-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L8YL1aHV9qnzIwBcYJ3AjUJxmQcaMreMh4ms0PFXqKSSU/V1hNPHGSo/Vzgb6RnZ tB3glcqZ8I17acP73+S0nQ== 0000353524-00-000008.txt : 20000317 0000353524-00-000008.hdr.sgml : 20000317 ACCESSION NUMBER: 0000353524-00-000008 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IBM CREDIT CORP CENTRAL INDEX KEY: 0000353524 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE LESSORS [6172] IRS NUMBER: 222351962 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08175 FILM NUMBER: 571770 BUSINESS ADDRESS: STREET 1: NORTH CASTLE DR MS NCA-306 STREET 2: ROOM 3C2108 CITY: ARMONK STATE: NY ZIP: 10504-1785 BUSINESS PHONE: 9146423000 MAIL ADDRESS: STREET 1: NORTH CASTLE DR MS NCA-306 STREET 2: PO BOX 10399 CITY: ARMONK STATE: NY ZIP: 10504-1785 10-K 1 FORM 10-K 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. -2- 2 TABLE OF CONTENTS _____________________ PART I Page Item 1. Business 3 Item 2. Properties 3 Item 3. Legal Proceedings 3 Item 4. Submission of Matters to a Vote of Security Holders 3 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 3 Item 6. Selected Financial Data 4 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 5 Item 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 -3- 3 PART I ITEM 1. BUSINESS: The principal business of IBM Credit Corporation (the Company) is the financing of IBM products and services. All of the outstanding capital stock of the Company is owned by International Business Machines Corporation (IBM), a New York corporation. The Company finances the purchase and lease of IBM products and related products and services by customers of IBM in the United States and finances inventory and accounts receivable for dealers and remarketers of IBM and non-IBM products and services. Pursuant to a Support Agreement between IBM and the Company, IBM has agreed to retain 100 percent of the voting capital stock of the Company, unless required to dispose of any or all such shares of stock pursuant to a court decree or order of any governmental authority that, in the opinion of counsel to IBM, may not be successfully challenged. IBM has also agreed to cause the Company to have a tangible net worth of at least $1.00 at all times. ITEM 2. PROPERTIES: The Company's principal executive offices are located at an IBM owned facility in 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 $100,000,000 during 1999 and 1998, respectively. Dividends are declared by the Board of Directors of the Company. -4- 4 ITEM 6. SELECTED FINANCIAL DATA: The following selected financial data should be read in conjunction with the financial statements of IBM Credit Corporation and the related notes to the financial statements included in this document.
(Dollars in thousands) 1999 1998 1997 1996 1995 __________ ___________ ___________ __________ __________ For the year: Finance and other income . . . .$ 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
-5- 5 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. -6- 6 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- 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. -8- 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. -9- 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 -10- 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 -11- 11 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. -12- 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. -13- 13 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). -14- 14 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- 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- 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA: 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 -17- 17 IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF FINANCIAL POSITION at December 31: (Dollars in thousands)
1999 1998 _____________ ____________ 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 =========== =========== The accompanying notes are an integral part of this statement.
-18- 18 IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF EARNINGS AND RETAINED EARNINGS For the years ended December 31: (Dollars in thousands)
1999 1998 1997 __________ __________ __________ 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 ========== ========== ========== The accompanying notes are an integral part of this statement.
-19- -20- 19 IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS For the years ended December 31: (Dollars in thousands)
1999 1998 1997 ____________ ___________ ___________ 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) ____________ ___________ ___________ The accompanying notes are an integral part of this statement.
-22- 20 IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS For the years ended December 31: (Continued) (Dollars in thousands) 1999 1998 1997
___________ ___________ ___________ 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 =========== =========== ============
-24- 21 IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS For the years ended December 31: (Continued) (Dollars in thousands) 1999 1998 1997
___________ ___________ ___________ 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 ========= ========== ========= 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. The accompanying notes are an integral part of this statement.
-25- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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 EX-12 2 ITEM 601-12 1
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 __________ __________ _________ _________ ________ 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 ==== <>
EX-23 3 ITEM 601-23 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 EX-27 4 ITEM 601-27
5 EXHIBIT III __________ FINANCIAL DATA SCHEDULE _______________________ 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. 1,000 YEAR DEC-31-1999 DEC-31-1999 600,111 0 6,499,081 0 0 0 0 0 16,344,705 0 0 457,411 0 0 1,774,923 16,344,705 473,960 1,919,833 422,744 422,744 213,608 4,986 569,545 708,950 279,330 429,620 0 0 0 429,620 0 0
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