========
The scheduled maturities of loans receivable outstanding at December 31,
1999, expressed as a percentage of the total, are due approximately as
follows:
Within 12 months. . . . . . . . . . . . . . . . 48%
13 to 24 months. . . . . . . . . . . . . . . . . 34
25 to 36 months . . . . . . . . . . . . . . . . . 13
37 to 48 months . . . . . . . . . . . . . . . . . 4
After 48 months . . . . . . . . . . . . . . . . . 1
____
100%
====
Included in loans receivable are $4.0 million and $3.1 million at
December 31, 1999 and 1998, 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 $6.1
million of seller interest at December 31, 1998, relating to the
securitization of such loans. These securitizations were terminated in
1999.
Refer to the note on page 31, Allowance for Receivable Losses, for a
reconciliation of the loans receivable allowance for receivable losses.
-33-
<PAGE> 30
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. Also included in working capital financing
receivables are participation loans. Participation loans are loans in
which the Company has purchased a fixed percentage of a specific
customer's loan facility from a bank or other lending institution. The
Company will receive its fixed percentage of interest and loan fees less
administrative fees charged by the agent bank.
As previously discussed in the note on pages 24 through 26, Relationship
with IBM and Related Company Transactions, the Company is reimbursed by
IBM for certain losses on working capital financing receivables with
specific dealers and for specific transactions. Approximately $1.1
million, $8.2 million and $2.2 million of such losses have been
reimbursed by IBM in 1999, 1998 and 1997, respectively.
With the continued trends toward consolidation in this industry segment,
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.
Payment terms for inventory-secured financing generally range from 30
days to 75 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, 1999, and 1998, are as follows:
(Dollars in thousands)
1999 1998
___________ _____________
Working capital financing receivables . $2,981,101 $2,878,916
Allowance for receivable losses . . . . (17,518) (17,136)
___________ ___________
Total . . . . . . . . . . . . . . . . . $2,963,583 $2,861,780
=========== ===========
Included in working capital financing receivables are $719.4 million of
seller interest at December 31, 1998, relating to the securitization of
such receivables. These securitizations were terminated and settled in
1999. Additionally, the Company has $3,220.6 million of approved but
unused working capital financing credit lines available to customers at
December 31, 1999.
Refer to the note on page 31, Allowance for Receivable Losses, for a
reconciliation of the working capital financing receivables allowance for
receivable losses.
-34-
<PAGE> 31
ALLOWANCE FOR RECEIVABLE LOSSES:
The following is a reconciliation of the allowance for receivable losses,
by portfolio, for the years ended December 31, 1999, 1998 and 1997:
(Dollars in thousands)
Direct Working
Financing Leveraged Loans Capital
1999 Total Leases Leases Receivable
Fin. Rec.
__________________ ________ _________ __________ __________
__________
Beginning of year .$161,286 $ 65,644 $ 3,362 $ 75,144 $ 17,136
Provision (reversal
of provision) for
receivable losses,
net . . . . . . . 4,986 (691) - 1,100 4,577
Accounts written
off (net of
recoveries). . . . (32,018) (17,733) - (10,090)
(4,195)
_________ _________ __________ __________
__________
End of year. . . .$134,254 $ 47,220 $ 3,362 $ 66,154 $ 17,518
========= ========= ========== ==========
==========
Direct Working
Financing Leveraged Loans Capital
1998 Total Leases Leases Receivable
Fin. Rec.
__________________ ________ _________ __________ _________ __________
Beginning of year . $167,514 $ 52,373 $ 3,362 $ 71,229 $ 40,550
Provision for
receivable losses. 37,805 24,659 - 8,735 4,411
Accounts written
off(net of
recoveries). . . . (44,522) (11,904) - (5,491)
(27,127)
Transfers from (to)
allowance for
losses on receiv-
ables sold and
other, net . . . . 489 516 - 671
(698)
________ _________ __________ __________
___________
End of year. . . . $161,286 $ 65,644 $ 3,362 $ 75,144 $
17,136
======== ========= ========== ========= ==========
-35-
<PAGE> 32
ALLOWANCE FOR RECEIVABLE LOSSES (Continued):
(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 receiv-
ables 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
======== ========= ========== ========= ==========
The amounts written off, net of recoveries, of working capital financing
receivables in 1998 and 1997 primarily reflects previously identified and
reserved exposures. The 1999 and 1998 provision for receivables losses
reflects the Company's improved ability to effectively manage credit risk
and contain losses. Additionally, the 1999 provision for receivable
losses reflects a revision in the Company's methodology for calculating
the reserve relating to operating lease assets.
The reconciliation of the allowance for receivable losses by portfolio
presented above, excludes the allowance for estimated credit losses on
factored IBM receivables, which was $6.3 million at December 31, 1998.
IBM factored receivables written off, net of recoveries, during 1998,
were $6.2 million. There were no factored IBM receivables at December
31, 1999. Provisions for expected losses, as they relate to factored IBM
receivables, were provided during the period in which the receivables
were purchased.
At December 31, 1999, and December 31, 1998, approximately 55 percent and
56 percent, respectively, of the working capital financing receivables
outstanding were concentrated in ten working capital accounts. The
allowance for receivable losses approximated 1.1 percent of the Company's
portfolio of capital leases, loans, factored IBM receivables and working
capital financing receivables at both December 31, 1999, and 1998.
-36-
<PAGE> 33
INVESTMENTS AND OTHER ASSETS:
The components of investments and other assets at December 31, 1999, and
1998, are as follows:
(Dollars in thousands)
1999 1998
_________ _________
Receivables from customers. . . . . . . . . . . $ 218,312 $ 196,700
Receivables from affiliates . . . . . . . . . . 165,955 105,472
Remarketing inventory . . . . . . . . . . . . . 88,517 58,917
Investments in partnerships and other . . . . . 26,111 250
Due and deferred from receivable sales. . . . . - 29,990
Other assets . . . . . . . . . . . . . . . . . 22,732 33,510
_________ _________
Total . . . . . . . . . . . . . . . . . . . . . $ 521,627 $ 424,839
========= =========
Receivables from customers of $218.3 million and $196.7 million at
December 31, 1999, and 1998, respectively, represent amounts due for
operating leases that have not yet been collected and for remarketing
transactions, such as sales, lease payments and termination charges.
Receivables from affiliates of $166.0 million and $105.5 million at
December 31, 1999, and 1998, respectively, primarily consist of amounts
due from IBM Global Services for monthly rentals and termination charges.
Remarketing inventory is valued at the lower of cost or market on a
first-in, first-out basis.
Included in other assets at December 31, 1999, and 1998, are $15.8
million and $15.3 million, respectively, on deposit in restricted
accounts, held as security deposits received from customers. Also
included in other assets at December 31, 1998, is $2.1 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.
-37-
<PAGE> 34
SHORT-TERM DEBT:
The components of short-term debt at December 31, 1999, and 1998, are as
follows:
(Dollars in thousands) 1999 1998
__________ __________
Commercial paper, with rates averaging 5.9%
in 1999 and 1998 . . . .. . . . . . . . . . . . $4,118,870
$3,198,864
Other short-term debt, with rates averaging 5.6%
in 1999 and 1998 . . . .. . . . . . . . . . . . 326,571
2,303,756
Current maturities of long-term debt . . . . . . 1,046,000
1,116,075
__________
__________
5,491,441
6,618,695
IBM short-term borrowings . . . . . . . . . . . 1,641,447
158,527
__________
__________
Total. . . . . . . . . . . . . . . . . . . . . . $7,132,888
$6,777,222
========== =
=========
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, 1999 and 1998.
The approximate weighted average stated rates (after the effects of
interest rate swap agreements) on commercial paper outstanding at
December 31, 1999, and 1998, were 6.0% and 6.1%, respectively. The
approximate weighted average stated rates (after the effects of interest
rate swap agreements) on other short-term debt outstanding at December
31, 1999, and 1998, were 6.0% and 5.2%, respectively. Other short-term
debt primarily includes notes having maturities between nine and twelve
months offered through the Company's medium-term note program.
LONG-TERM DEBT:
The components of long-term debt at December 31, 1999, and 1998, are as
follows:
(Dollars in thousands)
1999 1998
____________ _____________
Medium-term notes with original maturities
ranging from 2000 to 2010, with rates
averaging 5.9% in 1999 and 5.7% in 1998. . . $ 3,325,516 $ 3,015,075
IBM loan payable, with maturities ranging
from 2001 to 2004 . . . . . . . . . . . . . 1,391,702 2,070,651
____________ ____________
4,717,218
5,085,726
Net unamortized premiums/(discounts) . . . . . (79) 4,188
____________ ____________
4,717,139 5,089,914
-38-
Less: Current maturities . . . . . . . . . . . 1,046,000 1,116,075
____________ ____________
Total. . . . . . . . . . . . . . . . . . . . . $ 3,671,139 $ 3,973,839
============ ============
-39-
<PAGE> 35
LONG-TERM DEBT (Continued):
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, 1999, and
1998. The approximate weighted average stated rates (after the effects
of interest rate swap agreements) on medium-term notes outstanding at
December 31, 1999, and 1998, were 6.0% and 5.3%, 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, 1999, is as follows:
(Dollars in thousands)
2000 . . . . . . . . . . . . . . . . . . . . . $1,046,000
2001 . . . . . . . . . . . . . . . . . . . . . 2,113,110
2002 . . . . . . . . . . . . . . . . . . . . . 628,108
2003 . . . . . . . . . . . . . . . . . . . . . 240,000
2004 . . . . . . . . . . . . . . . . . . . . . 50,000
2005 and thereafter . . . . . . . . . . . . . 640,000
__________
$4,717,218
==========
RATIO OF EARNINGS TO FIXED CHARGES:
The ratio of earnings to fixed charges calculated in accordance with
applicable Securities and Exchange Commission requirements was 2.24, 1.83
and 1.83 for the years ended December 31, 1999, 1998 and 1997,
respectively.
PROVISION FOR INCOME TAXES:
The components of the provision for income taxes are as follows:
(Dollars in thousands)
1999 1998 1997
__________ __________ __________
Federal:
Current . . . . . . . . . . . . $ 311,865 $ 93,164 $ 32,401
Deferred. . . . . . . . . . . . (80,531) 74,081 100,332
__________ __________ _________
231,334 167,245 132,733
__________ __________ _________
State and local:
Current . . . . . . . . . . . . 63,215 20,900 8,575
Deferred. . . . . . . . . . . . (15,219) 12,603 21,907
__________ __________ _________
47,996 33,503 30,482
__________ __________ _________
Total provision . . . . . . . . . $ 279,330 $ 200,748 $ 163,215
========== ========== =========
The decrease in deferred income taxes, both state and local, is due to an
adjustment made in 1999 between current and deferred taxes relating to
overestimation of tax depreciation in 1998.
-40-
<PAGE> 36
PROVISION FOR INCOME TAXES (Continued):
Changes in the deferred tax assets and liabilities resulting from
temporary differences between financial and tax reporting are as follows:
(Dollars in thousands)
1999 1998
_____________ ____________
Deferred tax assets (liabilities):
Provision for receivable losses. . . . $ 62,256 $ 87,623
Lease income and depreciation. . . . . (906,882) (1,017,373)
Other, net . . . . . . . . . . . . . . (33,290)
(43,936)
_____________ ____________
Deferred income taxes. . . . . . . . . . $ (877,916) $ (973,686)
============= ============
The provision for income taxes varied from the U.S. federal statutory
income tax rate as follows:
1999 1998 1997
________ ________ _______
Federal statutory rate. . . . . . . . 35.0% 35.0% 35.0%
State and local taxes, net of
federal tax benefit. . . . . . . . . 4.4 4.3 4.4
Adjustments to prior years' tax
liabilities . . . . . . . . . . . . - - (2.9)
Other, net. . . . . . . . . . . . . . - .1 -
________ ________ _______
Effective income tax rate . . . . . . 39.4% 39.4% 36.5%
======== ======== =======
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
-41-
<PAGE> 37
FINANCIAL INSTRUMENTS (Continued):
to fair value of the swap contract are recognized in income each period
until it matures.
The tables below 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, 1999, and
1998. 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.
(Dollars in thousands)
At December 31, 1999:
Notional Weighted Average Rate
Type Amount Maturities Receive Pay
________________ ______________ _____________ ___________
______________
Swap to Fixed $ 960,000 2000-2002 5.13% 6.25%
Swap to Floating 1,518,420 2000-2009 5.35% 5.92%
Int. Rate Cap/Floor 50,000 2000 n/a * n/a *
______________
$2,528,420
==============
At December 31, 1999 (Continued):
Notional Unrealized Unrealized Net
Unrealized
Type Amount Gross Gain Gross Loss Gain/(Loss)
________________ ______________ _____________ ___________
______________
Swap to Fixed $ 960,000 $ 3,722 $ (908) $ 2,814
Swap to Floating 1,518,420 22,302 (20,767) 1,535
Int. Rate Cap/Floor 50,000 148 - 148
______________ _____________ ___________
______________
$2,528,420 $ 26,172 $ (21,675) $ 4,497
============== ============= ===========
==============
At December 31, 1998:
Notional Weighted Average Rate
Type Amount Maturities Receive Pay
________________ ______________ _____________ ___________
______________
Swap to Fixed $2,390,000 1999-2002 4.98% 5.91%
Swap to Floating 2,371,450 1999-2008 5.70% 5.14%
Currency Related 339,547 1999 n/a * n/a *
Int. Rate Cap/Floor 200,000 1999 n/a * n/a *
______________
$5,300,997
==============
-42-
<PAGE> 38
FINANCIAL INSTRUMENTS (Continued):
At December 31, 1998 (Continued):
Notional Unrealized Unrealized Net
Unrealized
Type Amount Gross Gain Gross Loss Gain/(Loss)
________________ ______________ ____________ ___________
______________
Swap to Fixed $2,390,000 $ 917 $ (27,490) $
(26,573)
Swap to Floating 2,371,450 21,951 (2,181) 19,770
Currency Related 339,547 543 (15,855)
(15,312)
Int. Rate Cap/Floor 200,000 - (178)
(178)
______________ ____________ ___________
______________
$5,300,997 $ 23,411 $ (45,704) $
(22,293)
============== ============= ===========
==============
* n/a: not applicable
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 34 and 35, Short-Term
Debt and Long-Term Debt, include the effects of interest rate swap
agreements.
Fair value is a very theoretical measure that is valid only at a
particular point in time and whose sensitivity is based on certain
assumptions. As such, fair value can represent only a 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 instruments 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.
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.
-43-
<PAGE> 39
FINANCIAL INSTRUMENTS (Continued):
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.
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, 1999: Amount Fair Value
_______________ ______________
Cash and cash equivalents $ 600,111 $ 600,111
Marketable securities - -
Loans receivable 3,535,498 3,528,927
Working capital financing
receivables 2,963,583 2,963,583
Short-term debt (excluding current
maturities of long-term debt) 6,086,888 6,100,118
Long-term debt and current maturities
of long-term debt 4,717,139 4,741,805
Off-balance-sheet derivatives:
Interest rate related --
Assets - 30,168
Liabilities - 14,456
Carrying Estimated
At December 31, 1998: Amount Fair Value
_______________ ________________
Cash and cash equivalents $ 822,844 $ 822,844
Marketable securities 68,838 68,838
Loans receivable 3,041,222 3,164,109
Working capital financing
receivables 2,789,029 2,789,029
Short-term debt (excluding current
maturities of long-term debt) 5,661,147 5,698,298
Long-term debt and current maturities
of long-term debt 5,089,914 5,160,904
Off-balance-sheet derivatives:
Currency related --
Assets - 581
Liabilities - 16,113
Interest rate related --
Assets - 40,221
Liabilities - 33,794
-44-
<PAGE> 40
FINANCIAL INSTRUMENTS (Continued):
The Company has financial guarantees amounting to $266.9 million and
$313.7 million, at December 31, 1999 and 1998, respectively.
Additionally, the Company has approved, but unused working capital
financing lines of credit available to customers amounting to $3,022.6
million and $2,877.0 million at December 31, 1999, and 1998,
respectively.
SEGMENT REPORTING:
The Company is organized on the basis of its finance offerings. The
Company's reportable segments are strategic business units that offer
different financing solutions based upon the customers' needs.
The Company's operations are conducted primarily through its two
operating segments: Customer Financing and Commercial Financing. The
Customer Financing segment provides lease and loan financing of IBM and
non-IBM advanced information processing products and services to end
users. The Commercial Financing segment provides primarily secured
inventory and accounts receivable financing (_working capital financing_)
for dealers and remarketers of information industry products.
The accounting policies of the segments are the same as those followed by
the Company. Segment data includes an allocation of interest expense and
all corporate headquarters costs to each of its operating segments.
Interest expense is allocated primarily on the basis of a planned
leverage ratio using an average interest rate. Corporate headquarters
expenses are allocated on the basis of headcount, an annual survey of the
corporate staff to determine the time spent on each business segment, and
asset utilization depending on the type of expense. The Company
evaluates the performance of its segments and allocates resources to them
based upon their earnings before taxes.
The following schedules represent disaggregated income and expense
information for both segments. There are no intersegment transactions.
(in thousands)
For the Year Ended December 31:
Customer Commercial
1999 Financing Financing Total
______________________ _____________ ____________ ___________
Revenues............... $ 1,609,114 $ 242,362 $ 1,851,476
Interest expense....... $ 477,849 $ 58,259 $ 536,108
Earnings before income
taxes................ $ 540,279 $ 133,965 $ 674,244
Assets................. $ 12,537,711 $ 2,993,245 $15,530,956
-45-
<PAGE> 41
SEGMENT REPORTING (Continued):
Customer Commercial
1998 Financing Financing Total
______________________ _____________ ____________ ___________
Revenues............... $ 1,458,858 $ 239,328 $ 1,698,186
Interest expense....... $ 466,774 $ 59,718 $ 526,492
Earnings before income
taxes................ $ 346,282 $ 130,450 $ 476,732
Assets................. $ 12,164,432 $ 2,859,027 $15,023,459
1997
______________________
Revenues............... $ 1,258,095 $ 260,508 $ 1,518,603
Interest expense....... $ 406,111 $ 71,265 $ 477,376
Earnings before income
taxes................ $ 267,173 $ 132,709 $ 399,882
Assets................. $ 11,144,390 $ 3,402,325 $14,546,715
A reconciliation of total segment revenues, total segment interest
expense, total segment earnings before income taxes and total segment
assets to the Company's consolidated amounts are as follows:
For the years ended December 31:
1999 1998 1997
___________ ___________ ___________
(in thousands)
Revenues:
Total revenues for reportable
segments. . . . . . . . . . $ 1,851,476 $ 1,698,186 $ 1,518,603
Other revenues. . . . . . . . 68,357 118,312 112,292
___________ ___________ ___________
Total consolidated revenues . $ 1,919,833 $ 1,816,498 $ 1,630,895
=========== =========== ===========
Interest Expense:
Total interest expense
for reportable segments. . . $ 536,108 $ 526,492 $ 477,376
Other interest expense. . . . 33,437 84,714 61,184
___________ ___________ ___________
Total consolidated interest
expense. . . . . . . . . . . $ 569,545 $ 611,206 $ 538,560
=========== =========== ===========
Earnings Before Income Taxes:
Total earnings before income
taxes for reportable
segments . . . . . . . . . . $ 674,244 $ 476,732 $ 399,882
Other earnings before income
taxes. . . . . . . . . . . . 34,706 32,781 47,226
___________ ___________ ___________
Total consolidated earnings
before income taxes. . . . . $ 708,950 $ 509,513 $ 447,108
=========== =========== ===========
-46-
<PAGE> 42
SEGMENT REPORTING (Continued):
At December 31:
1999 1998 1997
___________ ___________ ___________
Assets:
Total assets for reportable
segments . . . . . . . . . . $15,530,956 $15,023,459 $14,546,715
Other assets. . . . . . . . . 813,749 1,373,900 2,025,401
___________ ___________ ___________
Total consolidated assets. . $16,344,705 $16,397,359 $16,572,116
=========== =========== ===========
For the year ended December 31, 1999, Customer Financing revenue
increased 10 percent to $1,609.1 million from $1,458.9 million for the
year ended December 31, 1998. This increase is due to improved average
lease yields and reduced residual value writedowns during 1999.
For the year ended December 31, 1999, earnings before income taxes for
Customer Financing increased 56 percent to $540.3 million from $346.3
million for the year ended December 31, 1998. This increase is primarily
due to an improvement in the average spread on the Company's lease and
loan portfolio and the reduction in residual value writedowns during
1999, as compared with 1998 and to the increase in gross profit from the
sale of leased assets to IBM relating to the sale of IBM's global network
to AT&T.
For the year ended December 31, 1999, Commercial Financing revenue
increased 1 percent to $242.4 million, from $239.3 million for the same
period of 1998. This increase is due to higher income due to the growth
in participation loans during 1999.
Earnings before income taxes for Commercial Financing increased 3 percent
to $134.0 million for the year ended December 31, 1999, compared with
$130.4 million for 1998. This increase is primarily attributable to
income from participation loans as discussed above, offset by the
decrease in income from dealer interest and fees from IBM.
For the year ended December 31, 1998, Customer Financing revenue
increased 16 percent to $1,458.9 million from $1,258.1 million for the
year ended December 31, 1997. This is primarily due to growth in the
customer financing lease and loan portfolio, as well as increased
remarketing sales.
Earnings before income taxes for Customer Financing increased 30 percent
to $346.3 million for 1998, as compared with 1997. This is primarily due
to the increase in revenue, reductions in selling, general and
administrative expenses and provision for doubtful accounts in 1998, as
compared with 1997.
Commercial Financing revenue decreased 8 percent to $239.3 million for
the year ended December 31, 1998, as compared with the prior year. This
is due to a decrease in income from dealer interest due to lower average
receivable balances outstanding during 1998, as compared with 1997.
-47-
<PAGE> 43
SEGMENT REPORTING (Continued):
Earnings before income taxes for Commercial Financing decreased 2 percent
to $130.4 million for 1998, from $132.7 million for 1997. This decrease
is primarily attributable to a decrease in dealer interest, offset by a
shift towards higher margin fee income from IBM.
The Company's business is conducted principally in the United States;
foreign operations are not material.
For the years ended December 31, 1999, 1998 and 1997, one customer, IBM,
accounted for $499.1 million, $542.2 million and $456.6 million,
respectively, of the Company's consolidated revenues.
The Company continues to evaluate its organizational structure which
could lead to changes in future reportable segments.
-48-
<PAGE> 44
SELECTED QUARTERLY FINANCIAL DATA: (Unaudited)
(Dollars in thousands)
Finance Gross Profit
and Other Interest Equipment on Equipment Net
1999 Income Expense Sales Sales
Earnings
_________________ __________ _________ ___________ _____________
_________
First Quarter . . $ 434,516 $ 138,730 $ 97,623 $ 7,623 $
91,277
Second Quarter. . 530,405 139,961 183,086 27,104
102,416
Third Quarter . . 438,571 141,255 75,303 6,841
102,271 Fourth Quarter. . 516,341 149,599 117,948
9,648 133,656
__________ _________ ___________ ____________
_________
$1,919,833 $569,545 $ 473,960 $ 51,216 $
429,620
========== ========= =========== ============
=========
Finance Gross Profit
and Other Interest Equipment on Equipment Net
1998 Income Expense Sales Sales
Earnings
_________________ __________ _________ ___________ _____________
_________
First Quarter . . $ 432,371 $ 156,161 $ 109,829 $ 15,295 $
75,690
Second Quarter. . 421,117 155,175 95,111 9,789
71,605
Third Quarter . . 432,593 148,420 103,971 10,606
79,949
Fourth Quarter. . 530,417 151,450 201,245 27,751
81,521
__________ _________ ___________ ____________
_________
$1,816,498 $611,206 $ 510,156 $ 63,441 $
308,765
========== ========= =========== ============
=========
Finance Gross Profit
and Other Interest Equipment on Equipment Net
1997 Income Expense Sales Sales
Earnings
_________________ __________ _________ ___________ _____________
_________
First Quarter . . $ 365,891 $ 112,966 $ 86,655 $ 11,305 $
79,183
Second Quarter. . 363,110 126,824 85,459 12,566
68,583
-49-
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
=========== ========= =========== ============
=========
-50-
<PAGE> 45
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 16).
Consolidated Statement of Financial Position at December 31, 1999
and 1998 (page 17).
Consolidated Statement of Earnings and Retained Earnings for the
year ended December 31, 1999, 1998 and 1997 (page 18).
Consolidated Statement of Cash Flows for the year ended December
31, 1999, 1998 and 1997 (pages 19 through 21).
Notes to Consolidated Financial Statements (pages 22 through 44).
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.
-51-
<PAGE> 46
3. Exhibits required to be filed by Item 601 of Regulation S-K:
Included in this Form 10-K:
Exhibit Number
I. Statement re computation of ratios
II. Consent of experts and counsel
III. Financial data schedule
Not included in this Form 10-K:
Trust Agreement dated March 5, 1999, relating to the Company's Euro
Medium-Term Note Programme filed pursuant to the annual report
on Form 10-K for the fiscal year ended December 31, 1998, and is hereby
incorporated by reference.
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.
b) Reports on Form 8-K:
A Form 8-K dated October 6, 1999, was filed with respect to the
Agency Agreement dated October 6, 1999 among IBM Credit
Corporation, Chase Securities Inc., Credit Suisse First
Boston Corporation, Goldman Sachs & Co., Lehman Brothers Inc., Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley &
Co. Incorporated, and Salomon Smith Barney Inc.
A Form 8-K dated October 20, 1999, was filed with respect to the
Company's financial results for the period ended September 30, 1999.
-52-
<PAGE> 47
[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
rdersigned, thereunto duly
authorized.
IBM CREDIT CORPORATION
(Registrant)
By: /s/Joseph C. Lane
________________________
(Joseph C. Lane)
President
Date: March 15, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities on March 15, 2000.
Signature Title
__________ ______
Joseph C. Lane
_______________________
(Joseph C. Lane) President and Director
/s/ Paula L. Summa
_______________________
(Paula Summa) Vice President, Finance, and Chief
Financial Officer and Director
/s/Gautam Srivastava
_______________________
(Gautam Srivastava) Treasurer
/s/Robert F. Woods
_______________________
(Robert Woods) Director
-53-
<PAGE> 48
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,
liquidation or succession. Not
applicable
(3) Certificate of Incorporation and By-Laws
The Certificate of Incorporation
of IBM Credit Corporation is filed
pursuant to 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 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.
Trust Agreement dated March 5, 1999,
related to the Company's Euro
Medium-Term Note Programme is filed
pursuant to the annual report on
Form 10-K for the fiscal year ended
December 31, 1998, and is hereby
incorporated by reference.
(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
-54-
of per share earnings. Not
applicable
-55-
<PAGE> 49
EXHIBIT INDEX
(continued)
Reference Number Exhibit
Number
per Item 601 of in This
Regulation S-K Description of Exhibits Form 10-K
__________________ __________________________________ _________________
(12) Statement regarding computation
of ratios. I
(16) Letter on change in certifying
accountant. Not
applicable
(18) Letter regarding change in
accounting principles. Not
Applicable
(21) Subsidiaries of the registrant. Omitted
(22) Published report regarding matters
submitted to vote of security holders. Not
Applicable
(23) Consent of experts and counsel. II
(27) Financial data schedule. III
(28) Information from reports furnished to
state insurance regulatory authorities. Not
applicable
(99) Additional exhibits. Not
applicable
<PAGE> 1
<TABLE>
<CAPTION>
EXHIBIT I
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:
1999 1998 1997 1996 1995
__________ __________ _________ _________
________
<S> <C> <C> <C> <C> <C>
Fixed charges:
Interest expense $ 569,545 $ 611,206 $538,560 $436,109
$394,572
Approximate portion of
rental expense
representative of the
interest factor 291 239 283 479
507
__________ __________ _________ _________
________
Total fixed charges 569,836 611,445 538,843 436,588
395,079
Net Earnings 429,620 308,765 283,893 271,082
230,475
Provision for income
taxes 279,330 200,748 163,215 176,122
149,455
__________ __________ _________ _________
________
Earnings before
income taxes
and fixed charges $1,278,786 $1,102,958 $985,952 $883,792
$775,009
========== ========== ======== =========
========
Ratio of earnings to
fixed charges 2.24 1.83 1.83 2.02
1.96
====
<<//TTAABBLLEE>>
</TABLE>
<PAGE> 1
[SIGNATURE]
EXHIBIT II
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.
333-86615 and 333-42755) of IBM Credit Corporation of our report dated
January 19, 2000, appearing on page 16 of this Form 10-K.
/s/PricewaterhouseCoopers LLP
Stamford, CT
March 16, 2000
<TABLE> <S> <C>
<ARTICLE> 5
EXHIBIT III
__________
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, 1999 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-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 600,111
<SECURITIES> 0
<RECEIVABLES> 6,499,081
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 16,344,705
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 457,411
0
0
<OTHER-SE> 1,774,923
<TOTAL-LIABILITY-AND-EQUITY> 16,344,705
<SALES> 473,960
<TOTAL-REVENUES> 1,919,833
<CGS> 422,744
<TOTAL-COSTS> 422,744
<OTHER-EXPENSES> 213,608
<LOSS-PROVISION> 4,986
<INTEREST-EXPENSE> 569,545
<INCOME-PRETAX> 708,950
<INCOME-TAX> 279,330
<INCOME-CONTINUING> 429,620
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 429,620
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
