Annual Report (Form 10-K), fiscal year 1994

ITEM 1. BUSINESS:
The principal business of IBM Credit Corporation (the Company) is financing. All the outstanding capital stock of the Company is owned by International Business Machines Corporation (IBM), a New York corporation. The Company finances the purchase and lease of IBM products and related products and services by customers of IBM in the U.S. The Company also engages in other financings, some of which are related and some of which are unrelated to the business of IBM.
Pursuant to a Support Agreement between IBM and the Company, IBM has agreed to retain 100 percent of the voting capital stock of the Company, unless required to dispose of any or all such shares of stock pursuant to a court decree or order of any governmental authority that, in the opinion of counsel to IBM, may not be successfully challenged. IBM has also agreed to cause the Company to have a tangible net worth of at least $1.00 at all times.
ITEM 2.



ITEM 2. PROPERTIES:
The Company's principal executive offices in Stamford, Connecticut, comprise approximately 129,000 square feet of office space. The Company occupies this space under an arrangement with IBM, which is the master tenant of this property under long-term leases.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS:
None material.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
Omitted pursuant to General Instruction J.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS:
All shares of the Company's capital stock are owned by IBM and accordingly there is no market for such stock. The Company paid dividends of $295,000,000 and $325,000,000 to IBM in 1994 and 1993, respectively. Dividends are paid as declared by the Board of Directors of the Company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
:hp3.OVERVIEW:ehp3.
The Company originated financing for $10.4 billion of equipment, software and services during 1994. Net earnings for 1994 were $250.6 million, yielding a return on average equity of 24.1 percent.
Net earnings for 1994 benefited from one-time pretax gains of $13.3 million from the sale of 100 percent of the stock of IBM Credit Investment Management Corporation (ICIM) to a Fleet Financial Group subsidiary in the second quarter, and $46.0 million, which is net of directly related expenses, resulting from the Company's litigation settlement with Comdisco, Inc. in the third quarter. The total cash proceeds received from the litigation settlement was $70.0 million. These pretax gains were included in other income in the Consolidated Statement of Earnings and Retained Earnings.
Effective August 3, 1994, the Company securitized and sold $300.0 million of capital lease and loan receivables. No material gain or loss resulted from this transaction. The Company used the net proceeds from the sale for general corporate purposes, including the retirement of debt.
:hp3.FINANCING ORIGINATED:ehp3.
For the year ended December 31, 1994, the Company originated financing for $10.4 billion of equipment, software and services, an increase of 12 percent from 1993. Capital equipment financing for end users decreased by 16 percent to $2.8 billion. Although total capital equipment financing originated decreased compared with that of 1993, placements of new equipment with third-party end-user customers essentially remained unchanged. Declines occurred primarily in placements of equipment to IBM affiliates and other end-user financing activities. Working capital financing for dealers and remarketers of information industry products increased by 30 percent to $7.6 billion. This growth reflects an increase in the volumes of IBM's workstation products financed by the Company throughout 1994, as well as increased volumes of financing provided to information technology resellers for non-IBM products.
Capital equipment financings for end users comprised purchases of $1,616.9 million of information handling systems products from IBM, financing originated for installment receivables of $136.1 million, other financing primarily for IBM software and services of $361.1 million, installment and lease financing for state and local government customers of $232.8 million for the account of IBM, and other financing of $417.5 million for equipment and services, as well as selected complementary non-IBM equipment that meets IBM customers' total solution requirements. The purchases of $1,616.9 million from IBM consisted of $1,174.6 million for capital leases and $442.3 million for operating leases.
:HP3.REMARKETING ACTIVITIES:EHP3. In addition to originating new financing, the Company remarkets used IBM equipment. This equipment is primarily sourced from the conclusion of lease transactions and is typically remarketed in cooperation with the IBM sales force. The equipment is generally leased or sold to end users. These transactions may be with existing lessees or, when equipment is returned, with new customers. At December 31, 1994, the investment in remarketed equipment on capital and operating leases totaled $623.7 million, an increase of 1 percent from the 1993 year-end investment of $619.8 million. Income from leases and gross profit on equipment sales, net of write-downs in residual values of certain leased equipment, are included in remarketing activities. Contributions from remarketing activities amounted to $141.6 million for the year ended December 31, 1994, an increase of 37 percent compared with $103.2 million for the year ended December 31, 1993.
:hp3.ASSETS:ehp3.
Total assets were $9.7 billion at December 31, 1994, compared with $10.0 billion at December 31, 1993. This decrease is primarily the result of cash collections on capital lease investments and loans receivable from customers and affiliates exceeding financings originated during 1994, and the securitization and sale of $300.0 million of capital lease and loan receivables, effective August 3, 1994. These decreases were partially offset by working capital financing originations exceeding cash collections during 1994. Total financing assets serviced by the Company as of December 31, 1994, were $10.5 billion, compared with $11.1 billion at December 31, 1993. Total financing assets serviced include those financing receivables securitized and sold ($1,181.6 million in 1994, $1,370.6 million in 1993), capital and operating leases ($5,261.2 million in 1994, $6,190.4 million in 1993), loans receivable ($1,070.6 million in 1994, $1,037.9 million in 1993), working capital financing receivables ($2,135.0 million in 1994, $1,425.8 million in 1993) and subordinated interests in trusts ($159.0 million in 1994, $173.0 million in 1993), as well as state and local government installment and lease financing receivables of IBM ($726.4 million in 1994, $868.6 million in 1993).
:hp3.LIABILITIES AND STOCKHOLDER'S EQUITY:ehp3.
The assets of the business were financed with $5,938.9 million of debt at December 31, 1994. Total short-term and long-term debt decreased by $568.6 million, from $6,507.5 million at December 31, 1993. This decrease was the result of the redemption of IBM Money Market Account notes of $359.8 million, a decline in long-term debt of $696.0 million, as well as a matured $300.0 million bond, offset by increases in commercial paper outstanding of $615.4 million and floating and fixed rate medium-term notes of $171.8 million. Included in long-term debt at December 31, 1994 was $125.0 million payable to IBM at market terms and conditions, maturing on November 1, 1997.
The Company has available $2.8 billion of a shelf registration with the Securities and Exchange Commission. This shelf registration allows the Company rapid access to domestic financial markets. In addition, a subsidiary of the Company has available $450.0 million of a separate shelf registration for asset-backed securities. The Company also has commercial paper and medium-term note programs. On October 19, 1994, Moody's Investors Service, Inc., announced that it had upgraded its rating for the Company's commercial paper from Prime-2 (P-2) to Prime-1 (P-1).
:hp3.LIABILITIES AND STOCKHOLDER'S EQUITY (Continued):ehp3.
The Company is an authorized borrower of up to $1.6 billion under a $10.0 billion IBM committed global credit facility, and has a liquidity agreement with IBM for $500.0 million. The Company has no borrowings outstanding under the committed global credit facility or the liquidity agreement. The Company also has the option, as approved by the Board of Directors on September 30, 1994, to sell, assign, pledge, or transfer up to an additional $4.0 billion of assets to third parties through December 31, 1995. As previously described, the Company securitized and sold $300.0 million of capital lease and loan receivables, effective August 3, 1994. During the fourth quarter of 1994, the Company and IBM signed master loan agreements providing additional funding flexibility to each other. These agreements allow for short-term (up to 270-day) funding, made available at market terms and conditions, upon the request of either the Company or IBM. There are no borrowings outstanding under these agreements. 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 fund its lease and loan portfolio and working capital requirements and to service debt.
Due to IBM Corporation and affiliates increased by $233.9 million to $1,493.4 million at December 31, 1994, from $1,259.5 million at December 31, 1993. This increase was primarily attributable to higher volumes of capital equipment purchases from IBM in the fourth quarter of 1994, compared with the fourth quarter of 1993, offset by the payment of $339.0 million to IBM for a current tax liability during 1994. Due to IBM Corporation and affiliates includes amounts of trade payables arising from purchases of equipment for term leases and installment receivables, working capital financing receivables for dealers and remarketers, and software license fees, typically with terms comparable to those offered to other IBM customers, unless the Company is participating in IBM product promotions. Also included in due to IBM Corporation and affiliates are income taxes currently payable under the intercompany tax allocation agreement.
Total stockholder's equity at December 31, 1994, was $1,121.2 million, down $29.5 million from year-end 1993. The decline in stockholder's equity reflects the payment of $295.0 million in dividends to IBM, offset by 1994 net earnings of $250.6 million and the issuance of $14.9 million of capital stock to IBM. During the fourth quarter of 1994, the Company issued 149 shares of capital stock, par value $1.00 per share, to IBM, in exchange for assets IBM transferred to the Company. This is part of a program developed to periodically transfer certain excess IBM assets to the Company for the purpose of remarketing such assets.
At December 31, 1994, the Company's debt to equity ratio was 5.3:1, compared with 5.7:1 at December 31, 1993.
:hp3.TOTAL CASH PROVIDED BEFORE DIVIDENDS:EHP3.
Total cash provided before dividends was $299.4 million for 1994, compared with $336.3 million for 1993. Total cash provided before dividends reflects $1,591.3 million of cash used in investing and financing activities before dividends, offset by $1,890.7 million of cash provided by operating activities during 1994.
Cash and cash equivalents at December 31, 1994, totaled $614.3 million, an increase of $4.4 million compared with the balance at December 31, 1993.
:hp3.INCOME FROM LEASES:ehp3.
Income from leases decreased by 24 percent to $437.6 million in 1994, from $573.4 million in 1993. This decline resulted from lower asset balances, which in turn were primarily caused by the securitization and sale of capital lease receivables in the third quarter of 1994 and the fourth quarter of 1993, and a decrease in capital equipment financing originated during 1994 and 1993. Income from leases includes lease income resulting from remarketing transactions. For the year ended December 31, 1994, lease income from remarketing transactions amounted to $80.1 million, an increase of 12 percent from 1993.
On a periodic basis, the Company reassesses the future residual value of its portfolio of leases. In accordance with generally accepted account- ing principles, anticipated increases in specific future residual values may not be recognized before realization and are thus a source of potential future profits. Anticipated decreases in specific future residual values, considered to be other than temporary, must be recognized currently.
A review of the Company's $542.0 million residual value portfolio at December 31, 1994, indicated that the overall estimated future value of the portfolio continues to be greater than the value currently recorded, but declines in the future residual value of certain leased equipment were identified. To recognize these declines, the Company recorded a $7.0 million reduction to income from leases for 1994, compared with $32.0 million in 1993.
:hp3.INCOME FROM LOANS:ehp3.
Income from loans decreased by 17 percent to $92.7 million in 1994 from $112.3 million in 1993. This decline resulted from lower asset balances, which in turn were primarily the result of the securitization and sale of loan receivables in the third quarter of 1994 and the fourth quarter of 1993, and a decrease in financing originated during 1994 and 1993.
:hp3.INCOME FROM WORKING CAPITAL FINANCING:EHP3.
Income from working capital financing increased 36 percent to $141.7 million in 1994, compared with $104.3 million in 1993. This increase is primarily due to growth in the average working capital financing receivables outstanding and generally higher interest rates charged during 1994 compared with 1993, partially offset by the securitization and sale of such receivables during the fourth quarter of 1993. The growth in average working capital financing receivables outstanding primarily reflects increased originations as discussed in the "Financing Originated" section of this discussion and analysis.
:HP3.EQUIPMENT SALES:EHP3.
Equipment sales decreased by 26 percent to $625.7 million in 1994, compared with $840.9 million in 1993. The revenue associated with outright sales and sales-type leases is included in equipment sales. Company-owned equipment may be sold or leased to existing lessees or, when equipment is returned, to new customers.
Gross profit on equipment sales amounted to $68.5 million for 1994, compared with $63.6 million for 1993. The gross profit margin increased to 10.9 percent in 1994 from 7.6 percent in 1993. During the third and fourth quarters of 1993, the Company recognized a $20.0 million charge for declines in market values for selected equipment sold or leased under sales-type leases during those quarters or inventoried at December 31, 1993, which reduced the gross profit margin for 1993.
:HP3.OTHER INCOME:EHP3.
Other income increased by 34 percent to $187.0 million in 1994 from $139.5 million in 1993. The litigation settlement reached with Comdisco, Inc. during the third quarter of 1994 resulted in the recognition of a pretax gain, net of directly related expenses, of $46.0 million. The sale of IBM Credit Investment Management Corporation during the second quarter of 1994 generated a pretax gain of $13.3 million. These amounts are included in other income in the Consolidated Statement of Earnings and Retained Earnings.
The securitization and sale of financing receivables generally accelerates the recognition of income and can result in a current period gain or loss. The amount of such gain or loss is dependent on a number of factors and may create a degree of volatility in earnings depending on the type of receivables securitized and sold, the structure of the transaction, and prevailing financial market conditions. During the fourth quarter of 1993, the Company recognized a $21.0 million gain on the securitization and sale of $1.4 billion of financing receivables. This amount is included in other income in the Consolidated Statement of Earnings and Retained Earnings. No material gain or loss resulted from the $300.0 million securitization and sale of capital lease and loan receivables in the third quarter of 1994. The Company continues to service the financing receivables securitized and sold, and earns a fee which is included in other income.
Also included in other income is interest income earned on cash and cash equivalents and notes, as well as fees for managing IBM's state and local government installment and lease financing receivables portfolio.
:HP3.TOTAL FINANCE AND OTHER INCOME:EHP3.
Total finance and other income decreased by 16 percent to $1,484.7 million in 1994 from $1,770.4 million in 1993. The decline was largely due to reductions in income from leases, income from loans and income from equipment sales, partially offset by increases in income from working capital financing and other income.
:HP3.INTEREST EXPENSE:EHP3.
Interest expense declined primarily because of the reduction in the Company's average outstanding debt balance. Interest expense decreased by 16 percent to $306.1 million in 1994, compared with $365.7 million in 1993. The Company's overall average cost of debt for the year remained unchanged at 5.0 percent.
:HP3.SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES:EHP3.
Selling, general, and administrative expenses decreased 12 percent to $163.9 million in 1994, from $185.5 million in 1993. The decrease is partly due to the continuing efforts to manage expenses and reflects savings realized from the Company's actions in the second quarter of 1993 to reduce its infrastructure.
:HP3.PROVISION FOR RECEIVABLE LOSSES:EHP3.
The Company's portfolio of capital equipment leases and loans is predominantly with investment grade customers. The Company generally takes a security interest in any underlying equipment financed. The portfolio is diversified by geography, industry, and individual unaffiliated customer. Working capital financing receivables are generally secured by the underlying inventory and accounts receivable financed. At December 31, 1994, the allowance for receivable losses approximated 1.1 percent of the Company's portfolio of leases, loans and working capital financing receivables, compared with approximately 1.5 percent at December 31, 1993. The provision for receivable losses increased 16 percent to $44.1 million in 1994, from $38.0 million in 1993. This increase reflects the Company's timely recognition of probable receivable losses and its revised estimate of the recoverability of specific receivables. During 1994 and 1993, the Company recovered $8.5 million and $14.3 million, respectively, of losses previously recorded.
:HP3.INCOME TAXES:EHP3.
The effective tax rate in 1994 was 39.4 percent, compared with 44.0 percent in 1993. On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 (the Act) was enacted. The Act increased the U.S. corporate income tax rate from 34 percent to 35 percent, retroactive to January 1, 1993. The tax rate increase resulted in a $23.9 million charge for 1993; $20.1 million related to previously provided deferred taxes, and $3.8 million in current taxes.
Consistent with 1994, the Company expects its effective tax rate to continue to approximate the statutory federal and state income tax rates in future years.
:HP3.NET EARNINGS:EHP3.
Net earnings were $250.6 million for the year ended December 31, 1994, compared with $220.2 million for 1993, an increase of 14 percent.
The Company's expanding working capital financing business, large and profitable capital equipment remarketing operations and the containment of operating expenses contributed to the favorable performance during 1994. In addition, as a result of the litigation settlement with Comdisco, Inc., in the third quarter of 1994 and the sale of IBM Credit Investment Management Corporation during the second quarter of 1994, the Company recognized one-time pretax gains of $46.0 million and $13.3 million, respectively, which contributed to the strong performance during 1994. The after-tax contributions of these two items were $27.9 million and $8.1 million, respectively.
During 1993, an additional income tax expense of $23.9 million was recorded to reflect the retroactive tax rate increase under the Omnibus Budget Reconciliation Act of 1993 and pretax restructuring charges of $10.5 million ($6.4 million after-tax) were recorded to recognize the cost of the Company's actions to reduce its infrastructure. These expense items were partially offset by a $21.0 million pretax gain ($12.9 million after-tax), net of related expenses, realized on the securitization and sale of $1.4 billion of financing receivables during the fourth quarter of 1993.
:HP3.RETURN ON AVERAGE EQUITY:EHP3.
The 1994 results yielded a return on average equity of 24.1 percent, compared with 19.1 percent in 1993.
:hp3.NEW ACCOUNTING STANDARDS:EHP3.
In November 1992, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 112, "Employer's Accounting for Postemployment Benefits," which established new accounting principles for the cost of benefits provided to former or inactive employees after employment but before retirement. Effective January 1, 1993, IBM and the Company adopted SFAS 112. The impact of adoption did not materially impact the Company's financial position and results of operations.
In May 1993, the FASB issued SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities," which prescribes the accounting for debt and equity securities held as assets. This statement is effective for fiscal years beginning after December 15, 1993. The Company implemented SFAS 115, effective January 1, 1994. The implementation had no material impact on the Company's financial position and results of operations.
:hp3.NEW ACCOUNTING STANDARDS (Continued):EHP3.
In May 1993, the FASB issued SFAS 114, "Accounting by Creditors for Impairment of a Loan," which amends SFAS 5, "Accounting for Contingencies," and SFAS 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings." Under SFAS 114, creditors should evaluate the collectibility of both contractual interest and principal of all receivables when assessing the need for a loss accrual. Additionally, SFAS 114 requires creditors to measure all loans that are restructured in a troubled debt restructuring involving a modification of terms to reflect the time value of money. This statement is effective for fiscal years beginning after December 15, 1994.
In October 1994, SFAS 114 was amended by SFAS 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures," which allows a creditor to use existing methods for recognizing interest income on an impaired loan. SFAS 118 eliminates the provisions in SFAS 114 that describe how a creditor should report income on an impaired loan. However, it does not preclude a creditor from using either of the methods described. Additionally, SFAS 118 amends the disclosure requirements in SFAS 114 to require information about the recorded investment in certain impaired loans and about how a creditor recognizes interest income related to those impaired loans. SFAS 118 is effective concurrent with the effective date of SFAS 114.
It is expected that the implementation of SFAS 114 and SFAS 118 will not materially impact the Company's financial position and results of operations.
In October 1994, the FASB issued SFAS 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," to improve disclosure requirements for all derivative financial instruments and to amend existing requirements of SFAS 105, "Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk", and SFAS 107, "Disclosures about Fair Value of Financial Instruments." The Company implemented SFAS 119 effective December 31, 1994.
:HP3.CLOSING DISCUSSION:EHP3.
The Company's resources continue to be sufficient to enable it to carry out its mission of offering customers competitive leasing and financing, providing information technology remarketers with inventory and accounts receivable financing and contributing to the growth and stability of IBM earnings.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
Report of Independent Accountants
January 20, 1995, except as to the Subsequent Event note on page 34, which is as of February 8, 1995
To the Stockholder and Board of Directors of IBM Credit Corporation
In our opinion, the accompanying consolidated financial statements listed in the index appearing under Item 14(a) 1. and 2. on pages 36 and 37 present fairly, in all material respects, the financial position of IBM Credit Corporation and its subsidiaries at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion thereon based on our audits. We conducted our audits in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether such statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP Stamford, CT


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
:hp3.OVERVIEW:ehp3.
The Company originated financing for $10.4 billion of equipment, software and services during 1994. Net earnings for 1994 were $250.6 million, yielding a return on average equity of 24.1 percent.
Net earnings for 1994 benefited from one-time pretax gains of $13.3 million from the sale of 100 percent of the stock of IBM Credit Investment Management Corporation (ICIM) to a Fleet Financial Group subsidiary in the second quarter, and $46.0 million, which is net of directly related expenses, resulting from the Company's litigation settlement with Comdisco, Inc. in the third quarter. The total cash proceeds received from the litigation settlement was $70.0 million. These pretax gains were included in other income in the Consolidated Statement of Earnings and Retained Earnings.
Effective August 3, 1994, the Company securitized and sold $300.0 million of capital lease and loan receivables. No material gain or loss resulted from this transaction. The Company used the net proceeds from the sale for general corporate purposes, including the retirement of debt.
:hp3.FINANCING ORIGINATED:ehp3.
For the year ended December 31, 1994, the Company originated financing for $10.4 billion of equipment, software and services, an increase of 12 percent from 1993. Capital equipment financing for end users decreased by 16 percent to $2.8 billion. Although total capital equipment financing originated decreased compared with that of 1993, placements of new equipment with third-party end-user customers essentially remained unchanged. Declines occurred primarily in placements of equipment to IBM affiliates and other end-user financing activities. Working capital financing for dealers and remarketers of information industry products increased by 30 percent to $7.6 billion. This growth reflects an increase in the volumes of IBM's workstation products financed by the Company throughout 1994, as well as increased volumes of financing provided to information technology resellers for non-IBM products.
Capital equipment financings for end users comprised purchases of $1,616.9 million of information handling systems products from IBM, financing originated for installment receivables of $136.1 million, other financing primarily for IBM software and services of $361.1 million, installment and lease financing for state and local government customers of $232.8 million for the account of IBM, and other financing of $417.5 million for equipment and services, as well as selected complementary non-IBM equipment that meets IBM customers' total solution requirements. The purchases of $1,616.9 million from IBM consisted of $1,174.6 million for capital leases and $442.3 million for operating leases.
:HP3.REMARKETING ACTIVITIES:EHP3. In addition to originating new financing, the Company remarkets used IBM equipment. This equipment is primarily sourced from the conclusion of lease transactions and is typically remarketed in cooperation with the IBM sales force. The equipment is generally leased or sold to end users. These transactions may be with existing lessees or, when equipment is returned, with new customers. At December 31, 1994, the investment in remarketed equipment on capital and operating leases totaled $623.7 million, an increase of 1 percent from the 1993 year-end investment of $619.8 million. Income from leases and gross profit on equipment sales, net of write-downs in residual values of certain leased equipment, are included in remarketing activities. Contributions from remarketing activities amounted to $141.6 million for the year ended December 31, 1994, an increase of 37 percent compared with $103.2 million for the year ended December 31, 1993.
:hp3.ASSETS:ehp3.
Total assets were $9.7 billion at December 31, 1994, compared with $10.0 billion at December 31, 1993. This decrease is primarily the result of cash collections on capital lease investments and loans receivable from customers and affiliates exceeding financings originated during 1994, and the securitization and sale of $300.0 million of capital lease and loan receivables, effective August 3, 1994. These decreases were partially offset by working capital financing originations exceeding cash collections during 1994. Total financing assets serviced by the Company as of December 31, 1994, were $10.5 billion, compared with $11.1 billion at December 31, 1993. Total financing assets serviced include those financing receivables securitized and sold ($1,181.6 million in 1994, $1,370.6 million in 1993), capital and operating leases ($5,261.2 million in 1994, $6,190.4 million in 1993), loans receivable ($1,070.6 million in 1994, $1,037.9 million in 1993), working capital financing receivables ($2,135.0 million in 1994, $1,425.8 million in 1993) and subordinated interests in trusts ($159.0 million in 1994, $173.0 million in 1993), as well as state and local government installment and lease financing receivables of IBM ($726.4 million in 1994, $868.6 million in 1993).
:hp3.LIABILITIES AND STOCKHOLDER'S EQUITY:ehp3.
The assets of the business were financed with $5,938.9 million of debt at December 31, 1994. Total short-term and long-term debt decreased by $568.6 million, from $6,507.5 million at December 31, 1993. This decrease was the result of the redemption of IBM Money Market Account notes of $359.8 million, a decline in long-term debt of $696.0 million, as well as a matured $300.0 million bond, offset by increases in commercial paper outstanding of $615.4 million and floating and fixed rate medium-term notes of $171.8 million. Included in long-term debt at December 31, 1994 was $125.0 million payable to IBM at market terms and conditions, maturing on November 1, 1997.
The Company has available $2.8 billion of a shelf registration with the Securities and Exchange Commission. This shelf registration allows the Company rapid access to domestic financial markets. In addition, a subsidiary of the Company has available $450.0 million of a separate shelf registration for asset-backed securities. The Company also has commercial paper and medium-term note programs. On October 19, 1994, Moody's Investors Service, Inc., announced that it had upgraded its rating for the Company's commercial paper from Prime-2 (P-2) to Prime-1 (P-1).
:hp3.LIABILITIES AND STOCKHOLDER'S EQUITY (Continued):ehp3.
The Company is an authorized borrower of up to $1.6 billion under a $10.0 billion IBM committed global credit facility, and has a liquidity agreement with IBM for $500.0 million. The Company has no borrowings outstanding under the committed global credit facility or the liquidity agreement. The Company also has the option, as approved by the Board of Directors on September 30, 1994, to sell, assign, pledge, or transfer up to an additional $4.0 billion of assets to third parties through December 31, 1995. As previously described, the Company securitized and sold $300.0 million of capital lease and loan receivables, effective August 3, 1994. During the fourth quarter of 1994, the Company and IBM signed master loan agreements providing additional funding flexibility to each other. These agreements allow for short-term (up to 270-day) funding, made available at market terms and conditions, upon the request of either the Company or IBM. There are no borrowings outstanding under these agreements. 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 fund its lease and loan portfolio and working capital requirements and to service debt.
Due to IBM Corporation and affiliates increased by $233.9 million to $1,493.4 million at December 31, 1994, from $1,259.5 million at December 31, 1993. This increase was primarily attributable to higher volumes of capital equipment purchases from IBM in the fourth quarter of 1994, compared with the fourth quarter of 1993, offset by the payment of $339.0 million to IBM for a current tax liability during 1994. Due to IBM Corporation and affiliates includes amounts of trade payables arising from purchases of equipment for term leases and installment receivables, working capital financing receivables for dealers and remarketers, and software license fees, typically with terms comparable to those offered to other IBM customers, unless the Company is participating in IBM product promotions. Also included in due to IBM Corporation and affiliates are income taxes currently payable under the intercompany tax allocation agreement.
Total stockholder's equity at December 31, 1994, was $1,121.2 million, down $29.5 million from year-end 1993. The decline in stockholder's equity reflects the payment of $295.0 million in dividends to IBM, offset by 1994 net earnings of $250.6 million and the issuance of $14.9 million of capital stock to IBM. During the fourth quarter of 1994, the Company issued 149 shares of capital stock, par value $1.00 per share, to IBM, in exchange for assets IBM transferred to the Company. This is part of a program developed to periodically transfer certain excess IBM assets to the Company for the purpose of remarketing such assets.
At December 31, 1994, the Company's debt to equity ratio was 5.3:1, compared with 5.7:1 at December 31, 1993.
:hp3.TOTAL CASH PROVIDED BEFORE DIVIDENDS:EHP3.
Total cash provided before dividends was $299.4 million for 1994, compared with $336.3 million for 1993. Total cash provided before dividends reflects $1,591.3 million of cash used in investing and financing activities before dividends, offset by $1,890.7 million of cash provided by operating activities during 1994.
Cash and cash equivalents at December 31, 1994, totaled $614.3 million, an increase of $4.4 million compared with the balance at December 31, 1993.
:hp3.INCOME FROM LEASES:ehp3.
Income from leases decreased by 24 percent to $437.6 million in 1994, from $573.4 million in 1993. This decline resulted from lower asset balances, which in turn were primarily caused by the securitization and sale of capital lease receivables in the third quarter of 1994 and the fourth quarter of 1993, and a decrease in capital equipment financing originated during 1994 and 1993. Income from leases includes lease income resulting from remarketing transactions. For the year ended December 31, 1994, lease income from remarketing transactions amounted to $80.1 million, an increase of 12 percent from 1993.
On a periodic basis, the Company reassesses the future residual value of its portfolio of leases. In accordance with generally accepted account- ing principles, anticipated increases in specific future residual values may not be recognized before realization and are thus a source of potential future profits. Anticipated decreases in specific future residual values, considered to be other than temporary, must be recognized currently.
A review of the Company's $542.0 million residual value portfolio at December 31, 1994, indicated that the overall estimated future value of the portfolio continues to be greater than the value currently recorded, but declines in the future residual value of certain leased equipment were identified. To recognize these declines, the Company recorded a $7.0 million reduction to income from leases for 1994, compared with $32.0 million in 1993.
:hp3.INCOME FROM LOANS:ehp3.
Income from loans decreased by 17 percent to $92.7 million in 1994 from $112.3 million in 1993. This decline resulted from lower asset balances, which in turn were primarily the result of the securitization and sale of loan receivables in the third quarter of 1994 and the fourth quarter of 1993, and a decrease in financing originated during 1994 and 1993.
:hp3.INCOME FROM WORKING CAPITAL FINANCING:EHP3.
Income from working capital financing increased 36 percent to $141.7 million in 1994, compared with $104.3 million in 1993. This increase is primarily due to growth in the average working capital financing receivables outstanding and generally higher interest rates charged during 1994 compared with 1993, partially offset by the securitization and sale of such receivables during the fourth quarter of 1993. The growth in average working capital financing receivables outstanding primarily reflects increased originations as discussed in the "Financing Originated" section of this discussion and analysis.
:HP3.EQUIPMENT SALES:EHP3.
Equipment sales decreased by 26 percent to $625.7 million in 1994, compared with $840.9 million in 1993. The revenue associated with outright sales and sales-type leases is included in equipment sales. Company-owned equipment may be sold or leased to existing lessees or, when equipment is returned, to new customers.
Gross profit on equipment sales amounted to $68.5 million for 1994, compared with $63.6 million for 1993. The gross profit margin increased to 10.9 percent in 1994 from 7.6 percent in 1993. During the third and fourth quarters of 1993, the Company recognized a $20.0 million charge for declines in market values for selected equipment sold or leased under sales-type leases during those quarters or inventoried at December 31, 1993, which reduced the gross profit margin for 1993.
:HP3.OTHER INCOME:EHP3.
Other income increased by 34 percent to $187.0 million in 1994 from $139.5 million in 1993. The litigation settlement reached with Comdisco, Inc. during the third quarter of 1994 resulted in the recognition of a pretax gain, net of directly related expenses, of $46.0 million. The sale of IBM Credit Investment Management Corporation during the second quarter of 1994 generated a pretax gain of $13.3 million. These amounts are included in other income in the Consolidated Statement of Earnings and Retained Earnings.
The securitization and sale of financing receivables generally accelerates the recognition of income and can result in a current period gain or loss. The amount of such gain or loss is dependent on a number of factors and may create a degree of volatility in earnings depending on the type of receivables securitized and sold, the structure of the transaction, and prevailing financial market conditions. During the fourth quarter of 1993, the Company recognized a $21.0 million gain on the securitization and sale of $1.4 billion of financing receivables. This amount is included in other income in the Consolidated Statement of Earnings and Retained Earnings. No material gain or loss resulted from the $300.0 million securitization and sale of capital lease and loan receivables in the third quarter of 1994. The Company continues to service the financing receivables securitized and sold, and earns a fee which is included in other income.
Also included in other income is interest income earned on cash and cash equivalents and notes, as well as fees for managing IBM's state and local government installment and lease financing receivables portfolio.
:HP3.TOTAL FINANCE AND OTHER INCOME:EHP3.
Total finance and other income decreased by 16 percent to $1,484.7 million in 1994 from $1,770.4 million in 1993. The decline was largely due to reductions in income from leases, income from loans and income from equipment sales, partially offset by increases in income from working capital financing and other income.
:HP3.INTEREST EXPENSE:EHP3.
Interest expense declined primarily because of the reduction in the Company's average outstanding debt balance. Interest expense decreased by 16 percent to $306.1 million in 1994, compared with $365.7 million in 1993. The Company's overall average cost of debt for the year remained unchanged at 5.0 percent.
:HP3.SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES:EHP3.
Selling, general, and administrative expenses decreased 12 percent to $163.9 million in 1994, from $185.5 million in 1993. The decrease is partly due to the continuing efforts to manage expenses and reflects savings realized from the Company's actions in the second quarter of 1993 to reduce its infrastructure.
:HP3.PROVISION FOR RECEIVABLE LOSSES:EHP3.
The Company's portfolio of capital equipment leases and loans is predominantly with investment grade customers. The Company generally takes a security interest in any underlying equipment financed. The portfolio is diversified by geography, industry, and individual unaffiliated customer. Working capital financing receivables are generally secured by the underlying inventory and accounts receivable financed. At December 31, 1994, the allowance for receivable losses approximated 1.1 percent of the Company's portfolio of leases, loans and working capital financing receivables, compared with approximately 1.5 percent at December 31, 1993. The provision for receivable losses increased 16 percent to $44.1 million in 1994, from $38.0 million in 1993. This increase reflects the Company's timely recognition of probable receivable losses and its revised estimate of the recoverability of specific receivables. During 1994 and 1993, the Company recovered $8.5 million and $14.3 million, respectively, of losses previously recorded.
:HP3.INCOME TAXES:EHP3.
The effective tax rate in 1994 was 39.4 percent, compared with 44.0 percent in 1993. On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 (the Act) was enacted. The Act increased the U.S. corporate income tax rate from 34 percent to 35 percent, retroactive to January 1, 1993. The tax rate increase resulted in a $23.9 million charge for 1993; $20.1 million related to previously provided deferred taxes, and $3.8 million in current taxes.
Consistent with 1994, the Company expects its effective tax rate to continue to approximate the statutory federal and state income tax rates in future years.
:HP3.NET EARNINGS:EHP3.
Net earnings were $250.6 million for the year ended December 31, 1994, compared with $220.2 million for 1993, an increase of 14 percent.
The Company's expanding working capital financing business, large and profitable capital equipment remarketing operations and the containment of operating expenses contributed to the favorable performance during 1994. In addition, as a result of the litigation settlement with Comdisco, Inc., in the third quarter of 1994 and the sale of IBM Credit Investment Management Corporation during the second quarter of 1994, the Company recognized one-time pretax gains of $46.0 million and $13.3 million, respectively, which contributed to the strong performance during 1994. The after-tax contributions of these two items were $27.9 million and $8.1 million, respectively.
During 1993, an additional income tax expense of $23.9 million was recorded to reflect the retroactive tax rate increase under the Omnibus Budget Reconciliation Act of 1993 and pretax restructuring charges of $10.5 million ($6.4 million after-tax) were recorded to recognize the cost of the Company's actions to reduce its infrastructure. These expense items were partially offset by a $21.0 million pretax gain ($12.9 million after-tax), net of related expenses, realized on the securitization and sale of $1.4 billion of financing receivables during the fourth quarter of 1993.
:HP3.RETURN ON AVERAGE EQUITY:EHP3.
The 1994 results yielded a return on average equity of 24.1 percent, compared with 19.1 percent in 1993.
:hp3.NEW ACCOUNTING STANDARDS:EHP3.
In November 1992, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 112, "Employer's Accounting for Postemployment Benefits," which established new accounting principles for the cost of benefits provided to former or inactive employees after employment but before retirement. Effective January 1, 1993, IBM and the Company adopted SFAS 112. The impact of adoption did not materially impact the Company's financial position and results of operations.
In May 1993, the FASB issued SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities," which prescribes the accounting for debt and equity securities held as assets. This statement is effective for fiscal years beginning after December 15, 1993. The Company implemented SFAS 115, effective January 1, 1994. The implementation had no material impact on the Company's financial position and results of operations.
:hp3.NEW ACCOUNTING STANDARDS (Continued):EHP3.
In May 1993, the FASB issued SFAS 114, "Accounting by Creditors for Impairment of a Loan," which amends SFAS 5, "Accounting for Contingencies," and SFAS 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings." Under SFAS 114, creditors should evaluate the collectibility of both contractual interest and principal of all receivables when assessing the need for a loss accrual. Additionally, SFAS 114 requires creditors to measure all loans that are restructured in a troubled debt restructuring involving a modification of terms to reflect the time value of money. This statement is effective for fiscal years beginning after December 15, 1994.
In October 1994, SFAS 114 was amended by SFAS 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures," which allows a creditor to use existing methods for recognizing interest income on an impaired loan. SFAS 118 eliminates the provisions in SFAS 114 that describe how a creditor should report income on an impaired loan. However, it does not preclude a creditor from using either of the methods described. Additionally, SFAS 118 amends the disclosure requirements in SFAS 114 to require information about the recorded investment in certain impaired loans and about how a creditor recognizes interest income related to those impaired loans. SFAS 118 is effective concurrent with the effective date of SFAS 114.
It is expected that the implementation of SFAS 114 and SFAS 118 will not materially impact the Company's financial position and results of operations.
In October 1994, the FASB issued SFAS 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," to improve disclosure requirements for all derivative financial instruments and to amend existing requirements of SFAS 105, "Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk", and SFAS 107, "Disclosures about Fair Value of Financial Instruments." The Company implemented SFAS 119 effective December 31, 1994.
:HP3.CLOSING DISCUSSION:EHP3.
The Company's resources continue to be sufficient to enable it to carry out its mission of offering customers competitive leasing and financing, providing information technology remarketers with inventory and accounts receivable financing and contributing to the growth and stability of IBM earnings.
ITEM 8.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
Report of Independent Accountants
January 20, 1995, except as to the Subsequent Event note on page 34, which is as of February 8, 1995
To the Stockholder and Board of Directors of IBM Credit Corporation
In our opinion, the accompanying consolidated financial statements listed in the index appearing under Item 14(a) 1. and 2. on pages 36 and 37 present fairly, in all material respects, the financial position of IBM Credit Corporation and its subsidiaries at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion thereon based on our audits. We conducted our audits in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether such statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP Stamford, CT