ITEM 1. BUSINESS:
The principal business of IBM Credit Corporation (the Company) is the financing of IBM products and services. All the outstanding capital stock of the Company is owned by International Business Machines Corporation (IBM), a New York corporation. The Company finances the purchase and lease of IBM products and related products and services by customers of IBM in the U.S. and finances inventory and accounts receivable for dealers and remarketers of IBM and non-IBM products and services.
Pursuant to a Support Agreement between IBM and the Company, IBM has agreed to retain 100 percent of the voting capital stock of the Company, unless required to dispose of any or all such shares of stock pursuant to a court decree or order of any governmental authority that, in the opinion of counsel to IBM, may not be successfully challenged. IBM has also agreed to cause the Company to have a tangible net worth of at least $1.00 at all times.
ITEM 2.
ITEM 2. PROPERTIES:
Effective August 1, 1996, the Company relocated its principal executive offices from leased space to an IBM owned facility in White Plains, New York. The executive offices comprise approximately 200,000 square feet of office space. The Company occupies this space under an arrangement with IBM. The Company also maintains offices in Oakbrook, Illinois, under long-term lease.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS:
None material.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
Omitted pursuant to General Instruction J.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS:
All shares of the Company's capital stock are owned by IBM, and accordingly, there is no market for such stock. The Company paid IBM cash dividends of $45,000,000 in 1996 and cash dividends of $145,000,000 and noncash dividends of $1,419,000 in 1995. Dividends are declared by the Board of Directors of the Company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
OVERVIEW
Net earnings for 1996 were $271.1 million, yielding a return on average equity of 20.7 percent, as compared with 1995 net earnings of $230.5 million, yielding a return on average equity of 20.9 percent.
ACQUISITION OF CHRYSLER SYSTEMS INC.
On February 8, 1995, the Company acquired all of the issued and outstanding stock of Chrysler Systems Inc. and certain of its affiliates for $133.5 million. The acquisition was consummated pursuant to a share purchase agreement with certain Chrysler Corporation subsidiaries (the Seller). The purchase price was funded by the Company's cash on hand and credits issued to the Seller that were applied against certain future obligations of the Seller to the Company. IBM CS Systems, as the unit is now known, buys, sells and leases data processing equipment, and provides related technology management services such as equipment procurement and asset management for customers of IBM products and related products and services. The transaction was accounted for as a purchase, and IBM CS Systems is included in the Company's consolidated financial statements from the date of acquisition.
FINANCING ORIGINATED
For the year ended December 31, 1996, the Company originated capital equipment financing for end users of $5,750.4 million, a 28 percent increase from $4,480.7 million for 1995. For the year ended December 31, 1996, originations of working capital financing for dealers and remarketers of information industry products increased by 30 percent to $13,387.0 million, from $10,297.6 million for 1995.
The growth in capital equipment financing originated is related to IBM's increase in placements of its products and services in the United States and an increase in the propensity for customers to finance their acquisitions with the Company throughout 1996, compared with 1995.
Capital equipment financings for end users comprised purchases of $3,439.8 million of information handling systems from IBM, financing for IBM software and services of $1,021.3 million, installment and lease financing for state and local government customers of $410.3 million for the account of IBM, financing originated for installment receivables of $190.2 million and other financing of $688.8 million for IBM equipment, as well as related non-IBM equipment to meet IBM customers' total solution requirements. The purchases of $3,439.8 million from IBM consisted of $1,963.3 million for capital leases and $1,476.5 million for operating leases.
FINANCING ORIGINATED (Continued)
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 both IBM's personal system client products and non-IBM products for remarketers financed by the Company throughout 1996. 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 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 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 are fully integrated in the Company's financial statements. Remarketing activities are comprised of 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.
At December 31, 1996, the investment in remarketed equipment on capital and operating leases totaled $305.3 million, a decrease of 35 percent from the 1995 year-end investment of $470.5 million. For the year ended December 31, 1996, the remarketing activities contributed $149.2 million to pretax earnings, which was relatively flat compared with $150.0 million for 1995. Refer to Equipment Sales in Management's Discussion and Analysis on page 10 for additional details.
ASSETS
Total assets increased to $12.9 billion at December 31, 1996, compared with $11.4 billion at December 31, 1995. This increase is primarily the result of financings originated of $16.9 billion exceeding cash collections of $16.5 billion on capital leases, loans receivable and working capital financing receivables. Additionally, growth of $855.6 million in equipment on operating leases during 1996, offset in part by payments to IBM of cash dividends of $45.0 million and a tax payment of $113.3 million contributed to the year-to-year increase in total assets. Total financing assets serviced by the Company at December 31, 1996, were $12.7 billion, compared with $11.8 billion at December 31, 1995. Total financing assets serviced include the remaining balance of financing
ASSETS (Continued)
receivables securitized and sold ($324.2 million in 1996, $610.1 million in 1995), capital and operating leases ($6,766.2 million in 1996, $5,662.1 million in 1995), loans receivable ($1,846.9 million in 1996, $1,473.8 million in 1995), working capital financing receivables ($2,898.7 million in 1996, $3,158.9 million in 1995), subordinated interests in trusts resulting from the securitization and sale of financing receivables ($37.0 million in 1996, $86.8 million in 1995) and other assets ($44.6 million in 1996, $55.4 million in 1995). Also included in total financing assets serviced are state and local government installment and lease financing receivables of IBM ($805.9 million in 1996, $757.2 million in 1995).
The carrying amount of marketable securities, as reported in the Company's Consolidated Statement of Financial Position, approximates market value. At December 31, 1996, the marketable securities consisted entirely of debt securities, and were available-for-sale.
LIABILITIES AND STOCKHOLDER'S EQUITY
The assets of the Company were financed with $8,082.3 million of debt at December 31, 1996. Total short-term and long-term debt increased by approximately $494.2 million, from $7,588.1 million at December 31, 1995. This increase was the result of increases in commercial paper outstanding of $704.9 million and long-term debt of $400.4 million, offset by the maturity of medium-term notes of $611.1 million. Included in short-term debt at December 31, 1996, was $125.0 million payable to IBM at market terms and conditions, maturing on November 1, 1997. The $125.0 million payable to IBM was included in long-term debt at December 31, 1995.
At December 31, 1996, the Company had available $1.4 billion of a shelf registration with the Securities and Exchange Commission (SEC) for the issuance of debt securities. This shelf registration allows the Company rapid access to domestic financial markets, and 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, 1996, to issue and sell up to $5.0 billion of debt securities in domestic and foreign financial markets through December 31, 1997. 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 3.0 billion in European Currency Units (ECU), or its equivalent in any other currency. At December 31, 1996, there was 2.0 billion in ECU available for the issuance of debt securities under this program. The Company will issue debt securities over the next twelve months under this program, dependent on prevailing market conditions and its need for such funding.
LIABILITIES AND STOCKHOLDER'S EQUITY (Continued)
The Company has the option, as approved by the Board of Directors on November 1, 1996, to sell, assign, pledge or transfer up to $3.0 billion of assets to third parties through December 31, 1999. Included within this $3.0 billion authorization is $450.0 million of a separate shelf registration for issuance of asset-backed securities, which a subsidiary of the Company has available. The subsidiary's intention to issue any asset-backed securities over the next twelve months under this shelf registration is dependent on prevailing market conditions and its need for such funding.
The Company is an authorized borrower of up to $3.0 billion under a $10.0 billion IBM committed global credit facility, and has a liquidity agreement with IBM for $500.0 million. The Company has no borrowings outstanding under the committed global credit facility or the liquidity agreement. The Company and IBM have 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 no borrowings outstanding under this agreement at December 31, 1996. The Company had borrowings outstanding of $214.1 million at December 31, 1995. 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 financings and loan portfolios, to fund working capital requirements and to service debt.
The Company uses agreements related to currencies and interest rates to lower costs of funding its business, to diversify sources of funding, or to manage interest rate and currency exposures arising from mismatches between assets and liabilities. The Company enters into such financial instrument transactions solely for hedging purposes. The Company does not enter into such financial instrument transactions for trading or other speculative purposes. The Company routinely evaluates existing and potential counterparty credit exposures associated with such financial instrument transactions to ensure that these exposures remain within credit guidelines. The Company does not anticipate any material adverse effect on its financial position resulting from its use of these instruments, nor does it anticipate nonperformance by any of its counterparties.
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 increased by approximately $682.6 million to $2,289.0 million at December 31, 1996, from $1,606.4 million at December 31, 1995. This increase was primarily attributable to higher volumes of capital equipment purchases from IBM in the fourth quarter of 1996, compared with the fourth quarter of 1995 and lower tax payments made to IBM during 1996, compared with 1995. Tax payments made
to IBM were $108.4 million, compared with $330.8 million for current tax liability during 1996 and 1995, respectively.
LIABILITIES AND STOCKHOLDER'S EQUITY (Continued)
Total stockholder's equity at December 31, 1996, was $1,435.1 million, up $226.5 million from year-end 1995. The increase in stockholder's equity reflects 1996 net earnings of $271.1 million and the issuance of $.4 million of capital stock to IBM, offset by the payment of $45.0 million in cash dividends to IBM during 1996. During 1994, a program was developed to periodically transfer certain excess IBM manufacturing assets to the Company for the purpose of remarketing such assets. In exchange for assets IBM transferred to the Company, the Company issued 4 shares and 33 shares of capital stock, par value $1.00 per share, to IBM during the first quarter of 1996 and the fourth quarter of 1995, respectively.
At December 31, 1996, the Company's debt to equity ratio was 5.6:1, compared with 6.3:1 at December 31, 1995.
TOTAL CASH PROVIDED BEFORE DIVIDENDS
Total cash provided before dividends was $341.0 million in 1996, compared with total cash used before dividends of $132.5 million in 1995. Total cash provided before dividends reflects $2,235.1 million of cash used in investing and financing activities before dividends, offset by $2,576.1 million of cash provided by operating activities in 1996. For 1995, total cash used before dividends reflects $1,984.7 million of cash used in investing and financing activities before dividends, offset by $1,852.2 million of cash provided by operating activities. Cash and cash equivalents at December 31, 1996, totaled $632.8 million, an increase of $296.0 million, compared with the balance at December 31, 1995.
INCOME FROM LEASES
Income from leases increased 12 percent to $524.0 million for the year ended December 31, 1996, from $466.4 million in 1995. The growth in capital equipment financings for end users under capital and operating leases during 1996 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 $143.6 million in 1996, an increase of 57 percent from 1995.
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, considered to be other than temporary, must be recognized currently.
INCOME FROM LEASES (Continued)
A review of the Company's $818.3 million residual value portfolio at December 31, 1996, 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 recorded a $36.4 million reduction to income from leases during 1996 to recognize decreases in the expected future residual value of specific leased equipment, compared with $16.0 million during 1995. The year-to-year increase primarily reflects additional anticipated declines in residual values for storage related products.
INCOME FROM LOANS
Income from loans increased 26 percent to $148.8 million in 1996, compared with $117.7 million in 1995. This increase was primarily the result of an increase in financing originated for software and services during 1995 and 1996.
INCOME FROM WORKING CAPITAL FINANCING
Income from working capital financing increased 9 percent to $265.3 million in 1996, compared with $242.5 million in 1995. This increase was mainly due to growth in the average working capital financing receivables outstanding during 1996, compared with 1995. The growth in average working capital financing receivables outstanding is due to increased originations.
EQUIPMENT SALES
Equipment sales amounted to $419.3 million in 1996, compared with $493.6 million in 1995. The decrease in equipment sales reflects less equipment available at the end of lease term, which in turn is primarily due to lower financing originated in prior years. Also contributing to this decrease in equipment sales is the growth of equipment remarketed as operating leases, rather than sales. 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 in 1996 was $50.9 million, a decrease of 32 percent, compared with $74.6 million in 1995. The gross profit margin in 1996 decreased to 12.1 percent, compared with 15.1 percent in 1995. The mix of products available for sale and changing market conditions for certain used equipment during the applicable periods are factors contributing to the decrease in gross profit margins.
OTHER INCOME
Other income increased 6 percent to $140.4 million in 1996, compared with $132.0 million in 1995. This increase is largely attributable to the recognition of one-time pretax gains of $9.3 million upon the sale of certain restricted securities during the first quarter of 1996. Additionally, interest income earned on cash and cash equivalents and fees for the servicing of IBM financing receivables securitized and sold increased during 1996, compared with 1995. These year-to-year increases were partially offset by a $5.0 million pretax gain recognized during the first quarter of 1995, upon Comdisco, Inc.'s redemption of a convertible subordinated promissory note on March 1, 1995, and by a $1.9 million pretax gain recognized upon the sale of certain restricted securities during the fourth quarter of 1995.
The Company continues to service financing receivables securitized and sold in prior years, and earns a fee, which is included in other income. During 1996 and 1995, there were no securitizations or sales of financing receivables by the Company.
Also included in other income is interest income earned on cash and cash equivalents and notes, as well as fees for managing IBM's state and local government installment and lease financing receivables portfolio.
INTEREST EXPENSE
As a result of an increase in the Company's average outstanding debt balance, interest expense increased 11 percent to $436.1 million in 1996, compared with $394.6 million in 1995. Due to generally lower interest rates, the Company's average cost of debt decreased to 5.8 percent in 1996, from 6.0 percent in 1995.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses were $201.2 million in 1996, an increase of 6 percent compared with $190.4 million in 1995. This increase is mainly due to a growth in the Company's resources for 1996, resulting in an increase in compensation related expenses, and twelve months of expenses incurred by IBM CS Systems (formerly known as Chrysler Systems, Inc.), compared with eleven months of expenses during 1995.
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 for capital equipment. 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 1995 and 1996, 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 December 31, 1996, and December 31, 1995, approximately 62 percent and 70 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 1996 and 1995. 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 overall provision for receivable losses decreased to $44.9 million in 1996, compared with $68.4 million in 1995. While there was a growth in capital equipment financings originated during 1996, compared with 1995, and a corresponding increase in the provision for receivable losses, the increase was offset by declines in specific reserves.
INCOME TAXES
The effective tax rate in 1996 was 39.4 percent, compared with 39.3 percent in 1995. Consistent with 1996, the Company expects its effective tax rate to continue to approximate the statutory federal and state income tax rates in future years.
NET EARNINGS
Net earnings grew 18 percent to $271.1 million in 1996, compared with $230.5 million in 1995. This increase was mainly due to the increase in income from leases, loans and working capital financings. The year-to-year income growth was the result of increased capital equipment and working capital financings originated from prior years.
NET EARNINGS (Continued)
Offsetting the year-to-year income growth was an increase in selling, general, and administrative expenses primarily attributable to a growth in the Company's resources, and additional interest expense due to an increase in the Company's average outstanding debt balance.
RETURN ON AVERAGE EQUITY
The 1996 results yielded an annualized return on average equity of 20.7 percent, compared with 20.9 percent in 1995.
CREDIT RATING
On December 16, 1996, Fitch Investors Service, L.P., announced it had upgraded its rating for the Company's senior debt from A+ to AA-. On August 28, 1995, Moody's Investors Service, Inc., announced it had upgraded its rating for the Company's long-term debt from A3 to A1.
ACCOUNTING CHANGES
The Company implemented new accounting standards in 1996, 1995 and 1994. None of these standards had a material effect on the financial position or results of operations of the Company.
In June 1996, the Financial Accounting Standards Board issued SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This standard provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. While the standard requires implementation in 1997, the Company is already generally in compliance.
Effective January 1, 1995, the Company implemented SFAS 114, "Accounting by Creditors for Impairment of a Loan," and SFAS 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures." These standards prescribe impairment measurements and reporting related to certain loans.
In 1995, the Company implemented SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This standard prescribes the method for asset impairment evaluation for long-lived assets and certain identifiable intangibles that are either held and used or to be disposed of. The Company was generally in conformance with this standard prior to adoption.
Effective January 1, 1994, the Company implemented SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities." This standard addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
Report of Independent Accountants
To the Stockholder and Board of Directors of IBM Credit Corporation
In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a) 1. on page 40 present fairly, in all material respects, the financial position of IBM Credit Corporation and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP Stamford, CT January 20, 1997, except as to the Subsequent Event note on page 38, which is as of January 24, 1997
IBM CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation: The consolidated financial statements include the accounts of the Company and those of its subsidiaries that are more than 50 percent owned. Investments in partnerships in which the Company has typically a 20 percent ownership are accounted for using the equity method.
Cash and Cash Equivalents: Time deposits with original maturities generally of three months or less are included in cash and cash equivalents. Cash paid for interest was $443.2 million, $388.3 million and $315.9 million in 1996, 1995 and 1994, respectively.
Marketable Securities: The Company's marketable securities, all of which are debt securities, are available-for-sale. The carrying amount of the debt securities approximates market value.
Finance Income Recognition: Income attributable to direct financing leases and loans receivable is initially recorded as unearned income and subsequently recognized as finance income at level rates of return over the term of the leases or receivables. Income recognized from leveraged leases includes the amortization of unearned finance income and deferred investment and other tax credits over the term of the leases, at level rates of return, during periods when the net investment balance is positive.
Equipment on Operating Leases: Equipment is depreciated on a straight-line basis to its estimated residual value over the lease term.
Equipment Sales Income Recognition: Revenue from equipment sales to existing lessees is recognized at the effective date a purchase provision is exercised. Revenue from sales to parties other than existing lessees is recognized when title transfers.
Allowance for Receivable Losses: The allowance for receivable losses is determined on the basis of actual collection experience and estimated collectibility of the related assets.
Income Taxes: Income tax expense is based on reported earnings before income taxes. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes on a separate company basis. In accordance with Statement of Financial Accounting Standards (SFAS) 109, "Accounting for Income Taxes", these deferred taxes are measured by applying currently enacted tax laws.
SIGNIFICANT ACCOUNTING POLICIES (Continued):
Financial Instruments: The Company uses agreements related to currencies and interest rates to lower costs of funding its business, to diversify sources of funding, or to manage interest rate and currency exposures arising from mismatches between assets and liabilities. The Company enters into such financial instrument transactions solely for hedging purposes. The Company does not enter into such financial instrument transactions for trading or other speculative purposes. Debt obligations denominated in foreign currencies and subject to foreign currency swap agreements are included in the Consolidated Statement of Financial Position at the contractual rate of exchange in the respective foreign currency swap agreement. Gains and losses on forward contracts and purchased options, designated as hedges, are deferred and included in the settlement of the related transaction.
Use of Estimates: Management uses estimates in preparing the consolidated financial statements, in conformity with generally accepted accounting principles. Significant estimates include collectibility of receivables, recoverability of residual values of equipment on capital and operating leases, and useful economic lives of long-term fixed assets. The Company regularly assesses these estimates, and while actual results may differ from these estimates, management believes that material changes will not occur in the near term.
RELATIONSHIP WITH IBM:
Pursuant to a Support Agreement between IBM and the Company, IBM has agreed to retain 100 percent of the voting capital stock of the Company, unless required to dispose of any or all such shares of stock pursuant to a court decree or order of any governmental authority that in the opinion of counsel to IBM may not be successfully challenged. IBM has also agreed to cause the Company to have a tangible net worth of at least $1.00 at all times. The Support Agreement provides that it shall not be deemed to constitute a guarantee by IBM to any party of the payment of any debt or other obligation, indebtedness or liability of the Company. The Support Agreement may not be modified, amended or terminated while there is outstanding any debt of the Company, unless all holders of such debt have consented in writing.
Pursuant to an operating agreement, IBM provides collection, administration and other services and products for the Company and is reimbursed for the cost of these services and products. The Company is compensated for services performed for IBM, primarily for management of IBM's state and local government installment receivables portfolio, the fees for which are reflected in other income.
The operating agreement with IBM also provides that installment receivables, which include finance charges, may be purchased by the Company at a mutually agreed-upon price. The Company is reimbursed by IBM for any price adjustments and concessions that reduce the amount of receivables previously purchased by the Company.
RELATIONSHIP WITH IBM (Continued):
The operating agreement with IBM also provides that IBM will offer term leases of the Company to creditworthy potential lessees. IBM's sales price of the equipment to the Company will typically be at the purchase price payable by the lessee, unless the Company is participating in IBM product promotions.
The Company also has an indemnification agreement with IBM. IBM reimburses the Company for losses on working capital financing receivables with specific dealers and for specific transactions. Approximately $10.5 million, $9.3 million and $3.1 million of such losses have been reimbursed by IBM in 1996, 1995 and 1994, respectively.
The Company has a liquidity agreement with IBM International Finance, N.V. (IIF), whereby the Company has agreed to advance funds to IIF as an enhancement to IIF's ability to carry out business. The amount of the advances is not to exceed the greater of $500.0 million or 5 percent of the Company's total assets. To support this agreement, the Company has entered into a backup agreement with IBM, whereby IBM has agreed to advance funds to the Company, in an amount not to exceed the greater of $500.0 million or 5 percent of the Company's total assets, if at any time the Company requires such funds to satisfy its agreement with IIF. The Company has neither received nor made any advances with respect to these agreements at December 31, 1996 and 1995.
The Company, together with IBM and IIF, has the option to issue and sell debt securities in an aggregate nominal amount of up to 3.0 billion in European Currency Units, or its equivalent in any other currency. This option is part of a $5.0 billion Board of Directors' authorization the Company has to issue and sell debt securities in domestic and foreign financial markets through December 31, 1997. As previously mentioned, at December 31, 1996, there was 2.0 billion in ECU available for the issuance of debt securities under this program. The Company's intention to issue any debt securities over the next twelve months under this program is dependent on prevailing market conditions and the Company's need for such funding.
From time to time, the Company will either borrow funds from or lend funds to IBM and its affiliates, at prevailing interest rates. During the fourth quarter of 1994, the Company and IBM signed master loan agreements providing additional funding flexibility to each other. These agreements allow for short-term (up to 270-day) funding, made available at market terms and conditions, upon the request of either the Company or IBM. The purpose of these agreements is to finance the borrower's assets, for working capital or for other general corporate purposes. At December 31, 1996, the Company had no borrowings outstanding under these agreements. At December 31, 1995, the Company had borrowings outstanding under these agreements of $214.1 million, payable to IBM. This borrowing was repaid on January 2, 1996.
RELATIONSHIP WITH IBM (Continued):
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.
MARKETABLE SECURITIES:
The following is a summary of marketable securities at December 31, 1996 and December 31, 1995 which were available-for-sale. The marketable securities consisted entirely of debt securities. Contractual maturities of marketable debt securities at December 31, 1996 and December 31, 1995, are between one and five years. It is expected that actual maturities will differ from contractual maturities because some borrowers have the right to call or prepay certain obligations, sometimes without call or prepayment penalties.
(Dollars in thousands) 1996 1995 ________ _________ Corporate . . . . . . . . . . . . . . . . $125,138 $ 68,220 U.S. federal agency . . . . . . . . . . . 34,210 21,710 ________ _________ Total, which approximates market value. . $159,348 $ 89,930 ======== =========
NET INVESTMENT IN CAPITAL LEASES:
The Company's capital lease portfolio includes direct financing and leveraged leases. The Company originates financing for customers in a variety of industries and throughout the United States. The Company has a diversified portfolio of capital equipment financings for end users.
Direct financing leases consist principally of IBM information handling equipment with terms generally from three to five years. The components of the net investment in direct financing leases at December 31, 1996 and 1995, are as follows:
(Dollars in thousands) 1996 1995 ___________ ___________ Gross lease payments receivable . . . . . $4,299,250 $4,071,811 Estimated unguaranteed residual values. . 260,004 293,497 Deferred initial direct costs . . . . . . 30,087 20,520 Unearned income . . . . . . . . . . . . . (528,830) (576,149) Allowance for receivable losses . . . . . (44,131) (46,266) ___________ ___________ $4,016,380 $3,763,413 =========== ===========
NET INVESTMENT IN CAPITAL LEASES (Continued):
The scheduled maturities of minimum lease payments outstanding at December 31, 1996, expressed as a percentage of the total, are due approximately as follows:
Within 12 months. . . . . . . . . . . . . . . . . . . . 46% 13 to 24 months . . . . . . . . . . . . . . . . . . . . 33 25 to 36 months . . . . . . . . . . . . . . . . . . . . 17 37 to 48 months . . . . . . . . . . . . . . . . . . . . 3 After 48 months . . . . . . . . . . . . . . . . . . . . 1 ____ 100% ====
Included in the net investment in capital leases are $55.6 million and $118.4 million of seller interest at December 31, 1996 and 1995, respectively, relating to the securitization of such leases.
Leveraged lease investments include coal-fired electric generating facilities, commercial aircraft and other non-IBM manufactured equipment. Leveraged leases have remaining terms ranging from five to twenty-two years. The components of the net investment in leveraged leases at December 31, 1996 and 1995, are as follows:
(Dollars in thousands) 1996 1995 __________ __________ Net rents receivable. . . . . . . . . . $ 258,022 $ 263,800 Estimated unguaranteed residual values. 39,752 39,752 Unearned and deferred income. . . . . . (93,296) (94,606) Allowance for receivable losses . . . . (6,036) (6,104) __________ __________ Investment in leveraged leases. . . . . 198,442 202,842 Less: Deferred income taxes. . . . . . (196,460) (206,487) __________ __________ Net investment in leveraged leases. . . $ 1,982 $ (3,645) ========== ==========
Refer to the note on page 26, Allowance for Receivable Losses, for a reconciliation of the direct financing leases and leveraged leases allowances for receivable losses.
EQUIPMENT ON OPERATING LEASES:
Operating leases consist principally of IBM information handling equipment with terms generally from two to four years. The components of equipment on operating lease at December 31, 1996 and 1995, are as follows:
(Dollars in thousands) 1996 1995 ____________ ____________ Cost. . . . . . . . . . . . . . . . . . . $ 4,839,547 $ 3,752,380 Accumulated depreciation. . . . . . . . . (2,288,165) (2,056,568) ____________ ____________ $ 2,551,382 $ 1,695,812 ============ ============
EQUIPMENT ON OPERATING LEASES (Continued):
Minimum future rentals were approximately $2,266.6 million at December 31, 1996. The scheduled maturities of the minimum future rentals at December 31, 1996, expressed as a percentage of the total, are due approximately as follows:
Within 12 months. . . . . . . . . . . . . . . . . . . . 46% 13 to 24 months . . . . . . . . . . . . . . . . . . . . 32 25 to 36 months . . . . . . . . . . . . . . . . . . . . 16 37 to 48 months . . . . . . . . . . . . . . . . . . . . 4 After 48 months . . . . . . . . . . . . . . . . . . . . 2 ____ 100% ==== LOANS RECEIVABLE:
Loans receivable include installment receivables which are principally financings of customer purchases of IBM information handling products. Also included are other financings, comprising primarily IBM software and services. The components of loans receivable at December 31, 1996 and 1995, are as follows:
(Dollars in thousands) 1996 1995 ___________ ___________ Gross loans receivable . . . . . . . $2,166,019 $1,743,920 Deferred initial direct costs. . . . 13,168 9,259 Unearned income. . . . . . . . . . . (268,876) (219,988) Allowance for receivable losses. . . (63,364) (59,369) ___________ ___________ $1,846,947 $1,473,822 =========== ===========
The scheduled maturities of loans receivable outstanding at December 31, 1996, expressed as a percentage of the total, are due approximately as follows:
Within 12 months . . . . . . . . . . . . . . . . . . . 42% 13 to 24 months. . . . . . . . . . . . . . . . . . . . 31 25 to 36 months. . . . . . . . . . . . . . . . . . . . 17 37 to 48 months. . . . . . . . . . . . . . . . . . . . 7 After 48 months. . . . . . . . . . . . . . . . . . . . 3 ____ 100% ====
Included in loans receivable are $40.0 million and $63.0 million at December 31, 1996, and 1995, respectively, that are due from the Company's term lease partnerships. Such loans are secured by the general pool of leases in the partnerships. Also included in loans receivable are $16.1 million and $29.5 million of seller interest at December 31, 1996, and 1995, respectively, relating to the securitization of such loans.
Refer to the note on page 26, Allowance for Receivable Losses, for a reconciliation of the loans receivable allowance for receivable losses.
WORKING CAPITAL FINANCING RECEIVABLES:
Working capital financing receivables arise primarily from secured inventory and accounts receivable financing for dealers and remarketers of IBM and non-IBM products and services. Inventory financing includes the financing of the purchase by these dealers and remarketers of information handling products. As previously discussed in the note on pages 20 through 22, Relationship with IBM, the Company is reimbursed by IBM for certain losses on working capital financing receivables with specific dealers and for specific transactions. Approximately $10.5 million, $9.3 million and $3.1 million of such losses have been reimbursed by IBM in 1996, 1995 and 1994, respectively. With the growth of the Company's working capital financing business in 1996 and 1995, the concentration of such financings for certain large dealers and remarketers of information industry products is significant. However, the Company has a secured position on substantially all of its inventory and accounts receivable financing which mitigates the amount of potential loss. The Company does not believe that there is a risk of loss that would have a material impact on its financial position or results of operations.
Payment terms for inventory-secured financing generally range from 30 days to 45 days. Accounts receivable financing includes the financing of trade accounts receivable for these dealers and remarketers. Payment terms for accounts receivable secured financing typically range from 30 days to 90 days. The components of working capital financing receivables at December 31, 1996, and 1995, are as follows:
(Dollars in thousands) 1996 1995 ___________ ___________ Working capital financing receivables $2,955,411 $3,206,736 Allowance for receivable losses . . . (56,723) (47,804) ___________ ___________ $2,898,688 $3,158,932 =========== ===========
Included in working capital financing receivables are $608.7 million and $693.7 million of seller interest at December 31, 1996, and 1995, respectively, relating to the securitization of such receivables. Additionally, the Company has $2,051.5 million of approved but unused working capital financing credit lines available to customers at December 31, 1996.
Refer to the note on page 26, Allowance for Receivable Losses, for a reconciliation of the working capital financing receivables allowance for receivable losses.
ALLOWANCE FOR RECEIVABLE LOSSES:
The following is a reconciliation of the allowance for receivable losses, by portfolio, for the years ended December 31, 1996, 1995 and 1994:
(Dollars in thousands) Direct Working Financing Leveraged Loans Capital 1996 Total Leases Leases Receivable Fin. Rec. _____________________ _________ _________ __________ __________ _________ Beginning of year . . $159,543 $ 46,266 $ 6,104 $ 59,369 $ 47,804 Provision for receivable losses. . 44,883 17,940 - 13,260 13,683 Accounts written off (net of recoveries). (40,849) (22,104) - (11,686) (7,059) Transfers (to) from allowance for losses on receivables sold and other, net . . . 6,677 2,029 (68) 2,421 2,295 _________ _________ __________ __________ _________ End of year . . . . . $170,254 $ 44,131 $ 6,036 $ 63,364 $ 56,723 ========= ========= ========== ========== =========
Direct Working Financing Leveraged Loans Capital 1995 Total Leases Leases Receivable Fin. Rec. _____________________ _________ _________ __________ __________ _________ Beginning of year . . $ 89,489 $ 24,389 $ 7,171 $ 41,665 $ 16,264 Provision for receivable losses. . 68,417 16,208 - 21,200 31,009 Accounts written off (net of recoveries). (5,680) 2,967 (1,067) (7,232) (348) Transfers from allowance for losses on receivables sold and other, net . . . 7,317 2,702 - 3,736 879 _________ _________ __________ __________ _________ End of year . . . . . $159,543 $ 46,266 $ 6,104 $ 59,369 $ 47,804 ========= ========= ========== ========== =========
Direct Working Financing Leveraged Loans Capital 1994 Total Leases Leases Receivable Fin. Rec. _____________________ _________ _________ __________ __________ _________ Beginning of year . . $126,440 $ 47,398 $ 7,240 $ 57,504 $ 14,298 Provision for receivable losses. . 44,097 37,200 - 1,500 5,397 Accounts written off (net of recoveries). (75,533) (54,610) (69) (17,862) (2,992) Transfers (to) from allowance for losses on receivables sold and other, net . . . (5,515) (5,599) - 523 (439) _________ _________ __________ __________ _________ End of year . . . . . $ 89,489 $ 24,389 $ 7,171 $ 41,665 $ 16,264 ========= ========= ========== ========== =========
ALLOWANCE FOR RECEIVABLE LOSSES (Continued):
The reconciliation of the allowance for receivable losses, by portfolio, presented on page 26, excludes the allowance for estimated credit losses on receivables sold, which was $5.1 million and $9.7 million at December 31, 1996 and 1995, respectively. Provisions for expected losses as they relate to receivables sold, are provided during the periods in which the receivables were originated. No material provisions were made for the years ended December 31, 1996 and December 31, 1995.
At December 31, 1996, 1995 and 1994, the allowance for receivable losses approximated 1.5 percent, 1.6 percent and 1.1 percent, respectively, of the Company's portfolio of leases, loans and working capital financing receivables. The decline in this ratio from 1995 to 1996 was due to a decrease in specific reserves recorded for certain receivables.
INVESTMENTS AND OTHER ASSETS:
The components of investments and other assets at December 31, 1996, and 1995, are as follows:
(Dollars in thousands) 1996 1995 ________ ________ Receivables from customers . . . . . . . . . $259,588 $223,851 Investments in partnerships and other . . . . 142,742 72,524 Receivables from affiliates . . . . . . . . . 99,214 215,292 Due and deferred from receivable sales. . . . 63,046 106,079 Remarketing inventory . . . . . . . . . . . . 35,986 50,822 Other assets . . . . . . . . . . . . . . . . 41,542 35,393 ________ ________ $642,118 $703,961 ======== ======== Due and deferred from receivable sales are net of the allowance for estimated credit losses on receivables sold and include subordinated interests in trusts, cash deposits held by trustee, receivables from investors and interest in excess servicing cash flows. Due and deferred from receivable sales are restricted assets and subject to limited recourse provisions. There were no sales in 1996 and 1995 of financing receivables to investors. The Company acts as servicer for receivables securitized and sold, and is contingently liable for up to $6.5 million in the event of nonperformance, default or other loss relating to the outstanding pool balance at December 31, 1996, of IBM state and local government installment receivables securitized and sold. Adequate reserves exist to cover potential losses.
Included in other assets at December 31, 1996, and 1995, are $10.0 million and $6.5 million, respectively, on deposit in restricted accounts, held as security deposits received from customers. Also included in other assets at December 31, 1996, and December 31, 1995, respectively, are $4.1 million on deposit in restricted accounts for purposes of credit enhancement. The Company, as servicer, deposited the cash in connection with certain tax-exempt grantor trusts comprised of pools of IBM state and local government installment receivables. The trustee of each grantor trust is entitled to draw upon the amounts in the restricted accounts,
INVESTMENTS AND OTHER ASSETS (Continued):
in the event of nonperformance, default or other loss relating to such installment receivables.
SHORT-TERM DEBT:
The components of short-term debt at December 31, 1996, and 1995, are as follows:
(Dollars in thousands) 1996 1995 __________ __________ Commercial paper, with rates averaging 5.6% in 1996 and 5.7% in 1995. . . . . . . . . $4,717,531 $4,012,615 Other short-term debt, with rates averaging 5.8% in 1996 and 6.3% in 1995. . . . . . . . . 1,509,994 1,532,187 Current maturities of long-term debt. . . . . . 213,875 713,683 __________ __________ 6,441,400 6,258,485 IBM short-term borrowings . . . . . . . . . . . 125,000 214,142 __________ __________ $6,566,400 $6,472,627 ========== ========== The approximate weighted average effective interest rates, above, include the effects of interest rate swap agreements and have been calculated on the basis of rates in effect at December 31, 1996, and 1995. The approximate weighted average stated rates (before the effects of interest rate swap agreements) on commercial paper outstanding at December 31, 1996, and 1995, were 5.5% and 5.9%, respectively. The approximate weighted average stated rates (before the effects of interest rate swap agreements) on other short-term debt outstanding at December 31, 1996, and 1995, were 5.5% and 6.5%, respectively. Other short-term debt primarily includes notes having maturities between nine and twelve months offered through the Company's medium-term note program.
On November 1, 1994, the Company borrowed $125.0 million from IBM at market terms and conditions. The loan matures on November 1, 1997.
LONG-TERM DEBT:
The components of long-term debt at December 31, 1996, and 1995, are as follows:
(Dollars in thousands) 1996 1995 ___________ ___________ Medium-term notes with original maturities ranging from 1997 to 2008, with rates averaging 5.9% in 1996 and 5.8% in 1995. . . $1,731,344 $1,704,982 IBM loan payable, due November 1997 . . . . . - 125,000 ___________ ___________ 1,731,344 1,829,982 Net unamortized discounts . . . . . . . . . . (1,532) (859) ___________ ___________ 1,729,812 1,829,123 Less: Current maturities . . . . . . . . . . 213,875 713,683 ___________ ___________ $1,515,937 $1,115,440 =========== ===========
LONG-TERM DEBT (Continued):
The approximate weighted average effective interest rates include the effects of interest rate swap agreements and have been calculated on the basis of rates in effect at December 31, 1996, and 1995. The approximate weighted average stated rates (before the effects of interest rate swap agreements) on medium-term notes outstanding at December 31, 1996, and 1995, were 5.9% and 5.8%, respectively. Discounts and premiums have the effect of modifying the stated rate of interest on long-term debt offerings.
Annual maturity of long-term debt at December 31, 1996, is as follows:
(Dollars in thousands)
1997 . . . . . . . . . . . . . . . . . . . $ 213,875 1998 . . . . . . . . . . . . . . . . . . . 531,394 1999 . . . . . . . . . . . . . . . . . . . 456,075 2000 . . . . . . . . . . . . . . . . . . . 201,000 2001 . . . . . . . . . . . . . . . . . . . 265,000 2002 and thereafter . . . . . . . . . . . 64,000 __________ $1,731,344 ==========
RATIO OF EARNINGS TO FIXED CHARGES:
The ratio of earnings to fixed charges calculated in accordance with applicable Securities and Exchange Commission requirements was 2.02, 1.96 and 2.34 for the years ended December 31, 1996, 1995 and 1994, respectively.
RELATED COMPANY TRANSACTIONS:
IBM charged the Company $64.8 million, $62.6 million and $67.2 million in 1996, 1995 and 1994, respectively, representing costs for lease services, employee benefit plans, facilities rental and staff support.
The Company received compensation for services and benefits provided to IBM. Included in income from working capital financing is fee income earned from IBM of $63.1 million, $51.1 million and $40.4 million in 1996, 1995 and 1994, respectively. The fees received also include payment for the management of IBM's portfolio of state and local government installment receivables of $51.0 million, $46.8 million and $50.8 million in 1996, 1995 and 1994, respectively, which are included in other income.
RELATED COMPANY TRANSACTIONS (Continued):
Amounts due to IBM and affiliates include current income taxes payable, as well as amounts for software, services, purchases of receivables and purchases of equipment for term leases. At December 31, 1996, and 1995, amounts due to IBM and affiliates were $2,289.0 million and $1,606.4 million, respectively.
Interest and finance income of $1.9 million, $6.9 million and $12.9 million was earned from loans to IBM and affiliates in 1996, 1995 and 1994, respectively. Interest expense of $10.6 million, $10.2 million and $8.5 million was incurred on loans from IBM and affiliates during 1996, 1995 and 1994, respectively.
The Company also provides equipment financing at market rates to IBM and affiliated companies for both IBM and non-IBM products. The Company originated $682.0 million and $305.5 million of such financings during 1996 and 1995, respectively. At December 31, 1996, and 1995, approximately $828.0 million and $687.4 million, respectively, of such financings were included in the lease and loan portfolio. Of these amounts, $723.4 million and $677.3 million were included in the Company's operating lease portfolio at December 31, 1996, and 1995, respectively. The finance income earned from operating leases to IBM and affiliated companies, net of depreciation expense, was $107.6 million, $91.9 million and $53.3 million in 1996, 1995 and 1994, respectively.
An intercompany tax allocation agreement (the Agreement) exists between the Company and its parent company, IBM. The Agreement aligns the settlement of federal and state tax benefits and/or obligations with the Company's provision for income taxes determined on a separate company basis. The Company is part of the IBM consolidated federal tax return and files separate state tax returns in selected states. Included in amounts due to IBM and affiliates at December 31, 1996, and 1995, are $5.5 million and $40.9 million, respectively, of current income taxes payable determined in accordance with the Agreement. Cash paid for income taxes to IBM and to states that require separate tax returns in 1996, 1995 and 1994 was $113.3 million, $339.2 million and $348.3 million, respectively.
PROVISION FOR INCOME TAXES:
The components of the provision for income taxes are as follows:
(Dollars in thousands) 1996 1995 1994 _________ __________ __________ Federal: Current . . . . . . . . . . $ 60,741 $ 114,262 $ 271,304 Deferred. . . . . . . . . . 83,637 9,306 (136,766) _________ __________ __________ 144,378 123,568 134,538 _________ __________ __________ State and local: Current . . . . . . . . . . 19,216 23,405 53,996 Deferred. . . . . . . . . . 12,528 2,482 (25,831)
_________ __________ __________ 31,744 25,887 28,165 _________ __________ __________ Total provision . . . . . . $ 176,122 $ 149,455 $ 162,703 ========== ========== ==========
PROVISION FOR INCOME TAXES (Continued):
Changes in the deferred tax assets and liabilities resulting from temporary differences between financial and tax reporting are as follows:
(Dollars in thousands) 1996 1995 __________ __________ Deferred tax assets (liabilities):
Provision for receivable losses. . . . . . $ 90,909 $ 66,981 Federal benefit for state and local taxes. - 24,080 Lease income and depreciation. . . . . . . (901,514) (801,561) Other, net . . . . . . . . . . . . . . . . 49,111 45,334 __________ __________ Deferred income taxes . . . . . . . . . . . . $(761,494) $(665,166) ========== ==========
The provision for income taxes varied from the U.S. federal statutory income tax rate as follows:
1996 1995 1994 ______ ______ ______ Federal statutory rate. . . . . . . . 35.0% 35.0% 35.0% State and local taxes, net of federal tax benefit . . . . . . . 4.4 4.4 4.5 Other, net. . . . . . . . . . . . . . - (0.1) (0.1) ______ ______ ______ Effective income tax rate . . . . . . 39.4% 39.3% 39.4% ====== ====== ======
FINANCIAL INSTRUMENTS:
The Company uses agreements related to currencies and interest rates to lower costs of funding its business, to diversify sources of funding, or to manage interest rate and currency exposures arising from mismatches between assets and liabilities. The Company enters into such financial instruments solely for hedging purposes. The Company does not enter into such financial instrument transactions for trading or other speculative purposes. The Company routinely evaluates existing and potential counterparty credit exposures associated with such financial instrument transactions to ensure that these exposures remain within credit guidelines.
Under interest rate swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between interest amounts calculated by reference to a floating index or a fixed rate on an agreed upon notional principal amount. Swap contracts are primarily between one and five years in duration. The Company enters into currency exchange agreements to hedge debt denominated in foreign currencies. The term of the currency derivatives is generally less than five years. The purpose of the Company's foreign currency hedging activities is to protect itself from the risk that the eventual dollar net cash outflows will be affected by changes in exchange rates. The Company enters into interest rate cap and floor agreements to reduce the potential impact of changes in interest rates on floating rate debt, supporting fixed rate assets.
The Company does not anticipate any material adverse effect on its financial position resulting from its use of these instruments, nor does it anticipate nonperformance by any of its counterparties. The tables on page 33 illustrate the contract or notional (face) amounts outstanding, maturity dates, weighted average receive and pay rates and the net unrealized gain (loss) of derivative financial instruments by category at December 31, 1996, and 1995. Notional amount represents agreed upon amounts on which calculations of interest payments to be exchanged are based. Notional amounts do not represent direct credit exposures. Rather, they provide an indication of the extent of the Company's involvement in such derivative financial instruments. Interest rate agreements generally involve the exchange of interest payments without the exchange of the underlying notional amount on which the interest payments are calculated. The net unrealized gain (loss) for the derivative financial instruments on page 33 is equal to their estimated fair value.
FINANCIAL INSTRUMENTS (Continued):
(Dollars in thousands)
At December 31, 1996:
Notional Weighted Average Rate Type Amount Maturities Receive Pay ____________________ __________ __________ _____________________ Swap to Fixed $2,400,000 1997-2001 5.77% 6.27% Swap to Floating 1,670,800 1997-2001 5.86% 5.58% Currency Related 245,445 1998-1999 n/a * n/a * Int. Rate Cap/Floor 500,000 1997-1999 n/a * n/a * __________ $4,816,245 ==========
At December 31, 1996 (Continued):
Notional Unrealized Unrealized Net Unrealized Type Amount Gross Gain Gross (Loss) Gain (Loss) ____________________ __________ __________ ____________ ______________ Swap to Fixed $2,400,000 $1,848 $(17,876) $(16,028) Swap to Floating 1,670,800 4,838 (4,413) 425 Currency Related 245,445 961 (19,569) (18,608) Int. Rate Cap/Floor 500,000 675 - 675 __________ __________ ____________ ______________ $4,816,245 $8,322 $(41,858) $(33,536) ========== ========== ============ ==============
At December 31, 1995:
Notional Weighted Average Rate Type Amount Maturities Receive Pay ____________________ __________ __________ _____________________ Swap to Fixed $1,564,000 1996-2000 4.84% 6.00% Swap to Floating 880,000 1996-2000 6.78% 5.02% Currency Related 95,374 1998 n/a * n/a * Int. Rate Cap 72,500 1996 n/a * n/a * __________ $2,611,874 ==========
At December 31, 1995 (Continued):
Notional Unrealized Unrealized Net Unrealized Type Amount Gross Gain Gross (Loss) Gain (Loss) ____________________ __________ __________ ____________ ______________ Swap to Fixed $1,564,000 $ 107 $(29,643) $(29,536) Swap to Floating 880,000 6,102 (440) 5,662 Currency Related 95,374 3,936 - 3,936 Int. Rate Cap 72,500 - - - __________ __________ ____________ ______________ $2,611,874 $10,145 $(30,083) $(19,938) ========== ========== ============ ==============
* n/a: not applicable
FINANCIAL INSTRUMENTS (Continued):
At December 31, 1996, approximately 61 percent of the Company's total debt was hedged through the use of currency and interest rate related agreements. Before the effects of such agreements, the Company's debt comprised approximately 36 percent fixed rate debt and 64 percent floating rate debt. After the effects of such agreements, the Company's debt consisted of approximately 45 percent fixed rate debt and 55 percent floating rate debt. At December 31, 1995, about 34 percent of the Company's total debt was hedged through the use of currency and interest rate related agreements. Before the effects of such agreements, the Company's debt comprised approximately 35 percent fixed rate debt and 65 percent floating rate debt. After the effects of such agreements, the Company's debt consisted of approximately 50 percent fixed rate debt and 50 percent floating rate debt.
The approximate weighted average effective interest rates for the commercial paper, other short-term debt, medium-term notes and other long-term debt, as disclosed in the notes on pages 28 and 29, Short-Term Debt and Long-Term Debt, include the effects of interest rate swap agreements.
FINANCIAL INSTRUMENTS (Continued):
Fair value is a very subjective and imprecise measurement that is based on numerous estimates and assumptions that require substantial judgment and may be valid only at a particular point in time. As such, fair value can represent only a very general approximation of possible value that may never actually be realized.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate.
Cash and cash equivalents: The carrying amount approximates fair value due to the short maturity of these instruments.
Marketable securities: The carrying amount approximates fair value which is estimated using quoted market prices.
Loans receivable: The fair value is estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings with the same remaining maturities.
Working capital financing receivables: The carrying amount approximates fair value due to the short maturity of most of these instruments.
Due and deferred from receivable sales: The carrying amount approximates fair value.
Short-term debt: For the majority of these instruments, the carrying amount approximates fair value due to their short maturity.
Long-term debt and current maturities of long-term debt: The fair value of these instruments is based on replacement cost or quoted market prices for the same issues. Replacement cost is the cost to issue a similar instrument with similar maturity and credit risk.
Interest rate related and currency related agreements: The fair value of these instruments has been estimated as the amount the Company would receive or pay to terminate the agreements, taking into consideration current interest and currency exchange rates.
Commitments to extend credit: The fair value of commitments to extend credit is estimated as the amount of approved but unused working capital financing credit lines available to customers.
Financial guarantees: The fair value of financial guarantees is estimated as the amounts that would be paid if the Company had to settle the obligations.
FINANCIAL INSTRUMENTS (Continued):
The following table summarizes the carrying amount and the estimated fair value of all of the Company's financial instruments:
(Dollars in thousands) Carrying Estimated At December 31, 1996: Amount Fair Value __________ ___________
Cash and cash equivalents $ 632,834 $ 632,834 Marketable securities 159,348 159,348 Loans receivable 1,846,947 1,899,413 Working capital financing receivables 2,898,688 2,898,688 Short-term debt (excluding current maturities of long-term debt) 6,352,525 6,573,150 Long-term debt and current maturities of long-term debt 1,729,812 1,373,218 Off-balance-sheet derivatives: Currency related -- Assets - 961 Liabilities - 19,569 Interest rate related -- Assets - 7,361 Liabilities - 22,289 Commitments to extend credit - 2,051,496 Financial guarantees - 12,884
Carrying Estimated At December 31, 1995: Amount Fair Value __________ ___________
Cash and cash equivalents $ 336,839 $ 336,839 Marketable securities 89,930 89,930 Loans receivable 1,473,822 1,536,726 Working capital financing receivables 3,158,932 3,158,932 Due and deferred from receivable sales 106,079 106,079 Short-term debt (excluding current maturities of long-term debt) 5,758,944 5,908,779 Long-term debt and current maturities of long-term debt 1,829,123 1,690,747 Off-balance-sheet derivatives: Currency related -- Assets - 3,936 Liabilities - - Interest rate related -- Assets - 6,209 Liabilities - 30,083 Commitments to extend credit - 1,001,186 Financial guarantees - 23,207
ACQUISITION OF CHRYSLER SYSTEMS INC.:
On February 8, 1995, the Company acquired all of the issued and outstanding stock of Chrysler Systems Inc. and certain of its affiliates for $133.5 million. The acquisition was consummated pursuant to a share purchase agreement with certain Chrysler Corporation subsidiaries (the Seller). The purchase price was funded by the Company's cash on hand and credits issued to the Seller that were applied against certain future obligations of the Seller to the Company. IBM CS Systems, as the unit is now known, buys, sells and leases data processing equipment, and provides related technology management services such as equipment procurement and asset management. The transaction was accounted for as a purchase and IBM CS Systems is included in the Company's consolidated financial statements from the date of acquisition.
LITIGATION SETTLEMENT:
Effective August 26, 1994, IBM, the Company, certain partnerships in which the Company is the general partner and Comdisco settled all outstanding litigation between the parties. Pursuant to the settlement agreement, on August 30, 1994, Comdisco delivered $70.0 million in cash proceeds to the Company, $20.0 million of which the Company loaned back to Comdisco in exchange for an interest-bearing convertible subordinated promissory note, which was repaid on March 1, 1995. As a result of reaching this settlement agreement, the Company recognized a pretax gain, net of directly related expenses, of $46.0 million. This amount was included in other income on the Consolidated Statement of Earnings and Retained Earnings for the year ended December 31, 1994. The redemption of the subordinated promissory note on March 1, 1995, was included in other income on the Consolidated Statement of Earnings and Retained Earnings for the year ended December 31, 1995.
SALE OF IBM CREDIT INVESTMENT MANAGEMENT CORPORATION:
During the second quarter of 1994, a Fleet Financial Group subsidiary purchased 100 percent of the stock of IBM Credit Investment Management Corporation (ICIM), a wholly owned subsidiary of the Company. ICIM provided investment management and administrative services for the IBM Mutual Funds. As a result of this sale, the Company recognized a pretax gain of $13.3 million, which was included in other income. In connection with the sale of ICIM, the IBM Money Market Account notes were redeemed in early July 1994. The IBM Money Market Account notes were a source of short-term funding for the Company.
INDUSTRY SEGMENT REPORTING:
The Company operates principally in a single business segment offering customer financing of information industry products and services.
SUBSEQUENT EVENT:
On January 24, 1997, the Company's Board of Directors declared a $50.0 million dividend, payable to IBM on February 24, 1997.
SELECTED QUARTERLY FINANCIAL DATA: (Unaudited)
(Dollars in thousands)
Finance Gross Profit and Other Interest Equipment on Equipment Net Income Expense Sales Sales Earnings ___________ ________ _________ ____________ ________ ____
First Quarter . .$ 374,179* $106,280 $106,488 $18,689 $ 73,928 Second Quarter. . 368,114 106,931 101,432 17,626 74,075 Third Quarter . . 359,648 110,362 76,367 7,670 71,610 Fourth Quarter. . 395,859 112,536 135,005 6,951 51,469 ___________ ________ _________ _______ ________ $1,497,800 $436,109 $419,292 $50,936 $271,082 =========== ======== ========= ======= ======== ____
First Quarter . .$ 337,481* $ 86,296 $114,103 $13,268 $ 57,945 Second Quarter. . 361,229* 94,621 130,967 26,158 63,924 Third Quarter . . 378,739 106,050 123,454 13,539 53,526 Fourth Quarter. . 374,836* 107,605 125,095 21,648 55,080 ___________ ________ ________ _______ ________ $1,452,285 $394,572 $493,619 $74,613 $230,475 =========== ======== ======== ======= ========
* During the first quarter of 1996, the Company recognized a pretax gain of $9.3 million upon the sale of certain restricted securities.
* During the first quarter of 1995, the Company recognized a pretax gain of $5.0 million upon Comdisco Inc.'s redemption of the convertible subordinated promissory note on March 1, 1995. During the second quarter of 1995, the Company recognized a pretax gain of $4.3 million from the sale of financing assets. During the fourth quarter of 1995, the Company recognized a pretax gain of $1.9 million upon the sale of certain restricted securities. These amounts are included in other income.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE:
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT: Omitted pursuant to General Instruction J.
ITEM 11. EXECUTIVE COMPENSATION: Omitted pursuant to General Instruction J.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT: Omitted pursuant to General Instruction J.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS: Omitted pursuant to General Instruction J.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K:
(a) The following documents are filed as part of this report:
1. Consolidated Financial Statements included in Part II of this report:
Report of Independent Accountants (page 14).
Consolidated Statement of Financial Position at December 31, 1996 and 1995 (page 15).
Consolidated Statement of Earnings and Retained Earnings for the years ended December 31, 1996, 1995 and 1994 (page 16).
Consolidated Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994 (pages 17 and 18).
Notes to Consolidated Financial Statements (pages 19 through 39).
2. Financial statement schedules required to be filed by Item 8 of this Form 10-K:
Schedules are omitted because of the absence of the conditions under which they are required or because the information is disclosed in the financial statements or in the notes thereto.
3. Exhibits required to be filed by Item 601 of Regulation S-K: Included in this Form 10-K:
Exhibit Number _______________ I. The By-Laws of IBM Credit Corporation.
II. Agreement to furnish information defining the rights of debt holders
III. Statement re computation of ratios
IV. Consent of experts and counsel
V. Financial Data Schedule
Not included in this Form 10-K: The Certificate of Incorporation of IBM Credit Corporation is filed pursuant to the quarterly report on Form 10-Q for the quarterly period ended June 30, 1993, on August 10, 1993, and is hereby incorporated by reference.
The Support Agreement dated as of April 15, 1981, between the Company and IBM is filed with Form SE dated March 26, 1987, and is hereby incorporated by reference.
Power of Attorney of Jeffrey D. Serkes
(b) Reports on Form 8-K: A Form 8-K dated October 21, 1996 was filed with respect to the Company's financial results for the periods ended September 30, 1996.
[SIGNATURE] SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. :ehp3.
IBM CREDIT CORPORATION (Registrant)
By: /s/W. Wilson Lowery, Jr. ________________________ (W. Wilson Lowery, Jr.) Chairman Date: March 25, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities on March 25, 1997.
Signature Title _________ _____
_/s/W. Wilson Lowery, Jr.__ ___________________________ (W. Wilson Lowery, Jr.) Chairman and Director
_/s/Allison R. Schleicher__ ___________________________ (Allison R. Schleicher) Vice President, Finance, and Chief Financial Officer and Director _/s/Kimberly A. Kispert____ ___________________________ (Kimberly A. Kispert) Controller and Treasurer
| | | /s/Allison R. Schleicher Jeffrey D. Serkes Director |By: ________________________ | (Allison R. Schleicher) | Attorney-in-fact |
EXHIBIT INDEX _____________ Reference Number Exhibit Number per Item 601 of in This Regulation S-K Description of Exhibits Form 10-K ________________ _________________________________________ ______________ (3) Certificate of Incorporation and By-Laws
The Certificate of Incorporation of IBM Credit Corporation is filed pursuant to Form 10Q for the quarterly period ended June 30, 1993, on August 10, 1993, and is hereby incorporated by reference.
The By-Laws of IBM Credit Corporation. I
(4)(a) Instruments defining the rights of security holders.
An agreement to furnish to the Securities II and Exchange Commission, on request, a copy of instruments defining the rights of debt holders.
(4)(b) Indenture dated as of January 15, 1989, filed electronically as Exhibit No. 4 to Amendment No. 1 to Form S-3 on April 3, 1989, and is hereby incorporated by reference.
(9) Voting trust agreement. Not applicable (10) Material contracts.
The Support Agreement as of dated April 15, 1981, between the Company and IBM is filed with Form SE dated March 26, 1987, and is hereby incorporated by reference.
(11) Statement re computation of per share Not earnings. applicable
(12) Statement re computation of ratios. III
(18) Letter re change in accounting principles. Not applicable
(21) Subsidiaries of the registrant. Omitted
(22) Published report regarding matters Not submitted to vote of security holders. applicable
(23) Consent of experts and counsel. IV
EXHIBIT INDEX _____________ (continued) Reference Number Exhibit Number per Item 601 of in This Regulation S-K Description of Exhibits Form 10-K ________________ _________________________________________ ______________
(24) Power of Attorney of Jeffrey D. Serkes (incorporated by reference to Exhibit IV(j) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, electronically transmitted to the Securities and Exchange Commission on March 18, 1996).
(27) Financial data schedule. V
(28) Information from reports furnished to Not state insurance regulatory authorities. applicable
(99) Additional exhibits. Not applicable
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
OVERVIEW
Net earnings for 1996 were $271.1 million, yielding a return on average equity of 20.7 percent, as compared with 1995 net earnings of $230.5 million, yielding a return on average equity of 20.9 percent.
ACQUISITION OF CHRYSLER SYSTEMS INC.
On February 8, 1995, the Company acquired all of the issued and outstanding stock of Chrysler Systems Inc. and certain of its affiliates for $133.5 million. The acquisition was consummated pursuant to a share purchase agreement with certain Chrysler Corporation subsidiaries (the Seller). The purchase price was funded by the Company's cash on hand and credits issued to the Seller that were applied against certain future obligations of the Seller to the Company. IBM CS Systems, as the unit is now known, buys, sells and leases data processing equipment, and provides related technology management services such as equipment procurement and asset management for customers of IBM products and related products and services. The transaction was accounted for as a purchase, and IBM CS Systems is included in the Company's consolidated financial statements from the date of acquisition.
FINANCING ORIGINATED
For the year ended December 31, 1996, the Company originated capital equipment financing for end users of $5,750.4 million, a 28 percent increase from $4,480.7 million for 1995. For the year ended December 31, 1996, originations of working capital financing for dealers and remarketers of information industry products increased by 30 percent to $13,387.0 million, from $10,297.6 million for 1995.
The growth in capital equipment financing originated is related to IBM's increase in placements of its products and services in the United States and an increase in the propensity for customers to finance their acquisitions with the Company throughout 1996, compared with 1995.
Capital equipment financings for end users comprised purchases of $3,439.8 million of information handling systems from IBM, financing for IBM software and services of $1,021.3 million, installment and lease financing for state and local government customers of $410.3 million for the account of IBM, financing originated for installment receivables of $190.2 million and other financing of $688.8 million for IBM equipment, as well as related non-IBM equipment to meet IBM customers' total solution requirements. The purchases of $3,439.8 million from IBM consisted of $1,963.3 million for capital leases and $1,476.5 million for operating leases.
FINANCING ORIGINATED (Continued)
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 both IBM's personal system client products and non-IBM products for remarketers financed by the Company throughout 1996. 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 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 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 are fully integrated in the Company's financial statements. Remarketing activities are comprised of 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.
At December 31, 1996, the investment in remarketed equipment on capital and operating leases totaled $305.3 million, a decrease of 35 percent from the 1995 year-end investment of $470.5 million. For the year ended December 31, 1996, the remarketing activities contributed $149.2 million to pretax earnings, which was relatively flat compared with $150.0 million for 1995. Refer to Equipment Sales in Management's Discussion and Analysis on page 10 for additional details.
ASSETS
Total assets increased to $12.9 billion at December 31, 1996, compared with $11.4 billion at December 31, 1995. This increase is primarily the result of financings originated of $16.9 billion exceeding cash collections of $16.5 billion on capital leases, loans receivable and working capital financing receivables. Additionally, growth of $855.6 million in equipment on operating leases during 1996, offset in part by payments to IBM of cash dividends of $45.0 million and a tax payment of $113.3 million contributed to the year-to-year increase in total assets. Total financing assets serviced by the Company at December 31, 1996, were $12.7 billion, compared with $11.8 billion at December 31, 1995. Total financing assets serviced include the remaining balance of financing
ASSETS (Continued)
receivables securitized and sold ($324.2 million in 1996, $610.1 million in 1995), capital and operating leases ($6,766.2 million in 1996, $5,662.1 million in 1995), loans receivable ($1,846.9 million in 1996, $1,473.8 million in 1995), working capital financing receivables ($2,898.7 million in 1996, $3,158.9 million in 1995), subordinated interests in trusts resulting from the securitization and sale of financing receivables ($37.0 million in 1996, $86.8 million in 1995) and other assets ($44.6 million in 1996, $55.4 million in 1995). Also included in total financing assets serviced are state and local government installment and lease financing receivables of IBM ($805.9 million in 1996, $757.2 million in 1995).
The carrying amount of marketable securities, as reported in the Company's Consolidated Statement of Financial Position, approximates market value. At December 31, 1996, the marketable securities consisted entirely of debt securities, and were available-for-sale.
LIABILITIES AND STOCKHOLDER'S EQUITY
The assets of the Company were financed with $8,082.3 million of debt at December 31, 1996. Total short-term and long-term debt increased by approximately $494.2 million, from $7,588.1 million at December 31, 1995. This increase was the result of increases in commercial paper outstanding of $704.9 million and long-term debt of $400.4 million, offset by the maturity of medium-term notes of $611.1 million. Included in short-term debt at December 31, 1996, was $125.0 million payable to IBM at market terms and conditions, maturing on November 1, 1997. The $125.0 million payable to IBM was included in long-term debt at December 31, 1995.
At December 31, 1996, the Company had available $1.4 billion of a shelf registration with the Securities and Exchange Commission (SEC) for the issuance of debt securities. This shelf registration allows the Company rapid access to domestic financial markets, and 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, 1996, to issue and sell up to $5.0 billion of debt securities in domestic and foreign financial markets through December 31, 1997. 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 3.0 billion in European Currency Units (ECU), or its equivalent in any other currency. At December 31, 1996, there was 2.0 billion in ECU available for the issuance of debt securities under this program. The Company will issue debt securities over the next twelve months under this program, dependent on prevailing market conditions and its need for such funding.
LIABILITIES AND STOCKHOLDER'S EQUITY (Continued)
The Company has the option, as approved by the Board of Directors on November 1, 1996, to sell, assign, pledge or transfer up to $3.0 billion of assets to third parties through December 31, 1999. Included within this $3.0 billion authorization is $450.0 million of a separate shelf registration for issuance of asset-backed securities, which a subsidiary of the Company has available. The subsidiary's intention to issue any asset-backed securities over the next twelve months under this shelf registration is dependent on prevailing market conditions and its need for such funding.
The Company is an authorized borrower of up to $3.0 billion under a $10.0 billion IBM committed global credit facility, and has a liquidity agreement with IBM for $500.0 million. The Company has no borrowings outstanding under the committed global credit facility or the liquidity agreement. The Company and IBM have 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 no borrowings outstanding under this agreement at December 31, 1996. The Company had borrowings outstanding of $214.1 million at December 31, 1995. 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 financings and loan portfolios, to fund working capital requirements and to service debt.
The Company uses agreements related to currencies and interest rates to lower costs of funding its business, to diversify sources of funding, or to manage interest rate and currency exposures arising from mismatches between assets and liabilities. The Company enters into such financial instrument transactions solely for hedging purposes. The Company does not enter into such financial instrument transactions for trading or other speculative purposes. The Company routinely evaluates existing and potential counterparty credit exposures associated with such financial instrument transactions to ensure that these exposures remain within credit guidelines. The Company does not anticipate any material adverse effect on its financial position resulting from its use of these instruments, nor does it anticipate nonperformance by any of its counterparties.
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 increased by approximately $682.6 million to $2,289.0 million at December 31, 1996, from $1,606.4 million at December 31, 1995. This increase was primarily attributable to higher volumes of capital equipment purchases from IBM in the fourth quarter of 1996, compared with the fourth quarter of 1995 and lower tax payments made to IBM during 1996, compared with 1995. Tax payments made
to IBM were $108.4 million, compared with $330.8 million for current tax liability during 1996 and 1995, respectively.
LIABILITIES AND STOCKHOLDER'S EQUITY (Continued)
Total stockholder's equity at December 31, 1996, was $1,435.1 million, up $226.5 million from year-end 1995. The increase in stockholder's equity reflects 1996 net earnings of $271.1 million and the issuance of $.4 million of capital stock to IBM, offset by the payment of $45.0 million in cash dividends to IBM during 1996. During 1994, a program was developed to periodically transfer certain excess IBM manufacturing assets to the Company for the purpose of remarketing such assets. In exchange for assets IBM transferred to the Company, the Company issued 4 shares and 33 shares of capital stock, par value $1.00 per share, to IBM during the first quarter of 1996 and the fourth quarter of 1995, respectively.
At December 31, 1996, the Company's debt to equity ratio was 5.6:1, compared with 6.3:1 at December 31, 1995.
TOTAL CASH PROVIDED BEFORE DIVIDENDS
Total cash provided before dividends was $341.0 million in 1996, compared with total cash used before dividends of $132.5 million in 1995. Total cash provided before dividends reflects $2,235.1 million of cash used in investing and financing activities before dividends, offset by $2,576.1 million of cash provided by operating activities in 1996. For 1995, total cash used before dividends reflects $1,984.7 million of cash used in investing and financing activities before dividends, offset by $1,852.2 million of cash provided by operating activities. Cash and cash equivalents at December 31, 1996, totaled $632.8 million, an increase of $296.0 million, compared with the balance at December 31, 1995.
INCOME FROM LEASES
Income from leases increased 12 percent to $524.0 million for the year ended December 31, 1996, from $466.4 million in 1995. The growth in capital equipment financings for end users under capital and operating leases during 1996 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 $143.6 million in 1996, an increase of 57 percent from 1995.
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, considered to be other than temporary, must be recognized currently.
INCOME FROM LEASES (Continued)
A review of the Company's $818.3 million residual value portfolio at December 31, 1996, 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 recorded a $36.4 million reduction to income from leases during 1996 to recognize decreases in the expected future residual value of specific leased equipment, compared with $16.0 million during 1995. The year-to-year increase primarily reflects additional anticipated declines in residual values for storage related products.
INCOME FROM LOANS
Income from loans increased 26 percent to $148.8 million in 1996, compared with $117.7 million in 1995. This increase was primarily the result of an increase in financing originated for software and services during 1995 and 1996.
INCOME FROM WORKING CAPITAL FINANCING
Income from working capital financing increased 9 percent to $265.3 million in 1996, compared with $242.5 million in 1995. This increase was mainly due to growth in the average working capital financing receivables outstanding during 1996, compared with 1995. The growth in average working capital financing receivables outstanding is due to increased originations.
EQUIPMENT SALES
Equipment sales amounted to $419.3 million in 1996, compared with $493.6 million in 1995. The decrease in equipment sales reflects less equipment available at the end of lease term, which in turn is primarily due to lower financing originated in prior years. Also contributing to this decrease in equipment sales is the growth of equipment remarketed as operating leases, rather than sales. 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 in 1996 was $50.9 million, a decrease of 32 percent, compared with $74.6 million in 1995. The gross profit margin in 1996 decreased to 12.1 percent, compared with 15.1 percent in 1995. The mix of products available for sale and changing market conditions for certain used equipment during the applicable periods are factors contributing to the decrease in gross profit margins.
OTHER INCOME
Other income increased 6 percent to $140.4 million in 1996, compared with $132.0 million in 1995. This increase is largely attributable to the recognition of one-time pretax gains of $9.3 million upon the sale of certain restricted securities during the first quarter of 1996. Additionally, interest income earned on cash and cash equivalents and fees for the servicing of IBM financing receivables securitized and sold increased during 1996, compared with 1995. These year-to-year increases were partially offset by a $5.0 million pretax gain recognized during the first quarter of 1995, upon Comdisco, Inc.'s redemption of a convertible subordinated promissory note on March 1, 1995, and by a $1.9 million pretax gain recognized upon the sale of certain restricted securities during the fourth quarter of 1995.
The Company continues to service financing receivables securitized and sold in prior years, and earns a fee, which is included in other income. During 1996 and 1995, there were no securitizations or sales of financing receivables by the Company.
Also included in other income is interest income earned on cash and cash equivalents and notes, as well as fees for managing IBM's state and local government installment and lease financing receivables portfolio.
INTEREST EXPENSE
As a result of an increase in the Company's average outstanding debt balance, interest expense increased 11 percent to $436.1 million in 1996, compared with $394.6 million in 1995. Due to generally lower interest rates, the Company's average cost of debt decreased to 5.8 percent in 1996, from 6.0 percent in 1995.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses were $201.2 million in 1996, an increase of 6 percent compared with $190.4 million in 1995. This increase is mainly due to a growth in the Company's resources for 1996, resulting in an increase in compensation related expenses, and twelve months of expenses incurred by IBM CS Systems (formerly known as Chrysler Systems, Inc.), compared with eleven months of expenses during 1995.
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 for capital equipment. 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 1995 and 1996, 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 December 31, 1996, and December 31, 1995, approximately 62 percent and 70 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 1996 and 1995. 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 overall provision for receivable losses decreased to $44.9 million in 1996, compared with $68.4 million in 1995. While there was a growth in capital equipment financings originated during 1996, compared with 1995, and a corresponding increase in the provision for receivable losses, the increase was offset by declines in specific reserves.
INCOME TAXES
The effective tax rate in 1996 was 39.4 percent, compared with 39.3 percent in 1995. Consistent with 1996, the Company expects its effective tax rate to continue to approximate the statutory federal and state income tax rates in future years.
NET EARNINGS
Net earnings grew 18 percent to $271.1 million in 1996, compared with $230.5 million in 1995. This increase was mainly due to the increase in income from leases, loans and working capital financings. The year-to-year income growth was the result of increased capital equipment and working capital financings originated from prior years.
NET EARNINGS (Continued)
Offsetting the year-to-year income growth was an increase in selling, general, and administrative expenses primarily attributable to a growth in the Company's resources, and additional interest expense due to an increase in the Company's average outstanding debt balance.
RETURN ON AVERAGE EQUITY
The 1996 results yielded an annualized return on average equity of 20.7 percent, compared with 20.9 percent in 1995.
CREDIT RATING
On December 16, 1996, Fitch Investors Service, L.P., announced it had upgraded its rating for the Company's senior debt from A+ to AA-. On August 28, 1995, Moody's Investors Service, Inc., announced it had upgraded its rating for the Company's long-term debt from A3 to A1.
ACCOUNTING CHANGES
The Company implemented new accounting standards in 1996, 1995 and 1994. None of these standards had a material effect on the financial position or results of operations of the Company.
In June 1996, the Financial Accounting Standards Board issued SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This standard provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. While the standard requires implementation in 1997, the Company is already generally in compliance.
Effective January 1, 1995, the Company implemented SFAS 114, "Accounting by Creditors for Impairment of a Loan," and SFAS 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures." These standards prescribe impairment measurements and reporting related to certain loans.
In 1995, the Company implemented SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This standard prescribes the method for asset impairment evaluation for long-lived assets and certain identifiable intangibles that are either held and used or to be disposed of. The Company was generally in conformance with this standard prior to adoption.
Effective January 1, 1994, the Company implemented SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities." This standard addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities.
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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
Report of Independent Accountants
To the Stockholder and Board of Directors of IBM Credit Corporation
In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a) 1. on page 40 present fairly, in all material respects, the financial position of IBM Credit Corporation and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP Stamford, CT January 20, 1997, except as to the Subsequent Event note on page 38, which is as of January 24, 1997
IBM CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation: The consolidated financial statements include the accounts of the Company and those of its subsidiaries that are more than 50 percent owned. Investments in partnerships in which the Company has typically a 20 percent ownership are accounted for using the equity method.
Cash and Cash Equivalents: Time deposits with original maturities generally of three months or less are included in cash and cash equivalents. Cash paid for interest was $443.2 million, $388.3 million and $315.9 million in 1996, 1995 and 1994, respectively.
Marketable Securities: The Company's marketable securities, all of which are debt securities, are available-for-sale. The carrying amount of the debt securities approximates market value.
Finance Income Recognition: Income attributable to direct financing leases and loans receivable is initially recorded as unearned income and subsequently recognized as finance income at level rates of return over the term of the leases or receivables. Income recognized from leveraged leases includes the amortization of unearned finance income and deferred investment and other tax credits over the term of the leases, at level rates of return, during periods when the net investment balance is positive.
Equipment on Operating Leases: Equipment is depreciated on a straight-line basis to its estimated residual value over the lease term.
Equipment Sales Income Recognition: Revenue from equipment sales to existing lessees is recognized at the effective date a purchase provision is exercised. Revenue from sales to parties other than existing lessees is recognized when title transfers.
Allowance for Receivable Losses: The allowance for receivable losses is determined on the basis of actual collection experience and estimated collectibility of the related assets.
Income Taxes: Income tax expense is based on reported earnings before income taxes. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes on a separate company basis. In accordance with Statement of Financial Accounting Standards (SFAS) 109, "Accounting for Income Taxes", these deferred taxes are measured by applying currently enacted tax laws.
SIGNIFICANT ACCOUNTING POLICIES (Continued):
Financial Instruments: The Company uses agreements related to currencies and interest rates to lower costs of funding its business, to diversify sources of funding, or to manage interest rate and currency exposures arising from mismatches between assets and liabilities. The Company enters into such financial instrument transactions solely for hedging purposes. The Company does not enter into such financial instrument transactions for trading or other speculative purposes. Debt obligations denominated in foreign currencies and subject to foreign currency swap agreements are included in the Consolidated Statement of Financial Position at the contractual rate of exchange in the respective foreign currency swap agreement. Gains and losses on forward contracts and purchased options, designated as hedges, are deferred and included in the settlement of the related transaction.
Use of Estimates: Management uses estimates in preparing the consolidated financial statements, in conformity with generally accepted accounting principles. Significant estimates include collectibility of receivables, recoverability of residual values of equipment on capital and operating leases, and useful economic lives of long-term fixed assets. The Company regularly assesses these estimates, and while actual results may differ from these estimates, management believes that material changes will not occur in the near term.
RELATIONSHIP WITH IBM:
Pursuant to a Support Agreement between IBM and the Company, IBM has agreed to retain 100 percent of the voting capital stock of the Company, unless required to dispose of any or all such shares of stock pursuant to a court decree or order of any governmental authority that in the opinion of counsel to IBM may not be successfully challenged. IBM has also agreed to cause the Company to have a tangible net worth of at least $1.00 at all times. The Support Agreement provides that it shall not be deemed to constitute a guarantee by IBM to any party of the payment of any debt or other obligation, indebtedness or liability of the Company. The Support Agreement may not be modified, amended or terminated while there is outstanding any debt of the Company, unless all holders of such debt have consented in writing.
Pursuant to an operating agreement, IBM provides collection, administration and other services and products for the Company and is reimbursed for the cost of these services and products. The Company is compensated for services performed for IBM, primarily for management of IBM's state and local government installment receivables portfolio, the fees for which are reflected in other income.
The operating agreement with IBM also provides that installment receivables, which include finance charges, may be purchased by the Company at a mutually agreed-upon price. The Company is reimbursed by IBM for any price adjustments and concessions that reduce the amount of receivables previously purchased by the Company.
RELATIONSHIP WITH IBM (Continued):
The operating agreement with IBM also provides that IBM will offer term leases of the Company to creditworthy potential lessees. IBM's sales price of the equipment to the Company will typically be at the purchase price payable by the lessee, unless the Company is participating in IBM product promotions.
The Company also has an indemnification agreement with IBM. IBM reimburses the Company for losses on working capital financing receivables with specific dealers and for specific transactions. Approximately $10.5 million, $9.3 million and $3.1 million of such losses have been reimbursed by IBM in 1996, 1995 and 1994, respectively.
The Company has a liquidity agreement with IBM International Finance, N.V. (IIF), whereby the Company has agreed to advance funds to IIF as an enhancement to IIF's ability to carry out business. The amount of the advances is not to exceed the greater of $500.0 million or 5 percent of the Company's total assets. To support this agreement, the Company has entered into a backup agreement with IBM, whereby IBM has agreed to advance funds to the Company, in an amount not to exceed the greater of $500.0 million or 5 percent of the Company's total assets, if at any time the Company requires such funds to satisfy its agreement with IIF. The Company has neither received nor made any advances with respect to these agreements at December 31, 1996 and 1995.
The Company, together with IBM and IIF, has the option to issue and sell debt securities in an aggregate nominal amount of up to 3.0 billion in European Currency Units, or its equivalent in any other currency. This option is part of a $5.0 billion Board of Directors' authorization the Company has to issue and sell debt securities in domestic and foreign financial markets through December 31, 1997. As previously mentioned, at December 31, 1996, there was 2.0 billion in ECU available for the issuance of debt securities under this program. The Company's intention to issue any debt securities over the next twelve months under this program is dependent on prevailing market conditions and the Company's need for such funding.
From time to time, the Company will either borrow funds from or lend funds to IBM and its affiliates, at prevailing interest rates. During the fourth quarter of 1994, the Company and IBM signed master loan agreements providing additional funding flexibility to each other. These agreements allow for short-term (up to 270-day) funding, made available at market terms and conditions, upon the request of either the Company or IBM. The purpose of these agreements is to finance the borrower's assets, for working capital or for other general corporate purposes. At December 31, 1996, the Company had no borrowings outstanding under these agreements. At December 31, 1995, the Company had borrowings outstanding under these agreements of $214.1 million, payable to IBM. This borrowing was repaid on January 2, 1996.
RELATIONSHIP WITH IBM (Continued):
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.
MARKETABLE SECURITIES:
The following is a summary of marketable securities at December 31, 1996 and December 31, 1995 which were available-for-sale. The marketable securities consisted entirely of debt securities. Contractual maturities of marketable debt securities at December 31, 1996 and December 31, 1995, are between one and five years. It is expected that actual maturities will differ from contractual maturities because some borrowers have the right to call or prepay certain obligations, sometimes without call or prepayment penalties.
(Dollars in thousands) 1996 1995 ________ _________ Corporate . . . . . . . . . . . . . . . . $125,138 $ 68,220 U.S. federal agency . . . . . . . . . . . 34,210 21,710 ________ _________ Total, which approximates market value. . $159,348 $ 89,930 ======== =========
NET INVESTMENT IN CAPITAL LEASES:
The Company's capital lease portfolio includes direct financing and leveraged leases. The Company originates financing for customers in a variety of industries and throughout the United States. The Company has a diversified portfolio of capital equipment financings for end users.
Direct financing leases consist principally of IBM information handling equipment with terms generally from three to five years. The components of the net investment in direct financing leases at December 31, 1996 and 1995, are as follows:
(Dollars in thousands) 1996 1995 ___________ ___________ Gross lease payments receivable . . . . . $4,299,250 $4,071,811 Estimated unguaranteed residual values. . 260,004 293,497 Deferred initial direct costs . . . . . . 30,087 20,520 Unearned income . . . . . . . . . . . . . (528,830) (576,149) Allowance for receivable losses . . . . . (44,131) (46,266) ___________ ___________ $4,016,380 $3,763,413 =========== ===========
NET INVESTMENT IN CAPITAL LEASES (Continued):
The scheduled maturities of minimum lease payments outstanding at December 31, 1996, expressed as a percentage of the total, are due approximately as follows:
Within 12 months. . . . . . . . . . . . . . . . . . . . 46% 13 to 24 months . . . . . . . . . . . . . . . . . . . . 33 25 to 36 months . . . . . . . . . . . . . . . . . . . . 17 37 to 48 months . . . . . . . . . . . . . . . . . . . . 3 After 48 months . . . . . . . . . . . . . . . . . . . . 1 ____ 100% ====
Included in the net investment in capital leases are $55.6 million and $118.4 million of seller interest at December 31, 1996 and 1995, respectively, relating to the securitization of such leases.
Leveraged lease investments include coal-fired electric generating facilities, commercial aircraft and other non-IBM manufactured equipment. Leveraged leases have remaining terms ranging from five to twenty-two years. The components of the net investment in leveraged leases at December 31, 1996 and 1995, are as follows:
(Dollars in thousands) 1996 1995 __________ __________ Net rents receivable. . . . . . . . . . $ 258,022 $ 263,800 Estimated unguaranteed residual values. 39,752 39,752 Unearned and deferred income. . . . . . (93,296) (94,606) Allowance for receivable losses . . . . (6,036) (6,104) __________ __________ Investment in leveraged leases. . . . . 198,442 202,842 Less: Deferred income taxes. . . . . . (196,460) (206,487) __________ __________ Net investment in leveraged leases. . . $ 1,982 $ (3,645) ========== ==========
Refer to the note on page 26, Allowance for Receivable Losses, for a reconciliation of the direct financing leases and leveraged leases allowances for receivable losses.
EQUIPMENT ON OPERATING LEASES:
Operating leases consist principally of IBM information handling equipment with terms generally from two to four years. The components of equipment on operating lease at December 31, 1996 and 1995, are as follows:
(Dollars in thousands) 1996 1995 ____________ ____________ Cost. . . . . . . . . . . . . . . . . . . $ 4,839,547 $ 3,752,380 Accumulated depreciation. . . . . . . . . (2,288,165) (2,056,568) ____________ ____________ $ 2,551,382 $ 1,695,812 ============ ============
EQUIPMENT ON OPERATING LEASES (Continued):
Minimum future rentals were approximately $2,266.6 million at December 31, 1996. The scheduled maturities of the minimum future rentals at December 31, 1996, expressed as a percentage of the total, are due approximately as follows:
Within 12 months. . . . . . . . . . . . . . . . . . . . 46% 13 to 24 months . . . . . . . . . . . . . . . . . . . . 32 25 to 36 months . . . . . . . . . . . . . . . . . . . . 16 37 to 48 months . . . . . . . . . . . . . . . . . . . . 4 After 48 months . . . . . . . . . . . . . . . . . . . . 2 ____ 100% ==== LOANS RECEIVABLE:
Loans receivable include installment receivables which are principally financings of customer purchases of IBM information handling products. Also included are other financings, comprising primarily IBM software and services. The components of loans receivable at December 31, 1996 and 1995, are as follows:
(Dollars in thousands) 1996 1995 ___________ ___________ Gross loans receivable . . . . . . . $2,166,019 $1,743,920 Deferred initial direct costs. . . . 13,168 9,259 Unearned income. . . . . . . . . . . (268,876) (219,988) Allowance for receivable losses. . . (63,364) (59,369) ___________ ___________ $1,846,947 $1,473,822 =========== ===========
The scheduled maturities of loans receivable outstanding at December 31, 1996, expressed as a percentage of the total, are due approximately as follows:
Within 12 months . . . . . . . . . . . . . . . . . . . 42% 13 to 24 months. . . . . . . . . . . . . . . . . . . . 31 25 to 36 months. . . . . . . . . . . . . . . . . . . . 17 37 to 48 months. . . . . . . . . . . . . . . . . . . . 7 After 48 months. . . . . . . . . . . . . . . . . . . . 3 ____ 100% ====
Included in loans receivable are $40.0 million and $63.0 million at December 31, 1996, and 1995, respectively, that are due from the Company's term lease partnerships. Such loans are secured by the general pool of leases in the partnerships. Also included in loans receivable are $16.1 million and $29.5 million of seller interest at December 31, 1996, and 1995, respectively, relating to the securitization of such loans.
Refer to the note on page 26, Allowance for Receivable Losses, for a reconciliation of the loans receivable allowance for receivable losses.
WORKING CAPITAL FINANCING RECEIVABLES:
Working capital financing receivables arise primarily from secured inventory and accounts receivable financing for dealers and remarketers of IBM and non-IBM products and services. Inventory financing includes the financing of the purchase by these dealers and remarketers of information handling products. As previously discussed in the note on pages 20 through 22, Relationship with IBM, the Company is reimbursed by IBM for certain losses on working capital financing receivables with specific dealers and for specific transactions. Approximately $10.5 million, $9.3 million and $3.1 million of such losses have been reimbursed by IBM in 1996, 1995 and 1994, respectively. With the growth of the Company's working capital financing business in 1996 and 1995, the concentration of such financings for certain large dealers and remarketers of information industry products is significant. However, the Company has a secured position on substantially all of its inventory and accounts receivable financing which mitigates the amount of potential loss. The Company does not believe that there is a risk of loss that would have a material impact on its financial position or results of operations.
Payment terms for inventory-secured financing generally range from 30 days to 45 days. Accounts receivable financing includes the financing of trade accounts receivable for these dealers and remarketers. Payment terms for accounts receivable secured financing typically range from 30 days to 90 days. The components of working capital financing receivables at December 31, 1996, and 1995, are as follows:
(Dollars in thousands) 1996 1995 ___________ ___________ Working capital financing receivables $2,955,411 $3,206,736 Allowance for receivable losses . . . (56,723) (47,804) ___________ ___________ $2,898,688 $3,158,932 =========== ===========
Included in working capital financing receivables are $608.7 million and $693.7 million of seller interest at December 31, 1996, and 1995, respectively, relating to the securitization of such receivables. Additionally, the Company has $2,051.5 million of approved but unused working capital financing credit lines available to customers at December 31, 1996.
Refer to the note on page 26, Allowance for Receivable Losses, for a reconciliation of the working capital financing receivables allowance for receivable losses.
ALLOWANCE FOR RECEIVABLE LOSSES:
The following is a reconciliation of the allowance for receivable losses, by portfolio, for the years ended December 31, 1996, 1995 and 1994:
(Dollars in thousands) Direct Working Financing Leveraged Loans Capital 1996 Total Leases Leases Receivable Fin. Rec. _____________________ _________ _________ __________ __________ _________ Beginning of year . . $159,543 $ 46,266 $ 6,104 $ 59,369 $ 47,804 Provision for receivable losses. . 44,883 17,940 - 13,260 13,683 Accounts written off (net of recoveries). (40,849) (22,104) - (11,686) (7,059) Transfers (to) from allowance for losses on receivables sold and other, net . . . 6,677 2,029 (68) 2,421 2,295 _________ _________ __________ __________ _________ End of year . . . . . $170,254 $ 44,131 $ 6,036 $ 63,364 $ 56,723 ========= ========= ========== ========== =========
Direct Working Financing Leveraged Loans Capital 1995 Total Leases Leases Receivable Fin. Rec. _____________________ _________ _________ __________ __________ _________ Beginning of year . . $ 89,489 $ 24,389 $ 7,171 $ 41,665 $ 16,264 Provision for receivable losses. . 68,417 16,208 - 21,200 31,009 Accounts written off (net of recoveries). (5,680) 2,967 (1,067) (7,232) (348) Transfers from allowance for losses on receivables sold and other, net . . . 7,317 2,702 - 3,736 879 _________ _________ __________ __________ _________ End of year . . . . . $159,543 $ 46,266 $ 6,104 $ 59,369 $ 47,804 ========= ========= ========== ========== =========
Direct Working Financing Leveraged Loans Capital 1994 Total Leases Leases Receivable Fin. Rec. _____________________ _________ _________ __________ __________ _________ Beginning of year . . $126,440 $ 47,398 $ 7,240 $ 57,504 $ 14,298 Provision for receivable losses. . 44,097 37,200 - 1,500 5,397 Accounts written off (net of recoveries). (75,533) (54,610) (69) (17,862) (2,992) Transfers (to) from allowance for losses on receivables sold and other, net . . . (5,515) (5,599) - 523 (439) _________ _________ __________ __________ _________ End of year . . . . . $ 89,489 $ 24,389 $ 7,171 $ 41,665 $ 16,264 ========= ========= ========== ========== =========
ALLOWANCE FOR RECEIVABLE LOSSES (Continued):
The reconciliation of the allowance for receivable losses, by portfolio, presented on page 26, excludes the allowance for estimated credit losses on receivables sold, which was $5.1 million and $9.7 million at December 31, 1996 and 1995, respectively. Provisions for expected losses as they relate to receivables sold, are provided during the periods in which the receivables were originated. No material provisions were made for the years ended December 31, 1996 and December 31, 1995.
At December 31, 1996, 1995 and 1994, the allowance for receivable losses approximated 1.5 percent, 1.6 percent and 1.1 percent, respectively, of the Company's portfolio of leases, loans and working capital financing receivables. The decline in this ratio from 1995 to 1996 was due to a decrease in specific reserves recorded for certain receivables.
INVESTMENTS AND OTHER ASSETS:
The components of investments and other assets at December 31, 1996, and 1995, are as follows:
(Dollars in thousands) 1996 1995 ________ ________ Receivables from customers . . . . . . . . . $259,588 $223,851 Investments in partnerships and other . . . . 142,742 72,524 Receivables from affiliates . . . . . . . . . 99,214 215,292 Due and deferred from receivable sales. . . . 63,046 106,079 Remarketing inventory . . . . . . . . . . . . 35,986 50,822 Other assets . . . . . . . . . . . . . . . . 41,542 35,393 ________ ________ $642,118 $703,961 ======== ======== Due and deferred from receivable sales are net of the allowance for estimated credit losses on receivables sold and include subordinated interests in trusts, cash deposits held by trustee, receivables from investors and interest in excess servicing cash flows. Due and deferred from receivable sales are restricted assets and subject to limited recourse provisions. There were no sales in 1996 and 1995 of financing receivables to investors. The Company acts as servicer for receivables securitized and sold, and is contingently liable for up to $6.5 million in the event of nonperformance, default or other loss relating to the outstanding pool balance at December 31, 1996, of IBM state and local government installment receivables securitized and sold. Adequate reserves exist to cover potential losses.
Included in other assets at December 31, 1996, and 1995, are $10.0 million and $6.5 million, respectively, on deposit in restricted accounts, held as security deposits received from customers. Also included in other assets at December 31, 1996, and December 31, 1995, respectively, are $4.1 million on deposit in restricted accounts for purposes of credit enhancement. The Company, as servicer, deposited the cash in connection with certain tax-exempt grantor trusts comprised of pools of IBM state and local government installment receivables. The trustee of each grantor trust is entitled to draw upon the amounts in the restricted accounts,
INVESTMENTS AND OTHER ASSETS (Continued):
in the event of nonperformance, default or other loss relating to such installment receivables.
SHORT-TERM DEBT:
The components of short-term debt at December 31, 1996, and 1995, are as follows:
(Dollars in thousands) 1996 1995 __________ __________ Commercial paper, with rates averaging 5.6% in 1996 and 5.7% in 1995. . . . . . . . . $4,717,531 $4,012,615 Other short-term debt, with rates averaging 5.8% in 1996 and 6.3% in 1995. . . . . . . . . 1,509,994 1,532,187 Current maturities of long-term debt. . . . . . 213,875 713,683 __________ __________ 6,441,400 6,258,485 IBM short-term borrowings . . . . . . . . . . . 125,000 214,142 __________ __________ $6,566,400 $6,472,627 ========== ========== The approximate weighted average effective interest rates, above, include the effects of interest rate swap agreements and have been calculated on the basis of rates in effect at December 31, 1996, and 1995. The approximate weighted average stated rates (before the effects of interest rate swap agreements) on commercial paper outstanding at December 31, 1996, and 1995, were 5.5% and 5.9%, respectively. The approximate weighted average stated rates (before the effects of interest rate swap agreements) on other short-term debt outstanding at December 31, 1996, and 1995, were 5.5% and 6.5%, respectively. Other short-term debt primarily includes notes having maturities between nine and twelve months offered through the Company's medium-term note program.
On November 1, 1994, the Company borrowed $125.0 million from IBM at market terms and conditions. The loan matures on November 1, 1997.
LONG-TERM DEBT:
The components of long-term debt at December 31, 1996, and 1995, are as follows:
(Dollars in thousands) 1996 1995 ___________ ___________ Medium-term notes with original maturities ranging from 1997 to 2008, with rates averaging 5.9% in 1996 and 5.8% in 1995. . . $1,731,344 $1,704,982 IBM loan payable, due November 1997 . . . . . - 125,000 ___________ ___________ 1,731,344 1,829,982 Net unamortized discounts . . . . . . . . . . (1,532) (859) ___________ ___________ 1,729,812 1,829,123 Less: Current maturities . . . . . . . . . . 213,875 713,683 ___________ ___________ $1,515,937 $1,115,440 =========== ===========
LONG-TERM DEBT (Continued):
The approximate weighted average effective interest rates include the effects of interest rate swap agreements and have been calculated on the basis of rates in effect at December 31, 1996, and 1995. The approximate weighted average stated rates (before the effects of interest rate swap agreements) on medium-term notes outstanding at December 31, 1996, and 1995, were 5.9% and 5.8%, respectively. Discounts and premiums have the effect of modifying the stated rate of interest on long-term debt offerings.
Annual maturity of long-term debt at December 31, 1996, is as follows:
(Dollars in thousands)
1997 . . . . . . . . . . . . . . . . . . . $ 213,875 1998 . . . . . . . . . . . . . . . . . . . 531,394 1999 . . . . . . . . . . . . . . . . . . . 456,075 2000 . . . . . . . . . . . . . . . . . . . 201,000 2001 . . . . . . . . . . . . . . . . . . . 265,000 2002 and thereafter . . . . . . . . . . . 64,000 __________ $1,731,344 ==========
RATIO OF EARNINGS TO FIXED CHARGES:
The ratio of earnings to fixed charges calculated in accordance with applicable Securities and Exchange Commission requirements was 2.02, 1.96 and 2.34 for the years ended December 31, 1996, 1995 and 1994, respectively.
RELATED COMPANY TRANSACTIONS:
IBM charged the Company $64.8 million, $62.6 million and $67.2 million in 1996, 1995 and 1994, respectively, representing costs for lease services, employee benefit plans, facilities rental and staff support.
The Company received compensation for services and benefits provided to IBM. Included in income from working capital financing is fee income earned from IBM of $63.1 million, $51.1 million and $40.4 million in 1996, 1995 and 1994, respectively. The fees received also include payment for the management of IBM's portfolio of state and local government installment receivables of $51.0 million, $46.8 million and $50.8 million in 1996, 1995 and 1994, respectively, which are included in other income.
RELATED COMPANY TRANSACTIONS (Continued):
Amounts due to IBM and affiliates include current income taxes payable, as well as amounts for software, services, purchases of receivables and purchases of equipment for term leases. At December 31, 1996, and 1995, amounts due to IBM and affiliates were $2,289.0 million and $1,606.4 million, respectively.
Interest and finance income of $1.9 million, $6.9 million and $12.9 million was earned from loans to IBM and affiliates in 1996, 1995 and 1994, respectively. Interest expense of $10.6 million, $10.2 million and $8.5 million was incurred on loans from IBM and affiliates during 1996, 1995 and 1994, respectively.
The Company also provides equipment financing at market rates to IBM and affiliated companies for both IBM and non-IBM products. The Company originated $682.0 million and $305.5 million of such financings during 1996 and 1995, respectively. At December 31, 1996, and 1995, approximately $828.0 million and $687.4 million, respectively, of such financings were included in the lease and loan portfolio. Of these amounts, $723.4 million and $677.3 million were included in the Company's operating lease portfolio at December 31, 1996, and 1995, respectively. The finance income earned from operating leases to IBM and affiliated companies, net of depreciation expense, was $107.6 million, $91.9 million and $53.3 million in 1996, 1995 and 1994, respectively.
An intercompany tax allocation agreement (the Agreement) exists between the Company and its parent company, IBM. The Agreement aligns the settlement of federal and state tax benefits and/or obligations with the Company's provision for income taxes determined on a separate company basis. The Company is part of the IBM consolidated federal tax return and files separate state tax returns in selected states. Included in amounts due to IBM and affiliates at December 31, 1996, and 1995, are $5.5 million and $40.9 million, respectively, of current income taxes payable determined in accordance with the Agreement. Cash paid for income taxes to IBM and to states that require separate tax returns in 1996, 1995 and 1994 was $113.3 million, $339.2 million and $348.3 million, respectively.
PROVISION FOR INCOME TAXES:
The components of the provision for income taxes are as follows:
(Dollars in thousands) 1996 1995 1994 _________ __________ __________ Federal: Current . . . . . . . . . . $ 60,741 $ 114,262 $ 271,304 Deferred. . . . . . . . . . 83,637 9,306 (136,766) _________ __________ __________ 144,378 123,568 134,538 _________ __________ __________ State and local: Current . . . . . . . . . . 19,216 23,405 53,996 Deferred. . . . . . . . . . 12,528 2,482 (25,831)
_________ __________ __________ 31,744 25,887 28,165 _________ __________ __________ Total provision . . . . . . $ 176,122 $ 149,455 $ 162,703 ========== ========== ==========
PROVISION FOR INCOME TAXES (Continued):
Changes in the deferred tax assets and liabilities resulting from temporary differences between financial and tax reporting are as follows:
(Dollars in thousands) 1996 1995 __________ __________ Deferred tax assets (liabilities):
Provision for receivable losses. . . . . . $ 90,909 $ 66,981 Federal benefit for state and local taxes. - 24,080 Lease income and depreciation. . . . . . . (901,514) (801,561) Other, net . . . . . . . . . . . . . . . . 49,111 45,334 __________ __________ Deferred income taxes . . . . . . . . . . . . $(761,494) $(665,166) ========== ==========
The provision for income taxes varied from the U.S. federal statutory income tax rate as follows:
1996 1995 1994 ______ ______ ______ Federal statutory rate. . . . . . . . 35.0% 35.0% 35.0% State and local taxes, net of federal tax benefit . . . . . . . 4.4 4.4 4.5 Other, net. . . . . . . . . . . . . . - (0.1) (0.1) ______ ______ ______ Effective income tax rate . . . . . . 39.4% 39.3% 39.4% ====== ====== ======
FINANCIAL INSTRUMENTS:
The Company uses agreements related to currencies and interest rates to lower costs of funding its business, to diversify sources of funding, or to manage interest rate and currency exposures arising from mismatches between assets and liabilities. The Company enters into such financial instruments solely for hedging purposes. The Company does not enter into such financial instrument transactions for trading or other speculative purposes. The Company routinely evaluates existing and potential counterparty credit exposures associated with such financial instrument transactions to ensure that these exposures remain within credit guidelines.
Under interest rate swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between interest amounts calculated by reference to a floating index or a fixed rate on an agreed upon notional principal amount. Swap contracts are primarily between one and five years in duration. The Company enters into currency exchange agreements to hedge debt denominated in foreign currencies. The term of the currency derivatives is generally less than five years. The purpose of the Company's foreign currency hedging activities is to protect itself from the risk that the eventual dollar net cash outflows will be affected by changes in exchange rates. The Company enters into interest rate cap and floor agreements to reduce the potential impact of changes in interest rates on floating rate debt, supporting fixed rate assets.
The Company does not anticipate any material adverse effect on its financial position resulting from its use of these instruments, nor does it anticipate nonperformance by any of its counterparties. The tables on page 33 illustrate the contract or notional (face) amounts outstanding, maturity dates, weighted average receive and pay rates and the net unrealized gain (loss) of derivative financial instruments by category at December 31, 1996, and 1995. Notional amount represents agreed upon amounts on which calculations of interest payments to be exchanged are based. Notional amounts do not represent direct credit exposures. Rather, they provide an indication of the extent of the Company's involvement in such derivative financial instruments. Interest rate agreements generally involve the exchange of interest payments without the exchange of the underlying notional amount on which the interest payments are calculated. The net unrealized gain (loss) for the derivative financial instruments on page 33 is equal to their estimated fair value.
FINANCIAL INSTRUMENTS (Continued):
(Dollars in thousands)
At December 31, 1996:
Notional Weighted Average Rate Type Amount Maturities Receive Pay ____________________ __________ __________ _____________________ Swap to Fixed $2,400,000 1997-2001 5.77% 6.27% Swap to Floating 1,670,800 1997-2001 5.86% 5.58% Currency Related 245,445 1998-1999 n/a * n/a * Int. Rate Cap/Floor 500,000 1997-1999 n/a * n/a * __________ $4,816,245 ==========
At December 31, 1996 (Continued):
Notional Unrealized Unrealized Net Unrealized Type Amount Gross Gain Gross (Loss) Gain (Loss) ____________________ __________ __________ ____________ ______________ Swap to Fixed $2,400,000 $1,848 $(17,876) $(16,028) Swap to Floating 1,670,800 4,838 (4,413) 425 Currency Related 245,445 961 (19,569) (18,608) Int. Rate Cap/Floor 500,000 675 - 675 __________ __________ ____________ ______________ $4,816,245 $8,322 $(41,858) $(33,536) ========== ========== ============ ==============
At December 31, 1995:
Notional Weighted Average Rate Type Amount Maturities Receive Pay ____________________ __________ __________ _____________________ Swap to Fixed $1,564,000 1996-2000 4.84% 6.00% Swap to Floating 880,000 1996-2000 6.78% 5.02% Currency Related 95,374 1998 n/a * n/a * Int. Rate Cap 72,500 1996 n/a * n/a * __________ $2,611,874 ==========
At December 31, 1995 (Continued):
Notional Unrealized Unrealized Net Unrealized Type Amount Gross Gain Gross (Loss) Gain (Loss) ____________________ __________ __________ ____________ ______________ Swap to Fixed $1,564,000 $ 107 $(29,643) $(29,536) Swap to Floating 880,000 6,102 (440) 5,662 Currency Related 95,374 3,936 - 3,936 Int. Rate Cap 72,500 - - - __________ __________ ____________ ______________ $2,611,874 $10,145 $(30,083) $(19,938) ========== ========== ============ ==============
* n/a: not applicable
FINANCIAL INSTRUMENTS (Continued):
At December 31, 1996, approximately 61 percent of the Company's total debt was hedged through the use of currency and interest rate related agreements. Before the effects of such agreements, the Company's debt comprised approximately 36 percent fixed rate debt and 64 percent floating rate debt. After the effects of such agreements, the Company's debt consisted of approximately 45 percent fixed rate debt and 55 percent floating rate debt. At December 31, 1995, about 34 percent of the Company's total debt was hedged through the use of currency and interest rate related agreements. Before the effects of such agreements, the Company's debt comprised approximately 35 percent fixed rate debt and 65 percent floating rate debt. After the effects of such agreements, the Company's debt consisted of approximately 50 percent fixed rate debt and 50 percent floating rate debt.
The approximate weighted average effective interest rates for the commercial paper, other short-term debt, medium-term notes and other long-term debt, as disclosed in the notes on pages 28 and 29, Short-Term Debt and Long-Term Debt, include the effects of interest rate swap agreements.
FINANCIAL INSTRUMENTS (Continued):
Fair value is a very subjective and imprecise measurement that is based on numerous estimates and assumptions that require substantial judgment and may be valid only at a particular point in time. As such, fair value can represent only a very general approximation of possible value that may never actually be realized.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate.
Cash and cash equivalents: The carrying amount approximates fair value due to the short maturity of these instruments.
Marketable securities: The carrying amount approximates fair value which is estimated using quoted market prices.
Loans receivable: The fair value is estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings with the same remaining maturities.
Working capital financing receivables: The carrying amount approximates fair value due to the short maturity of most of these instruments.
Due and deferred from receivable sales: The carrying amount approximates fair value.
Short-term debt: For the majority of these instruments, the carrying amount approximates fair value due to their short maturity.
Long-term debt and current maturities of long-term debt: The fair value of these instruments is based on replacement cost or quoted market prices for the same issues. Replacement cost is the cost to issue a similar instrument with similar maturity and credit risk.
Interest rate related and currency related agreements: The fair value of these instruments has been estimated as the amount the Company would receive or pay to terminate the agreements, taking into consideration current interest and currency exchange rates.
Commitments to extend credit: The fair value of commitments to extend credit is estimated as the amount of approved but unused working capital financing credit lines available to customers.
Financial guarantees: The fair value of financial guarantees is estimated as the amounts that would be paid if the Company had to settle the obligations.
FINANCIAL INSTRUMENTS (Continued):
The following table summarizes the carrying amount and the estimated fair value of all of the Company's financial instruments:
(Dollars in thousands) Carrying Estimated At December 31, 1996: Amount Fair Value __________ ___________
Cash and cash equivalents $ 632,834 $ 632,834 Marketable securities 159,348 159,348 Loans receivable 1,846,947 1,899,413 Working capital financing receivables 2,898,688 2,898,688 Short-term debt (excluding current maturities of long-term debt) 6,352,525 6,573,150 Long-term debt and current maturities of long-term debt 1,729,812 1,373,218 Off-balance-sheet derivatives: Currency related -- Assets - 961 Liabilities - 19,569 Interest rate related -- Assets - 7,361 Liabilities - 22,289 Commitments to extend credit - 2,051,496 Financial guarantees - 12,884
Carrying Estimated At December 31, 1995: Amount Fair Value __________ ___________
Cash and cash equivalents $ 336,839 $ 336,839 Marketable securities 89,930 89,930 Loans receivable 1,473,822 1,536,726 Working capital financing receivables 3,158,932 3,158,932 Due and deferred from receivable sales 106,079 106,079 Short-term debt (excluding current maturities of long-term debt) 5,758,944 5,908,779 Long-term debt and current maturities of long-term debt 1,829,123 1,690,747 Off-balance-sheet derivatives: Currency related -- Assets - 3,936 Liabilities - - Interest rate related -- Assets - 6,209 Liabilities - 30,083 Commitments to extend credit - 1,001,186 Financial guarantees - 23,207
ACQUISITION OF CHRYSLER SYSTEMS INC.:
On February 8, 1995, the Company acquired all of the issued and outstanding stock of Chrysler Systems Inc. and certain of its affiliates for $133.5 million. The acquisition was consummated pursuant to a share purchase agreement with certain Chrysler Corporation subsidiaries (the Seller). The purchase price was funded by the Company's cash on hand and credits issued to the Seller that were applied against certain future obligations of the Seller to the Company. IBM CS Systems, as the unit is now known, buys, sells and leases data processing equipment, and provides related technology management services such as equipment procurement and asset management. The transaction was accounted for as a purchase and IBM CS Systems is included in the Company's consolidated financial statements from the date of acquisition.
LITIGATION SETTLEMENT:
Effective August 26, 1994, IBM, the Company, certain partnerships in which the Company is the general partner and Comdisco settled all outstanding litigation between the parties. Pursuant to the settlement agreement, on August 30, 1994, Comdisco delivered $70.0 million in cash proceeds to the Company, $20.0 million of which the Company loaned back to Comdisco in exchange for an interest-bearing convertible subordinated promissory note, which was repaid on March 1, 1995. As a result of reaching this settlement agreement, the Company recognized a pretax gain, net of directly related expenses, of $46.0 million. This amount was included in other income on the Consolidated Statement of Earnings and Retained Earnings for the year ended December 31, 1994. The redemption of the subordinated promissory note on March 1, 1995, was included in other income on the Consolidated Statement of Earnings and Retained Earnings for the year ended December 31, 1995.
SALE OF IBM CREDIT INVESTMENT MANAGEMENT CORPORATION:
During the second quarter of 1994, a Fleet Financial Group subsidiary purchased 100 percent of the stock of IBM Credit Investment Management Corporation (ICIM), a wholly owned subsidiary of the Company. ICIM provided investment management and administrative services for the IBM Mutual Funds. As a result of this sale, the Company recognized a pretax gain of $13.3 million, which was included in other income. In connection with the sale of ICIM, the IBM Money Market Account notes were redeemed in early July 1994. The IBM Money Market Account notes were a source of short-term funding for the Company.
INDUSTRY SEGMENT REPORTING:
The Company operates principally in a single business segment offering customer financing of information industry products and services.
SUBSEQUENT EVENT:
On January 24, 1997, the Company's Board of Directors declared a $50.0 million dividend, payable to IBM on February 24, 1997.
SELECTED QUARTERLY FINANCIAL DATA: (Unaudited)
(Dollars in thousands)
Finance Gross Profit and Other Interest Equipment on Equipment Net Income Expense Sales Sales Earnings ___________ ________ _________ ____________ ________ ____
First Quarter . .$ 374,179* $106,280 $106,488 $18,689 $ 73,928 Second Quarter. . 368,114 106,931 101,432 17,626 74,075 Third Quarter . . 359,648 110,362 76,367 7,670 71,610 Fourth Quarter. . 395,859 112,536 135,005 6,951 51,469 ___________ ________ _________ _______ ________ $1,497,800 $436,109 $419,292 $50,936 $271,082 =========== ======== ========= ======= ======== ____
First Quarter . .$ 337,481* $ 86,296 $114,103 $13,268 $ 57,945 Second Quarter. . 361,229* 94,621 130,967 26,158 63,924 Third Quarter . . 378,739 106,050 123,454 13,539 53,526 Fourth Quarter. . 374,836* 107,605 125,095 21,648 55,080 ___________ ________ ________ _______ ________ $1,452,285 $394,572 $493,619 $74,613 $230,475 =========== ======== ======== ======= ========
* During the first quarter of 1996, the Company recognized a pretax gain of $9.3 million upon the sale of certain restricted securities.
* During the first quarter of 1995, the Company recognized a pretax gain of $5.0 million upon Comdisco Inc.'s redemption of the convertible subordinated promissory note on March 1, 1995. During the second quarter of 1995, the Company recognized a pretax gain of $4.3 million from the sale of financing assets. During the fourth quarter of 1995, the Company recognized a pretax gain of $1.9 million upon the sale of certain restricted securities. These amounts are included in other income.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE:
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT: Omitted pursuant to General Instruction J.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION: Omitted pursuant to General Instruction J.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT: Omitted pursuant to General Instruction J.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS: Omitted pursuant to General Instruction J.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K:
(a) The following documents are filed as part of this report:
1. Consolidated Financial Statements included in Part II of this report:
Report of Independent Accountants (page 14).
Consolidated Statement of Financial Position at December 31, 1996 and 1995 (page 15).
Consolidated Statement of Earnings and Retained Earnings for the years ended December 31, 1996, 1995 and 1994 (page 16).
Consolidated Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994 (pages 17 and 18).
Notes to Consolidated Financial Statements (pages 19 through 39).
2. Financial statement schedules required to be filed by Item 8 of this Form 10-K:
Schedules are omitted because of the absence of the conditions under which they are required or because the information is disclosed in the financial statements or in the notes thereto.
3. Exhibits required to be filed by Item 601 of Regulation S-K: Included in this Form 10-K:
Exhibit Number _______________ I. The By-Laws of IBM Credit Corporation.
II. Agreement to furnish information defining the rights of debt holders
III. Statement re computation of ratios
IV. Consent of experts and counsel
V. Financial Data Schedule
Not included in this Form 10-K: The Certificate of Incorporation of IBM Credit Corporation is filed pursuant to the quarterly report on Form 10-Q for the quarterly period ended June 30, 1993, on August 10, 1993, and is hereby incorporated by reference.
The Support Agreement dated as of April 15, 1981, between the Company and IBM is filed with Form SE dated March 26, 1987, and is hereby incorporated by reference.
Power of Attorney of Jeffrey D. Serkes
(b) Reports on Form 8-K: A Form 8-K dated October 21, 1996 was filed with respect to the Company's financial results for the periods ended September 30, 1996.
[SIGNATURE] SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. :ehp3.
IBM CREDIT CORPORATION (Registrant)
By: /s/W. Wilson Lowery, Jr. ________________________ (W. Wilson Lowery, Jr.) Chairman Date: March 25, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities on March 25, 1997.
Signature Title _________ _____
_/s/W. Wilson Lowery, Jr.__ ___________________________ (W. Wilson Lowery, Jr.) Chairman and Director
_/s/Allison R. Schleicher__ ___________________________ (Allison R. Schleicher) Vice President, Finance, and Chief Financial Officer and Director _/s/Kimberly A. Kispert____ ___________________________ (Kimberly A. Kispert) Controller and Treasurer
| | | /s/Allison R. Schleicher Jeffrey D. Serkes Director |By: ________________________ | (Allison R. Schleicher) | Attorney-in-fact |
EXHIBIT INDEX _____________ Reference Number Exhibit Number per Item 601 of in This Regulation S-K Description of Exhibits Form 10-K ________________ _________________________________________ ______________ (3) Certificate of Incorporation and By-Laws
The Certificate of Incorporation of IBM Credit Corporation is filed pursuant to Form 10Q for the quarterly period ended June 30, 1993, on August 10, 1993, and is hereby incorporated by reference.
The By-Laws of IBM Credit Corporation. I
(4)(a) Instruments defining the rights of security holders.
An agreement to furnish to the Securities II and Exchange Commission, on request, a copy of instruments defining the rights of debt holders.
(4)(b) Indenture dated as of January 15, 1989, filed electronically as Exhibit No. 4 to Amendment No. 1 to Form S-3 on April 3, 1989, and is hereby incorporated by reference.
(9) Voting trust agreement. Not applicable (10) Material contracts.
The Support Agreement as of dated April 15, 1981, between the Company and IBM is filed with Form SE dated March 26, 1987, and is hereby incorporated by reference.
(11) Statement re computation of per share Not earnings. applicable
(12) Statement re computation of ratios. III
(18) Letter re change in accounting principles. Not applicable
(21) Subsidiaries of the registrant. Omitted
(22) Published report regarding matters Not submitted to vote of security holders. applicable
(23) Consent of experts and counsel. IV
EXHIBIT INDEX _____________ (continued) Reference Number Exhibit Number per Item 601 of in This Regulation S-K Description of Exhibits Form 10-K ________________ _________________________________________ ______________
(24) Power of Attorney of Jeffrey D. Serkes (incorporated by reference to Exhibit IV(j) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, electronically transmitted to the Securities and Exchange Commission on March 18, 1996).
(27) Financial data schedule. V
(28) Information from reports furnished to Not state insurance regulatory authorities. applicable
(99) Additional exhibits. Not applicable