10-K 1 dec10k1.txt FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 Commission file number 1-8175 __________________________________ IBM CREDIT CORPORATION ___________________________________________________________ (Exact name of registrant as specified in its charter) DELAWARE 22-2351962 ____________________________ _____________________________ (State of incorporation) (IRS employer identification number) North Castle Drive, MS NCA-306 Armonk, New York 10504-1785 ______________________________________________ ___________ (Address of principal executive offices) (Zip Code) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ____________________________ ________________________ NONE NONE Securities registered pursuant to Section 12(g) of the Act: NONE Registrant's telephone number, including area code 914-765-1900 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of February 28, 2002, 936 shares of capital stock, par value $1.00 per share, were held by International Business Machines Corporation. Aggregate market value of the voting stock held by nonaffiliates of the registrant at February 28, 2002: NONE. The registrant meets the conditions set forth in General Instruction I (1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format. 2 TABLE OF CONTENTS _____________________ PART I Page Item 1. Business 3 Item 2. Properties 3 Item 3. Legal Proceedings 3 Item 4. Submission of Matters to a Vote of Security Holders 3 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 3 Item 6. Selected Financial Data 4 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 5 Item 7A. Qualitative and Quantitative Disclosure about Market Risk 13 Item 8. Financial Statements and Supplementary Data 15 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 45 PART III Item 10. Directors and Executive Officers of the Registrant 45 Item 11. Executive Compensation 45 Item 12. Security Ownership of Certain Beneficial Owners and Management 45 Item 13. Certain Relationships and Related Transactions 45 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 45 -2- 3 PART I ITEM 1. BUSINESS: The principal business of IBM Credit Corporation (the Company) is the financing of IBM products and services. All of the outstanding capital stock of the Company is owned by International Business Machines Corporation (IBM), a New York corporation. The Company finances the purchase and lease of IBM and non-IBM products and related products and services by customers of IBM in the United States and finances inventory and accounts receivable for U.S. dealers and remarketers of IBM and non-IBM products. Pursuant to a Support Agreement between IBM and the Company, IBM has agreed to retain 100 percent of the voting capital stock of the Company, unless required to dispose of any or all such shares of stock pursuant to a court decree or order of any governmental authority that, in the opinion of counsel to IBM, may not be successfully challenged. IBM has also agreed to cause the Company to have a tangible net worth of at least $1.00 at all times. ITEM 2. PROPERTIES: The Company's principal executive offices are located at an IBM owned facility in Armonk, New York. The executive offices comprise approximately 274,300 square feet of office space. The Company occupies this space under an arrangement with IBM. ITEM 3. LEGAL PROCEEDINGS: The Company is subject to a variety of claims and suits that arise from time to time out of the ordinary course of business. The Company does not believe that any such current action will have a material impact on the Company's business, financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: Omitted pursuant to General Instruction I. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS: All shares of the Company's capital stock are owned by IBM and, accordingly, there is no market for such stock. The Company paid IBM cash dividends of $793,000,000 and $772,000,000 during 2001 and 2000, respectively. Dividends are declared by the Board of Directors of the Company. -3- 4 ITEM 6. SELECTED FINANCIAL DATA: The following selected financial data should be read in conjunction with the consolidated financial statements of IBM Credit Corporation and the related notes to the consolidated financial statements included in this document.

(Dollars in thousands) 2001 2000 1999 1998 1997 ~~1996~~__________ ~~___________~~__________ ___________ ~~___________~~_________ ___________ ~~___________~~ For the year: Finance and other income$ 2,072,523 $ 2,169,511 $ 1,919,833 $ 1,816,498 $ 1,630,895 ~~$ 1,497,800~~ Gross profit on equipment ~~sales~~Sales. . . .122,019 77,932 51,216 63,441 60,574 ~~50,936~~ Interest expense . . 507,171 619,995 569,545 611,206 538,560 ~~436,109~~ Net earnings .445,273 428,357 429,620 308,765 283,893 ~~271,082~~ Dividends. . .793,000 772,000 75,000 100,000 50,000 ~~45,000~~Financing originated: Products purchased from IBM for leases . .4 3,~~145~~315,~~371~~200 43,~~154~~228,~~263~~900 43,~~683~~523,~~015~~200 43,~~803~~875,~~985~~400 3,~~903~~998,~~052~~100 ~~Loans~~Financing ~~receivable~~for ~~financing~~software .and Services . .2 1,~~029~~715,~~061~~700 21,~~039~~874,~~793~~500 1,~~913~~675,~~501~~400 1,~~460~~563,~~214~~000 1,~~211~~182,~~318~~900 ~~IBM~~Installment ~~state~~receivables and ~~local~~leases ~~installment~~for ~~Receivables~~the ~~and~~account ~~leases~~of .IBM .479,000 180,~~340~~300 ~~405~~406,~~975~~000 429,400 411,~~029~~000 ~~410,328~~ Other ~~capital~~installment ~~equipment financing~~receivables. . .192,500 ~~118~~154,~~346~~800 ~~194~~364,~~707~~300 ~~195~~350,~~324~~600 ~~274~~285,~~869~~900 ~~225~~Other financing 975,~~744~~500 1,034,600 825,800 957,800 1,072,200 Working capital financing. . .11,464,200 13,215,000 14,530,300 14,181,900 15,005,200 ~~13,387,014~~ Return on average assets 2.9% 2.8% 2.8% 2.0% 2.1% ~~2.4%~~ Return on average equity . . . . 25.0% 19.6% 21.4% 17.2% 18.6% ~~20.7%~~ At end of year: Total assets. 15,309,537 $16,797,738 $16,344,705 $16,397,359 $16,572,116 ~~$12,946,139~~Investment ~~Net investment~~ in capital leases, Net. . . . . 5,253,317 5,580,313 5,337,200 5,265,941 4,931,292 ~~4,214,822~~ Equipment on ~~operating~~Operating leases, net. .2,136,954 ~~. . . .~~ 2,537,665 3,386,686 3,619,585 3,583,641 ~~2,251,382~~ Loans receivable, net. . . . . .3,875,800 4,207,276 3,535,498 3,041,222 2,381,261 ~~1,846,947~~ Working capital financing receivables, -4- net . . . . .2,514,903 2,791,671 2,963,583 2,861,780 32,249,310 ~~2,898,688~~ Short-term debt. . . . .7,545,569 7,894,187 7,132,888 6,777,222 8,591,781 ~~6,566,400 -4-~~ Long-term ~~debt.~~debt2,922,433 . 3,527,383 3,671,139 3,973,839 2,476,488 ~~1,515,937~~ Stockholder's equity. . . . .1,539,746 1,888,691 2,232,334 1,877,714 1,668,949 ~~1,435,056~~

-5- 5 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: OVERVIEW Net earnings for 2001 were $445.3 million, yielding a return on average equity of 25.0 percent, compared with 2000 net earnings of $428.4 million, yielding a return on average equity of 19.6 percent. FINANCING ORIGINATED For the year ended December 31, 2001, the Company originated customer equipment financing for end users of $6,677.9 million, a 3 percent increase from $6,473.1 million for 2000. The increase in customer equipment financing originated is related to the increase in the propensity for IBM's customers to finance their acquisitions with the Company. Customer financing originations for end users included purchases of $3,315.2 million of information handling systems from IBM, consisting of $2,562.3 million for capital leases and $752.9 million for operating leases. In addition, customer financing originations for end users included the following: (1) financing for IBM software and services of $1,715.7 million; (2) financings of $975.5 million, which includes IBM and non-IBM equipment and software and services to meet IBM customers' total solution requirements; (3) installment and lease financing of $479.0 million, managed by the Company for the account of IBM; and (4) financing originated for installment receivables for IBM information handling systems of $192.5 million. The Company's capital lease portfolio primarily includes direct financing leases. Both direct financing leases and operating leases consist principally of IBM advanced information processing products with terms generally from two to three years. For the year ended December 31, 2001, originations of working capital financing for dealers and remarketers of information industry products decreased by 13 percent to $11,464.2 million, from $13,215.0 million for 2000. The decline in working capital financing originations reflects volume decreases in IBM's workstation products and non-IBM products for remarketers financed by the Company throughout 2001. Additionally, the trend toward lower IBM sales through remarketers contributed to the decrease in working capital financing originations during 2001. Working capital financing receivables arise primarily from secured inventory and accounts receivable financing for dealers and remarketers of IBM and non-IBM products. Payment terms for inventory secured financing generally range from 30 days to 75 days. Payment terms for accounts receivable secured financing generally range from 30 days to 90 days. -6- 6 REMARKETING ACTIVITIES In addition to originating new financing, the Company remarkets used IBM and non-IBM equipment. This equipment is primarily sourced from the conclusion of lease transactions and is typically remarketed in cooperation with the IBM sales force. The equipment is generally leased or sold to end users. These transactions may be with existing lessees or, when equipment is returned, with new customers. Remarketing activities comprise income from follow-on capital and operating leases and gross profit on equipment sales, net of write-downs in residual values of certain leased equipment. For the year ended December 31, 2001, the remarketing activities contributed $429.9 million to pretax earnings, an increase of 34 percent compared with $321.1 million for 2000, primarily due to an increase in gross profit on equipment sales and a decrease in writedowns on returns of leased equipment. At December 31, 2001, the investment in remarketed equipment on capital and operating leases totaled $269.5 million, compared with 2000 year-end investment of $312.7 million. FINANCIAL CONDITION ASSETS Total assets decreased to $15,309.5 million at December 31, 2001, compared with $16,797.7 million at December 31, 2000. This decrease is primarily attributable to a decrease in the Company's lease, loan and working capital financing portfolios, offset by an increase in factored IBM receivables. Total financing assets serviced by the Company, at December 31, 2001, were $15,254.5 million, compared with $16,040.8 million at December 31, 2000. Total financing assets serviced include capital and operating leases ($7,390.3 million in 2001, $8,118.0 million in 2000), loans receivable ($3,875.8 million in 2001, $4,207.3 million in 2000), working capital financing receivables ($2,514.9 million in 2001, $2,791.7 million in 2000) and factored IBM receivables ($438.5 million in 2001, $0 in 2000). Also included in assets serviced by the Company are federal, state and local government installment and lease financing receivables of IBM ($679.1 million in 2001, $818.3 million in 2000) and leases to divisions of IBM ($355.9 million in 2001 and $105.5 million in 2000), which are not reflected on the Company's Consolidated Statement of Financial Position. LIABILITIES AND STOCKHOLDER'S EQUITY The assets of the Company were financed with $10,468.0 million of debt at December 31, 2001. Total short-term and long-term debt decreased by approximately $953.6 million, from $11,421.6 million at December 31, 2000. This decrease was the result of decreases in commercial paper of $1,415.2 million, short-term debt of $318.3 million and long-term debt of $1,230.0 million, offset by an increase in short-term debt payable to IBM of $1,384.8 million and long-term debt payable to IBM of $625.1 million. Long-term debt, IBM at December 31, 2001, of $2,875.1 million was payable at market terms and conditions and had maturity dates ranging from March 19, 2003, to December 22, 2004. -7- 7 FINANCIAL CONDITION (Continued) At December 31, 2001, the Company had available $9.8 billion of a shelf registration with the Securities and Exchange Commission (SEC) for the issuance of debt securities. The Company intends to issue debt securities under this shelf registration as the need arises. This allows the Company rapid access to domestic financial markets. The Company has no firm commitments for the purchase of debt securities that it may issue from the unused portion of this shelf registration. The Company has the option, together with IBM, to issue and sell debt securities under a Euro Medium Term Note Programme (EMTN) in an aggregate amount of up to .8.0 billion, or its equivalent in any other currency. At December 31, 2001, there was .3.9 billion available for the issuance of debt securities under this program. The Company had no debt outstanding under this program as of December 31, 2001. The Company may issue debt securities over the next twelve months under this program, dependent on prevailing market conditions and its need for such funding. The Company is an authorized borrower under IBM's $12.0 billion committed global credit facility, and has a liquidity agreement with IBM for $500.0 million. The Company has no borrowings outstanding under the committed global credit facility or the liquidity agreement. The Company and IBM have master loan agreements for both short-term and long-term funding. At December 31, 2001, and 2000, the Company had $8,088.3 million and $6,078.3 million, respectively, of borrowings outstanding under this agreement. Refer to Note 3, Relationship with IBM and Related Party Transactions in the Notes to the Consolidated Financial Statements for additional details. These financing sources, along with the Company's internally generated cash and medium-term note and commercial paper programs, provide flexibility to the Company to grow its lease, working capital financing and loan portfolios, to fund working capital requirements and to service debt. The Company periodically pays dividends to IBM in order to maintain its capital structure at appropriate levels. Amounts due to IBM and affiliates include trade payables arising from purchases of equipment for term leases and installment receivables, working capital financing receivables for dealers and remarketers, software license fees and services. Also included in amounts due to IBM and affiliates are amounts due to IBM for services received from IBM under the intercompany operating agreement, as well as income taxes currently payable under the intercompany tax allocation agreement. Amounts due to IBM and affiliates increased by approximately $142.9 million to $2,017.2 million at December 31, 2001, from $1,874.3 million at December 31, 2000. This increase was primarily attributable to an increase in the amount payable for working capital financing receivables, factored IBM receivables and income taxes. At December 31, 2001, the Company's debt to equity ratio was 6.8:1, compared with 6.1:1 at December 31, 2000. -8- 8 TOTAL CASH PROVIDED BEFORE DIVIDENDS Total cash provided before dividends was $376.5 million in 2001, compared with total cash provided before dividends of $1,123.4 million in 2000. For 2001, total cash provided before dividends reflects $2,580.4 million of cash provided by operating activities, offset by $2,203.9 million of cash used in investing and financing activities before dividends. For 2000, total cash provided before dividends reflects $2,779.0 million of cash provided by operating activities, offset by $1,655.6 million of cash used in investing and financing activities before dividends. Cash and cash equivalents at December 31, 2001, totaled $535.0 million, a decrease of $416.5 million, compared with the balance at December 31, 2000. RESULTS OF OPERATIONS INCOME FROM LEASES Income from leases increased 7 percent to $986.0 million for the year ended December 31, 2001, from $920.2 million in 2000. Income from leases includes lease income resulting from remarketing transactions. Lease income from remarketing transactions was $309.2 million in 2001, an increase of 25 percent from $246.9 million in 2000. Increased capital lease volumes, improved average lease yields and lower residual value writedowns contributed to the overall increase in lease income and lease income from remarketing transactions for the year ended December 31, 2001. On a periodic basis, the Company reassesses the future residual values of its portfolio of leases. In accordance with generally accepted accounting principles, anticipated increases in specific future residual values are not recognized before realization and are thus a source of potential future profits. Anticipated decreases in specific future residual values that are considered to be other than temporary are recognized currently. A review of the Company's $983.2 million residual value portfolio at December 31, 2001, indicated that the overall estimated future value of the portfolio continues to be greater than the value currently recorded, which is the lower of the Company's cost or net realizable value. The Company did not record any write-down to its residual value portfolio in 2001. The Company did record a $7.3 million reduction to income from leases during 2000 to recognize decreases in the expected future residual value of specific leased equipment. INCOME FROM LOANS Income from loans decreased 3 percent to $297.8 million in 2001, compared with $306.1 million in 2000. This decrease resulted from lower average loan balances, which were due to the decline in financing originated for software and services, offset by an increase in income from term participation loans. Income from term participation loans amounted to $50.4 million in 2001, compared with $33.8 million in 2000. -9- 9 INCOME FROM WORKING CAPITAL FINANCING Income from working capital financing decreased 22 percent to $210.9 million in 2001, compared with $271.2 million in 2000. This decrease is due to a decline in both fee income earned from inventory financing and interest income from dealer financing due to lower originations. Additionally, a decrease in income from revolving participation loans contributed to the overall decline in income from working capital financing. EQUIPMENT SALES Equipment sales amounted to $547.3 million in 2001, compared with $616.2 million in 2000. Gross profit on equipment sales in 2001 was $122.0 million, compared with $77.9 million in 2000. The gross profit margin in 2001 increased to 22.3 percent, compared with 12.6 percent in 2000. The mix of products available for sale and changing market conditions for certain used equipment during 2001 contributed to the increase in sales, gross profit and gross profit margins, compared with 2000. INCOME FROM FACTORED IBM RECEIVABLES In May, 2001, the Company resumed the factoring of selected IBM receivables. Income from factored IBM receivables amounted to $16.4 million for the year ended December 31, 2001. Refer to Note 3, Relationship with IBM and Related Party Transactions in the Notes to the Consolidated Financial Statements for additional details. OTHER INCOME Other income decreased to $14.2 million in 2001, compared with $55.9 million in 2000. The decrease in other income is primarily attributable to a decline of $27.2 million in the fees for servicing IBM's federal, state and local portfolio caused by a decline in rates and losses incurred on one of the Company's investments of $27.7 million. These decreases were offset by income from a legal settlement of $15.5 million. INTEREST EXPENSE Interest expense decreased 18 percent to $507.2 million in 2001, compared with $620.0 million in 2000 due to a decline in interest rates. The Company's average cost of debt for 2001 decreased to 5.2 percent, from 6.1 percent for 2000. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses decreased 4 percent to $279.1 million in 2001, compared with $289.3 million in 2000. This decrease is attributable to a decrease in spending relating to sales commissions, contracted services and information technology. -10- 10 PROVISION FOR RECEIVABLE LOSSES The majority of the Company's portfolio of capital equipment leases and loans is with investment grade customers. The Company generally retains ownership or takes a security interest in any underlying equipment financed. The Company's working capital financing business is predominantly with non-investment grade customers. Such financing receivables are typically collateralized by the inventory and accounts receivable of the dealers and remarketers. With the continued trend toward consolidation in this industry, the concentration of such financings for certain large dealers and remarketers of information industry products, while continuously declining, remains significant. At December 31, 2001, and December 31, 2000,approximately 42 percent and 45 percent, respectively, of the working capital financing receivables outstanding were concentrated in ten working capital accounts. As of December 31, 2001, the Company's allowance for receivable losses of $180.4 million represented management's best estimate of probable losses inherent in its portfolios. This allowance consisted of $104.8 million allocated to specific accounts and $75.6 million that was unallocated. As of December 31, 2000, the Company's allowance for receivable losses of $103.1 million consisted of $23.6 million that was allocated to specific accounts and $79.5 million that was unallocated. While the overall asset quality of the portfolio has remained relatively stable, the Company continues to pay particular attention to areas of potential risk which includes exposure to the telecom industry. As a result of the deterioration of certain companies in this and other industries, the Company recorded additional specific reserves. The overall provision for receivable losses increased to $126.3 million for the year ended December 31, 2001, compared with $15.1 million for 2000. The increase in the provision for receivable losses is primarily attributable to the matters referred to above. For the twelve months ended December 31, 2001, and 2000, the Company's write-offs amounted to $70.4 million and $46.3 million, respectively. Write-offs for the twelve months ended December 31, 2001, and 2000, have not materially exceeded the amount estimated as uncollectible when the reserves were recorded. INCOME TAXES Income taxes for 2001 amounted to $289.5 million for the year ended December 31, 2001, compared with $278.5 million for 2000. This increase is due to an increase in earnings before taxes. The Company expects its effective tax rate to approximate 39.4%. This effective rate reflects the current federal statutory and applicable state income tax rates. -11- 11 RETURN ON AVERAGE EQUITY The results for the year ended December 31, 2001, yielded an average return on average equity of 25.0 percent, compared with 19.6 percent for 2000. The increase in the return on average equity is primarily due to dividends paid, which caused stockholder's equity to decrease. CLOSING DISCUSSION The Company's resources continue to be sufficient to enable it to carry out its mission of offering customers competitive leasing and financing and providing information technology remarketers with inventory and accounts receivable financing, which contributes to the growth and stability of IBM earnings. -12- 12 FORWARD LOOKING STATEMENTS Except for the historical information and discussions contained herein, statements contained in this Report on Form 10-K may constitute "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including, but not limited to, the Company's level of equipment financing originations; the propensity for customers to finance their acquisition of IBM products and services with the Company; the competitive environment in which the Company operates; the success of the Company in developing strategies to manage debt levels; non-performance by a customer of contractual requirements; the concentration of credit risk and creditworthiness of the customers; the Company's associated collection and asset management efforts; the Company's determination and subsequent recoverability of recorded residual values; currency fluctuations on the associated debt and liabilities; change in interest rates; non-performance by the counterparty in derivative transactions; the Company's ability to attract and retain key personnel; the Company's ability to manage acquisitions and alliances; legal, political and economic changes and other risks, uncertainties and factors inherent in the Company's business and otherwise discussed in this Form 10-K and in the Company's other filings with the SEC. -13- 13 ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK MARKET RISK In the normal course of business, the financial position of the Company is routinely subjected to a variety of risks. In addition to the market risk associated with interest rate movements on the Company's assets and liabilities, as well as currency rate movements on non-U.S. denominated assets, other examples of risk include collectibility of accounts receivable and recoverability of residual values on leased assets. The Company regularly assesses these risks and has established policies and business practices to protect against the adverse effects of these and other potential exposures. As a result, the Company does not anticipate any material losses from these risks. The Company manages these risks, in part, through the use of a variety of financial instruments including derivatives. Refer to Note 14, Derivative Financial Instruments and Hedging Activities in the Notes to the Consolidated Financial Statements. To meet disclosure requirements, the Company performs sensitivity analysis to determine the effects that market risk exposures may have on the fair value of the Company's debt and other financial instruments. The financial instruments included in the sensitivity analysis consist of all of the Company's cash and cash equivalents, non-lease receivables, long-term and short-term debt and all derivative financial instruments. The Company's portfolio of derivative financial instruments consists of interest rate swaps. To perform sensitivity analysis, the Company assesses the risk of loss in fair values from the impact of hypothetical changes in interest rates and foreign currency exchange rates on market sensitive instruments. The market values for interest and foreign currency exchange risk are computed based on the present value of future cash flows as impacted by the changes in the rates attributable to the market risk being measured. The discount rates used for the present value computations were selected based upon market interest and foreign currency exchange rates in effect at December 31, 2001. The market values that result from these computations are compared with the actual market values of these financial instruments. The differences in this comparison are the hypothetical gains or losses associated with each type of risk. Information provided by the sensitivity analysis does not necessarily represent the actual changes in the fair value that the Company would incur under normal market conditions because, due to practical limitations, all variables other than the specific market risk factor are held constant. In addition, the results of the model are constrained by the fact that certain items, such as leased assets, are specifically excluded from the analysis, while the financial instruments relating to the financing or hedging of those items are included by definition. As a consequence, reported changes in the values of some of the financial instruments affecting the results of the sensitivity analysis are not matched with the offsetting changes in the value of the items that those items are designated to finance or hedge. -14- 14 INTEREST RATE AND FOREIGN CURRENCY EXCHANGE RATE RISK: The following table presents the results of the sensitivity analysis. This table details the changes in fair market value of the Company's financial instruments, with all other variables held constant, at December 31, 2001, and 2000: (in millions) Level of Foreign Currency Level of Interest Rates Exchange Rates +10% -10% +10% -10% __________ __________ _________ __________ December 31, 2001 $(14.5) $15.0 $43.8 $(43.8) December 31, 2000 $(45.0) $46.0 - - -15- 15 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA: Report of Independent Accountants To the Stockholder and Board of Directors of IBM Credit Corporation In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a) 1. on page 45 present fairly, in all material respects, the financial position of IBM Credit Corporation and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, 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 our opinion. PricewaterhouseCoopers LLP Stamford, CT January 17, 2002 -16- 16 IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF FINANCIAL POSITION at December 31: (Dollars in thousands)

2001 2000 ~~1999~~ _____________ ____________ ASSETS: Cash and cash equivalents. . . . . . . $ ~~951~~535,~~490~~037 $ ~~600~~951,~~111~~490 ~~Net~~Investment ~~investment~~ in capital leases, net. 5,~~580~~253,~~313~~317 5,~~337~~580,~~200~~313 Equipment on operating leases, net . . 2,~~537~~136,~~665~~954 32,~~386~~537,~~686~~665 Loans receivable, net. . . . . . . . . 3,875,800 4,207,276 ~~3,535,498~~ Working capital financing receivables, net . . . . . . . . . . . . . . . . . 2,~~791~~514,~~671~~903 2,~~963~~791,~~583~~671 ~~Investments~~Factored ~~and~~IBM ~~other~~receivables, net. . . . . 438,540 - Other assets . . . . . . . . . . . . . 554,986 729,323 ~~521,627~~ ___________ ___________ Total Assets $1615,~~797~~309,~~738~~537 $16,~~344~~797,~~705~~738 =========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY: Liabilities: Short-term debt. . . . . . . . . . . . $ 42,~~065~~332,~~842~~375 $ 54,~~491~~065,~~441~~842 Short-term debt, IBM . . . . . . . . . 5,213,194 3,828,345 ~~1,641,447~~ Due to IBM and affiliates. . . . . . . 12,~~874~~017,~~250~~221 1,~~976~~874,~~167~~250 Interest and other accruals. . . . . . 306,795 623,152 ~~454,261~~ Deferred income taxes. . . . . . . . . 977,773 990,075 ~~877,916~~ Long-term debt . . . . . . . . . . . . 47,333 1,277,383 ~~2,279,437~~ Long-term debt, IBM. . . . . . . . . . 2,~~250~~875,~~000~~100 12,~~391~~250,~~702~~000 ___________ ~~___________~~__________ Total liabilities . . . . . . . . . 1413,~~909~~769,~~047~~791 14,~~112~~909,~~371~~047 ___________ ~~___________~~__________ Commitments and Contingencies (Note 16) Stockholder's equity: Capital stock, par value $1.00 per share Shares authorized: 10,000 Shares issued and outstanding: 936 in ~~2000~~2001 and ~~1999~~2000 . . . . . . 457,411 457,411 Other comprehensive loss . . . . . . . (1,218) - Retained earnings. . . . . . . . . . . 1,~~431~~083,~~280~~553 1,~~774~~431,~~923~~280 __________ ___________ Total stockholder's equity. . . . . 1,~~888~~539,~~691~~746 21,~~232~~888,~~334~~691 __________ ___________ Total Liabilities and Stockholder's Equity . . . . . . . . . . . . . . . . $1615,~~797~~309,~~738~~537 $16,~~344~~797,~~705~~738 =========== =========== The accompanying notes are an integral part of this statement.

-17- 17 IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF EARNINGS AND RETAINED EARNINGS For the years ended December 31: (Dollars in thousands)

2001 2000 1999 ~~1998~~ __________ __________ __________ FINANCE AND OTHER INCOME: Income from leases: Capital leases . . . . . . . . . . $ 469,563 $ 412,974 $ 385,969 ~~$ 334,365~~ Operating leases, net of depreciation: ~~2000~~2001-$1,~~887~~552,~~409~~896; ~~1999~~2000-$21,~~112~~887,~~840~~409 and ~~1998~~1999-$12,~~944~~112,~~157~~840 . . . . . . 516,419 507,190 463,869 ~~363,975~~_________ __________ __________ ~~__________~~985,982 920,164 849,838 ~~698,340~~ Income from ~~working capital financing~~loans. . . . . . . . . . ~~. . . 271~~297,~~159~~817 ~~240~~306,~~253~~136 ~~236~~251,~~848~~175 Income from ~~loans~~working capital financing. . . . . . . . . . ~~306~~. . . 210,~~136~~925 ~~251~~271,~~175~~159 ~~208~~240,~~434~~253 Equipment sales. . . . . . . . . . . 547,263 616,173 473,960 ~~510~~Income from factored IBM receivables. 16,~~156~~366 - 3,138 Other income . . . . . . . . . . . . 14,170 55,879 ~~104~~101,~~607~~469 ~~162,720~~ __________ __________ __________ Total finance and other income. . 2,072,523 2,169,511 1,919,833 ~~1,816,498~~ __________ __________ __________ COST AND EXPENSES: Interest . . . . . . . . . . . . . . 507,171 619,995 569,545 ~~611,206~~ Cost of equipment sales. . . . . . . 425,244 538,241 422,744 ~~446,715~~ Selling, general and administrative. 279,060 289,318 213,608 ~~211,259~~ Provision for receivable losses. . . 126,268 15,091 4,986 ~~37,805~~ __________ __________ __________ Total cost and expenses. . . . . 1,337,743 1,462,645 1,210,883 ~~1,306,985~~ __________ __________ __________ EARNINGS BEFORE INCOME TAXES. . . . . 734,780 706,866 708,950 ~~509,513~~ Provision for income taxes. . . . . . 289,507 278,509 279,330 ~~200,748~~ __________ __________ __________ NET EARNINGS. . . . . . . . . . . . . 445,273 428,357 429,620 ~~308,765~~ Dividends . . . . . . . . . . . . . . (~~772~~793,000) (75772,000) (~~100~~75,000) Retained earnings, January 1. . . . . 1,431,280 1,774,923 1,420,303 ~~1,211,538~~ __________ __________ __________ Retained earnings, December 31. . . . $1,~~431~~083,~~280~~553 $1,~~774~~431,~~923~~280 $1,~~420~~774,~~303~~923 ========== ========== ========== The accompanying notes are an integral part of this statement.

-18- 18 IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the years ended December 31: (Dollars in thousands)

2001 2000 1999 ~~1998~~__________ ~~____________~~__________ ~~___________~~__________ ~~___________ CASH FLOWS FROM OPERATING ACTIVITIES:~~ Net earnings . . . . . . . . . . $. ~~428,357~~. $ ~~429~~445,~~620~~273 $ ~~308~~428,~~765~~357 ~~Adjustments~~$ ~~to reconcile net earnings to cash provided by operating activities: Depreciation and amortization. . 1~~429,~~887,008~~620 ~~2,113,302~~Other ~~1,944,420~~comprehensive ~~Provision for receivable losses . . . . . . . . . . . . 15~~loss,~~091~~ ~~4,986~~net ~~37,805 Increase (decrease) in deferred income taxes. . . . . . . . . 112,159 (95,770) 86,058 Increase (decrease) in interest and other accruals . . . . . . 168,891 (180,803) 18,594 Cost~~ of equipment sold . . . . . 484,075 376,839 409,240 (Decrease) increase in amounts due IBM and affiliates. . . . (101,917) (378,483) (168,090) (Increase) decrease in deferred assets. . . . . . . . . . . . (148,916) 37,783 188,140 Other, net . . . . . . . . . . . (65,786) (21,868) (144,727) ____________ ___________ ___________ Cash provided by operating activities. . . . . . . . . . . . 2,778,962 2,285,606 2,680,205 ____________ ___________ ___________ CASH FLOWS FROM INVESTING ACTIVITIEStax: ~~Investment~~Deferred inlosses ~~capital~~from ~~leases~~cash .flow ~~. (2~~hedges,~~980,089)~~ ~~(2,417,029) (2,855,084) Collections on capital leases,~~ net of ~~income~~tax ~~earned~~ . . . . . ~~2,591,066 2,530,236 2,161,767 Investment in equipment on operating leases~~ . . . . . . . (1,~~341,295~~218) ~~(2,001,142)~~- ~~(2,053,865)~~- ~~Investment~~__________ in__________ ~~loans~~__________ ~~receivable~~Other .comprehensive ~~(2,435,412)~~loss ~~(2,190,012) (1,913,501) Collections on loans receivable, net of interest earned~~ . . . . ~~1,763,284 1,694,637 1,244,806 Collections on (investments in) working capital financing receivables, net~~ . ~~. . . . . . 139,709~~ (~~106~~1,~~380~~218) ~~455,869~~- ~~Purchases~~- of__________ ~~marketable~~__________ ~~securities~~__________ .Comprehensive income. . . . . . . . . -$ ~~(24~~444,~~390)~~055 ~~(82,165)~~$ ~~Proceeds from redemption of marketable securities. . . . . - 93~~428,~~203~~357 ~~141,207~~$ ~~____________ ___________ ___________ Total carried forward . . . . . . . (2~~429,~~262,737)~~620 ~~(2,420,877)~~========== ~~(2,900,966)~~========== ~~____________~~========== ~~___________ ___________~~ The accompanying notes are an integral part of this statement. ~~-17-~~

-19- 19 IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS For the years ended December 31: (Dollars in thousands)

2001 2000 1999 ~~1998~~ ____________ ___________ ___________ CASH FLOWS FROM ~~INVESTING~~OPERATING ACTIVITIES ~~(Continued)~~: ~~Total~~Net ~~carried~~earnings ~~forward~~. . . . . . . (2. . . $ 445,~~262~~273 $ 428,~~737)~~357 (2$ 429,~~420~~620 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation and amortization. . 1,~~877)~~553,432 (1,887,008 2,~~900~~113,~~966)~~302 ~~Proceeds~~Provision ~~from~~for ~~the~~receivable ~~sale~~losses of. ~~the~~. ~~net~~. ~~assets~~. of. ~~IBM~~. ~~Credit~~. ~~International~~. ~~Factoring~~. ~~Corporation~~. . . 126,268 15,091 4,986 (Decrease) increase in deferred income taxes. . . . . . . . -. ~~273~~(12,~~759~~302) 11112,~~737~~159 ~~Cash~~(95,770) ~~payment~~(Decrease) ~~for~~increase ~~lease~~in ~~portfolio~~interest ~~acquired~~and other accruals . . . . . . (316,357) 168,891 (180,803) Proceeds from sale of equipment, net of gross profit. . . . . . -419,925 ~~(176~~484,~~613~~075 376,839 Increase (decrease) -in ~~Other~~amounts due IBM and affiliates . . . . 142,971 ~~net~~(101,917) (378,483) Decrease (increase) in deferred assets . . . . . . . . . . . . ~~(12~~49,~~318)~~726 (63148,~~840~~916) ~~139~~37,~~282~~783 ~~____________~~Decrease ~~___________~~(increase) ~~___________~~in ~~Cash~~miscellaneous ~~used~~receivables. in. ~~investing~~. ~~activities~~. . . . . . . 93,657 (279,~~275,055~~025) (2115,~~387,571~~734) (2Other,~~749~~ net . . . . . . . . . . . 77,~~947)~~817 13,239 93,866 ____________ ___________ ___________ ~~CASH~~Cash ~~FLOWS~~provided ~~FROM~~by ~~FINANCING~~operating ~~ACTIVITIES:~~activities. ~~Proceeds~~. ~~from~~. ~~issuance~~. ~~of long-term debt~~ . . . . . . . . 2,~~325~~580,~~000~~410 2,~~523~~778,~~833~~962 32,~~081~~285,~~436~~606 ~~Repayment~~____________ of___________ ~~debt~~___________ ~~with~~CASH ~~original~~FLOWS ~~maturities~~FROM ofINVESTING ~~one~~ACTIVITIES: ~~year~~Investment orin ~~more~~capital leases . . (~~832~~3,~~080~~026,728) (12,~~000~~980,~~776~~089) (12,~~330~~417,~~194~~029) ~~Repayment~~Collections ofon ~~debt~~capital ~~with~~leases, ~~original~~net ~~maturities~~of ~~within~~income ~~one~~earned ~~year,~~. ~~net~~. ~~(873~~. . . 2,~~448)~~767,831 (12,~~568~~591,~~825)~~066 (12,~~551~~530,~~127)~~236 ~~Cash~~Investment ~~dividends~~in ~~paid~~equipment toon ~~IBM~~operating leases . . . . . . . (~~772~~1,~~000~~264,010) (751,~~000~~341,295) (~~100~~2,~~000~~001,142) ~~___________~~Investment ~~____________~~in ~~___________~~loans ~~Cash~~receivable . (~~used~~2,337,821) in(2,435,412) ~~provided~~(2,190,012) byCollections ~~financing~~on ~~activities~~loans .receivable, .net .of .interest .earned . . . . ~~. . (152~~2,~~528)~~604,368 ~~(120~~1,~~768)~~763,284 ~~100~~1,~~115~~694,637 ~~___________~~Collections ~~____________~~on ~~___________~~working ~~Change~~capital infinancing ~~cash~~receivables, ~~and~~net ~~cash~~. ~~equivalents~~. ~~351~~248,~~379~~291 139,709 (~~222~~106,~~733~~380) ~~30,373~~Purchase ~~Cash~~of ~~and~~factored ~~cash~~IBM ~~equivalents, January 1~~receivables. . . . . . . . . . ~~. . 600~~(2,~~111 822~~948,~~844~~708) ~~792,471~~- ~~___________~~- ~~___________~~ ____________ ~~Cash~~___________ ~~and~~___________ ~~cash~~Total ~~equivalents,~~carried ~~December~~forward 31 . . . . . . . ~~. . . $ 951~~(3,~~490~~956,777) ~~$ 600~~(2,~~111~~262,737) ~~$ 822~~(2,~~844~~489,690) ~~===========~~____________ ~~===========~~___________ ~~============~~___________ The accompanying notes are an integral part of this statement. -20-

-21- 20 IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS For the years ended December 31: (Continued) (Dollars in thousands)

2001 2000 1999 ~~1998~~____________ ___________ ___________ ~~___________~~CASH ~~Supplemental~~FLOWS ~~Disclosure~~FROM ofINVESTING ~~Cash~~ACTIVITIES ~~Flow Information~~(Continued): ~~Cash~~Total ~~paid~~carried ~~for~~forward. ~~interest~~. $. ~~629,410~~. $. ~~568~~. . (3,~~571~~956,777) $(2,262,737) ~~635~~(2,~~658~~489,690) ~~=========~~Collections ~~==========~~of ~~=========~~IBM ~~Cash~~factored ~~paid~~receivables, ~~for~~net of income ~~taxes~~earned $. ~~447,050~~. $. ~~106,144~~. $. ~~109~~. . . . . . . . 2,~~313~~507,048 ~~=========~~- ~~==========~~- ~~=========~~Proceeds ~~Supplemental~~from ~~schedule~~sale of ~~noncash~~selected ~~investing~~capital leases and ~~financing~~loans ~~activities:~~. In. ~~May~~. ~~1999~~. 67,892 ~~the~~- ~~Company~~- ~~purchased~~Purchases ~~selected~~of ~~assets~~marketable securities - - (24,390) Proceeds from redemption of marketable securities. . . . . . - - 93,203 Proceeds from the ~~leasing~~sale ~~portfolio~~of the net assets of ~~Comdisco~~IBM Credit International Factoring Corporation. . . . . . . . . . . - - 273,759 ~~Inc~~Cash payment for lease portfolio - acquired . ~~The~~. ~~purchase~~. ~~price~~. ~~was~~. ~~financed~~. . . . . . . - (176,613) Other, net . . . . . . . . . . . . 131,203 (12,318) (63,840) ____________ ___________ ___________ Cash used in ~~part~~investing activities. . (1,250,634) ~~through~~(2,275,055) ~~the~~(2,387,571) ~~assumption~~____________ ___________ ___________ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt of. ~~$102~~.0 ~~million~~. ~~and~~. ~~through~~. ~~the~~. ~~issuance~~. . 2,100,100 2,325,000 2,523,833 Repayment of adebt ~~credit~~with onoriginal ~~account~~maturities of ~~$195~~one year or more (3,871,219) (832,080) (1,000,776) Issuance (repayment) of debt with original maturities within one year, net.4 ~~million~~. . . . . . . . . . 817,890 ~~which~~(873,448) ~~had~~(1,568,825) ~~been~~Cash ~~fully~~dividends ~~utilized~~paid atto IBM . . . (793,000) (772,000) (75,000) ___________ ____________ ___________ Cash used in financing activities . (1,746,229) (152,528) (120,768) ___________ ____________ ___________ Change in cash and cash equivalents (416,453) 351,379 (222,733) Cash and cash equivalents, January 1. . . . . . . . . . . . 951,490 600,111 822,844 ___________ ___________ ____________ Cash and cash equivalents, December 31, ~~2000~~. . . . . . . . . . $ 535,037 $ 951,490 $ 600,111 =========== =========== ============ The accompanying notes are an integral part of this statement. -22-

-23- 21 IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS For the years ended December 31: (Continued) (Dollars in thousands)

~~EXHIBIT~~2001 I2000 ~~IBM~~1999 ~~CREDIT~~___________ ~~CORPORATION~~___________ ~~STATEMENT~~___________ RESupplemental ~~COMPUTATION~~Disclosure OFof ~~RATIOS~~Cash ~~COMPUTATION~~Flow OFInformation: ~~RATIO~~Cash OFpaid ~~EARNINGS~~for TOinterest ~~FIXED~~$ ~~CHARGES~~529,798 ~~(dollars~~$ in629,410 ~~thousands)~~$ ~~FOR~~568,571 ~~THE~~========= ~~YEAR~~========== ~~ENDED~~========= ~~DECEMBER~~Cash ~~31:~~paid ~~2000~~for ~~1999~~income ~~1998~~taxes ~~1997 1996 __________ __________ __________ _________ ________ Fixed charges: Interest expense~~ $ ~~619~~117,~~995~~920 $ ~~569~~447,~~545~~050 $ ~~611~~106,~~206~~144 ~~$538,560~~========= ~~$436,109~~========== ~~Approximate~~========= ~~portion~~Supplemental ofschedule ~~rental expense representative~~ of ~~the~~noncash ~~interest~~investing ~~factor~~and ~~264~~financing ~~291~~activities: ~~239~~In ~~283~~May ~~479~~1999, ~~__________~~the ~~__________~~Company ~~_________~~purchased ~~_________~~selected ~~________~~assets ~~Total~~from ~~fixed~~the ~~charges~~leasing ~~620,259~~portfolio ~~569,836~~of ~~611~~Comdisco,~~445~~ ~~538,843~~Inc. ~~436,588~~The ~~Net~~purchase ~~earnings~~price ~~428,357~~was ~~429~~financed,~~620~~ ~~308,765~~in ~~283~~part,~~893~~ ~~271,082~~through ~~Provision~~the ~~for~~assumption ~~income~~of ~~taxes~~debt ~~278,509~~of ~~279,330~~$102.0 ~~200,748~~million ~~163,215~~and ~~176,122~~through ~~__________~~the ~~__________~~issuance ~~_________~~of ~~_________~~a ~~________~~credit ~~Earnings~~on ~~before~~account ~~income~~of ~~taxes and fixed charges~~ $~~1,327,125~~195.4 $1million,~~278,786~~ ~~$1,102,958~~which ~~$985,951~~had ~~$883,792~~been ~~==========~~fully ~~==========~~utilized ~~==========~~at ~~=========~~December ~~========~~31, ~~Ratio~~2000. ofThe ~~earnings~~accompanying tonotes ~~fixed~~are ~~charges~~an ~~2.14~~integral ~~2.24~~part ~~1.80~~of ~~1.83~~this 2statement.~~02 ==== ==== ==== ==== ====~~

-24- 22 IBM CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES: Principles of Consolidation: The consolidated financial statements include the accounts of the Company and those of its controlled subsidiaries, which in general are majority owned. Investments in business entities in which the Company does not have control, but has the ability to exercise significant influence over operating and accounting policies (generally 20-50 percent) are accounted for by 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. Estimated Residual Value of Leased Assets: The recorded residual values of the Company's leased assets are estimated at the inception of the lease to be the expected fair market value of the assets at the end of the lease term. On a quarterly basis, the Company reassesses the realizable value of its lease residual values. In accordance with generally accepted accounting principles, anticipated increases in specific future residual values are not recognized before realization. Anticipated decreases in specific future residual values that are considered to be other than temporary are recognized immediately. 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 loans. 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. Operating lease income is recognized on a straight-line basis over term of the lease. 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: Below are the methodologies the Company uses to calculate both its allocated and unallocated reserves, which are applied consistently to its different portfolios. -25- 23 NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued): Allocated: The Company's credit department reviews all accounts at risk on a quarterly basis. The review primarily consists of an analysis based upon current information available about the customer, such as financial statements, news reports, published credit ratings, the current economic environment, as well as, collateral and prior history. The credit department will also take into account the current fair market value and the costs of repossessing the collateralized equipment, where applicable. For loans that are collateral dependent, impairment is measured using the fair value of the collateral when foreclosure is probable. Using this information, the credit department determines the expected cash flows for the receivable and calculates a recommended estimate of the potential loss and the probability of loss. For those accounts where the loss is probable, the Company records an allocated reserve. Unallocated: The Company records an unallocated reserve which is calculated by applying a write-off rate to the total portfolio, excluding accounts that have been specifically reserved. This write-off rate is based upon write-off history and is adjusted to reflect current economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to revisions as more information becomes available. Receivable losses are charged against the allowance when management believes the uncollectibility of the receivable is confirmed. Subsequent recoveries, if any, are credited to the allowance. 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) No. 109, "Accounting for Income Taxes," these deferred taxes are measured by applying currently enacted tax laws. Derivative financial instruments: In the normal course of business, the Company uses derivative instruments to manage interest rate risk. The Company does not use derivatives for trading or speculative purposes, nor is it a party to leveraged derivatives. All derivatives are recognized on the balance sheet at fair value and are generally reported in Other assets or Interest and Other accruals in the Consolidated Statement of Financial Position. To qualify for hedge accounting, the Company requires that the instruments are effective in reducing the risk exposure that they are designated to hedge. Instruments that meet established accounting criteria are formally designated as hedges at the inception of the contract. These criteria demonstrate that the derivative is expected to be highly effective at offsetting changes in fair value of the underlying exposure both at inception of the hedging relationship and on an ongoing basis. The assessment for effectiveness is formally documented at hedge inception and reviewed at least quarterly throughout the designated hedge period. -26- 24 NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued): Generally, the Company applies hedge accounting as allowed by SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities.:" To comply with SFAS No. 133 requirements, the Company designates each derivative as a hedge of (1) the fair value of a recognized asset or liability or of an unrecognized firm commitment ("fair value" hedge); or (2) the variability of anticipated cash flows of a forecasted transaction or the cash flows to be received or paid related to a recognized asset or liability ("cash flow" hedge). Changes in the value of a derivative that is designated as a fair value hedge, along with offsetting changes in fair value of the underlying hedged exposure, are recorded in earnings each period. For hedges of interest rate risk, the fair value adjustments are recorded as adjustments to Interest expense in the Company's Consolidated Statement of Earnings. Changes in the value of a derivative that is designated as a cash flow hedge are recorded in the Other Comprehensive Loss section of stockholder's equity. When earnings are affected by the variability of the underlying cash flow, the applicable amount deferred in stockholder's equity is released to earnings and reported in Interest expense. When the underlying hedged item ceases to exist, all changes in the fair value of the derivative instrument are marked-to-market with changes in value included in earnings each period until the instrument matures. Derivatives that are not designated as hedges and changes in the value of derivatives which do not offset the underlying hedged item throughout the designated hedge period (collectively, "ineffectiveness"), are recorded in earnings each period and generally reported in selling, general and administrative expense. Refer to Note 14, Derivative Financial Instruments and Hedging Activities for additional information. Financial Instruments: In determining the fair value of its financial instruments, the Company uses a variety of methods and assumptions that are based on market conditions existing at each balance sheet date. For the majority of financial instruments including most derivatives, certain receivables and long-term debt, standard market conventions and techniques such as discounted cash flow analysis, option pricing models, replacement cost and termination cost are used to determine fair value. Dealer quotes are used for the remaining financial instruments. All methods of assessing fair value result in a general approximation of fair value, and such value may never be realized. -27- 25 NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued): 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. Reclassifications: Certain prior year amounts in the Consolidated Statement of Cash Flows have been reclassified to conform to current year presentation. NOTE 2 - ACCOUNTING CHANGES: The Company implemented new accounting standards in 2001, 2000 and 1999. None of these standards had a material effect on the financial position or results of operations of the Company. Pursuant to the SEC's Staff Accounting Bulletin (SAB) No. 101 , "Revenue Recognition in Financial Statements," the Company has reviewed its accounting policies for recognition of revenue. SAB 101 was required to be implemented in the fourth quarter of 2000. SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition in the financial statements. The Company's accounting policies are consistent with the views of SAB 101. Refer to Note 1, Significant Accounting Policies for a description of the Company's policies on revenue recognition. On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments. Specifically, SFAS No. 133 requires an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Additionally, the fair value adjustments will affect either stockholder's equity or net earnings depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity. Effective January 1, 2001, the Company adopted SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities-a replacement of SFAS No. 125." This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities and revises the accounting standards for securitizations and transfers of assets and collateral. The adoptions did not have a material effect on the Company"s results of operations or financial position. The standard also requires new disclosures which were not applicable to the Company. -28- 26 NOTE 2 - ACCOUNTING CHANGES (Continued): Pursuant to the SEC's SAB 102, "Selected Loan Loss Allowance Methodology and Documentation Issues," the Company has reviewed its policies related to methodologies for the determination of, and documentation in support for its allowance for receivables losses and its provision for receivable losses. The Company's methodology and documentation policies are consistent with the views expressed in SAB 102. NOTE 3 - RELATIONSHIP WITH IBM AND RELATED PARTY TRANSACTIONS: Pursuant to a Support Agreement between IBM and the Company, IBM has agreed to retain 100 percent of the voting capital stock of the Company, unless required to dispose of any or all such shares of stock pursuant to a court decree or order of any governmental authority that in the opinion of counsel to IBM may not be successfully challenged. IBM has also agreed to cause the Company to have a tangible net worth of at least $1.00 at all times. The Support Agreement provides that it shall not be deemed to constitute a guarantee by IBM to any party of the payment of any debt or other obligation, indebtedness or liability of the Company. The Support Agreement may not be modified, amended or terminated while any debt of the Company is outstanding, unless all holders of such debt have consented in writing. Pursuant to an operating agreement, IBM provides collection, administration and other services and products for the Company and is reimbursed for the cost of these services and products. IBM charged the Company $134.4 million, $141.2 million and $114.2 million in 2001, 2000 and 1999, respectively, representing costs for lease services, employee benefit plans, facilities rental and staff support. Additionally, the operating agreement allows IBM to charge the Company for shared expenses at the corporate and geographic levels. Where practical, shared expenses are determined based upon measurable drivers of expense. When a clear and measurable driver cannot be identified, shared expenses are determined on a financial basis that is consistent with the Company's management system. Management believes that these methods are reasonable. These expenses amounted to $99.1 million and $87.2 million for the years ended December 31, 2001, and 2000, respectively, and are included in Selling, General and Administrative expenses on the Company's Consolidated Statement of Earnings. Additionally, the Company is compensated, at market rates as determined by management, for services performed for IBM, primarily for management of IBM's federal, state and local government installment receivables portfolio. These fees, amounting to $3.5 million, $30.7 million and $45.5 million in 2001, 2000 and 1999, respectively, are included in other income. The operating agreement with IBM also provides that installment receivables, which include finance charges, may be purchased by the Company at fair value as determined by management. The Company is reimbursed by IBM for any price adjustments and concessions that reduce the amount of receivables previously purchased by the Company. -29- 27 NOTE 3 - RELATIONSHIP WITH IBM AND RELATED PARTY TRANSACTIONS (Continued): Additionally, the operating agreement with IBM provides that IBM will offer term leases of the Company to creditworthy potential lessees. IBM's sales price of the equipment to the Company will typically be at the purchase price payable by the lessee, unless the Company is participating in unique IBM product offerings. The Company provides accounts receivable and inventory financing, at market rates, to dealers and remarketers of IBM products. Included in income from working capital financing is fee income earned from IBM of $84.5 million, $84.9 million and $98.5 million in 2001, 2000 and 1999, respectively related to these financings. 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. There were no such losses in 2001. Approximately $3.4 million and $1.1 million of such losses were reimbursed by IBM in 2000, and 1999, respectively. IBM will also reimburse the Company for losses on certain lease and loan transactions with specific customers. Approximately $9.3 million, $10.6 million and $4.8 million of such losses were reimbursed by IBM in 2001, 2000, and 1999, respectively. The Company also provides equipment, software and services financing at market rates to IBM and affiliated companies for both IBM and non-IBM products. The Company originated $402.7 million and $857.2 million of such financings during 2001 and 2000, respectively. The decrease in originations is primarily due to the reclassification of certain new internal leases to another division of IBM. At December 31, 2001, and 2000, approximately $1,134.1 million and $1,324.0 million, respectively, of such financings were included in the Company's lease and loan portfolio. Of these amounts, $1,069.4 million and $1,140.0 million were included in the Company's operating lease portfolio at December 31, 2001, and 2000, respectively. The finance income earned from operating leases to IBM and affiliated companies, net of depreciation expense, was $176.1 million, $219.4 million and $180.9 million in 2001, 2000 and 1999, respectively. Interest and finance income of $3.6 million, $15.2 million and $9.6 million was earned from loans to IBM and affiliates in 2001, 2000 and 1999, respectively. The Company sells used equipment to IBM at the conclusion of IBM's lease or from the Company's inventory. For the twelve months ended December 31, 2001, 2000 and 1999, the Company's sales of equipment to IBM amounted to $154.0 million, $134.9 million and $161.5 million, 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, 2001 and 2000. -30- 28 NOTE 3 - RELATIONSHIP WITH IBM AND RELATED PARTY TRANSACTIONS (Continued): In May 2001, the Company resumed the factoring of certain IBM receivables by purchasing selected factoring assets from IBM International Holdings Finance Company, Ltd. (IIHFC), at cost which approximated fair market value. The initial purchase amounted to $525.0 million. The Company acquired additional receivables having a nominal value of $2,450.8 million for $2,432.9 million. The Company has a master loan agreement with IBM. This agreement allows for short-term (up to 270-day) funding, made available at market terms and conditions, upon the request of either the Company or IBM. At December 31, 2001, and 2000, the Company had borrowings outstanding under this agreement of $3,238.2 million and $1,186.6 million, respectively, payable to IBM. The Company and IBM have an additional master loan agreement which allows for long-term funding, made available at market terms and conditions, upon the request of the Company. As of December 31, 2001 and 2000, the Company had $4,850.1 million and $4,891.7 million, respectively of borrowings outstanding under this agreement. These borrowings have due dates ranging from January 18, 2002, to December 22, 2004. Interest expense of $299.4 million, $228.5 million and $152.5 million was incurred on loans from IBM and affiliates during 2001, 2000 and 1999, respectively. The Company is an authorized borrower under IBM's $12.0 billion committed global credit facility and has a liquidity agreement with IBM for $500.0 million. The Company has no borrowings outstanding under the committed global credit facility or the liquidity agreement. An intercompany tax allocation agreement (the Agreement) exists between the Company and IBM. The Agreement aligns the settlement of federal and state tax benefits and/or obligations with the Company's provision for income taxes determined on a separate company basis. The Company is part of the IBM consolidated federal tax return and files separate state tax returns in selected states. Included in amounts due to IBM and affiliates at December 31, 2001, and 2000, are $180.1 million and $15.0 million, respectively, of current income taxes payable determined in accordance with the Agreement. NOTE 4 - INVESTMENT IN CAPITAL LEASES, NET: The Company's capital lease portfolio includes direct financing and leveraged leases. The Company originates financing for customers in a variety of industries throughout the United States. The Company has a diversified portfolio of capital equipment financings for end users. Direct financing leases consist principally of IBM advanced information processing products with terms generally from two to three years. The components of the net investment in direct financing leases at December 31, 2001 and 2000, are as follows: 29 NOTE 4 - INVESTMENT IN CAPITAL LEASES, NET (Continued): (Dollars in thousands) 2001 2000 -31- ___________ __________ Gross lease payments receivable . . . . $5,273,115 $5,540,087 Estimated unguaranteed residual values. 494,963 486,231 Deferred initial direct costs . . . . . 24,438 16,062 Unearned income . . . . . . . . . . . . (645,042) (636,733) Allowance for receivable losses . . . . (54,117) (19,281) __________ __________ Total . . . . . . . . . . . . . . . . $5,093,357 $5,386,366 ========== ========== The scheduled maturities of minimum lease payments outstanding at December 31, 2001, expressed as a percentage of the total, are due approximately as follows: Within 12 months. . . . . . . . . . . . . . . 49% 13 to 24 months . . . . . . . . . . . . . . . 33 25 to 36 months . . . . . . . . . . . . . . . 14 37 to 48 months . . . . . . . . . . . . . . . 3 After 48 months . . . . . . . . . . . . . . . 1 ____ 100% ==== Refer to Note 9, Allowance for Receivable Losses, for a reconciliation of the allowances for receivable losses for direct financing leases. As part of its risk management strategy, the Company sold the entire payment streams associated with a portion of selected direct financing leases and loans receivable. The Company retains servicing rights in the receivables that were sold. Any gain or loss associated with these sales are recognized in the period in which the sale occurs. As of December 31, 2001, the Company sold approximately $64.9 million of receivables, which consisted of $37.8 million of payment streams associated with capital leases and $27.1 million of payment streams associated with loans receivable. The Company recognized a gain on these sales amounting to $2.1 million in 2001. As of December 31, 2001, the remaining balance of these receivables under the Company's management amounted to $59.2 million. Leveraged lease investments include coal-fired electric generating facilities. Leveraged leases have maturity dates ranging from 2013 to 2018. The components of the net investment in leveraged leases at December 31, 2001 and 2000, are as follows: -32- 30 NOTE 4 - INVESTMENT IN CAPITAL LEASES, NET (Continued): (Dollars in thousands) 2001 2000 _________ __________ Net rents receivable. . . . . . . . . . . $ 205,240 $ 227,286 Estimated unguaranteed residual values . 13,750 33,568 Unearned and deferred income. . . . . . . (59,030) (66,907) _________ __________ Investment in leveraged leases. . . . . . $ 159,960 $ 193,947 ========= ========== Deferred income taxes relating to leverage leases amounted to $131.9 million and $146.0 million at December 31, 2001 and 2000, respectively. NOTE 5 - EQUIPMENT ON OPERATING LEASES: Operating leases consist principally of IBM advanced information processing products with terms generally from two to three years. The components of equipment on operating lease at December 31, 2001 and 2000, are as follows: (Dollars in thousands) 2001 2000 ____________ ____________ Cost. . . . . . . . . . . $ 5,188,667 $ 6,064,187 Accumulated depreciation. (3,051,713) (3,526,522) ____________ ____________ Total . . . . . . . . . . $ 2,136,954 $ 2,537,665 ============ ============ Minimum future rentals were approximately $2,123.9 million at December 31, 2001. The scheduled maturities of the minimum future rentals at December 31, 2001, expressed as a percentage of the total, are due approximately as follows: Within 12 months. . . . . . . . . . . . . 58% 13 to 24 months . . . . . . . . . . . . . 30 25 to 36 months . . . . . . . . . . . . . 9 37 to 48 months . . . . . . . . . . . . . . . 2 After 48 months. . . . . . . . . . . . . . . 1 ____ 100% ==== NOTE 6 - LOANS RECEIVABLE: Loans receivable include installment receivables that are principally financings of customer purchases of IBM software, services and information handling products, as well as non-IBM software and services. Also included in loans receivable are term participation loans. Participation loans are loans in which the Company has purchased a fixed percentage of a specific customer's loan facility from a bank or other lending institution. The Company receives its fixed percentage of interest and loan fees less administrative fees charged by the agent bank. -33- 31 NOTE 6 - LOANS RECEIVABLE (Continued): The components of loans receivable at December 31, 2001 and 2000, are as follows: (Dollars in thousands) 2001 2000 __________ ___________ Gross loans receivable . . . . . $4,263,802 $4,617,443 Deferred initial direct costs. . 18,448 21,552 Unearned income . . . . . . . . (347,133) (392,484) Allowance for receivable losses. (59,317) (39,235) ___________ ___________ Total. . . . . . . . . . . . . . $3,875,800 $4,207,276 =========== =========== The scheduled maturities of loans receivable outstanding at December 31, 2001, expressed as a percentage of the total, are due approximately as follows: Within 12 months. . . . . . . . . . . . . . . . 46% 13 to 24 months. . . . . . . . . . . . . . . . . 24 25 to 36 months . . . . . . . . . . . . . . . . . 15 37 to 48 months . . . . . . . . . . . . . . . . . 7 After 48 months . . . . . . . . . . . . . . . . . 8 ____ 100% ==== As part of its risk management strategy, the Company sold a portion of selected loans. Refer to Note 4, Investment In Capital Leases, Net for additional information. Refer to Note 9, Allowance for Receivable Losses, for a reconciliation of the loans receivable allowance for receivable losses. NOTE 7 - 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. Payment terms for inventory-secured financing generally range from 30 days to 75 days. Accounts receivable financing includes the financing of trade accounts receivable for these dealers and remarketers. Payment terms for accounts receivable secured financing typically range from 30 days to 90 days. Also included in working capital financing receivables are revolving participation loans. Refer to Note 6, Loans Receivable, for additional information on participation loans. -34- 32 NOTE 7 - WORKING CAPITAL FINANCING RECEIVABLES (Continued): With the continued trends toward consolidation in this industry segment, the concentration of such financings for certain large dealers and remarketers of information industry products remains significant, although it has continuously declined in the last several years. At December 31, 2001, and December 31, 2000, approximately 42 percent and 45 percent, respectively, of the working capital financing receivables outstanding were concentrated in ten working capital accounts. However, the Company has a secured position on most of its inventory and accounts receivable financing, which mitigates the amount of potential loss. The components of working capital financing receivables at December 31, 2001, and 2000, are as follows: (Dollars in thousands) 2001 2000 ___________ _____________ Working capital financing receivables . $2,558,568 $2,836,246 Allowance for receivable losses . . . . (43,665) (44,575) ___________ ___________ Total . . . . . . . . . . . . . . . . . $2,514,903 $2,791,671 =========== =========== The Company had $2,500.5 million of approved but unused working capital financing credit lines available to customers at December 31, 2001. Refer to Note 9, Allowance for Receivable Losses, for a reconciliation of the working capital financing receivables allowance for receivable losses. NOTE 8 - FACTORED IBM RECEIVABLES: The components of factored IBM receivables at December 31, 2001 and 2000, are as follows: (Dollars in thousands) 2001 2000 __________ ___________ Gross receivable . . . . . . . . $ 463,978 $ - Unearned income . . . . . . . . (2,122) - Allowance for receivable losses. (23,316) - ___________ ___________ Total. . . . . . . . . . . . . . $ 438,540 $ - =========== =========== Refer to Note 9, Allowance for Receivable Losses, for a reconciliation of the factored IBM receivables allowance for receivable losses. -35- 33 NOTE 9 - ALLOWANCE FOR RECEIVABLE LOSSES: The following is a reconciliation of the allowance for receivable losses, by portfolio, for the years ended December 31, 2001, 2000 and 1999: (Dollars in thousands) Direct Financing & Working Factored Leveraged Loans Capital IBM 2001 Total Leases Receivable Fin. Rec. Receivables __________________ ________ _________ __________ __________ __________ Beginning of year . $103,091 $ 19,281 $ 39,235 $ 44,575 $ - Reserve on initial purchase of factored assets from IIHFC. . . . 21,459 - - - 21,459 Provision for receivable losses, net . . . . . . . 126,268 56,851 37,820 28,477 3,120 Accounts written off (net of recoveries). . . . (70,403) (22,015) (17,738) (29,387) (1,263) _________ _________ __________ __________ __________ End of year. . . . $180,415 $ 54,117 $ 59,317 $ 43,665 $ 23,316 ========= ========== ========== ========== ========== Direct Financing & Working Factored Leveraged Loans Capital IBM 2000 Total Leases Receivable Fin. Rec. Receivables __________________ ________ _________ __________ __________ __________ Beginning of year . $134,254 $ 50,582 $ 66,154 $ 17,518 $ - Provision (reversal of provision) for receivable losses, net. . . . . . . . 15,091 (17,462) 350 32,203 - Accounts written off(net of Recoveries). . . . (46,254) (13,839) (27,269) (5,146) - ________ _________ __________ ____________ ___________ End of year . . . . $103,091 $ 19,281 $ 39,235 $ 44,575 $ - ======== ========= ========== =========== ========== -36- 34 NOTE 9 - ALLOWANCE FOR RECEIVABLE LOSSES (continued): Direct Financing & Working Factored Leveraged Loans Capital IBM 1999 Total Leases Receivable Fin. Rec. Receivables __________________ ________ _________ __________ __________ __________ Beginning of year . $161,286 $ 69,006 $ 75,144 $ 17,136 $ - Provision (reversal of provision) for receivable losses, net. . . . . . . 4,986 (691) 1,100 4,577 - Accounts written off(net of recoveries). . . . (32,018) (17,733) (10,090) (4,195) - ________ _________ __________ ___________ ___________ End of year. . . . $134,254 $ 50,582 $ 66,154 $ 17,518 $ - ======== ========= ========== ========== ========== NOTE 10 - OTHER ASSETS: The components of other assets at December 31, 2001, and 2000, are as follows: (Dollars in thousands) 2001 2000 _________ _________ Receivables from customers. . . . . . . . . . . $ 343,981 $ 467,914 Receivables from affiliates . . . . . . . . . . 107,301 122,960 Remarketing inventory, net. . . . . . . . . . . 98,052 70,721 Investments and other . . . . . . . . . . . . . 5,652 51,400 Restricted cash . . . . . . . . . . . . . . . . - 16,328 _________ _________ Total . . . . . . . . . . . . . . . . . . . . . $ 554,986 $ 729,323 ========= ========= Receivables from customers of $344.0 million and $467.9 million at December 31, 2001, and 2000, respectively, represent amounts due for operating leases that have not yet been collected and for remarketing transactions, such as sales, lease payments and termination charges. Receivables from affiliates of $107.3 million and $123.0 million at December 31, 2001, and 2000, respectively, primarily consist of amounts due from IBM Global Services for monthly rentals and termination charges. Remarketing inventory is valued at the lower of cost or market on a first-in, first-out basis. Restricted cash at December 31, 2000 of $16.3 million is deposits in restricted accounts, held as security deposits received from customers. -37- 35 NOTE 11 - SHORT-TERM DEBT: The components of short-term debt at December 31, 2001, and 2000, are as follows: (Dollars in thousands) 2001 2000 __________ __________ Commercial paper, with rates averaging 1.9% in 2001 and 6.7% in 2000 . . . . . . . . . . . . . $1,679,712 $ 3,094,919 Other short-term debt, with rates averaging 6.1% in 2001, and 2000. . . . . . . . . . . . . . . 2,663 20,923 Current maturities of long-term debt . . . . . . 650,000 950,000 __________ __________ 2,332,375 4,065,842 IBM short-term borrowings . . . . . . . . . . . 5,213,194 3,828,345 __________ __________ Total. . . . . . . . . . . . . . . . . . . . . . $7,545,569 $7,894,187 ========== ========== The approximate weighted average effective interest rates above are before the effects of interest rate swap agreements and have been calculated on the basis of rates in effect at December 31, 2001 and 2000. The approximate weighted average stated rates (after the effects of interest rate swap agreements) on commercial paper outstanding at December 31, 2001, and 2000, were 2.3% and 6.7%, respectively. The approximate weighted average stated rate (after the effects of interest rate swap agreements) on other short-term debt outstanding at December 31, 2001, and 2000, was 6.1%. NOTE 12 - LONG-TERM DEBT: The components of long-term debt at December 31, 2001, and 2000, are as follows: (Dollars in thousands) 2001 2000 ____________ _____________ Medium-term notes with original maturities ranging from 2002 to 2008, with rates averaging 6.5% in 2001 and 6.1% in 2000. . . $ 697,333 $2,227,383 Less: Current maturities. . . . . . . . . . . 650,000 950,000 ___________ ___________ 47,333 1,277,383 IBM loan payable, with maturities ranging from 2003 to 2004 . . . . . . . . . . . . . 2,875,100 2,250,000 ___________ ___________ Total. . . . . . . . . . . . . . . . . . . . . $2,922,433 $3,527,383 =========== =========== The approximate weighted average effective interest rates above are before the effects of interest rate swap agreements and have been calculated on the basis of rates in effect at December 31, 2001, and 2000. The approximate weighted average stated rates (after the effects of interest rate swap agreements) on medium-term notes outstanding at December 31, 2001, and 2000, were 6.2% and 6.3%, respectively. -38- 36 NOTE 12 - LONG-TERM DEBT (Continued): Annual maturity of long-term debt as of December 31, 2001, is as follows: (Dollars in thousands) 2002 . . . . . . . . . . . . . . . . . . . . . $ 650,000 2003 . . . . . . . . . . . . . . . . . . . . . 2,150,100 2004 . . . . . . . . . . . . . . . . . . . . . 725,000 2005 . . . . . . . . . . . . . . . . . . . . . - 2006 . . . . . . . . . . . . . . . . . . . . . - 2007 and thereafter . . . . . . . . . . . . . 47,333 __________ $3,572,433 ========== NOTE 13 - PROVISION FOR INCOME TAXES: The components of the provision for income taxes are as follows: (Dollars in thousands) 2001 2000 1999 __________ __________ __________ Federal: Current . . . . . . . . . . . . $ 233,981 $ 135,601 $ 311,865 Deferred. . . . . . . . . . . . 5,781 95,080 (80,531) __________ __________ _________ 239,762 230,681 231,334 __________ __________ _________ State and local: Current . . . . . . . . . . . . 48,558 27,697 63,215 Deferred. . . . . . . . . . . . 1,187 20,131 (15,219) __________ __________ _________ 49,745 47,828 47,996 __________ __________ _________ Total provision . . . . . . . . . $ 289,507 $ 278,509 $ 279,330 ========== ========== ========= Changes in the deferred tax assets and liabilities resulting from temporary differences between financial and tax reporting are as follows: (Dollars in thousands) 2001 2000 _____________ ____________ Deferred tax assets (liabilities): Provision for receivable losses. . . . $ 67,070 $ 45,147 Lease income and depreciation. . . . . (917,682) (946,613) Other, net . . . . . . . . . . . . . . (127,161) (88,609) _____________ ____________ Deferred income taxes. . . . . . . . . . $ (977,773) $ (990,075) ============= ============ -39- 37 NOTE 13 - PROVISION FOR INCOME TAXES (Continued): The provision for income taxes varied from the U.S. federal statutory income tax rate as follows: 2001 2000 1999 ________ ______ _______ Federal statutory rate. . . . . . . . 35.0% 35.0% 35.0% State and local taxes, net of federal tax benefit. . . . . . . . . 4.4 4.4 4.4 ________ ______ _______ Effective income tax rate . . . . . . 39.4% 39.4% 39.4% ======== ====== ======= NOTE 14 - DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES: The Company has used derivative instruments as an element of its risk management strategy for many years. Although derivatives entail risk of non-performance by counterparties, the Company manages this risk by establishing explicit dollar and term limitations that correspond to the credit rating of each carefully selected counterparty. When viewed in conjunction with the underlying and offsetting exposure that derivatives are designed to hedge, the Company has not sustained a material loss from these instruments. The Company does not use derivatives for trading or speculative purposes, nor is it a party to leveraged derivatives. The majority of the Company's derivative transactions relate to the matching of interest rate sensitive liabilities to assets. The Company issues debt principally to fund its lease and loan portfolio. Access to cost-effective financing can result in an interest rate mismatch with the underlying assets. To manage these mismatches and to reduce overall interest cost, the Company generally uses interest rate swaps to convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair value hedges) and to convert specific variable rate debt and anticipated commercial paper issuances to fixed rates (i.e., cash flow hedges). The resulting cost of funds is generally lower than that which would have been available if debt with matching characteristics was issued directly. The Company also holds warrants in connection with certain investments, that although not designated as hedging instruments, are deemed derivatives since they contain net share settlement clauses. During the year, the Company recorded the change in fair value of these warrants in net income. -40- 38 NOTE 14 - DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued): The following table summarizes the fair value at December 31, 2001, as recognized on the balance sheet, of the Company's derivative and other risk management instruments, included in the Consolidated Statement of Financial Position: (Dollars in thousands) Asset Liability Net _________ _________ _________ Fair value hedges $ 1,298 $ - $ 1,298 Cash flow hedges - (3,302) (3,302) Other 757 - 757 _________ _________ _________ Total $ 2,055 $ (3,302) $ (1,247) ========= ========= ========= Other Comprehensive Loss: The Company uses cash flow hedges as part of its interest rate risk management program. In connection with its cash flow hedges, the Company has deferred approximately $1.2 million of net losses in Other Comprehensive Loss as of December 31, 2001, net of tax, all of which is expected to be reclassified to earnings within the next twelve months to provide an economic offset to the earnings impact of the anticipated cash flows hedged. The following table summarizes activity in Other Comprehensive Loss section of stockholder's equity related to all derivatives classified as cash flow hedges held by the Company during the period January 1, 2001 (the date of the Company's adoption of SFAS 133) through December 31, 2001: (Dollars in thousands) Debit/ (Credit) __________ Cumulative effect of adoption SFAS 133 as of January 1, 2001, net of tax . . . . . . . . . $ (265) Losses reclassified into earnings from equity, net of tax. . . . . . . . . . . . . . . . . 3,828 Changes in fair value of derivatives, net of tax. . . (2,345) _________ Accumulated derivative loss included in other comprehensive loss, as of December 31, 2001 . . . .$ 1,218 ========= As of December 31, 2001, there were no gains or losses or portions thereof that were either ineffective or where the underlying exposure did not occur; nor are there any anticipated in the normal course of business. -41- 39 NOTE 15 - FINANCIAL INSTRUMENTS: Fair value is a theoretical measure that is valid only at a particular point in time and whose sensitivity is based on certain assumptions. As such, fair value represents only an estimate that may never actually be realized. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate. Cash and cash equivalents: The carrying amount approximates fair value due to the short maturity of these instruments. 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 and factored IBM receivables: The carrying amount approximates fair value due to the short maturity of most of these instruments. Short and long-term debt and current maturities of long-term debt: The fair value of these instruments is estimated by discounting the future cash flows using the current rates offered to the Company for debt with the same maturities. Interest rate related and currency related agreements: The fair value of these instruments has been estimated as the amount the Company would receive or pay to terminate the agreements, taking into consideration current interest and currency exchange rates. The following table summarizes the carrying amount and the estimated fair value of the Company's financial instruments, excluding derivatives: (Dollars in thousands) Carrying Estimated At December 31, 2001: Amount Fair Value _____________ ____________ Cash and cash equivalents $ 535,037 $ 535,037 Loans receivable 3,875,800 3,903,590 Working capital financing receivables 2,514,903 2,514,903 Factored IBM receivables 438,540 438,540 Short-term debt (excluding current maturities of long-term debt) 6,895,569 6,960,190 Long-term debt and current maturities of long-term debt 3,572,433 3,675,795 -42- 40 NOTE 15 - FINANCIAL INSTRUMENTS (Continued): (Dollars in thousands) Carrying Estimated At December 31, 2000: Amount Fair Value _____________ ____________ Cash and cash equivalents $ 951,490 $ 951,490 Loans receivable 4,207,276 4,196,613 Working capital financing receivables 2,791,671 2,791,671 Short-term debt (excluding current maturities of long-term debt) 6,944,187 6,965,123 Long-term debt and current maturities of long-term debt 4,477,383 4,565,379 Off-balance-sheet derivatives: Interest rate related -- Assets - 20,706 Liabilities - 2,630 NOTE 16 - COMMITMENTS AND CONTINGENCIES: The Company has guaranteed certain loans and financial commitments. These financial guarantees amounted to $96.4 million and $134.8 million, at December 31, 2001 and 2000, respectively. The Company has approved but unused working capital lines of credit available to customers which amounted to $2,500.5 million and $2,541.7 million at December 31, 2001, and 2000, respectively. Additionally, the Company committed to provide future financing to its customers in connection with customer purchase agreements for approximately $269.0 million and $128.6 million at December 31, 2001, and 2000, respectively. The table below summarizes these commitments and their expirations dates: (Dollars in millions) Balance as of December 31, Amounts expiring in: 2001 2002 2003-04 2005-06 After 2006 ___________ ________ _______ _______ __________ Unused lines of credit $2,500.5 $1,705.8 $ 307.8 $ 252.6 $ 234.3 Financial guarantees 96.4 70.5 25.9 - - Other commitments 269.0 138.1 128.4 2.5 - -43- 41 NOTE 17 - SEGMENT REPORTING: The Company is organized on the basis of its finance offerings. The Company's reportable segments are strategic business units that offer different financing solutions based upon the customers' needs. The Company's operations are conducted primarily through its two operating segments: Customer Financing and Commercial Financing. The Customer Financing segment provides lease and loan financing of IBM and non-IBM advanced information processing products and services to end users. The Commercial Financing segment provides primarily secured inventory and accounts receivable financing ("working capital financing") to dealers and remarketers of information industry products. Also included in the commercial financing segment are both term and revolver participation loans. Refer to Note 6, Loans Receivable, for additional information. The accounting policies of the segments are the same as those followed by the Company. Segment data includes an allocation of interest expense and all corporate headquarters costs to each of its operating segments. Interest expense is allocated primarily on the basis of a planned leverage ratio using an average interest rate. Corporate headquarters expenses are allocated on the basis of headcount, an annual survey of the corporate staff to determine the time spent on each business segment, and asset utilization depending on the type of expense. The Company evaluates the performance of its segments and allocates resources to them based upon their earnings before taxes. The following schedules represent disaggregated income and expense information for both segments. There are no intersegment transactions. (Dollars in thousands) For the Year Ended December 31: Customer Commercial 2001 Financing Financing Total ______________________ _____________ ____________ ___________ Revenues............... $ 1,776,264 $ 261,319 $ 2,037,583 Interest expense....... $ 415,463 $ 75,103 $ 490,566 Earnings before income taxes................ $ 629,654 $ 89,782 $ 719,436 Assets................. $ 10,860,545 $ 3,199,506 $14,060,051 Customer Commercial 2000 Financing Financing Total ______________________ _____________ ____________ ___________ Revenues............... $ 1,829,369 $ 305,000 $ 2,134,369 Interest expense....... $ 500,424 $ 98,600 $ 599,024 Earnings before income taxes................ $ 548,498 $ 144,197 $ 692,695 Assets................. $ 12,087,833 $ 3,286,771 $15,374,604 -44- 42 NOTE 17 - SEGMENT REPORTING (Continued): Customer Commercial 1999 Financing Financing Total ______________________ _____________ ____________ ___________ Revenues............... $ 1,609,114 $ 242,362 $ 1,851,476 Interest expense....... $ 477,849 $ 58,259 $ 536,108 Earnings before income taxes................ $ 540,279 $ 133,965 $ 674,244 Assets................. $ 12,537,711 $ 2,993,245 $15,530,956 A reconciliation of total segment revenues, total segment interest expense, total segment earnings before income taxes and total segment assets to the Company's consolidated amounts are as follows: For the years ended December 31: 2001 2000 1999 ___________ ___________ ___________ (Dollars in thousands) Revenues: Total revenues for reportable segments. . . . . . . . . . $ 2,037,583 $ 2,134,369 $ 1,851,476 Other revenues. . . . . . . . 34,940 35,142 68,357 ____________ ___________ ___________ Total consolidated revenues . $ 2,072,523 $ 2,169,511 $ 1,919,833 ============ =========== =========== 2001 2000 1999 ___________ ___________ ___________ Interest Expense: Total interest expense for reportable segments. . . $ 490,566 $ 599,024 $ 536,108 Other interest expense. . . . 16,605 20,971 33,437 ___________ ___________ ___________ Total consolidated interest expense. . . . . . . . . . . $ 507,171 $ 619,995 $ 569,545 =========== =========== =========== Earnings Before Income Taxes: Total earnings before income taxes for reportable segments . . . . . . . . . . $ 719,436 $ 692,695 $ 674,244 Other earnings before income taxes. . . . . . . . . . . . 15,344 14,171 34,706 ___________ ___________ ___________ Total consolidated earnings before income taxes. . . . . $ 734,780 $ 706,866 $ 708,950 =========== =========== =========== -45- 43 NOTE 17 - SEGMENT REPORTING (Continued): At December 31: (Dollars in thousands) 2001 2000 1999 ___________ ___________ ___________ Assets: Total assets for reportable segments . . . . . . . . . . $14,060,051 $15,374,604 $15,530,956 Other assets. . . . . . . . . 1,249,486 1,423,134 813,749 ___________ ___________ ___________ Total consolidated assets. . $15,309,537 $16,797,738 $16,344,705 =========== =========== =========== The Company's business is conducted principally in the United States; foreign operations are not material. For the years ended December 31, 2001, 2000 and 1999, one customer, IBM, accounted for $434.4 million, $485.1 million and $499.1 million, respectively, of the Company's consolidated revenues. The Company continues to evaluate its organizational structure which could lead to changes in future reportable segments. -46- 44 NOTE 18 - SELECTED QUARTERLY FINANCIAL DATA: (Unaudited) (Dollars in thousands) Finance Gross Profit and Other Interest Equipment on Equipment Net 2001 Income Expense Sales Sales Earnings _________________ __________ _________ ___________ _____________ _________ First Quarter . . $ 516,976 $ 160,778 $ 113,749 $ 19,545 $ 104,073 Second Quarter. . 523,749 135,682 153,542 33,367 103,469 Third Quarter . . 505,859 126,291 114,576 19,559 112,665 Fourth Quarter. . 525,939 84,420 165,396 49,548 125,066 ___________ _________ ___________ ____________ _________ $2,072,523 $ 507,171 $ 547,263 $122,019 $ 445,273 =========== ========= =========== ============ ========= Finance Gross Profit and Other Interest Equipment on Equipment Net 2000 Income Expense Sales Sales Earnings _________________ __________ _________ ___________ _____________ _________ First Quarter . . $ 497,012 $ 149,878 $ 120,481 $ 3,509 $ 96,688 Second Quarter. . 518,125 140,758 149,941 20,671 106,154 Third Quarter . . 549,505 162,218 152,831 14,858 105,014 Fourth Quarter. . 604,869 167,141 192,920 38,894 120,501 ___________ _________ ___________ ____________ _________ $2,169,511 $ 619,995 $ 616,173 $ 77,932 $ 428,357 =========== ========= =========== ============ ========= Finance Gross Profit and Other Interest Equipment on Equipment Net 1999 Income Expense Sales Sales Earnings _________________ __________ _________ ___________ _____________ _________ First Quarter . . $ 434,516 $ 138,730 $ 97,623 $ 7,623 $ 91,277 Second Quarter. . 530,405 139,961 183,086 27,104 102,416 Third Quarter . . 438,571 141,255 75,303 6,841 102,271 Fourth Quarter. . 516,341 149,599 117,948 9,648 133,656 __________ _________ ___________ ____________ __________ $1,919,833 $ 569,545 $ 473,960 $ 51,216 $ 429,620 ========== ========= =========== ============ ========== -47- 45 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE: None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT: Omitted pursuant to General Instruction I. ITEM 11. EXECUTIVE COMPENSATION: Omitted pursuant to General Instruction I. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT: Omitted pursuant to General Instruction I. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS: Omitted pursuant to General Instruction I. 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 15). Consolidated Statement of Financial Position at December 31, 2001 and 2000 (page 16). Consolidated Statement of Earnings and Retained Earnings for the years ended December 31, 2001, 2000 and 1999 (page 17). Consolidated Statement of Comprehensive Income for the years ended December 31, 2001, 2000 and 1999 (page 18). Consolidated Statement of Cash Flows for the years ended December 31, 2001, 2000 and 1999 (pages 19 through 21). Notes to Consolidated Financial Statements (pages 22 through 44). 2. Financial statement schedules required to be filed by Item 8 of this Form 10-K: Schedules are omitted because of the absence of the conditions under which they are required or because the information is disclosed in the financial statements or in the notes thereto. -48- 46 3. Exhibits required to be filed by Item 601 of Regulation S-K: Included in this Form 10-K: Exhibit Number I. Statement re computation of ratios II. Consent of experts and counsel 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 By-Laws of IBM Credit Corporation are filed pursuant to the annual report of Form 10-K for the fiscal year ended December 31, 1996, on March 25, 1997, and are hereby incorporated by reference. The Support Agreement dated as of April 15, 1981, between the Company and IBM is filed with Form SE dated March 26, 1987, and is hereby incorporated by reference. b) Reports on Form 8-K: A Form 8-K dated October 16, 2001, was filed with respect to the Company's financial results for the period ended September 30, 2001. -49- 47 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. IBM CREDIT CORPORATION (Registrant) By: /s/Joseph C. Lane ________________________ (Joseph C. Lane) President Date: March 27, 2002 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 27, 2002. Signature Title __________ ______ /s/ Joseph C. Lane _______________________ (Joseph C. Lane) President and Director /s/ Paula L. Summa _______________________ (Paula Summa) Vice President, Finance, and Chief Financial Officer and Director /s/ Robert F. Woods _______________________ (Robert Woods) Director -50- 48 EXHIBIT INDEX Reference Number Exhibit Number per Item 601 of in This Regulation S-K Description of Exhibits Form 10-K __________________ _________________________________ ___________________ (2) Plan of acquisition, reorganization, liquidation or succession. Not applicable (3) Certificate of Incorporation and By-Laws The Certificate of Incorporation of IBM Credit Corporation is filed pursuant to Form 10-Q for the quarterly period ended June 30, 1993, on August 10, 1993, and is hereby incorporated by reference. The By-Laws of IBM Credit Corporation are filed pursuant to the annual report on Form 10-K for the fiscal year ended December 31, 1996, on March 25, 1997, and are hereby incorporated by reference. (4)(a) Instruments defining the rights of security holders. Trust Agreement dated March 5, 2000, related to the Company's Euro Medium-Term Note Programme is filed pursuant to the annual report on Form 10-K for the fiscal year ended December 31, 1999, and is hereby incorporated by reference. (4)(b) Indenture dated as of January 15, 1989, filed electronically as Exhibit No. 4 to Amendment No. 1 to Form S-3 on April 3, 1989, is hereby incorporated by reference. (9) Voting trust agreement. Not applicable (10) Material contracts. The Support Agreement dated April 15, 1981, between the Company and IBM is filed with Form SE dated March 26, 1987, and is hereby incorporated by reference. (11) Statement regarding computation of per share earnings. Not applicable -51- 49 EXHIBIT INDEX (continued) Reference Number Exhibit Number per Item 601 of in This Regulation S-K Description of Exhibits Form 10-K __________________ __________________________________ _________________ (12) Statement regarding computation of ratios. I (16) Letter on change in certifying accountant. Not applicable (18) Letter regarding change in accounting principles. Not Applicable (21) Subsidiaries of the registrant. Omitted (22) Published report regarding matters submitted to vote of security holders. Not Applicable (23) Consent of experts and counsel. II (28) Information from reports furnished to state insurance regulatory authorities. Not applicable (99) Additional exhibits. Not applicable -52-

-53- 1 EXHIBIT II CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-86615 and 333-42755) of IBM Credit Corporation of our report dated January 17, 2002 relating to the financial statements, which appears in this Form 10-K. /s/PricewaterhouseCoopers LLP Stamford, CT March 27, 2002 -54-

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