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Also, check out: "Lou's Lair vs. Bill's Loft," ICC: More Armonk "Fudge," Armonk's "Fudge Factory," "Now IBM Is Even 'Officially' Spineless", "Where Armonk Meets Wall Street, Greed Breeds Incest", "Some Insiders Cashed in on IBM Stock Buybacks", "Louis XIX of Armonk", "Wag the Big Blue Dog", "the new blue"  

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Analysis of IBM Credit Corp.'s 1998 Business Results

ICC: More Armonk "Fudge"

A Declining WW Revenue Trend "Reversed" by Withholding '98 Figures; Where Did the "Missing" $800M Go?

Is IBM Cheating on Taxes?

PHOENIX, May 28 - The Armonk "fudge factory" performed its 1998 "hocus-pocus" accounting magic on its "global financing" business segment, including IBM Credit Corp. (ICC). Which was an easier feat than misleading millions of people about IBM's corporate performance last year (for the original "Fudge Factory" story, see Annex Bulletin 99-12, Apr. 9, 1999). After all, the leasing industry, not just ICC, has always depended on "black magic" in its accounting practices to make a buck look bigger than it was (see Annex Bulletin 94-54, 11/30/94, besides the earlier ones from the 1980s which exemplified that). So the Armonk "fudge factory" is just catching up to the leascos' tricks.

For example, did you know that ever since Lou Gerstner became IBM CEO in 1993, the Big Blue's global customer financing revenue has been declining?

Yessiree... It dropped from $5 billion in 1993, to $3.56 billion in 1997. Just check out IBM's Annual Reports for the 1993-1997 period.

So what did Armonk do to stop or reverse a declining trend? Quit reporting it. No kidding. That was the "solution" which Gerstner's "fudge factory" implemented in IBM's 1998 Annual Report. (Is Gerstner getting ready to run for President? For, sweeping problems under the rug has been that job's requirement lately).

So we start this report on ICC by first lifting the rug in Gerstner's old office at Armonk, the "Louvre," as we put it in our 1996, "Louis XIX of Armonk" (see Annex Bulletin 96-42, 8/22/96). And letting everyone see the creepy crawlies that had been swept under the carpet over the years.

Take a look at the above graphs, and you will see that IBM's global customer financing revenues have been declining, as IBM's U.S. leasing subsidiary's business (ICC) kept rising at the same time.

But wait a minute... if you look at the chart below, which shows IBM's corporate worldwide vs. U.S. revenues, the opposite is the case. The Big Blue's global revenues have been rising ever since 1993 (however wimpishly), something which Armonk's PR spin doctors have not failed to point out.

Is IBM Cheating on Taxes?

So what is all this about? It could be about lower taxes. And the so-called "financial engineering" to facilitate them. Could it be that IBM has been shifting its international revenues into its U.S. subsidiaries, like ICC, so as to benefit from the lower U.S. income tax rates? And that's how IBM's corporate tax rates "dropped" from over 46% in 1995, to 30% last year, without any tax reduction legislation being passed which could help explain such a dramatic drop? Here is, for example, what we said in July 1997, when we first discerned this phenomenon (an excerpt from the Annex Bulletin 97-30, 7/21/97):

Tax Rate Reduction. Have you heard anywhere that there has been a major tax reduction in the U.S. in the last two years? Or anywhere else in the industrial world?

We certainly haven't. Yet you'd be led to such a conclusion if you looked at IBM's financial statements. Three years ago (in 1994), IBM's tax rate was 41.4%. Two years ago (in 1995), IBM's tax rate was 46.5%. In the second quarter of 1997, it was 33.7%. That's almost a 13% drop in two years!!

From the taxpayers' perspective, one has to wonder if we are witnessing here a classic example of what consumer advocates call "corporate welfare."

But from the IBM shareholders' vantage point, the 13 points which this tax rate reduction shaved off IBM's costs and expenses in two years was bigger than the pretax margins of either of its hardware or services businesses (as you saw earlier)!

Well, make that more than 16 points by the end of 1998. Should the tax collectors in the countries shortchanged by IBM out of their fair share of Armonk's corporate taxes ever wake up to this "fudge factory" scam/scheme - take your pick, you may see more government bean counters with green shades crawling up and down IBM's back, lifting rugs, and sweeping out all the dirt from its executive suites. And out of its financial statements.

One of our European sources says that what IBM appears to have done with its overseas business, especially in Europe, is to take the prime (contract) offshore, and subcontract the real work back to the national companies on a cost-plus basis. That way, profit is taken offshore (where taxes are low or zero), the various national companies break even, and consequently pay little or no corporate taxes.

Nor is this necessarily only a customer financing phenomenon. "Look at all those contracts won by IBM Global Services," our source said. "Which legal entity is that?"

Whichever one Armonk wants it to be, we suppose. A neat scheme. If it is legal. But if so, we wonder why other multinational companies - IBM competitors - haven't latched on to it? A quick look at six of them, picked randomly in the services, software and leasing IT industry segments, revealed that their recent tax rates have been around 37%. If IBM were to be made to pay back the difference between its actual tax rates  and 37%, it would be facing a tax liability of over $1 billion as of the end of 1998. And growing... Plus any penalties, of course, should the tax courts deem appropriate, should they disagree with Armonk's "fudge factory" interpretation of the tax laws.

Where Did $800M Disappear?

And then there is money which just seems to vanish from IBM's financial statements. Like the $800 million which disappeared from its "global financing" business segment between the Big Blue's 1997 and the 1998 Annual Reports.

Back in 1997, IBM said its "global financing" business generated revenues of over $3.7 billion. But its 1998 disclosure, put the 1997 figure (restated) at only $2.9 billion.

So where did the $800 million of IBM's "global financing" revenue reported by IBM in 1997 disappear? Into "Lou's kitty?" Or some other slush fund? (see Annex Bulletin 99-12, Apr. 9, 1999).

And then, add to it the nearly $400 million of potential liabilities - the "under water" fair market value of IBM's $40.5 billion-derivatives - and you can begin to see gaping holes in IBM's financial statements once you scrape off the Armonk fudge.

Pension Fund Grab

And then there is widespread discontent now spreading through the IBM employee ranks, as the insatiable "Gerstner Greedsters" continue to exercise plutocracy by reaching into the employees' pension fund.

In an impersonal bulk e-mail message to all employees, IBM informed them earlier this month that many will see their pension benefits reduced. About 20% of employees will be able to choose between the new and the old plans. Eighty percent won't.

It's a "Kill the Baby Boomers" move, one disgruntled IBM couple wrote to us (see excerpts from their letter in APPENDIX A).

Adding insult to injury, on May 24, the Wall Street Journal reported that Gerstner sold (again) 185,000 of his IBM shares, for a pretax gain of $25.3 million. In 1998, Gerstner received $46 million in compensation, including $33 million from selling his stock options. That still left him with over $436 million-worth of unexercised stock options at the end of last year.

Not a bad pay package for someone whose company managed to eke out only a 4% growth last year.

Which, of course, is only the latest example of IBM CEO's "leadership" - in Armonk's "Greedfest." This spring event is usually staged after the Annual Meeting, at which the "Gerstner Greedsters" get a green light from the Board of Directors to keep on wasting IBM shareholders' money (see "Where Armonk Meets Wall Street, Greed Breeds Incest" - Annex Bulletin 98-41, 11/27/98, as well as Annex Bulletin 97-22, 5/27/97; 97-31, 7/31/97).

ICC's 1998 Results

Meanwhile, back to ICC's 1998 business results, net profit ($309 million) was up 9% on a revenue gain of 11% ($1.8 billion). IBM's worldwide customer financing operations contributed $733 million to the corporate bottom line, up 4% from 1997.

But ICC's new business volume declined by 3%, led by a 6% drop in working capital financing. And since the latter represents the short-term financing of IBM dealers' inventories, it has been a useful gauge for tracking how IBM's PC business is doing. As expected, the drop in working capital financing matched a corresponding decline in IBM PC revenues (see Annex Bulletin 99-12, 4/09/99).

On the plus side, ICC's financing of services and software gathered steam in 1998, increasing by 32% to $1.6 billion.

But ICC also continued to write off tens of millions of dollars in residual values every year. In 1998, the total RV write-offs added up to $34 million, down 2% from $35 million in 1997. As a result, ICC's gross margin on lease resales continued to be less than half that of its major competitor - Comdisco (5.8% vs. 16.4%).

When all ICC's lease resale profits during the company's 16-year history are taken into account, they have yielded only a 1.1% return on $44 billion of lease investments. Not much to write home about.

Happy bargain hunting!

Bob Djurdjevic













To Kill a Baby Boomer

An excerpt from a letter written by an IBM employee in the U.S. on

May 20, 1999

"In brief summary here's what IBM did (very, very poor implementation):

Sent vague email that new (pension) plan was coming out effective July 1st. Impersonal email to all of IBM to greet them on Monday morning when they log on (very impersonal). It was followed days later with booklets of propaganda on this great new plan. However, in fine print on back of the booklet (which most didn't even read) clearly states that effective July 1, 1999 IBM Retirement will be reduced.

New plan basically discontinues THE retirement medical (insurance), too. If you are around for 10 more years, they will put $2,500 a year (up to $25K over 10 years), and that is all you have to buy medical until you can be supported via US Medicare (if it's around by the time you retire). If you go on to another company, that medical account DOES NOT go with you, anyway.

Overview of plan data received thus far:

20% get choice of old or new plan (those that are within 25 years of service or age 55 by June 30, 1999 get a choice of old plan or new plan--- but, it appears even the old plan will have reduced accruals effective July 1st if you read the 'fine print' verbiage on back of the booklets)

80% get no option (e.g., my husband missed the 25 year mark by ONE MONTH! He gets his 25 years of service in August 1999 and he is representative of up to 40% in that late career category that just lost their IBM Retirement accrual -- new plan never crosses the old plan path... not even if you stay an extra 10 years).

Your exact starting pot amount will not be known until some time in June, but it is basically 5% of your average income over the past 5 years time the years of service... Again, letters of the $$ amounts will arrive in the mail to your home sometime in June.

The ESTIMATR tool that employees normally have ready access to calculate their retirement plans was conveniently taken offline days before they sent the 1st notification via email. This is to prevent employees from ever being able to run the compare to know how badly their plans have been reduced - especially the 40% that really got the rug pulled late in life. These are the ones that don't have the time or luxury to start a new career with a 40-year outlook on a cash pension plan. The 40% who have been 6 years or less with IBM, are not highly impacted (but not pleased either). But, IBM is going to invest their cash option money to yield high interest for IBM, and only pay them T-bill plus 1% and 5% of salary put in the new plan per year.

CASH BALANCE account is okay for the new wave of job hopping, but not an acceptable plan for someone with longevity of a new 40 year outlook. This is looked upon by many as KILL THE BABY BOOMERS.

As you know, IBM (and many other companies) have been cutting jobs, outsourcing, etc. over the past few years. But, when they start cutting pensions and destroying employees financial plans late in life, this has to have a big impact on the future of IBM and others. It may could even alter the stock values.

The June mailings will probably be as vague as legally possible.... IBM will only reveal what is legally required, as they will not give you the old vs new real $$ comparison even though they are reducing all employees retirement plans (reason ESTIMATR is only available to Human Resources Dept., not employees). When ESTIMATR comes back up on June 7th (reportedly), it will be on the new accrual $$, not the old, and will only be available through September 30th; then taken down again permanently.

I've read that IBM EMEA (Europe, Middle East and Africa) implemented (the plan), but all got a choice of old vs. new. Chat boards talk indicates that some attorneys feel that might be a cause of reverse discrimination (U.S. vs EMEA implementation) suits.

So, instead of a humane implementation and offering choices to 100% of their employees (such as KODAK did), they are reducing the benefits of 100% of their employees, discontinuing retirement medical to at least 80% of their employees, and not providing them the spreadsheet data to let them know how much they have really REDUCED drastically each employees retirement potential.

Many IBMers (dedicated and supportive of IBM) could have taken jobs elsewhere for more $$$, but stayed because they liked their jobs and were in the upswing of the back-loaded Retirement Plan benefit, supported and wanted IBM to succeed through the tough times, and now get this when it is too late to go start a new career.

Your professional opinions or references to some facts would be greatly appreciated. It looks like LOU will probably leave soon and leave IBM in the condition he did with RJR and Nabisco (where only LOU is the winner). This is the only opinions we can surmise with facts in hand at this time."

(Name withheld, but known to Annex Research)

Addtional Charts

  • IBM WW Customer Financing Shares - ASSETS
  • IBM WW Customer Financing Shares - PROFIT
  • ICC New Investment Volumes (1990-'99e).
  • ICC Revenue Shares (1990-1998)
  • Cumulative ICC Resale Gross Margins (1986-1998)
  • ICC Residual Value Writeoffs (1986-1998)


  • ICC's remarketing results - 4Q96-4Q98, 1996-1998
  • ICC - Financial results & new investments - 4Q96-4Q98
  • ICC - Financial results & new investments - 1996-1998
  • IBM Worldwide Financing Financial Results - 1996-1998
  • Equipment Remarketing Analysis (1982-1998)


Volume XV, No. 99-17
May 28, 1999

Editor: Bob Djurdjevic
Published by Annex Research

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