-----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, GABEf0ZJPHFP9oIwSrLs7Hc1qFvoMp03e12jBU3ndsNKg3fZLbIpI++CjK6OwB22 1CpHrERV6zYcoHZIXuhQ4A== 0000353524-02-000025.txt : 20021104 0000353524-02-000025.hdr.sgml : 20021104 20021104164737 ACCESSION NUMBER: 0000353524-02-000025 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021104 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: 02808617 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 q302final1101v1edgar.txt 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 September 30, 2002 Commission file number 1-8175 __________________________________ IBM CREDIT CORPORATION ______________________________________________________ (Exact name of registrant as specified in its charter) Delaware 22-2351962 ____________________ ______________________ (State or other (I.R.S. Employer jurisdiction of Identification No.) incorporation or organization)
North Castle Drive, MS NCA-306, Armonk, New York 10504-1785 ________________________________________ (Address of principal executive offices) (Zip Code) (914) 765-1900 ____________________________________________________ (Registrant's telephone number, including area code) 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 proceeding 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 September 30, 2002, there were 936 shares of capital stock, par value $1.00 per share, all held by International Business Machines Corporation. Aggregate market value of the voting stock held by nonaffiliates of the registrant at September 30, 2002: 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. Consolidated Financial Statements: Consolidated Statement of Financial Position at September 30, 2002 and December 31, 2001 1 Consolidated Statement of Earnings for the three and nine months ended September 30, 2002 and 2001 2 Consolidated Statement of Cash Flows for the nine months ended September 30, 2002 and 2001 3 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 4. Controls and Procedures 19 Part II - Other Information 20 IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Dollars in thousands) At At September December 30, 31, 2002 2001 ___________ ___________ ASSETS: (Unaudited) Cash and cash equivalents $ 940,578 $ 535,037 Investment in capital leases, net 4,733,322 5,253,317 Equipment on operating leases,net 1,888,579 2,136,954 Loans receivable, net 3,108,825 3,875,800 Working capital financing receivables, net 1,756,761 2,514,903 Factored IBM receivables, net 401,259 438,540 Other assets 408,832 554,986 ____________ ___________ Total Assets $13,238,156 $15,309,537 ============ =========== LIABILITIES AND STOCKHOLDER'S EQUITY: LIABILITIES Short-term debt $ 1,530,603 $ 2,332,375 Short-term debt - IBM 6,257,225 5,213,194 Due to IBM and affiliates 1,190,143 2,017,221 Interest and other accruals 305,712 306,795 Deferred income taxes 926,987 977,773 Long-term debt 2,078 47,333 Long-term debt - IBM 1,615,100 2,875,100 ____________ ___________ Total Liabilities 11,827,848 13,769,791 ____________ ___________ Stockholder's Equity: Capital stock, class A, par value $1.00 per share Shares authorized: 10,000 Shares issued and outstanding: 936 in 2002 and 2001 457,411 457,411 Accumulated other comprehensive loss (12) (1,218) Retained earnings 952,909 1,083,553 ____________ ___________ Total Stockholder's Equity 1,410,308 1,539,746 ____________ ___________ Total Liabilities and Stockholder's Equity $13,238,156 $15,309,537 ============ =========== The accompanying notes are an integral part of this statement.
IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF EARNINGS (Unaudited) (Dollars in thousands) Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 _________ ________ _________ __________ FINANCE AND OTHER INCOME: Income from leases: Capital leases $105,302 $121,088 $ 331,086 $ 356,441 Operating leases, net of depreciation 118,255 147,296 356,474 396,877 _________ ________ _________ __________ 223,557 268,384 687,560 753,318 _________ ________ _________ __________ Income from loans 56,909 53,159 198,236 222,460 Income from working capital financing 32,596 47,332 106,069 166,613 Equipment sales 163,174 114,576 383,152 381,868 Income from factored IBM receivables 5,263 7,179 16,441 10,042 Other income 5,133 15,229 4,160 12,283 Total finance income_________ ________ _________ __________ and other income 486,632 505,859 1,395,618 1,546,584 _________ ________ _________ __________ COST AND EXPENSES: Interest 74,128 126,291 243,057 422,751 Cost of equipment sales 124,743 95,017 304,697 309,396 Selling, general and administrative 69,807 74,226 211,346 207,790 Provision for receivable losses 113,575 24,630 258,039 78,474 __________ ________ _________ _________ Total cost and expenses 382,253 320,164 1,017,139 1,018,411 __________ ________ _________ _________ EARNINGS BEFORE INCOME TAXES 104,379 185,695 378,479 528,173 Provision for income taxes 41,126 73,030 149,123 207,966 __________ ________ _________ _________ NET EARNINGS $ 63,253 $112,665 $ 229,356 $ 320,207 ========== ======== ========= ========= The accompanying notes are an integral part of this statement.
IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (Dollars in thousands) Nine Months Ended September 30, 2002 2001 ___________ _____________ CASH FLOW FROM OPERATING ACTIVITIES: Net earnings $ 229,356 $ 320,207 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 961,018 1,210,782 Provision for receivable losses 258,039 78,474 (Decrease) increase in deferred income taxes (50,786) 57,499 Decrease in interest and other accruals (1,083) (194,952) Proceeds from sale of equipment, net of gross profit 311,389 311,400 Decrease in amounts due IBM and affiliates (827,078) (485,506) Decrease in deferred assets 1,842 66,981 Decrease in miscellaneous 110,618 122,945 receivables Other, net 8,217 69,617 ____________ ____________ Cash provided by operating operating activities 1,001,532 1,557,447 ____________ ____________ CASH FLOW FROM INVESTING ACTIVITIES: Investment in capital leases (1,615,402) (2,291,168) Collections of capital leases, net of income earned 1,958,849 1,958,065 Investment in equipment on operating leases (846,097) (818,199) Investment in loans receivable (1,210,554) (1,542,597) Collections of loans receivable, net of interest earned 1,723,692 1,861,690 Collections of working capital financing receivables, net 577,224 511,885 Purchase of factored IBM receivables (2,602,635) (1,960,164) Collections of IBM factored receivables, net of income earned 2,636,153 1,549,170 Proceeds from sale of selected working capital financing receivables 75,564 - Other, net 128,223 1,992 ____________ ____________ Cash provided by (used in) investing activities 825,017 (729,326) ____________ ____________
IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (Continued) (Dollars in thousands) Nine Months Ended September 30, 2002 2001 _____________ ______________ CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt 594,100 2,100,100 Repayment of debt with original maturities of one year or more (1,875,186) (3,233,799) Issuance of debt with original maturities within one year, net 220,078 471,048 Cash dividends paid to IBM (360,000) (518,000) ______________ ______________ Cash used in financing activities (1,421,008) (1,180,651) ______________ ______________ Change in cash and cash equivalents 405,541 (352,530) Cash and cash equivalents, January 1 535,037 951,490 ______________ ______________ Cash and cash equivalents, September 30 $ 940,578 $ 598,960 ============== ============== The accompanying notes are an integral part of this statement.
IBM CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - 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 nine-month periods are reflected in the unaudited interim financial statements presented. These adjustments are of a normal recurring nature. NOTE 2 - 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 $333.1 million and $252.9 million of such financings during the nine months ended September 30, 2002, and 2001, respectively. At September 30, 2002, and December 31, 2001, $1,231.0 million and $1,134.1 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 $130.0 million and $144.7 million for the first nine months of 2002, and 2001, 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 $61.0 million and $63.3 million of fee income earned from IBM for the nine months ended September 30, 2002, and 2001, respectively. The Company sells used equipment to IBM at the conclusion of IBM's lease or from the Company's inventory. For the nine months ended September 30, 2002, and 2001, the Company's sales of equipment to IBM amounted to $94.7 million and $121.0 million, respectively. IBM Credit International Factoring Corporation (ICIFC), a subsidiary of the Company, has entered into factoring agreements with selected IBM subsidiaries. Under these agreements, ICIFC will periodically purchase, without recourse, all the rights, title and interest to certain outstanding IBM customer receivables. During the nine months ended September 30, 2002, and December 31, 2001, the Company acquired IBM customer receivables having a notional value of $2,616.9 million and $2,966.6 million, for $2,602.6 million and $2,948.7 million, respectively. 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 the Company. At September 30, 2002, and December 31, 2001, the Company had $3,817.2 million and $3,238.2 million, respectively, of borrowings outstanding under this agreement. NOTE 2 - RELATED COMPANY TRANSACTIONS (Continued): 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 September 30, 2002, and December 31, 2001, the Company had $4,055.1 million and $4,850.1 million, respectively, of borrowings outstanding under this agreement. Long-term debt-IBM of $1,615.1 million at September 30, 2002, is payable at market terms and conditions and has maturity dates ranging from December 22, 2003 to July 30, 2007. Interest expense of $188.5 million and $225.1 million was incurred on loans from IBM and affiliates during the nine months ended September 30, 2002, and 2001, 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 $76.9 million and $71.5 million for the nine months ended September 30, 2002, and 2001, respectively, and are included in selling, general and administrative expenses. NOTE 3 - OTHER COMPREHENSIVE INCOME: The following table summarizes the components of comprehensive income: Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 ________ _________ ________ ________ Net earnings $63,253 $112,665 $229,356 $320,207 Other comprehensive income (loss): Deferred gains (losses) from cash flow hedges, net of tax 317 (184) 1,206 (1,838) Unrealized (losses) gains On marketable securities, - (28) - 17 net of tax _________ _________ ________ ________ Other comprehensive income (loss) 317 (212) 1,206 (1,821) _________ _________ ________ ________ Comprehensive income $63,570 $112,453 $230,562 $318,386 ========= ========= ======== ========
NOTE 4 - 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 syndicated loans. There are two types of syndicated loans: those in which the Company has purchased a fixed percentage of a specific customer's loan facility from a bank or other lending institution; and those in which the Company is part of a lending group that originates the loan. In both cases, the Company 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 income taxes. The following schedules represent disaggregated income and expense information for both segments. There are no intersegment transactions. For the three months ended September 30: (Dollars in thousands) Customer Commercial 2002 Financing Financing Total ________________________________ ___________ ____________ __________ Finance and other income $ 438,589 $ 37,208 $ 475,797 Interest expense $ 65,989 $ 5,507 $ 71,496 Earnings before income taxes $ 167,793 $ (70,856) $ 96,937 2001 Finance and other income $ 420,665 $ 59,266 $ 479,931 Interest expense $ 104,210 $ 16,992 $ 121,202 Earnings before income taxes $ 146,448 $ 20,813 $ 167,261
NOTE 4 - SEGMENT REPORTING (Continued): (Dollars in thousands) For the nine months ended September 30: Customer Commercial 2002 Financing Financing Total ___________________________ ___________ ____________ ______________ Finance and other income $1,249,609 $ 123,658 $ 1,373,267 Interest expense $ 215,303 $ 19,055 $ 234,358 Earnings (loss) before income taxes $ 510,876 $(142,478) $ 368,398 2001 Finance and other income $1,312,850 $ 207,113 $ 1,519,963 Interest expense $ 344,460 $ 65,296 $ 409,756 Earnings before income taxes $ 437,197 $ 78,912 516,109 At September 30, 2002: ___________________________ Assets $9,610,920 $2,133,651 $11,744,571 At December 31, 2001: ___________________________ Assets $10,860,545 $3,199,506 $14,060,051
SEGMENT REPORTING (Continued): 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: (Dollars in thousands) Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 _________ ________ ___________ ___________ Finance and Other Income: Total finance and other income for reportable segments $475,797 $479,931 $1,373,267 $1,519,963 Other finance and 10,835 25,928 22,351 26,621 other income _________ ________ ___________ ___________ Total consoldated finance and other income $486,632 $505,859 $1,395,618 $1,546,584 ========= ======== =========== =========== Interest expense: Total interest expense for reportable segments $ 71,496 $121,202 $ 234,358 $ 409,756 Other interest expense 2,632 5,089 8,699 12,995 Total consolidated _________ ________ ___________ ___________ interest expense $ 74,128 $126,291 $ 243,057 $ 422,751 ========= ======== =========== =========== Earnings Before Income Taxes: Total earnings before income taxes for reportable segments $ 96,937 $167,261 $ 368,398 $ 516,109 Other earnings (loss) before income taxes 7,442 18,434 10,081 12,064 Total consolidated earnings before _________ ________ ___________ ___________ income taxes $104,379 $185,695 $ 378,479 $ 528,173 ========= ======== =========== ===========
SEGMENT REPORTING (Continued): At At September December 30, 31, 2002 2001 ___________ _____________ Assets: Total assets for reportable segments $11,744,571 $14,060,051 Other assets 1,493,585 1,249,486 ___________ _____________ Total consolidated assets $13,238,156 $15,309,537 =========== =============
For the three months ended September 30, 2002, and 2001, IBM accounted for $128.9 million and $101.4 million, respectively, of the Company's consolidated finance and other income. For the nine months ended September 30, 2002, and 2001, IBM accounted for $304.9 million and $340.5 million, respectively, of the Company's consolidated finance and other income. The Company's business is conducted principally in the United States; foreign operations are not material. IBM CREDIT CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Net earnings for the three months ended September 30, 2002, were $63.3 million. Net earnings for the nine months ended September 30, 2002, were $229.4 million, yielding an annualized return on average equity of 20.3 percent. Net earnings for the three and nine month periods ended September 30, 2001, were $112.7 million and $320.2 million, respectively. The annualized return on average equity of the nine months ended September 30, 2001, was 23.6 percent. FINANCING ORIGINATED For the three months ended September 30, 2002, the Company originated customer equipment financing for end users of $1,174.2 million, a 15 percent decrease from $1,380.3 million for the same period of 2001. For the nine months ended September 30, 2002, the Company originated customer equipment financing for end users of $4,053.7 million, a 12 percent decrease from $4,619.0 million for the nine months ended September 30, 2001. The decrease in customer equipment financing originated is related to the decrease in demand for advanced information processing products caused by the current economic environment. Customer financing originations for end users included purchases of $1,972.3 million of information handling systems from IBM, consisting of $1,410.7 million for capital leases and $561.6 million for operating leases. In addition, customer financing originations for end users included the following: (1) financing for IBM software and services of $1,108.8 million; (2) financings of $489.2 million, which includes IBM and non-IBM equipment and software and services to meet IBM customers' total solution requirements; (3) installment and lease financing of $408.9 million, managed by the Company for the account of IBM; and (4) financing originated for installment receivables for IBM information handling systems of $74.5 million. 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 three months ended September 30, 2002, originations of working capital financing for dealers and remarketers of information industry products decreased by 6 percent to $2,569.7 million, compared with $2,740.7 million for the same period of 2001. For the nine months ended September 30, 2002, originations of working capital financing for dealers and remarketers of information industry products decreased by 10 percent to $7,531.1 million, compared with $8,391.6 million for the nine months ended September 30, 2001. The decline in working capital financing originations reflects volume decreases in non-IBM products for remarketers financed by the Company in 2002. FINANCING ORIGINATED (Continued) Working capital financing receivables arise primarily from secured financing for dealers and remarketers of IBM and non-IBM products. Payment terms for 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 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. For the three months ended September 30, 2002, the remarketing activities contributed $109.2 million to pretax earnings, a increase of 4 percent compared with $104.7 million for the same period of 2001. For the nine months ended September 30, 2002, the remarketing activities contributed $319.6 million to pretax earnings, an increase of 5 percent compared with $303.5 million for the same period of 2001. These increases are primarily due to an increase in sales in addition to a decrease in write-downs on returns of leased equipment. At September 30, 2002, the investment in remarketed equipment on capital and operating leases totaled $228.1 million, compared with 2001 year-end investment of $269.5 million. FINANCIAL CONDITION ASSETS Total assets decreased to $13,238.2 million at September 30, 2002, compared with $15,309.5 million at December 31, 2001. This decrease is attributable to a decrease in the Company's lease, loan, working capital financing and factored IBM receivables portfolios, due to declining volumes and the traditional seasonality of IBM's business. These decreases were offset by an increase in cash and cash equivalents. Included in the Company's total assets, were residual values of $943.2 million and $983.2 million at September 30, 2002 and December 31, 2001, respectively. As a percentage of the original amount financed, total residual values remained flat at 7 percent as of September 30, 2002 and December 31, 2001. LIABILITIES AND STOCKHOLDER'S EQUITY The assets of the Company were financed with $9,405.0 million of debt at September 30, 2002. Total short-term and long-term debt decreased by approximately $1,063.0 million, from $10,468.0 million at December 31, 2001. This decrease was the result of decreases in short-term debt of $801.7 million, long-term debt of $45.3 million and long-term debt payable to IBM of $1,260.0 million, offset by an increase in short-term debt payable to IBM of $1,044.0 million. FINANCIAL CONDITION (Continued) At September 30, 2002, the Company had available $9.8 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 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 (EMTN) in an aggregate amount of up to Euro 8.0 billion, or its equivalent in any other currency. At September 30, 2002, there was Euro 4.7 billion available for the issuance of debt securities under this program. The Company had no debt outstanding under this program as of September 30, 2002. The Company may issue debt securities, dependent on prevailing market conditions and its need for such funding. The Company is an authorized borrower under IBM's $12.0 billion 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 master loan agreements for both short- term and long-term funding. At September 30, 2002, and December 31, 2001, the Company had $7,872.3 million and $8,088.3 million, respectively, of borrowings outstanding under this agreement. Refer to Note 2, Related Company Transactions in the Notes to the Consolidated Financial Statements for additional details. 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. The Company periodically pays dividends to IBM in order to maintain its capital structure at appropriate levels. 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, software license fees and services and factored IBM receivables. Also included in amounts due to IBM and affiliates are amounts due to IBM for services received from IBM under the intercompany operating agreement, as well as income taxes currently payable under the intercompany tax allocation agreement. Amounts due to IBM and affiliates decreased by approximately $827.1 million to $1,190.1 million at September 30, 2002, from $2,017.2 million at December 31, 2001. This decrease was primarily attributable to a decrease in the amount payable for equipment purchased for term leases, working capital financing receivables and income taxes. The Company's debt to equity ratio was 6.7:1 at September 30, 2002, and 6.8:1 at December 31, 2001. FINANCIAL CONDITION (Continued) The Company has guaranteed certain loans and financial commitments. These financial guarantees amounted to $73.1 million and $96.4 million, at September 30, 2002, and December 31, 2001, respectively. The Company has approved but unused working capital lines of credit available to customers which amounted to $1,642.7 million and $2,500.5 million at September 30, 2002, and December 31, 2001, respectively. Additionally, the Company committed to provide future financing to its customers in connection with customer purchase agreements for approximately $254.3 million and $269.0 million at September 30, 2002, and December 31, 2001, respectively. The table below summarizes the Company's contractual obligations and financing commitments as of September 30, 2002, and their expiration dates: (Dollars in millions) Balance Amounts expiring in: as of September 30, 2002 2002 2003-04 2005-06 After 2006 ___________ _______ _________ ________ __________ Long-term debt $ 1,617.2 $ - $1,202.2 $ 390.0 $ 25.0 Unused lines of credit 1,642.7 735.0 621.1 128.5 158.1 Financial guarantees 73.1 24.4 48.7 - - Other financing commitments 254.3 38.7 175.8 39.8 - ___________ _______ _________ ________ __________ Total $ 3,587.3 $798.1 $2,047.8 $ 558.3 $183.1 =========== ======== ========== ========= ===========
TOTAL CASH PROVIDED BEFORE DIVIDENDS Total cash provided before dividends was $765.5 million for the nine months ended September 30, 2002, compared with $165.5 million for the same period of 2001. For the nine months ended September 30, 2002, total cash provided before dividends reflects $1,001.5 million of cash provided by operating activities and $236.0 million of cash used by investing and financing activities before dividends. For the first nine months of 2001, total cash provided before dividends reflected $1,557.4 million of cash provided by operating activities, offset by $1,392.0 million of cash used in investing and financing activities before dividends. Cash and cash equivalents at September 30, 2002, totaled $940.6 million, an increase of $405.5 million, compared with the balance at December 31, 2001. RESULTS OF OPERATIONS INCOME FROM LEASES Income from leases decreased 17 percent to $223.6 million for the third quarter of 2002, from $268.4 million for the third quarter of 2001. Income from leases decreased 9 percent to $687.6 million for the first nine months of 2002, from $753.3 million for the first nine months of 2001. Income from leases includes lease income resulting from remarketing transactions. Lease income from remarketing transactions was $70.7 million for the third quarter of 2002, a decrease of 17 percent from $85.5 million for the same period of 2001. For the first nine months of 2002, lease income from remarketing transactions was $241.2 million, an increase of 3 percent from $234.2 million for the same period of 2001. Lower average lease yields and lower volumes contributed to the overall decrease in lease income for the three- and nine-month periods ended September 30, 2002. On a periodic basis, the Company reassesses the future residual values of its portfolio of leases. 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 $943.2 million residual value portfolio at September 30, 2002, indicated that the overall estimated future value of the portfolio continues to be greater than the value currently recorded, which is the lower of the Company's cost or net realizable value. The Company will record write- downs to recognize decreases in expected future residual values of its leased equipment, when necessary. The Company recorded $0 million and $1.4 million of such write-downs during the three and nine months ended September 30, 2002, respectively. The Company did not record any write-downs to its residual value portfolio during the nine months ended September 30, 2001. INCOME FROM LOANS Income from loans increased 7 percent to $56.9 million for the three months ended September 30, 2002, compared with $53.2 million for the same period of 2001. For the nine months ended September 30, 2002, income from loans decreased 11 percent to $198.2 million, compared with $222.5 million for the same period of 2001. The decrease for the nine months ended September 30, 2002 was primarily due to lower average loan balances, which were due to the decline in financing originated for software and services, a decline in yields and lower syndicated loan income. INCOME FROM WORKING CAPITAL FINANCING Income from working capital financing decreased 31 percent to $32.6 million for the third quarter of 2002, compared with $47.3 million for the third quarter of 2001. For the first nine months of 2002, income from working capital financing decreased 36 percent to $106.1 million, compared with $166.6 million for the same period of 2001. This decrease is due to a decline in fee income earned from inventory financing and interest income from dealer financing due to lower originations. Additionally, a decrease of $12.9 million in income from revolving syndicated loans contributed to the overall decline in income from working capital financing receivables for the nine months ended September 30, 2002. RESULTS OF OPERATIONS (Continued) EQUIPMENT SALES Equipment sales amounted to $163.2 million for the third quarter of 2002, compared with $114.6 million for the third quarter of 2001. For the nine months ended September 30, 2002, equipment sales amounted to $383.2 million, compared with $381.9 million for the same period of 2001. Gross profit on equipment sales for the third quarter of 2002 was $38.4 million, compared with $19.6 million for the same period of 2001. Gross profit on equipment sales for the nine months ended September 30, 2002 was $78.5 million, compared with $72.5 million for the same period of 2001. The gross profit margin for the third quarter of 2002 increased to 24 percent, compared with 17 percent for the same period of 2001. For the nine months ended September 30, 2002, the gross profit margin increased to 21 percent, compared with 19 percent for the same period of 2001. The mix of products available for sale and changing market conditions for certain used equipment during the nine months ended September 30, 2002 contributed to the increases in sales, gross profit and gross profit margins, compared with the same period of 2001. INCOME FROM FACTORED IBM RECEIVABLES Income from factored IBM receivables decreased to $5.3 million, compared with $7.2 million for the third quarter of 2001 as a result of lower IBM volumes. For the nine months ended September 30, 2002, income from factored IBM receivables amounted to $16.4 million, compared with $10.0 million for the same 2001 period. In May 2001, the Company resumed the factoring of selected IBM receivables. Refer to Note 2, Related Company Transactions in the Notes to the Consolidated Financial Statements for additional details. OTHER INCOME Other income was $5.1 million and $15.2 million for the three months ended September 30, 2002 and 2001, respectively. Other income was $4.2 million and $12.3 million for the nine months ended September 30, 2002 and 2001, respectively. The decrease was primarily attributable to a litigation settlement received in 2001 of approximately $18.3 million. INTEREST EXPENSE Interest expense decreased 41 percent to $74.1 million for the third quarter of 2002, compared with $126.3 million for the same period of 2001. Interest expense decreased 43 percent to $243.1 million for the nine months ended September 30, 2002, compared with $422.8 million for the same period of 2001. This decrease is due to a decline in interest rates and in the Company's average debt balance outstanding. The Company's average cost of debt for the nine months ended September 30, 2002 decreased to 3.7 percent, from 5.5 percent for the same period of 2001. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative expense decreased 6 percent to $69.8 million for the third quarter of 2002, compared with $74.2 million for the third quarter of 2001 primarily due to lower compensation costs. For the nine months ended September 30, 2002, selling, general and administrative expenses increased 2 percent to $211.3 million, compared with $207.8 million for the same period of 2001. This increase is attributable to an increase in the expense allocation the Company receives from IBM. Refer to Note 2, Related Company Transactions in the Notes to the Consolidated Financial Statements for additional details. The Company incurred $3.2 million related to workforce reductions for the nine-month period ended September 30, 2002. 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'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. With the continued trend toward consolidation in this industry, the concentration of such financings for certain large dealers and remarketers of information industry products remains significant. At September 30, 2002, and December 31, 2001, approximately 49 percent and 42 percent, respectively, of the working capital financing receivables outstanding were concentrated in ten working capital accounts. As of September 30, 2002, the Company's allowance for receivable losses of $287.2 million represented management's best estimate of probable losses inherent in its portfolios. This allowance consisted of $207.4 million allocated to specific accounts and $79.8 million that was unallocated. As of December 31, 2001, the Company's allowance for receivable losses of $180.4 million consisted of $104.8 million that was allocated to specific accounts and $75.6 million that was unallocated. While the overall asset quality of the portfolio has remained relatively stable, the Company continues to pay particular attention to areas of potential risk, which includes exposure to the telecom industry. As a result of the deterioration of the financial condition of certain companies in this and other industries, the Company recorded additional specific reserves which were based upon estimates of collectibility and recovery, including collateral. In addition, certain loans have been placed on nonaccrual status and are being closely monitored by management. The overall provision for receivable losses increased to $113.6 million for the three months ended September 30, 2002, compared with $24.6 million for the same period of 2001. For the nine months ended September 30, 2002, the provision for receivable losses increased to $258.0 million, compared with $78.5 million for the same period of 2001. The increase in the provision for receivable losses is primarily attributable to the matters referred to above. PROVISION FOR RECEIVABLE LOSSES (Continued) For the three months ended September 30, 2002, and 2001, the Company's write-offs amounted to $74.6 million and $21.7 million, respectively. For the nine months ended September 30, 2002, and 2001, the Company's write-offs amounted to $151.2 million and $43.1 million, respectively. The increase in write-offs for the three- and nine-month periods ended September 30, 2002, relates primarily to specific reserves required as a result of the continuous decline in market conditions. Specific reserve requirements have been concentrated among companies in the telecommunications industry. Write-offs for the three- and nine- months periods ended September 30, 2002, and 2001, have been consistent with the Company's expected estimates of collectibility. INCOME TAXES The company's effective tax rate has remained relatively constant at approximately 39 percent. The rate for the third quarter of 2002 was 39.4 percent versus 39.3 percent for the same period in 2001, and the rate for the first nine months of 2002 and for the comparable period in 2001 was 39.4 percent. RETURN ON AVERAGE EQUITY The results for the nine months ended September 30, 2002, yielded an annualized return on average equity of 20.3 percent, compared with 23.6 percent for the same period of 2001. 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, all of which contribute to the growth and stability of IBM earnings. 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 recoverability of recorded residual values; currency fluctuations on the Company's assets; 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; and 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. Item 4. Controls and Procedures Based on their evaluation of the Company's disclosure controls and procedures as of a date within 90 days of the filing of this Report, the President and Vice President, Finance have concluded that such controls and procedures are effective. There were no significant changes in the Company's internal controls or in other factors that could significantly affect such controls subsequent to the date of their evaluation. Part II - Other Information Item 1. Legal Proceedings None material. Item 6. Exhibits and Reports on Form 8-K (a). Exhibits Exhibit 99.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002 Exhibit 99.2 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002 Exhibit 99.3 Certification Pursuant To 13A-14 or 15D-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of The Sarbanes-Oxley Act Of 2002 Exhibit 99.4 Certification Pursuant To 13A-14 or 15D-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of The Sarbanes-Oxley Act Of 2002 (b). Reports on Form 8-K A Form 8-K dated July 17, 2002, was filed with respect to the Company's financial results for the period ended June 30, 2002. 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: November 4, 2002 By: /s/ James Boyken __________________________ (James Boyken) Vice President, Finance Exhibit 99.1 CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Mark Loughridge, certify that: 1. I have reviewed this quarterly report on Form 10-Q of IBM Credit Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d- 14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: November 4, 2002 By: /s/ Mark Loughridge ___________________________ Mark Loughridge President EXHIBIT 99.2 IBM CREDIT CORPORATION CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of IBM Credit Corporation (the "Company") on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Mark Loughridge, President of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Mark Loughridge ____________________ Mark Loughridge President November 4, 2002 EXHIBIT 99.3 CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, James Boyken, certify that: 1. I have reviewed this quarterly report on Form 10-Q of IBM Credit Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d- 14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: November 4, 2002 By: /s/ James Boyken __________________________ James Boyken Vice President, Finance Exhibit 99.4 IBM CREDIT CORPORATION CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of IBM Credit Corporation (the "Company") on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James Boyken, Vice President, Finance, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ James Boyken ___________________________ James Boyken Vice President, Finance November 4, 2002 -----END PRIVACY-ENHANCED MESSAGE-----