-----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, K/+g8zWZqKsOZAiDKeomo8NAXiammAo3NBUyXj1DW0tLUaF7A4kTBuIc5QlZVHfE UevNxaQKxBfdzaC+9ugirg== 0000353524-98-000043.txt : 19980515 0000353524-98-000043.hdr.sgml : 19980515 ACCESSION NUMBER: 0000353524-98-000043 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 SROS: NYSE 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-Q SEC ACT: SEC FILE NUMBER: 001-08175 FILM NUMBER: 98620919 BUSINESS ADDRESS: STREET 1: 1133 WESTCHESTER AVE STREET 2: ROOM 3C2108 CITY: WHITE PLAINS STATE: NY ZIP: 10604 BUSINESS PHONE: 9146423000 MAIL ADDRESS: STREET 1: 290 HARBOR DR STREET 2: PO BOX 10399 CITY: STAMFORD STATE: CT ZIP: 06904 10-Q 1 FORM 10-Q 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 March 31, 1998 Commission file number 1-8175 _____________________________ IBM CREDIT CORPORATION ______________________________________________________ (Exact name of registrant as specified in its charter) DELAWARE 22-2351962 ________________________ ____________________________________ (State of incorporation) (IRS employer identification number) 1133 Westchester Avenue White Plains, New York 10604-3505 ________________________________________ ____________ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 914-642-3000 ____________ - - 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 April 30, 1998, 936 shares of capital stock, par value $1.00 per share, were held by International Business Machines Corporation. Aggregate market value of the voting stock held by nonaffiliates of the registrant at April 30, 1998: 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. INDEX _____ Part I - Financial Information: Page ____ Item 1. Financial Statements: Consolidated Statement of Financial Position at March 31, 1998 and December 31, 1997 . . . . . . . . . . . .1 Consolidated Statement of Earnings for the three months ended March 31, 1998 and 1997. . . . . . . . . . . . . .2 Consolidated Statement of Cash Flows for the three months ended March 31, 1998 and 1997. . . . . . . . . . . . . .3 Notes to Consolidated Financial Statements. . . . . . . . . . .5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . .7 Part II - Other Information . . . . . . . . . . . . . . . . . . . . .15 IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Dollars in thousands)
At At March 31, December 31, 1998 1997 _____________ ____________ ASSETS: Cash and cash equivalents. . . . . . . . . $ 633,756 $ 792,471 Marketable securities. . . . . . . . . . . 103,585 127,847 Net investment in capital leases . . . . . 4,873,929 4,931,292 Equipment on operating leases, net . . . . 3,527,624 3,583,641 Working capital financing receivables. . . 2,657,653 3,249,310 Loans receivable . . . . . . . . . . . . . 2,368,274 2,381,261 Factored IBM receivables . . . . . . . . . 774,180 824,031 Investments and other assets . . . . . . . 713,965 682,263 ___________ ___________ Total Assets $15,652,966 $16,572,116 =========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY: Liabilities: Short-term debt. . . . . . . . . . . . . . $ 7,076,030 $ 7,452,668 Short-term debt, IBM . . . . . . . . . . . 838,440 1,139,113 Due to IBM and affiliates. . . . . . . . . 1,626,140 2,524,475 Interest and other accruals. . . . . . . . 352,880 423,243 Deferred income taxes. . . . . . . . . . . 917,608 887,180 Long-term debt . . . . . . . . . . . . . . 2,435,171 1,887,235 Long-term debt, IBM. . . . . . . . . . . . 687,058 589,253 ___________ ___________ Total liabilities . . . . . . . . . . . 13,933,327 14,903,167 ___________ ___________ Stockholder's equity: Capital stock, par value $1.00 per share Shares authorized: 10,000 Shares issued and outstanding: 936 in 1998 and 1997 . . . . . . . . 457,411 457,411 Retained earnings. . . . . . . . . . . . . 1,262,228 1,211,538 ___________ ___________ Total stockholder's equity. . . . . . . 1,719,639 1,668,949 ___________ ___________ Total Liabilities and Stockholder's Equity $15,652,966 $16,572,116 =========== =========== The accompanying notes are an integral part of this statement.
-1- IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF EARNINGS FOR THE THREE MONTHS ENDED MARCH 31: (Dollars in thousands)
1998 1997 ________ ________ FINANCE AND OTHER INCOME: Income from leases: Capital leases . . . . . . . . $ 82,383 $ 77,335 Operating leases, net of depreciation. . . . . . . . . 84,454 62,479 ________ ________ 166,837 139,814 Income from working capital financing. . . . . . . . . . . . 66,180 57,724 Income from loans . . . . . . . . 49,816 39,763 Equipment sales . . . . . . . . . 109,829 86,655 Income from factored IBM receivables. . . . . . . . . . . 15,338 - Other income. . . . . . . . . . . 24,371 41,935 ________ ________ Total finance and other income. . . . . . . . . . . . 432,371 365,891 ________ ________ COST AND EXPENSES: Interest. . . . . . . . . . . . . 156,161 112,966 Cost of equipment sales . . . . . 94,534 75,350 Selling, general, and administrative . . . . . . . . . 49,657 51,952 Provision for receivable losses . 7,119 (5,057) ________ ________ Total cost and expenses. . . . 307,471 235,211 ________ ________ EARNINGS BEFORE INCOME TAXES: 124,900 130,680 Provision for income taxes. . . . . 49,210 51,497 ________ ________ NET EARNINGS:. . . . . . . . . $ 75,690 $ 79,183 ======== ======== The accompanying notes are an integral part of this statement.
-2- IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31: (Dollars in thousands) 1998 1997
__________ _________ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings . . . . . . . . . . . . . . . . . $ 75,690 $ 79,183 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation and amortization. . . . . . . . . 463,943 311,550 Provision for receivable losses. . . . . . . . 7,119 (5,057) Increase in deferred income taxes. . . . . . . 30,428 42,132 Decrease in interest and other accruals . . . (70,363) (51,013) Gross profit on equipment sales. . . . . . . . (15,295) (11,305) Other items that provided (used) cash: Proceeds from equipment sales. . . . . . . . 109,829 86,655 Decrease in amounts due IBM and affiliates . (898,335) (825,926) Other, net . . . . . . . . . . . . . . . . . 3,388 948 __________ _________ Cash used in operating activities . . . . . . . . (293,596) (372,833) __________ _________ CASH FLOWS FROM INVESTING ACTIVITIES: Investment in capital leases . . . . . . . . . (563,059) (506,692) Collection of capital leases, net of income earned. . . . . . . . . . . . . . . . . . . . 570,078 356,004 Investment in equipment on operating leases. . (368,966) (392,133) Investment in loans receivable . . . . . . . . (318,368) (280,206) Collection of loans receivable, net of income earned . . . . . . . . . . . . . . . . 333,856 214,090 Purchase of factored IBM receivables . . . . . (1,556,471) - Collection of factored IBM receivables . . . . 1,606,322 - Collection of working capital financing receivables, net . . . . . . . . . 588,917 319,325 Purchases of marketable securities . . . . . . (29,000) (21,500) Maturities of marketable securities. . . . . . 53,262 16,594 Other, net . . . . . . . . . . . . . . . . . . (126,330) 100,594 ___________ _________ Cash provided by (used in) investing activities . 190,241 (193,924) ___________ __________ The accompanying notes are an integral part of this statement.
-3- IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31: (Continued) 1998 1997 __________ _________ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt . . . 900,106 590,957 Repayment of debt with original maturities of one year or more . . . . . . . . . . . . . (105,962) (23,800) (Repayment)issuance of debt with original maturities within one year, net . . . . . . . (824,504) 107,829 Cash dividends paid to IBM . . . . . . . . . . (25,000) (50,000) __________ _________ Cash (used in)provided by financing activities . (55,360) 624,986 __________ _________ Change in cash and cash equivalents . . . . . . . (158,715) 58,229 Cash and cash equivalents, January 1. . . . . . . 792,471 632,834 __________ _________ Cash and cash equivalents, March 31 . . . . . . . $ 633,756 $ 691,063 ========== ========= The accompanying notes are an integral part of this statement.
-4- 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-month periods are reflected in the unaudited interim financial statements presented. These adjustments are of a normal recurring nature. RATIO OF EARNINGS TO FIXED CHARGES: The ratio of earnings to fixed charges calculated in accordance with applicable Securities and Exchange Commission requirements was 1.80 and 2.16 for the three months ended March 31, 1998, and 1997, respectively. COMPREHENSIVE INCOME: The Company implemented Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income," effective January 1, 1998. This standard requires that the total change in equity resulting from revenue, expenses, and gains and losses, including those which do not affect retained earnings, be reported. These amounts consist of net earnings, foreign currency translation adjustments and unrealized gains and losses on marketable securities. For the three month periods ending March 31, 1998 and 1997, respectively, other than net earnings, there were no items to report. RELATED COMPANY TRANSACTIONS: EQUIPMENT LEASING: __________________ The Company provides equipment financing at market rates, substantially through operating leases, to International Business Machines Corporation (IBM) and affiliated companies for both IBM and non-IBM products that IBM uses internally or in support of its managed operations environment. The Company originated $213.1 million and $196.6 million of such financings during the three months ended March 31, 1998 and 1997, respectively. At March 31, 1998, and December 31, 1997, approximately $1,283.5 million and $1,255.0 million, respectively, of such financings were included in the Company's lease and loan portfolio. The operating lease income, net of depreciation, earned from transactions with IBM and affiliated companies, was approximately $32.9 million and $22.1 million in the first three months of 1998 and 1997, respectively. -5- RELATED COMPANY TRANSACTIONS (Continued) ACCOUNTS RECEIVABLE PURCHASES: ______________________________ IBM Credit International Factoring Corporation (ICIFC) and IBM Credit EMEA Factoring Co.,LTD.(ICEFC), subsidiaries of the Company, have entered into factoring agreements with selected IBM subsidiaries. Under these agreements, ICIFC and ICEFC will periodically purchase, without recourse, all the rights, title and interest to certain outstanding IBM customer receivables. During the first quarter of 1998, ICIFC and ICEFC acquired IBM customer receivables having a nominal value of $1,578.2 million for approximately $1,556.5 million. The receivables acquired are short-term in nature and are denominated in non-U.S. currencies. The purchase was financed by the Company through the issuance of short-term debt. Transactions related to these receivables are fully integrated in the Company's consolidated financial statements. -6- IBM CREDIT CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Net earnings for the three months ended March 31, 1998, were $75.7 million, yielding an annualized return on average equity of 17.9 percent. Net earnings for the three months ended March 31, 1997, were $79.2 million. Effective May 1, 1998, the Company relocated its principal executive offices to an IBM-owned facility in Armonk, New York. FINANCING ORIGINATED For the three months ended March 31, 1998, the Company originated capital equipment financing for end users of $1,346.1 million, a 2 percent increase from $1,323.4 million for the same 1997 period. For the three months ended March 31, 1998, originations of working capital financing for dealers and remarketers of information industry products increased by 3 percent to $3,209.2 million, from $3,127.7 million for the same 1997 period. The growth in capital equipment financing originated is related to an increase in the propensity for customers to finance their acquisitions with the Company, during the first quarter of 1998, compared with the same period in 1997. Capital equipment financings for end users included purchases of $777.7 million of information handling systems from IBM, consisting of $492.9 million for capital leases and $284.8 million for operating leases. In addition, capital equipment financings for end users included the following: (1) financing originated for installment receivables of $45.1 million; (2) financing for IBM software and services of $273.3 million; (3) installment and lease financing for state and local government customers of $57.1 million for the account of IBM; and (4) other financing of $192.9 million for IBM equipment, as well as related non-IBM equipment to meet IBM customers' total solution requirements. The Company's capital lease portfolio primarily includes direct financing leases. Direct financing leases consist principally of IBM information handling equipment with terms generally from three to five years. Operating leases consist principally of IBM information handling equipment with terms generally from two to four years. The growth in working capital financing originations reflects volume increases in IBM's personal system client products for remarketers financed by the Company during the quarter ended March 31, 1998. 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 -7- FINANCING ORIGINATED (Continued) from 30 days to 45 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 customers at the conclusion of lease transactions and is typically remarketed in cooperation with the IBM sales force. The equipment is generally leased or sold to end users. These transactions may be with existing lessees or, when equipment is returned, with new customers. Remarketing activities are fully integrated in the Company's financial statements. Remarketing activities comprise income from follow-on capital and operating leases and gross profit on equipment sales, net of write-downs in residual values of certain leased equipment. For the three months ended March 31, 1998, remarketing activities contributed $48.7 million to pre-tax earnings, a decrease of 2 percent compared with $49.9 million for the same 1997 period. Refer to Equipment Sales in Management's Discussion and Analysis on page 11 for additional details. At March 31, 1998, the investment in remarketed equipment on capital and operating leases totaled $262.4 million, an 8 percent decrease from the 1997 year-end investment of $285.5 million. FINANCIAL CONDITION ASSETS Total assets decreased to $15.7 billion at March 31, 1998, compared with $16.6 billion at December 31, 1997. This decrease is primarily attributable to repayments of amounts due to IBM and affiliates, during the first three months of 1998. The carrying amount of marketable securities, as reported in the Consolidated Statement of Financial Position, approximates market value. These marketable securities were available-for-sale. At March 31, 1998, marketable securities included investments in corporate debt securities of $74.6 million and other marketable securities of $29.0 million. At December 31, 1997, marketable securities included investments in U.S. federal agency debt securities of $32.8 million and corporate debt securities of $95.0 million. LIABILITIES AND STOCKHOLDER'S EQUITY The assets of the business were financed with $11,036.7 million of debt at March 31, 1998. Total short-term and long-term debt decreased by approximately $31.6 million, from $11,068.3 million at December 31, 1997. The decline was the result of decreases in short-term notes of $376.6 million and short-term debt payable to IBM of $300.7 million, offset by -8- FINANCIAL CONDITION (Continued) an increase in long-term debt payable of $547.9 million and long-term debt payable to IBM of $97.8 million. Included in the decrease in total debt, is short-term borrowings associated accounts receivable purchases from selected IBM subsidiaries during the first quarter of 1998. Included in short-term debt at March 31, 1998, was $538.3 million payable to IBM at market terms and conditions, maturing in April 1998. Included in long-term debt at March 31, 1998, were $368.7 million, $179.7 million, and $138.7 million payable to IBM at market terms and conditions, maturing on August 21, 2000, February 26, 2001, and November 26, 2001, respectively. At March 31, 1998, the Company had available $4.6 billion of a shelf registration with the Securities and Exchange Commission (SEC) for the issuance of debt securities. On January 12, 1998, the Company's registration of an additional $5.0 billion of debt securities was filed with the SEC. Currently, the Company has avialable a total of $4.3 billion on the shelf registration with the SEC for the issuance of debt securities. This allows the Company rapid access to domestic financial markets. The Company intends to continue to issue debt securities under this shelf registration. The Company has no firm commitments for the purchase of debt securities that it may issue from the unused portion of this shelf registration. The Company has the option, as approved by the Board of Directors on November 1, 1997, to issue and sell up to $5.0 billion of debt securities in domestic and foreign financial markets through December 31, 1998. Included within this $5.0 billion authorization is the option, together with IBM and IBM International Finance, N.V., to issue and sell debt securities in an aggregate nominal amount of up to 4.0 billion in European Currency Units (ECU), or its equivalent in any other currency. At March 31, 1998, there were 2.2 billion in ECU available for the issuance of debt securities under this program. The Company may issue debt securities over the next nine months under this program depending 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 the ability to use $450.0 million of a separate shelf registration for issuance of asset-backed securities, which a subsidiary of the Company has available. The subsidiary's issuance of any asset-backed securities over the next nine months under this shelf registration is dependent upon 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 also signed master loan agreements providing additional funding flexibility to each other. These agreements allow for short-term (up to 270-day) funding, made available at market terms and conditions, upon the request of either the Company or IBM. The Company had borrowings outstanding under this agreement of $300.1 million and $600.2 million at March 31, 1998 and December 31, 1997, respectively. -9- FINANCIAL CONDITION (Continued) The Company and IBM have signed an additional master loan agreement providing funding flexibility. This agreement allows for long-term funding, made available at market terms and conditions, upon the request of the Company. These financing sources, along with the Company's internally generated cash, medium-term note and commercial paper programs, provide flexibility to the Company to grow its lease, working capital financings and loan portfolio, 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 $898.3 million to $1,626.1 million at March 31, 1998, from $2,524.5 million at December 31, 1997. This decline was primarily attributable to a $761.0 million decrease in the amount payable for capital equipment purchases during the first three months of 1998. Total stockholder's equity at March 31, 1998, was $1,719.6 million, up $50.7 million from year-end 1997. The increase in stockholder's equity reflects net earnings of $75.7 million for the first three months of 1998, offset by the payment of $25.0 million in cash dividends to IBM during the first quarter of 1998. At March 31, 1998, the Company's debt to equity ratio was 6.4:1, compared with 6.6:1 at December 31, 1997. TOTAL CASH PROVIDED BEFORE DIVIDENDS Total cash used before dividends was $133.7 million for the three months ended March 31, 1998, compared with total cash provided before dividends of $108.2 million for the same 1997 period. Total cash used before before dividends reflects $159.9 million of cash provided by investing an financing activities before dividends, offset by $293.6 million of cash used in operating activities for the first three months of 1998. For the three months ended March 31, 1997, total cash provided before dividends reflected $481.0 million of cash provided by investing and financing activities before dividends, offset by $372.8 million of cash used in operating activities. Cash and cash equivalents at March 31, 1998, totaled $633.8 million, a decrease of $158.7 million, compared with the balance at December 31, 1997. RESULTS OF OPERATIONS INCOME FROM LEASES Income from leases increased 19 percent to $166.8 million for the three months ended March 31, 1998, from $139.8 million for the same 1997 period. The growth in capital equipment financings for end users during 1997 -10- FINANCIAL CONDITION (Continued) contributed to the overall increase in income from leases. Income from leases includes lease income resulting from remarketing transactions. Lease income from remarketing transactions was $41.3 million for the three months ended March 31, 1998, relatively flat compared to the same 1997 period. On a periodic basis, the Company reassesses the future residual values of its portfolio of leases. In accordance with generally accepted accounting principles, anticipated increases in specific future residual values may not be recognized before realization and are thus a source of potential future profits. Anticipated decreases in specific future residual values, that are considered to be other than temporary, must be recognized currently. A review of the Company's $1,119.1 million residual value portfolio at March 31, 1998, 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. To recognize decreases in the expected future residual value of specific leased equipment, the Company recorded a $9.3 million reduction to income from leases during the first quarter of 1998, compared with a $2.4 million reduction to income from leases during the first quarter of 1997. INCOME FROM WORKING CAPITAL FINANCING Income from working capital financing increased 15 percent to $66.2 million for the three months ended March 31, 1998, compared with the same 1997 period. This increase is primarily the result of higher average working capital financing receivable balances during the first quarter of 1998, compared with the same 1997 period. INCOME FROM LOANS Income from loans increased 25 percent to $49.8 million for the three months ended March 31, 1998, compared with the respective 1997 period. This increase resulted from higher average asset balances, which in turn were primarily due to an increase in financing originated for software and services during 1997 and the first three months of 1998. EQUIPMENT SALES Equipment sales amounted to $109.8 million for the three months ended March 31, 1998, compared with $86.7 million for the same 1997 period. Contributing to this increase in equipment sales is the growth of equipment remarketed as sales, rather than as operating leases. The revenue associated with outright sales and sales-type leases is included in equipment sales. Company-owned equipment may be sold or released to existing lessees or, when equipment is returned, to new users of that equipment. Gross profit on equipment sales for the three months ended March 31, 1998 was $15.3 million, an increase of 35 percent, compared with $11.3 million for the same 1997 period. The gross profit margin for first quarter of 1998 increased to 13.9 percent, compared with 13.0 percent for the same -11- EQUIPMENT SALES (Continued) 1997 period. The mix of products available for sale and changing market conditions for certain used equipment during the applicable periods are factors contributing to the changes in gross profit margin. INCOME FROM FACTORED IBM RECEIVABLES: Income from factored IBM receivables was $15.3 million for the three months ended March 31, 1998. The Company did not enter into any factoring transactions during the three months ended March 31, 1997. Refer to Accounts Receivable Purchases within Related Company Transactions in the Notes to Consolidated Financial Statements on page 6 for additional details. OTHER INCOME Other income decreased 42 percent to $24.4 million for the three months ended March 31, 1998, compared with $41.9 million for the same 1997 period. The overall decrease in other income is primarily due to the sale of restricted securities during the three months ended March 31, 1997, which did not recur during the same 1998 period. The decrease in other income is also attributable to a decline in the fees for the servicing of IBM financing receivables sold, resulting from a decrease in the securitized asset portfolios during the three months ended March 31, 1998, as compared to the same 1997 period. INTEREST EXPENSE As a result of the growth in capital equipment and working capital financings originated and factoring of IBM customer receivables, the Company has experienced an increase in the average outstanding debt balance. This increase in the average outstanding debt balance resulted in a 38 percent growth in interest expense to $156.2 million for the three months ended March 31, 1998, compared with the same 1997 period. The Company's year-to-date average cost of debt through March 31, 1998, of 5.6 percent, is flat compared to the same 1997 period. SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES Selling, general, and administrative expenses were $49.7 million for the three months ended March 31, 1998, compared with $52.0 million for the same 1997 period. This decrease is mainly due to reductions of the Company's resources during 1997 and the first three months of 1998, resulting in a decrease in compensation related expenses. PROVISION FOR RECEIVABLE LOSSES The Company's portfolio of capital equipment leases and loans is predominantly with investment grade customers. The Company generally retains ownership or takes a security interest in any underlying equipment financed. The Company provides for receivable losses at the time financings are originated and from time to time for capital equipment as conditions -12- PROVISION FOR RECEIVABLE LOSSES (Continued) warrant. The portfolio is diversified by geography, industry, and individual unaffiliated customer. The Company provides for working capital financing receivable losses on the basis of actual collection experience and estimated collectibility of the related financing receivables. With the continued growth of the Company's working capital financing business in 1997 and the first three months of 1998, and with the continuation of the trend toward consolidation in this industry segment, the concentration of such financings for certain large dealers and remarketers of information industry products is significant. At March 31, 1998, and December 31, 1997, approximately 66 percent and 62 percent, respectively, of working capital financing receivables outstanding were concentrated in ten working capital accounts. The Company's working capital financing business is predominantly with non-investment grade customers. Such financing receivables are typically collateralized by the inventory and accounts receivable of the dealers and remarketers. The Company did not experience material losses in 1997 or the first three months of 1998. The Company does not believe that there is a risk of loss in this area that would have a material impact on its financial position or results of operations. The provision for receivable losses increased by $12.2 million for the quarter ended March 31, 1998, compared with the same 1997 period. The increase in the provision for receivable losses was the result of declines, during the quarter ended March 31, 1997, in specific reserves which were no longer necessary due to additional collateral acquired for certain working capital financing receivables. The Company continues to effectively manage credit risk and contain losses. INCOME TAXES Income taxes decreased 4 percent to $49.2 million for the three months ended March 31, 1998, from $51.5 million for the same period in 1997. The decline in the provision for income taxes is due to the decrease in pre-tax earnings for the three months ended March 31, 1998. RETURN ON AVERAGE EQUITY The results for the first three months of 1998 yielded an annualized return on average equity of 17.9 percent, compared with 22.1 percent for the first three months of 1997. 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 contribute to the growth and stability of IBM earnings. -13- FORWARD LOOKING STATEMENTS Except for the historical information and discussions contained herein, statements contained in this 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 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 customer; the Company's associated collection and asset management efforts; the Company's determination of residual values; currency fluctuations on the associated debt and liabilities; changes 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 Securities and Exchange Commission. -14- Part II - Other Information ___________________________ Item 1. Legal Proceedings __________________________ None material. Item 6(b). Reports on Form 8-K _______________________________ A Form 8-K dated January 12, 1998, was filed with respect to the Company's Registration Statement No. 333-42755 on Form S-3, relating to $5,000,000,000 aggregate principal amount of debt securities of the Registrant. A Form 8-K dated January 20, 1998, was filed with respect to the Company's financial results for the period ended December 31, 1997. 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: May 14, 1998 By: /s/ Kimberly A. Kispert _________________ ___________________________ (Kimberly A. Kispert) Vice President, Finance and Chief Financial Officer -15- EX-27 2 ITEM 601-27
5 EXHIBIT V _________ FINANCIAL DATA SCHEDULE _______________________ THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM IBM CREDIT CORPORATION'S CONSOLIDATED FINANCIAL STATEMENTS AT AND FOR THE THREE MONTHS ENDED MARCH 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1998 MAR-31-1998 633,756 103,585 5,800,107 0 0 0 0 0 15,652,966 0 0 457,411 0 0 1,262,228 15,652,966 109,829 432,371 94,534 94,534 49,657 7,119 156,161 124,900 49,210 75,690 0 0 0 75,690 0 0
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