-----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, DKoafze9/EVRZ4AiDHdUpXWBtYeLRzoJ3WjDL2l7mtaBr7r9p4BcyNQ7S+0WHQQY hA7I9lU2SH6qKTgrpOtjGA== 0000353524-01-500018.txt : 20010815 0000353524-01-500018.hdr.sgml : 20010815 ACCESSION NUMBER: 0000353524-01-500018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IBM CREDIT CORP CENTRAL INDEX KEY: 0000353524 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS BUSINESS CREDIT INSTITUTION [6159] IRS NUMBER: 222351962 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08175 FILM NUMBER: 1710905 BUSINESS ADDRESS: STREET 1: NORTH CASTLE DR MS NCA-306 STREET 2: ROOM 3C2108 CITY: ARMONK STATE: NY ZIP: 10504-1785 BUSINESS PHONE: 9147651900 MAIL ADDRESS: STREET 1: NORTH CASTLE DR MS NCA-306 STREET 2: PO BOX 10399 CITY: ARMONK STATE: NY ZIP: 10504-1785 10-Q 1 june10q.txt FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 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) 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 July 31, 2001, 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 July 31, 2001: NONE. The registrant meets the conditions set forth in General Instruction H (1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format. 2 INDEX Part I - Financial Information: Page _____ Item 1. Financial Statements: Consolidated Statement of Financial Position at June 30, 2001 and December 31, 2000 . . . . . . . . . . . 1 Consolidated Statement of Earnings for the three and six months ended June 30, 2001 and 2000. . . . . . . . . . . . . 2 Consolidated Statement of Comprehensive Income for three and six months ended June 30, 2001 and 2000 . . . . . . . . 3 Consolidated Statement of Cash Flows for the six months ended June 30, 2001 and 2000. . . . . . . . . . . . . . . . 4 Notes to Consolidated Financial Statements . . . . . . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . .11 Part II - Other Information. . . . . . . . . . . . . . . . . . . . 19 3 IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF FINANCIAL POSITION (unaudited) (Dollars in thousands)
At At June 30, December 31, 2001 2000 _____________ ____________ ASSETS: Cash and cash equivalents. . . . . $ 555,774 $ 951,490 Investment in capital leases, net. 5,647,894 5,580,313 Equipment on operating leases, net 2,300,123 2,537,665 Loans receivable, net. . . . . . . 4,067,880 4,207,276 Working capital financing receivables, net . . . . . . . . 2,185,685 2,791,671 Factored IBM receivables, net. . . 376,733 - Other assets . . . . . . . . . . . 565,715 729,323 __________ ___________ Total Assets $15,699,804 $16,797,738 =========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY: Liabilities: Short-term debt. . . . . . . . . . $ 2,707,526 $ 4,065,842 Short-term debt-IBM. . . . . . . . 4,544,324 3,828,345 Due to IBM and affiliates. . . . . 1,697,531 1,874,250 Interest and other accruals. . . . 449,041 623,152 Deferred income taxes. . . . . . . 1,010,756 990,075 Long-term debt . . . . . . . . . . 738,903 1,277,383 Long-term debt-IBM . . . . . . . . 2,875,100 2,250,000 ___________ ___________ Total liabilities . . . . . . . 14,023,181 14,909,047 ___________ ___________ Stockholder's equity: Capital stock, par value $1.00 per share Shares authorized: 10,000 Shares issued and outstanding: 936 in 2001 and 2000 . . . . 457,411 457,411 Accumulated gains and losses not affecting retained earnings . . (1,609) - Retained earnings. . . . . . . . . 1,220,821 1,431,280 ___________ ___________ Total stockholder's equity. . . 1,676,623 1,888,691 ___________ ___________ Total Liabilities and Stockholder's Equity . . . . . . . . . . . . . . $15,699,804 $16,797,738 =========== =========== The accompanying notes are an integral part of this statement. -1-
-2- 4 IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF EARNINGS (Unaudited) (Dollars in thousands)
Three Months Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 ________ ________ ________ ________ FINANCE AND OTHER INCOME: Income from leases: Capital leases . . . . . . . $124,274 $102,197 $235,353 $197,152 Operating leases, net of depreciation. . . . . . . . 115,441 118,981 249,581 241,786 ________ ________ ________ ________ 239,715 221,178 484,934 438,938 Income from working capital financing. . . . . . . . . . . 51,349 59,405 119,282 127,701 Income from loans . . . . . . . 82,037 73,718 169,302 142,310 Equipment sales . . . . . . . . 153,542 149,941 267,292 270,422 Income from factored IBM receivables. . . . . . . . . . 2,863 - 2,863 - Other income (loss) . . . . . . (5,757) 13,883 (2,948) 35,766 ________ ________ _________ _________ Total finance and other income 523,749 518,125 1,040,725 1,015,137 ________ ________ _________ _________ COST AND EXPENSES: Interest. . . . . . . . . . . . . 135,682 140,758 296,460 290,636 Cost of equipment sales . . . . . 120,175 129,270 214,379 246,242 Selling, general, and administrative . . . . . . . . . 65,201 69,265 133,565 134,676 Provision for receivable losses . 33,056 3,628 53,845 8,858 ________ ________ _________ _________ Total cost and expenses. . . . . 354,114 342,921 698,249 680,412 ________ ________ _________ _________ EARNINGS BEFORE INCOME TAXES. . . . 169,635 175,204 342,476 334,725 Provision for income taxes. . . . . 66,166 69,050 134,935 131,883 ________ ________ _________ _________ NET EARNINGS . . . . . . . . . . . $103,469 106,154 207,541 202,842 ======== ======== ========= ========= The accompanying notes are an integral part of this statement.
-3- 5 IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands)
Three Months Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 ________ ________ ________ ________ Net earnings . . . . . . . . . . . $103,469 $106,154 $207,541 $202,842 Other comprehensive income, net of tax: Deferred losses from cash flow hedges, net of tax . . . . . . (2,243) - (1,655) - Unrealized gains on marketable securities, net of tax. . . . . 46 - 46 - ________ ________ _________ _________ Other comprehensive income. . . . . (2,197) - (1,609) - ________ ________ _________ _________ Comprehensive income. . . . . . . .$101,272 $106,154 $205,932 $202,842 ======== ======== ========= ========= The accompanying notes are an integral part of this statement.
-4- 6 IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (Dollars in thousands)
Six Months Ended June 30, 2001 2000 ___________ ___________ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings . . . . . . . . . . . . . . $ 207,541 $ 202,842 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation and amortization. . . . . . 801,451 977,519 Provision for receivable losses. . . . . 53,845 8,858 Increase in deferred income taxes. . . . 20,681 19,173 Decrease in interest and other accruals. (177,508) (85,770) Proceeds on sale of equipment, net of gross profit . . . . . . . . . . . . . 235,894 223,482 Decrease in amounts due IBM and affiliates . . . . . . . . . . . . . . (176,719) (707,792) Decrease in miscellaneous receivables. . 70,366 45,314 Decrease in deferred assets. . . . . . . 89,793 637 Other, net . . . . . . . . . . . . . . . 29,901 (23,191) ___________ ___________ Cash provided by operating activities . . . 1,155,245 661,072 ___________ ___________ CASH FLOWS FROM INVESTING ACTIVITIES: Investment in capital leases . . . . . . (1,625,155) (1,179,584) Collections of capital leases, net of income earned . . . . . . . . . . . . . 1,261,824 1,146,049 Investment in equipment on operating leases. . . . . . . . . . . . . . . . . (610,466) (532,200) Investment in loans receivable . . . . . (907,796) (979,028) Collections of loans receivable, net of interest earned. . . . . . . . . . . 1,045,192 825,180 Collections of working capital financing receivables, net. . . 580,196 533,791 Purchase of factored IBM receivables . . (1,045,909) - Collections of IBM factored receivables, net of income earned . . . . . . . . . 668,604 - Other, net . . . . . . . . . . . . . . . 57,827 14,117 ___________ ___________ Cash used in investing activities . . . . . (575,683) (171,675) ___________ ___________ The accompanying notes are an integral part of this statement.
-5- 7 IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (Continued)
Six Months Ended June 30, 2001 2000 ___________ ___________ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . . 1,200,100 925,000 Repayment of debt with original maturities of one year or more . . . . . (2,218,798) (481,000) Issuance (repayment) of debt with original maturities within one year, net. . . . . 461,420 (490,713) Cash dividends paid to IBM. . . . . . . . (418,000) (350,000) ___________ ___________ Cash used in financing activities. . . . . . (975,278) (396,713) ___________ ___________ Change in cash and cash equivalents. . . . . (395,716) 92,684 Cash and cash equivalents, January 1 . . . . 951,490 600,111 ___________ ___________ Cash and cash equivalents, June 30. . . . . $ 555,774 $ 692,795 =========== =========== The accompanying notes are an integral part of this statement.
-6- 8 IBM CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BASIS OF PRESENTATION: In the opinion of management of IBM Credit Corporation (the Company), all adjustments necessary for a fair statement of the results for the three- and six-month periods are reflected in the unaudited interim financial statements presented. These adjustments are of a normal recurring nature. Certain prior year amounts have been reclassified to conform to current year presentation. ACCOUNTING CHANGES: On January 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, _Accounting for Derivative Instruments and Hedging Activities_, as amended by SFAS No. 138, _Accounting for Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133_. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments. Specifically, SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and to measure those instruments at fair value. Additionally, the fair value adjustments affect either stockholder's equity or net earnings depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity. RELATED COMPANY TRANSACTIONS: The Company provides equipment, software and services financing at market rates to IBM and affiliated companies for both IBM and non-IBM products. The Company originated $382.1 million and $267.6 million of such financings during the six months ended June 30, 2001, and 2000, respectively. At June 30, 2001, and December 31, 2000, $1,257.8 million and $1,324.0 million, respectively, of such financings were included in the Company's lease and loan portfolio. The operating lease income, net of depreciation, and income from loans earned from transactions with IBM and affiliated companies, was $102.9 million and $107.1 million for the first six months of 2001, and 2000, respectively. The Company provides working capital financing, at market rates, to certain remarketers of IBM products. IBM pays the Company a fee to provide an interest-free financing period to its remarketers. Included in income from working capital financing is $42.2 million and $40.9 million of fee income earned from IBM for the six months ended June 30, 2001, and 2000, respectively. -7- 9 RELATED COMPANY TRANSACTIONS (Continued): The Company sells used equipment to IBM at the conclusion of IBM's lease or from the Company's inventory. For the six months ended June 30, 2001, and 2000, the Company's sales of equipment to IBM amounted to $88.1 million and $64.6 million, respectively. In May 2001, the Company began factoring certain IBM receivables by purchasing selected factoring assets from IBM International Holdings Finance Company, Ltd. (IIHFC), at cost which approximated fair market value. The initial purchase amounted to $525.0 million. The Company acquired additional receivables having a nominal value of $522.6 million for $518.4 million. The Company has a master loan agreement with IBM. This agreement allows for short-term (up to 270-day) funding, made available at market terms and conditions, upon the request of either the Company or IBM. At June 30, 2001, and December 31, 2000, the Company had $2,781.4 million and $1,186.6 million, respectively, of borrowings outstanding under this agreement. The Company and IBM have 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 June 30, 2001, and December 31, 2000, the Company had $4,638.0 million and $4,891.7 million, respectively, of borrowings outstanding under this agreement. Long-term debt-IBM of $2,875.1 million at June 30, 2001, is payable at market terms and conditions and has maturity dates ranging from August 30, 2002, to December 22, 2004. Interest expense of $151.4 million and $84.9 million was incurred on loans from IBM and affiliates during the six months ended June 30, 2001, and 2000, respectively. Pursuant to an operating agreement, the Company is charged by IBM for shared expenses at the corporate and geographic levels. Where practical, shared expenses are determined based upon measurable drivers of expense. When a clear and measurable driver cannot be identified, shared expenses are determined on a financial basis that is consistent with the Company's management system. Management believes that these methods are reasonable. These expenses amounted to $45.0 million and $53.4 million for the six months ended June 30, 2001, and 2000, respectively, and are included in selling, general and administrative expenses. -8- 10 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. Also included in the commercial financing segment 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 then receives its fixed percentage of interest and loan fees less administrative fees charged by the agent bank. 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 three months ended June 30: Customer Commercial 2001 Financing Financing Total ______________________ _____________ ____________ ___________ Finance and other income $ 461,070 $ 64,841 $ 525,911 Interest expense....... $ 112,386 $ 20,581 $ 132,967 Earnings before income taxes................ $ 149,149 $ 24,521 $ 173,670 2000 ______________________ Finance and other income $ 444,305 $ 64,624 $ 508,929 Interest expense....... $ 116,946 $ 20,157 $ 137,103 Earnings before income taxes................ $ 133,459 $ 36,203 $ 169,662 -9- 11 SEGMENT REPORTING (Continued): For the six months Ended June 30: Customer Commercial 2001 Financing Financing Total ______________________ _____________ ____________ ___________ Finance and other income $ 892,185 $ 147,847 $ 1,040,032 Interest expense....... $ 240,250 $ 48,304 $ 288,554 Earnings before income taxes................ $ 290,749 $ 58,099 $ 348,848 2000 ______________________ Finance and other income $ 854,249 $ 136,767 $ 991,016 Interest expense....... $ 235,898 $ 42,948 $ 278,846 Earnings before income taxes................ $ 259,804 $ 62,589 $ 322,393 At June 30, 2001: Assets................. $ 11,598,946 $ 2,893,185 $14,492,131 At December 31, 2000: Assets................. $ 12,087,833 $ 3,286,771 $15,374,604 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 is as follows: Three Months Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 _________ _________ __________ __________ (in thousands) Finance and Other Income: Total finance and other income for reportable segments..... $ 525,911 $ 508,929 $1,040,032 $ 991,016 Other finance and other income (loss)............... (2,162) 9,196 693 24,121 _________ _________ __________ __________ Total consolidated finance and other income ........... $ 523,749 $ 518,125 $1,040,725 $1,015,137 ========= ========= ========== ========== Interest Expense: Total interest expense for reportable segments......... $ 132,967 $ 137,103 $ 288,554 $ 278,846 Other interest expense....... 2,715 3,655 7,906 11,790 _________ ________ _________ __________ Total consolidated interest expense..................... $ 135,682 $ 140,758 $ 296,460 $ 290,636 ========= ========= ========== ========== -10- 12 SEGMENT REPORTING (Continued): Three Months Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 _________ _________ __________ __________ (in thousands) Earnings Before Income Taxes: Total earnings before income taxes for reportable segments$ 173,670 $ 169,662 $ 348,848 $ 322,393 Other earnings (loss) before income taxes................ (4,035) 5,542 (6,372) 12,332 _________ _________ __________ __________ Total consolidated earnings before income taxes......... $ 169,635 $ 175,204 $ 342,476 $ 334,725 ========= ========= ========== ========== At At June 30, December 31, 2001 2000 _____________ ______________ Assets: Total assets for reportable segments.................... $ 14,492,131 $ 15,374,604 Other assets.................. 1,207,673 1,423,134 _____________ _____________ Total consolidated assets..... $ 15,699,804 $ 16,797,738 ============= ============= For the three months ended June 30, 2001, and 2000, IBM accounted for $123.5 million and $121.1 million, respectively, of the Company's consolidated revenues. For the six months ended June 30, 2001, and 2000, IBM accounted for $239.1 million and $228.8 million, respectively, of the Company's consolidated revenues. The Company's business is conducted principally in the United States; foreign operations are not material. The Company continues to evaluate its organizational structure which could lead to changes in future reportable segments. -11- 13 IBM CREDIT CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Net earnings for the three months ended June 30, 2001, were $103.5 million. Net earnings for the six months ended June 20, 2001, were $207.5 million, yielding an annualized return on average equity of 22.4 percent. Net earnings for the three and six months ended June 30, 2000, were $106.2 million and $202.8 million, respectively. The annualized return on average equity for the six months ended June 30, 2000, was 17.7 percent. FINANCING ORIGINATED For the three months ended June 30, 2001, the Company originated customer equipment financing for end users of $1,741.3 million, a 5 percent increase from $1,664.2 million for the same period of 2000. For the six months ended June 30, 2001, the Company originated customer equipment financing for end users of $3,238.7 million, a 21 percent increase from $2,678.6 million for the same period of 2000. The increase in customer equipment financing originated is related to an increase in demand for IBM's advanced information processing products. For the six months ended June 30, 2001, customer financing originations for end users included purchases of $1,915.5 million of IBM information processing products, consisting of $1,359.3 million for capital leases and $556.2 million for operating leases. In addition, customer financing originations for end users also included the following: (1) financing for IBM software and services of $667.8 million; (2) financing of $507.5 million for remarketed IBM equipment, as well as related non-IBM equipment, software and services to meet IBM customers' total solution requirements; (3) installment and lease financing for state and local government customers of $76.9 million for the account of IBM; and (4) financing originated for installment receivables of $71.0 million. The Company's capital lease portfolio primarily includes direct financing leases. Both direct financing leases and operating leases consist principally of advanced information processing products with terms generally from two to three years. For the three months ended June 30, 2001, originations of working capital financing of inventory for dealers and remarketers of information industry products decreased by 19 percent to $2,670.4 million, from $3,300.2 million for the same period of 2000. For the six months ended June 30, 2001, originations of working capital financing of inventory for dealers and remarketers of information industry products decreased by 8 percent to $5,650.9 million, from $6,130.1 million for the same period of 2000. -12- 14 FINANCING ORIGINATED (Continued) The decrease in working capital financing originations of inventory reflects volume decreases in IBM's workstation products and non-IBM products for remarketers financed by the Company during the first half of 2001. Additionally, the trend toward lower IBM sales through remarketers contributed to the decrease in working capital financing originations during the first half of 2001. 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. 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 often 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, extensions of existing leases and gross profit on equipment sales, net of write-downs in residual values of certain leased equipment. For the three months ended June 30, 2001, remarketing activities contributed $106.8 million to pretax earnings, an increase of 45 percent compared with $73.6 million for the same period of 2000. For the six months ended June 30, 2001, remarketing activities contributed $198.8 million to pretax earnings, an increase of 40 percent compared with $142.5 million for the same period of 2000. These increases are primarily attributable to an increase in optional extension income and an increase in gross profit on equipment sales. At June 30, 2001, the investment in remarketed equipment on capital and operating leases totaled $275.1 million, compared with the 2000 year-end investment of $312.7 million. FINANCIAL CONDITION ASSETS Total assets decreased to $15.7 billion at June 30, 2001, compared with $16.8 billion at December 31, 2000. This decrease is primarily due to the traditional seasonality of IBM's business. -13- 15 LIABILITIES AND STOCKHOLDER'S EQUITY The assets of the Company were financed with $10,865.9 million of debt at June 30, 2001, a decrease of $555.7 million, from $11,421.6 million at December 31, 2000. This decrease was the result of decreases in commercial paper outstanding of $1,225.8 million, short-term debt of $132.5 million and long-term debt of $538.5, offset by increases in short-term debt-IBM of $716.0 million and long-term debt-IBM of $625.1 million. At June 30, 2001, the Company had available $9.85 billion of a shelf registration with the Securities and Exchange Commission (SEC) for the issuance of debt securities. The Company may 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, to issue and sell debt securities under a Euro Medium Term Note Programme in an aggregate nominal amount of up to _4.0 billion, or its equivalent in any other currency. At June 30, 2001, there was _2.1 billion available for the issuance of debt securities under this program. The Company may issue debt securities during the next twelve months under this program, 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 has master loan agreements with IBM, for both short-term and long-term funding. At June 30, 2001, and December 31, 2000, the Company had $7,419.4 million and $6,078.3 million, respectively, of borrowings outstanding under these agreements. Refer to Related Company Transactions on page 6 in the Notes to the Consolidated Financial Statements for additional details. The Company periodically pays dividends to IBM in order to maintain its capital structure at appropriate levels. 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 and service fees. Also included in amounts due to IBM and affiliates are amounts due for services received from IBM under the intercompany operating agreement, as well as income taxes currently payable under the intercompany tax allocation agreement. 16 FINANCIAL CONDITION (Continued) -14- Amounts due to IBM and affiliates decreased by approximately $176.8 million to $1,697.5 million at June 30, 2001, from $1,874.3 million at December 31, 2000. This decrease was primarily attributable to a decrease in the amount payable for capital equipment purchases and working capital financing receivables due to the traditional seasonality of IBM's volumes. At June 30, 2001, the Company's debt to equity ratio was 6.5:1, compared with 6.1:1 at December 31, 2001. TOTAL CASH PROVIDED BEFORE DIVIDENDS Total cash provided before dividends was $22.3 million for the first six months of 2001, compared with $442.7 million for the same period of 2000. For the first six months of 2001, total cash provided before dividends reflects $1,155.2 million of cash provided by operating activities, offset by $1,132.9 million of cash used by investing and financing activities before dividends. For the first six months of 2000, total cash provided before dividends reflects $661.1 million of cash provided by operating activities, offset by $218.4 million of cash used in investing and financing activities before dividends. Cash and cash equivalents at June 30, 2001, totaled $555.8 million, a decrease of $395.7 million, compared with the balance at December 31, 2000. RESULTS OF OPERATIONS INCOME FROM LEASES Income from leases increased 8 percent to $239.7 million for the quarter ended June 30, 2001, from $221.2 million for the same period in 2000. For the six months ended June 30, 2001, income from leases increased 10 percent to $484.9 million, compared with $438.9 million for the same period of 2000. These increases are primarily due to improved average lease yields and an increase in originations. Income from leases includes lease income resulting from remarketing transactions. Lease income from remarketing transactions increased 47 percent to $73.8 million for the three months ended June 30, 2001, compared with $50.2 million for the same 2000 period. For the six months ended June 30, 2001, lease income from remarketing transactions increased 28 percent to $148.7 million, compared with $116.1 million for the first half of 2000. These increases are primarily attributable to an increase in optional extension income. 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 $1,002.1 million residual value portfolio at June 30, 2001, 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. -15- 17 RESULTS OF OPERATIONS (Continued) The Company will record write-downs to recognize decreases in the expected future residual values of its leased equipment. The Company did not record such a write-down during the first half of 2001. The Company did record a write-down of residual values of $3.5 million during the second quarter of 2000, for a total of $7.3 million for the first half of 2000. INCOME FROM WORKING CAPITAL FINANCING Income from working capital financing decreased 14 percent to $51.3 million for the three months ended June 30, 2001, compared with $59.4 million for the same period of 2000. For the six months ended June 30, 2001, income from working capital financing decreased 7 percent to $119.3 million, compared with $127.7 million for the same period of 2000. These decreases were primarily due to decreases in interest income on dealer financing, which was partially offset by additional income from revolving participation loans. Income from revolving participation loans increased to $20.3 million for the first half of 2001, compared with $17.3 million for the same period of 2000. INCOME FROM LOANS Income from loans increased 11 percent to $82.0 million for the second quarter of 2001, compared with $73.7 million for the second quarter of 2000. For the first half of 2001, income from loans increased 19 percent to $169.3 million, compared with $142.3 million for the same 2000 period. This increase was primarily due to income from term participation loans. Income from term participation loans amounted to $28.6 million and $9.1 million for the six months ended June 30, 2001, and 2000, respectively. Additionally, higher yields contributed to the overall increase in income from loans. EQUIPMENT SALES Equipment sales amounted to $153.5 million for the second quarter of 2001, compared with $149.9 million for the same period of 2000; for the first six months of 2001, equipment sales amounted to $267.3 million, compared with $270.4 million for the same 2000 period. Gross profit on equipment sales for the second quarter of 2001 was $33.4 million compared with $20.7 million for the second quarter of 2000. For the first half of 2001, gross profit from equipment sales increased to $52.9 million compared with $24.2 million for the same period of 2000. The gross profit margin for the second quarter of 2001 increased to 21.7 percent, compared with 13.8 percent for the same 2000 period. For the first half of 2001, the gross profit margin increased to 19.8 percent, compared with 8.9 percent for the first half of 2000. The mix of products available for sale and changing market conditions for certain used equipment during the first six months of 2001 contributed to the changes in sales, gross profit and gross profit margins, compared with the same period of 2000. -16- 18 INCOME FROM FACTORED IBM RECEIVABLES Income from factored IBM receivables was $2.9 million for both the three- and six-month periods ended June 30, 2001. There was no factoring income in 2000. In May, 2001, the Company began factoring selected IBM receivables. See Related Company Transactions in the Notes to the Consolidated Financial Statements on page 6 for additional details. OTHER INCOME (LOSS) Other income (loss) decreased to $(5.8) million for the second quarter of 2001, compared with $13.9 million for the same period of 2000. For the first half of 2001, other income (loss) decreased to $(2.9) million, compared with $35.8 million for the first half of 2000. This decrease is primarily attributable to losses incurred on one of the Company's investments and a decrease in the fees for the servicing of IBM's federal, state and local lease portfolio. INTEREST EXPENSE Interest expense decreased 4 percent to $135.7 million for the second quarter of 2001, compared with $140.8 million for the same 2000 period. For the first half of 2001, interest expense increased 2 percent to $296.5 million from $290.6 million for the same 2000 period. The Company's year-to-date average cost of debt for the first six months of 2001 remained flat at 5.7 percent for the six months ended June 30, 2001, and 2000. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses were $65.2 million for the second quarter of 2001, a decrease of 6 percent compared with $69.3 million for the same period in 2000. For the first half of 2001, selling, general and administrative expenses amounted to $133.6 million, compared with $134.7 million for the first six months of 2000. These declines are due to a decease in the amount charged by IBM for shared expenses during the first half of 2001, compared with the same period of 2000. Refer to Related Company Transactions in the Notes to the Consolidated Financial Statements on page 6 for additional details. PROVISION FOR RECEIVABLE LOSSES The majority of the Company's portfolio of capital equipment leases and loans is 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 based upon its extensive history in the customer financing business and taking into account currently available information about customer credit quality and performance. The portfolio is diversified by region, industry and individual unaffiliated customer. -17- 19 RESULTS OF OPERATIONS (Continued) 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, while continuously declining, remains significant. At June 30, 2001, and December 31, 2000, approximately 35 percent and 37 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 2000 or in the first six months of 2001. The overall provision for receivable losses increased to $33.1 million for the second quarter of 2001, compared with $3.6 million for the same period in 2000. For the first half of 2001, the provision for receivable losses increased to $53.8 million, compared with $8.9 million for the same 2000 period. The increase in the provision for receivable losses is primarily attributable to the recording of additional reserves for certain specific accounts due to general economic conditions. INCOME TAXES The provision for income taxes decreased 4 percent to $66.2 million for the quarter ended June 30, 2001, compared with $69.1 million for the same period in 2000. For the six months ended June 30, 2001, the provision for income taxes increased to $134.9 million, compared with $131.9 million for the same 2000 period. Theset variances are due to the fluctuations in pretax earnings for three- and six-month periods ending June 30, 2001, compared with the same periods of 2000. RETURN ON AVERAGE EQUITY The results for the first six months of 2001 yielded an annualized return on average equity of 22.4 percent, compared with 17.7 percent for the same period of 2000. This increase in the return on average equity is primarily attributable to the decrease in stockholder's equity since the first half of 2000 due to dividends the Company has paid. 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. -18- 20 FORWARD LOOKING STATEMENTS Except for the historical information and discussions contained herein, statements contained in this Quarterly Report on Form 10-Q may constitute "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including, but not limited to, the Company's level of equipment financing originations; the propensity for customers to finance their acquisition of IBM products and services with the Company; the competitive environment in which the Company operates; the success of the Company in developing strategies to manage debt levels; non-performance by a customer of contractual requirements; the concentration of credit risk and creditworthiness of the 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-Q and in the Company's other filings with the SEC. -19- 21 Part II - Other Information Item 1. Legal Proceedings None material. Item 6(b). Reports on Form 8-K A Form 8-K dated April 18, 2001, was filed with respect to the Company's financial results for the period ended March 31, 2001. -20- 22 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. IBM CREDIT CORPORATION _______________________________ (Registrant) Date: August 13, 2001 By: /s/ Paula L. Summa (Paula L. Summa) Vice President, Finance and Chief Financial Officer -21- -----END PRIVACY-ENHANCED MESSAGE-----